Bloomberg News

Hengdeli Declines After Report Some Watch Licenses Lost

January 31, 2013

Hengdeli Holdings Ltd. (3389), the Chinese retail partner of Swatch Group AG (UHR), closed higher after plunging in the previous trading session, when a Next Magazine report fueled concerns about the company’s operations and distribution.

The retailer rose 0.7 percent to HK$2.72 at the close in Hong Kong, after declining as much as 5.9 percent during the day. The stock fell 13 percent yesterday.

Operations are “normal, healthy and stable,” Hengdeli said in a statement yesterday. Hengdeli didn’t comment directly on the Next Magazine report and said it “has maintained good partnerships with numerous worldwide renowned watch suppliers.”

“Hengdeli’s response to the suspicions is unlikely to remove investors’ concerns,” said Macquarie analyst Linda Huang. “However it is hard to obtain substantial proof about some of the suspicions. We continue to have concerns about the company’s wholesale business model due to its low margin nature.”

Hengdeli lost its exclusive distribution licenses for brands including Omega, Rado, Longines and Fendi in China, Next Magazine said, without saying where it got the information.

China Operations

“Hengdeli has no further clarification at this point,” Kelly Fung, a media relations consultant at Porda Havas International Finance Communications Group, representing the company, said today.

Hengdeli has relied on China’s increasingly affluent consumers to boost sales. It gets about 70 percent of it annual revenue from mainland China, according to data compiled by Bloomberg.

“The so-called clarification failed to allay investor concerns,” Francis Lun, managing director of Lyncean Holdings Ltd., said by phone. “First, you have the macro-economic headwind, rents are rising and Chinese consumers are buying overseas. Secondly, the company is expanding too fast.”

Nick Hayek, chief executive officer of Swatch, which owns the Omega, Longines and Rado brands, forecast continued growth in mainland China and said in a phone interview yesterday that he’s “very happy” about his company’s arrangement with its Chinese partner.

Shareholders

Swatch Group owns 9.1 percent of Hengdeli, according to data compiled by Bloomberg. LVMH Moet Hennessy Louis Vuitton SA (MC), whose brands include Fendi, holds 5.9 percent, the data show.

“We are shareholders and it’s going very well --- there is no change,” Hayek said of Swatch’s relationship with Hengdeli. “The development is very good. There is no irritation in our collaboration.”

Hayek forecast industry growth of about 10 percent in mainland China. “It could be more or it could be less,” he said. “In the high end, they might have a little bit less sales, but you can’t grow every year by 50 or 60 percent.”

An external spokesman for LVMH didn’t immediately return a call and an e-mail seeking comment.

To contact the reporters on this story: Vinicy Chan in Hong Kong at vchan91@bloomberg.net; Dermot Doherty in Geneva at ddoherty9@bloomberg.net

To contact the editor responsible for this story: Anjali Cordeiro at acordeiro2@bloomberg.net


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