Oriental Watch (398 HK)

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Our friends at TickerTrends recently wrote about an ongoing turnaround in the luxury wristwatch market. The data is clear: in the past four months, an index of Google search queries for the keyword "Rolex" have shot up. Second-hand prices for Rolex watches have risen for the first time since 2022.

So what's going on? That's what I'll try to find out in this new deep-dive on Hong Kong's Oriental Watch (398 HK — US$214 million) – the most "blue chip" of the publicly listed watch retailers in China.

But first, let's talk about the industry. Oriental Watch and its publicly listed peers Emperor Watch & Jewellery and Hengdeli are authorized dealers for Rolex in Hong Kong and Mainland China. Rolex remains the most sought-after luxury wristwatch brand, and has performed well despite new competition from the Apple and Garmin.

Rolex has historically not run retail stores of its own. Instead, it's let authorized sell watches on its behalf. To become such an authorized dealer, companies need to meet strict requirements on the interior design of each store, service levels, store locations, etc.

In the past decade, the demand for Rolex watches has greatly exceeded supply. This means that customers need to sign up for waitlists managed by the authorized dealers. They can then decide who gets which Rolex watch and not. In my view, this waitlist system gives the dealer a significant amount of bargaining power. Customers will buy additional watches to qualify for the most sought after ones, say Rolex Daytonas or a Rolex GMT-Master IIs. And for that reason, owning an authorized dealer for Rolex has been a license to print money.

Oriental Watch has been around since the 1960s. It was founded by Hong Kong native Yeung Ming Biu and soon took control of the first authorized dealer for Rolex in Greater China. In 1993, it became the first publicly listed watch retailer in Hong Kong. And in 2004, it entered Mainland China - a market that now accounts for the majority of revenues.

After Xi Jinping took over as General Secretary of the Communist Party in 2012, he initiated an anti-corruption campaign that had a negative impact on the luxury wristwatch industry. Oriental Watch took the opportunity to downsize its Mainland China store network, reducing inventory levels and becoming more of a lean operation. From 2017 onwards, it's also started to pay out generous dividends, with a payout ratio of about 100%.

COVID-19 was initially a tough period. The company had to close its stores and watch production became disrupted. But as customers stayed at home without spending much money on services, they accumulated cash and spent part of it on luxury wristwatches. And it turns out that COVID led to record earnings for Oriental Watch, with margins expanding from the 5% level to 12% at the peak.

Founder Yeung Ming Biu passed away in 2021. However, his son, Dennis Yeung, now serves as Chairman and CEO. He seems to be a safe pair of hands. And from what I can tell, he seems to care about others. It's probably not a coincidence that the move towards a 100% payout ratio happened under Dennis Yeung's watch.

Since COVID-19, the luxury wristwatch industry has been in decline. Prices for second-hand Rolex watches have declined from US$30,000 to almost US$20,000 at the bottom, having a direct impact on Oriental Watch's margins.

That brings us to TickerTrends' arguments for why the wristwatch might have turned. Indices of Google search queries for "buy watches" and "Rolex" have risen recently. Second-hand prices for luxury wristwatches bottomed in early 2025 and are now rising. Website traffic to most of the major brands have also started rising.

But in my view, much of the buying that we've seen earlier this year is due to fears of US tariffs on Swiss watch imports. These tariffs were first set at 10% in April and then raised to 39% by August. Consumers responded by moving forward their watch purchases, and the second-hand prices reacted immediately.

In China, the wristwatch market remains weak. Swiss watch exports to Hong Kong and Mainland China have continued lower this year through August 2025. Chinese consumers are facing a high unemployment rate and a negative wealth effect from declining property prices. The weak Japanese Yen has also caused consumers to shift away from domestic watch stores to retailers in Japan, especially those stocking now-attractively priced Japanese watches such as those from Grand Seiko.

So I expect the current upturn in watch prices to be short-lived. A stronger Yen would be positive for Oriental Watch. Greater supply from Rolex's new Bulle production plant in 2029 should also help Oriental Watch secure larger allocations. But without these factors, I don't see a quick turnaround for China's luxury wristwatch market.

In my base case, I expect the operating margin to decline by 2.5 percentage points through FY2031, resulting in the P/E ratio expanding from 8.3x to 10.4x. In this process, I expect the dividend yield to compress from the current 12% to about 10%.

The company has a massive cash pile, representing roughly 50% of its market capitalization. We could see another share buyback, similar to the one in 2020, when 15% of the shares outstanding were repurchased and eventually cancelled.

To summarize, I think growth will be challenging. The major driver of its earnings remains the luxury wristwatch cycle, and it's not clear that the cycle has definitively turned. On the other hand, minority shareholders continue to enjoy generous, double-digit dividend payments. And I think it is plausible, that once Americans are hit with 39% tariffs on Swiss watch imports, that they will travel to Hong Kong for their watch purchases instead.

Longer-term, a big question for Oriental Watch, is whether Rolex will follow Hermès' lead in taking retailing in-house. Back in 2022, Rolex acquired the European watch retailer Bucherer, leading some to believe that Rolex is now taking its watch retailing operations in-house. While Bucherer primarily operates in Continental Europe, Bucherer opened a store in Shanghai last year and is now competing head-to-head with Oriental Watch in that city.

The threat from Bucherer could be real, longer-term. In the near term, I don't think Bucherer will move the needle for Oriental Watch. It only accounts for 5-8% of global Rolex wristwatch sales volumes, and the vast majority of those volumes are in Continental Europe. In addition, Rolex just awarded Oriental Watch the privilege of becoming a Certified Pre-Owned watch dealer, suggesting that the partnership is long-term in nature and unlikely to change anytime soon.

Thank you for reading.
Michael

NOTE! This was just a summary of the actual deep dive. To view the full PowerPoint presentation, click the button below:

Further material:

• An excellent 2023 write-up from a Substack newsletter called "Oriental Value"
• Oriental Watch's FY2025 annual report