The group posted a net loss of $7m in 3Q09 mainly due to a $14m impairment charge on its quoted investment securities as mentioned in its recent profit guidance. Excluding the impairment loss, the group would have reported a net profit of $21.2m for 9M09 that is in line with our expectation.

Despite the challenging business environment, sales in 3Q09 remained firm with a moderate 0.8% increase from 2Q09. Gross margins improved from 19.8% to 21.5% during the quarter, reflecting the management’s efforts to drive operating efficiencies. Operating margins stood steady at 8.1% due to effective cost management.

The group expects the spending on luxury consumer items to remain sluggish in the near-term amid the deterioration in the global economy. This is in line with industry statistics from the federation of the Swiss watch industry which reflects a 7.6% decline in the value of Swiss watch exports led by falling volumes.

A healthy balance sheet with net cash of $12.7m and positive operating cash flows of $10.9m will help the group to weather the downturn. However it might have to lower dividend payouts to conserve cash for working capital and CAPEX requirements.

We have cut our earnings estimates for FY09 by 56% after factoring in the impairment loss and lowered our FY10 earnings estimates by 25% in view of weaker sales and margins pressures ahead. Our target price is adjusted accordingly to 56 cents based on 5x FY10 PER. Trading at a mere 0.53x NAV and 0.6x of its inventory, we see value to invest in the stock over the long run. Maintain BUY.