Oriental Watch bullish as sales
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Oriental Watch (398 HK)announced it is proposing to buy back a maximum of 83 million shares at 3 HKD (249M HKD). This represents a premium over 57% vs the average 30-day closing price on HKex. Once the shares are bought back they will be canceled which will reduce total shares outstanding from 570 million to 478 million. A Special General Meeting (SGM) will be needed to approve the transaction, details of which are pending an official Offer Document. The full transaction has been covered by David Blennerhassett Oriental Watch (398 HK): Conditional Partial Offer
As long-time Oriental Watch followers let’s step back and assess what this means:
- The controlling family’s stake will rise over 30% (depending on uptake 30.85-36.10%) but they won’t have to make a mandatory general offer as they have requested an exemption from HKex. Minority investors need to approve the transaction: we would advise minorities to vote IN FAVOR.
- The founding family upping its stake at a significant premium to the latest stock price is bullish.
- Even at 3 HKD, the shares trade far below their latest book value of 4.04 HKD.
- With increased ownership management is now more incentivized to keep on paying large dividends going forward.
- Mr. Market has been perenially mispricing Oriental Watch at negative enterprise value or barely above net cash over the last 5 years. As discussed at length in various previous insights we think this is wrong and the latest transaction again highlights the underlying value.
- The company has returned 0.885 HKD/share in dividends over the past four years. When judging Oriental Watch’s share price performance please make sure you look up the total return on your Bloomberg.
- Mainland China Rolex sales have been seeing YoY SSS increases of 40-80% since April (depending month to month). Once HK opens up SSS comps become very easy after 2019 (riots) and 2020 (Covid-19). Please re-read our insight on Oriental Watch being a way to play Rolex in China Oriental Watch: Bet on Rolex Demand in China/HK and Collect 12% Dividends While Waiting
Questions & Answers
Q.Will the controlling family be required to make a mandatory general offer after increasing their stake?
Will the controlling family be required to make a mandatory general offer after increasing their stake?
No, they have requested an exemption from HKex. Their stake will rise to between 30.85% and 36.10% depending on the uptake of the share buyback, but they will not be mandated to make an offer.
Q.What is the key financial implication for the company's share structure if the buyback goes ahead?
What is the key financial implication for the company's share structure if the buyback goes ahead?
The total number of outstanding shares will decrease from 570 million to 478 million once the 83 million bought-back shares are cancelled. This transaction requires approval at a Special General Meeting.
Q.How do the proposed buyback price and the current book value compare?
How do the proposed buyback price and the current book value compare?
The proposed buyback price is 3 HKD per share, which is still significantly below the company's latest book value of 4.04 HKD per share. This indicates the shares are undervalued even at the premium buyback price.
Q.What is the advice given to minority investors regarding the proposed transaction?
What is the advice given to minority investors regarding the proposed transaction?
Minority investors are advised to vote in favour of the transaction. The founding family increasing their stake at a significant premium to the latest stock price is seen as a bullish sign for the company's underlying value.
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