Swatch: demand for tangible assets will support shares

With Swatch shares languishing close to the lows of the pandemic, the worst for shareholders is likely to have passed. Keystone / Martial Trezzini

Lockdowns in China are hurting Swiss watch sales. Yet the world’s largest watchmaker Swatch is unwilling to call time on its most important market.

China’s “zero Covid” policy has cost the company an estimated SFr400m of sales this year. But it still managed to turn over SFr3.6bn ($3.7bn) in the first half, 7.2 per cent more than in 2021. The Omega owner also confirmed it expects double digit sales growth for the full year as restrictions ease.

That is a bold bet that depends on the decisions of an increasingly unpredictable Chinese government. Such a recovery would also only bring sales back to the levels registered in 2017.

But with Swatch shares languishing close to the lows of the pandemic, the worst for shareholders is likely to have passed. A valuation of 13 times forward earnings is at the bottom of the range of recent decades. That discounts all but a full blown global downturn.

China aside, demand for Swiss watches is high. Swatch recorded double-digit growth in most other markets, including ex-China Asia. As with other tangible assets like art, the appeal of Swiss watches, especially higher end ones, increases during times of financial uncertainty. Buyers are seeking stores of value amid rising inflation and the worst first half for the US stock market in 50 years.

In May, sales of watches priced at SFr3,000 or more rose by 20 per cent on a value basis, according to the Swiss Watch Federation. The retailer Watches of Switzerland reported demand consistently outstripping supply at results last week. It still expects growth of one-fifth this year.

That context casts Swatch’s swelling inventory in a favourable light — even if average selling prices are lower than at the top brands. It now stands at SFr6.7bn, up SFr300m from the end of last year.

Firm demand and raging inflation makes stock writedowns less likely. Add SFr2.4bn of cash and SFr1bn of property to the value of the inventory and you reach a total that is equal to almost 90 per cent of the current market value. At the current share price, financial exposure to the watchmaker may prove as good a store of value as its timepieces.

Copyright The Financial Times Limited 2022