Monday, April 29, 2013

2013 High Dividend Stocks in Singapore - Part 1

Part 2 is out as well.

I am close to 5 months late in publishing this. But better late than never. Here is the new and updated list of high quality dividend stocks traded in the Singapore stock market.

This is the first half of this year's list.

This round produced 28 names in total and I have splitted up the list into 2 tranches so as to gain more traffic :). Dividend related posts are the best traffic drawer for this blog in this yield hungry environment in an even yield hungrier Singapore.

Actually, to be fair to Singaporeans, this is a global phenomenon as central bankers drive down the risk-free rate and as a result pushed up asset prices and inflation. To more advanced readers, you would know this is unchartered territory in the history of global finance. What does it mean if risk-free rate goes to zero? This is something never taught in textbooks. In fact, it should never happened. Without the risk-free rate (usually taken to be the 10-year government bond yield) how do you price all other assets like corporate bonds, stocks, real estate and other instruments? Nobody has an answer, and meanwhile asset prices shoot through the roof. More on this in time.

So, knowing that will make studying this current dividend screen all the more important! Make sure you study every name here religiously!

Ok, just kidding. As I have emphasized in all my past annual dividend posts (below), this screen alone cannot help you make money. It is just a starting point for you to study the stocks here in detail. To really know a stock, I try to answer 10 key questions to understand a stock as dictated in my Stocks page.

The past dividend lists:
2012 Dividend List
2011 Dividend List
2010 Dividend List
2009 Dividend List

Friday, April 12, 2013

Swatch's distribution

Well we should get back to Swatch after a few digression. So this is a continuation on the full fledge analysis on Swatch. Today we look at the distribution prowess of the company.

Swatch has 900 point of sales from its directly operated stores but these stores generate only 20-30% of sales for its watch division. The remaining 70-80% comes from its distributors and other 3rd party sellers. This is much lower than Richemont or LVMH, its key competitors at 50% or more sales coming from their own stores.

Here is a quick breakdown of the 900 stores:

Mono-brand stores
Swatch 600
Omega 260
Blancpain 30
Breguet 22
Jaquet Droz 6
Glashutte Original 5

Multi-brand stores
Tech Airport 40
Tourbillon 21

Most of Swatch's retail operations are actually in Europe, some airports and major retail outlets while others are in major global cities such as New York, Hong Kong, Singapore etc. Control over distribution has grown in importance in the last decade and Swatch has lagged in this aspect since it had strong history as a watch manufacturer with its watch movements business, not a retailer. Also, it did not have enough key brands to muster a formidable retail strategy, unlike its peers. That was partly why it wanted to buy over Harry Winston, a high end jeweller.

However, Swatch has now emphasized the need to expand directly operated stores so as to be able to get closer to the end customers, understand their preferences better and also have a better grasp on inventory. Not to mention, posh retail outlets are one of the best ways to market luxury brands, which is why we see megabrands like Louis Vuitton and Tiffany go all out to create the grandious stores in major shopping malls all over the world. To that end, Swatch has committed USD 400-600m (CHF 300-500m) in capex for the retail expansion annually. (Note: these no.s are before the acquisition of Harry Winston)

As a result of its smaller retail operations hitherto, Swatch has relied more on distributors to sell its watches. These are the Sincere Watch and Hour Glass that we see in Singapore. But more importantly for Swatch are its distributors in China: Hengdeli and Emperor Watch. Hengdeli has close to 1,000 stores in China while Emperor has a few hundred stores.

These distributors have allowed Swatch to expand rapidly into China at the expense of Swatch giving up the distribution margin. More importantly it has also allowed Swatch to hold less inventory and hence free up its working capital for investment into its movement and other businesses. Insofar, it looks like the strategy paid off with Swatch commanding a higher market share in China while its competitors Richemont and LVMH tries to play catch-up and are still building retail operations.

The next battle for Swatch is for the firm to claw back part of its distributor margin (est to be around 15-25% judging from Hengdeli's and other distributors' gross margins). However this will require time and capex but ultimately it should pay off with the benefits listed earlier (better inventory management and better customer understanding).

Having said that, distributors will still exist side by side as Swatch and other watch makers would still need them for nurturing new brands (the up and coming Omegas and Tag Heuers) and also their presence in inner cities and regional airports etc. With 20% of the global luxury watch market, the distributors cannot afford to ignore Swatch even if the firm decides it should distribute its megabrands (Omega, Breguet) by themselves.

This dual distribution model is one of Swatch's most enduring business moats as new players find it hard to engage distributors like Sincere or Hengdeli with a value proposition that Swatch cannot offer. On the other hand, the new players are also incapable of building up huge retail operations like LVMH and Richemont. So new entrants are almost a non issue.

How does Swatch compares with other branded competitors then?

As alluded to before, Swatch is playing catch-up by building up the retail stores as it sees the value of engaging customers at the last mile. One key difference is that Richemont and LVMH are both conglomerates with businesses that stretches far beyond watches. LVMH has bags and champagne while Richemont has jewellery and pens. Swatch has always been the watch company and by focusing on its strength, it should be able to compete on an even scale in the world of watches. Although this is changing with Harry Winston coming into the picture. Also Swatch always have leverage over these players via its movements business since Swatch provides the movements to these competitors. In an earlier post, we have also talked about how Swatch wanted to prioritize in-house movement to the detriment of its competitors.

As for Rolex, Patek Philippe and a few other remaining independent watch brands, Swatch's edge is again, both scale and again movements. Swatch, with its multiple high end watch brands, sells a much larger volume than Rolex. In terms of value, Swatch is also one notch ahead. Coupled with the fact that Swatch supply some key movements even to Rolex and Patek, we can say that Swatch is not in an inferior position vs these guys.

To conclude, Swatch's dual distribution via its own retail network and outside distributors, together with its dominance, allow it to create a strong business moat that rival the best competitors and should help Swatch maintain a sustainable advantage in the watch business.