The Hour Glass issued profit guidance that it is likely to incur a net loss for 3Q09 due to impairment loss on the investment securities amounting to $14.1m. The management, after discussing with the Board and the external Auditors has assessed that this investment is impaired given the significant and prolonged decline in its fair value below its cost of investment and the prevailing equity market condition. The recognition of the impairment loss on the investment has no impact on the group’s cash flow. There is also no material impact to the NAV as the investment as consistently been accounted for at fair value through the reserves. Notwithstanding this, the group expects to remain profitable for FY09E.

The $14.1m impairment loss on investment securities will reduce our full year 2009 earnings estimates of $27.8m by near 50.7%. But thanks to its strong 1H09 net profit of $13.6m, we believe the group will still remain profitable in FY09. Its resilient core business performance so far amid the global economic downturn is commendable. Moreover its firm cash hoard (net cash of $1.5m as at 1H09) that is not affected by the impairment losses, well-positioned the group to ride through the storm.

The weak upcoming 3Q09 earnings, coupled with the de-rating of luxury watch sector amid the bleak outlook for discretionary consumer spending will hurt sentiment of the stock in the near term. We are putting our rating and fair value estimate under review pending its upcoming 3Q09 results next week.