The Hour Glass (THG) posted a 37% yoy decline in 4Q09 net profit to $6.3m led by revenue weakness and a fair value loss on investment properties of $1m (vs a gain of 0.8m in 4Q08). For the full year, THG’s net profit fell by 57% to $12.8m due to the sharp contraction in consumer spending and an impairment loss of $14.1m. Despite that, its earnings were slightly above our expectation due to resilient gross margins and shrewd cost management.

Sales will remain under pressure in tandem with the weak discretionary spending. This is in tune with the lacklustre luxury watch sector evident in an accelerated decline in Swiss watch exports in March (-26.6% yoy) according to statistics from the Federation of the Swiss Watch Industry. Moreover, the group warns of margin deterioration ahead given the over supply of product in market channels and hefty rental expenses.

Despite bottomline weaknesses, the group’s net cash surged 92% to $26.6m due to improving operating efficiencies. Its inventory turnover remained at a healthy level of 2.4x (one of the best among peers), thanks to its astute merchandising expertise and early decision action to moderate the level of inventories ahead of the severe crisis. With a healthy cashflow, the group is proposing a first and final dividend of 2.5 cents per share, translating to a dividend yield of 4.5%.

While earning weaknesses may prevail over the next few quarters, the group expects to stay profitable. Tactful expansions and focus on operating efficiencies will continue to drive its profitability. Moving ahead, 2 new boutiques in Singapore (a stand-alone Rolex boutique and a multi-brand concept store) are slated to open in Orchard ION, while its existing Peninsular Plaza store will be relocated to Orchard Central by 2Q10.

We have cut our FY10 and FY11 by 13.5% and 20% respectively to reflect weaker revenue and margins. Our target price remains at 56 cents based on DDM. As the stock reached our fair valuation and no growth catalysts insight, we are downgrading the stock to a HOLD.