Webb-site Reports

An open letter to the Board of Time Watch (2033)
5 June 2024

Dear Directors,

As you know, I have been a disclosed 5% shareholder of TW since 6-Apr-2020. TW is 71.27% controlled by Michael Tung Koon Ming (Mr Tung), the Chairman, CEO and Founder of TW. TW is a manufacturer, brand-owner and retailer of watches in the PRC, including the core brand Tian Wang (天王) and the minor Swiss brand Balco, acquired in 2002. TW listed in HK on 5-Feb-2013 following an IPO at $1.35 per share which raised net proceeds of HK$742m.

Selling watches in mainland China was of course a tough market during 3 years of COVID restrictions, but the Group has survived that on much reduced sales and booked a net profit in each of the 11 post-listing financial years ending 30-Jun-2023. About a quarter of sales are online, and the rest through some 1,904 points-of-sale at 31-Dec-2023.

I have no problem with the core watch business; the group has a long history since 1988 and will continue to navigate the ups and downs of Chinese discretionary goods expenditure, assuming it manages the brands well.

Where I do have a problem is your appalling capital management. You seem to think that it is acceptable to hoard surplus shareholders' funds and invest outside of your core business rather than returning the money to shareholders. If Mr Tung wants to take his share of that surplus and invest privately, that is entirely up to him, but shareholders of TW did not invest in the company so that you could pick investments for us or keep our profits when they are not needed for the core business.

At the interim results on 31-Dec-2023, TW had net tangible assets of HK$2,321m or $1.13 per share. Of this, there was net cash and investments of $1,496m or $0.73 per share with no bank borrowings. The share price at today's close was $0.40, a discount of 65% to net assets and 45% to net cash and investments.

We've reached this dire situation because in the 11.5 years to 31-Dec-2023, our group made aggregate net profits of $2,421m but only distributed dividends of $997m. As a result, net cash and investments have piled up from $647m at 30-Jun-2013 (that figure includes the IPO proceeds), to $1,496m at 31-Dec-2023. In addition:

In FY2017, TW bought an investment property at CEO Tower, 77 Wing Hong St, for HK$96.3m "for rental income". That was not a good use of our money. You have no expertise or scale in property investment. At 30-Jun-2023, that property was valued in the accounts at $105m.
In the year to 30-Jun-2021, a year in which you paid no dividends and during which HK's borders were closed for COVID, TW bought a 50-seat yacht for HK$43m! That replaced a presumably smaller yacht purchased in FY2016 for $12.5m. No doubt, this vessel was essential for marketing purposes to Chinese watch buyers who could not visit HK without quarantine. After our borders re-opened, you sold the yacht on 26-Jun-2023 for US$5.3m. While that represents a small gain before maintenance costs, please stop messing about with yachts. Charter one if you need to entertain customers or suppliers and can justify the expense. Corporate yachts are a notorious red flag to investors.
On the last day of FY2021, TW purchased Winning Asia Holdings Group Ltd (WAHG) from Mr Tung for HK$84.7m. WAHG owned the company's head office on 27/F of CEO Tower and 4 car spaces. The announcement failed to disclose that WAHG came with HK$40m of bank borrowings, so the property was actually valued at HK$123.6m as shown in the 2021 accounts. In FY2021, TW paid rent of HK$4.728m, so that represents a pre-tax yield of 3.8%. Two years later on 30-Jun-2023, the property was valued at $121.3m.
The Board did not see fit in 2021 to declare any dividends, but the results were good enough that it did see fit to pay Mr Tung a HK$10m bonus on top of his $7m salary. In the 11 years since listing, his pay has totalled $103.9m, about 69% of the entire board pay of $151.2m. If you spent half as much on him and used the savings to hired a full-time CFO then we might actually make some progress. Mr Larry Ng Lai Po, your CFO appointed on 6-Jan-2023, also serves as an Executive Director of GEM-listed M&L Holdings Group Ltd (8152) which he runs with his older brothers. Let's just say that is not a success story.
You did resume declaring dividends in FY2022 and FY2023, but it was nowhere near enough to clear the accumulated surplus capital.

Unreasonable hoarding of "idle funds"

If TW needed the retained earnings for business expansion, then that money wouldn't be sitting idle in financial assets for years. In addition, the company has twice (in 2020 and 2023) been caught breaking the Listing Rules by failing to promptly announce purchases of various financial assets which exceeded the disclosure thresholds. In the 2020 announcement, you invested our money in a range of "principal-guaranteed" "structured deposit products" including three which were linked to the performance of the CSI Smallcap 500 Index, the price of sugar and the price of gold. In the 2023 announcement, you put US$5m into "KKR Ascendant Fund SCSp", a 10-year private equity fund, for the stated purpose:

"an opportunity to make reasonable and efficient use of its idle fund".

That's entirely unreasonable! It is of course reasonable for any company to maintain a sufficient level of working capital to handle fluctuations in its business. In each year's annual report, you state:

"The Group adopts a conservative treasury policy. The Group monitors and maintains a level of cash and cash equivalents deemed adequate by the management to finance the Group’s operations and mitigate the effects of unexpected fluctuations in cash flows."

In your 2019 annual report, you put that "adequate" figure for cash and cash equivalents, net of bank overdraft, at HK$398m. That seems reasonable! Clearly then, you do not need to hoard an additional $1,098m in cash and financial assets, particularly given that our Group's turnover has declined from $2,670m in FY2019 to only $982m in FY2023. I urge you to distribute these "idle funds", amounting to $0.53 per share, not sink them into private equity, bonds issued by other companies, or long-term bank deposits, as you have in the past. That distribution is more than the current share price and will have an instantly positive impact on investor confidence and the corporate image.

Be patriotic

Our country's leadership, via the CSRC, has recently begun urging Chinese companies to pay more dividends. It's the patriotic thing to do, because greater capital discipline will boost return on equity, increase market valuations, lower the cost of capital and thereby make China's companies and the economy as a whole more competitive on the world stage. That has to be good for the world; a prosperous country is more likely to be a peaceful one. And then they will buy more watches. Conversely, continuing to hoard capital as if preparing for Armageddon will only increase its likelihood. Do you really want to be seen as unpatriotic, as you seek to sell watches to our compatriots?

TW and companies like it are giving the HK stock market a bad name with your atrocious capital hoarding. In the absence of regulatory reform, the whole market is discounted for this risk, but you don't have to be one of the companies that drives investors away from HK. Be a better company.

As you know, I did try to resolve this issue with you privately, but in Oct-2023, having invited me to meet, I was told that Mr Tung cancelled the engagement because he "felt disappointed" by my email comments on the matter. I was left with no choice but to go public at a time of my choosing, which I now do. I expect you, Directors, including so-called Independent Non-executive Directors, to convene a board meeting and declare a distribution of all the surplus funds not later than the final results for the year to 30-Jun-2024, which must be published by 30-Sep-2024.

But why not convene a board meeting now and resolve the issue once and for all? Take it from me, there's no time like the present, and no present like the time. Carpe diem!

David M. Webb
Founder, Webb-site.com

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An open letter to the Board of Time Watch (2033) 5 June 2024