Time Watch Investments 1q2010 Results 131109

TIME WATCH INVESTMENTS LIMITED (Company Registration No. : 199502355R)

Unaudited First Quarter Financial Statements Announcement For The Period Ended 30 September 2009 PART I

INFORMATION REQUIRED FOR ANNOUNCEMENTS OF QUARTERLY (Q1, Q2 & Q3), HALF-YEAR AND FULL YEAR RESULTS

1(a)

An income statement for the group together with a comparative statement for the corresponding period of the immediately preceding financial year Group First Quarter ended 30 Sep 09 30 Sep 08 HK$'000 HK$'000

Revenue Cost of sales Gross Profit

Inc/(dec) %

281,394 (182,699) 98,695

280,197 (188,542) 91,655

0.4 (3.1) 7.7

2,274 (50,897) (21,119) (1,515) 520 -

2,729 (44,685) (20,846) (2,008) (1,745)

(16.7) 13.9 1.3 (24.6) 100.0 (100.0)

Profit before taxation Income tax expense

27,958 (6,826)

25,100 (5,700)

11.4 19.8

Profit for the period

21,132

19,400

8.9

17,644 3,488 21,132

16,410 2,990 19,400

7.5 16.7 8.9

Other operating income Distribution costs Administrative expenses Finance costs Share of results of associates Loss on dilution of shareholding in a subsidiary (Note B)

Attributable to: Equity holders of the Company Minority interests

1

Statement of Comprehensive Income With effect from annual period beginning or after 1 January 2009, FRS 1 Presentation of Financial Statements (Revised), requires an entity to present all non-owner changes in equity in a Statement of Comprehensive Income. Non-owner changes will include income and expenses recognised directly in equity. This is a change of presentation and does not affect the recognition or measurement of the entity‟s transactions. Previously, such non-owner changes were included in the Statement of Changes in Equity. Group First Quarter ended 30 Sep 09 30 Sep 08 HK$'000 HK$'000 Profit for the period Currency translation adjustments on foreign operations Total comprehensive income for the period Attributable to: Equity holders of the Company Minority interests

Inc/(dec) %

21,132

19,400

8.9

1,726

11,042

(84.4)

22,858

30,442

(24.9)

19,370 3,488 22,858

29,006 1,436 30,442

(33.2) 142.9 (24.9)

Notes: A) Profit for the period is determined after charging/(crediting) the following: Group First Quarter ended 30 Sep 09 30 Sep 08 HK$'000 Allowance for obsolete inventories Allowance/(reversal of allowance) for bad and doubtful debts (trade) Amortisation of expense on convertible loan notes Amortisation of intangible assets Bank interest Income Depreciation expense of property, plant and equipment Foreign exchange gain Loss on disposal of plant and equipment Provision for long service payments

HK$'000

Inc/(dec) %

1,642

347

NM

826

(784)

NM

33 47 (43)

33 47 (100)

(57.0)

3,107 (718) 230 45

2,236 (1,874) 498 3

39.0 (61.7) (53.8) NM

B)

The amount represented the excess of the carrying value of the minority interest in the net assets of Time Watch (Zhengzhou) Business Consultancy Co., Ltd (“Time Watch (Zhengzhou)”) over the consideration received from the minority shareholder for its equity interest in Time Watch (Zhengzhou) as at the date of transaction. The dilution was previously announced on 8 September 2008.

C)

Certain reclassifications/adjustments had been made to the prior period‟s income statement for the period ended 30 September 2008, resulting in amendments to certain line items. The reclassifications were made to enhance comparability with the current period‟s income statement, while the adjustments were made to recognise net revenue instead of gross revenue for sale of stocks which were held on consignment, as well as to eliminate certain intercompany sales previously understated. The items were reclassed/adjusted as follows: Previously reported HK$'000 Revenue Cost of sales Other operating income Distribution costs Administrative expenses

D)

297,664 (206,009) 1,131 (40,685) (23,248)

NM = not meaningful

2

Restated HK$'000 280,197 (188,542) 2,729 (44,685) (20,846)

1(b)(i)

A statement of financial position for the issuer and group, together with a comparative

statement as at the end of the immediately preceding financial year Group 30 Sep 09 30 Jun 09 HK$‟000 HK$‟000

Company 30 Sep 09 30 Jun 09 HK$‟000 HK$‟000

ASSETS Current Assets: Cash and bank balances Pledged bank deposits Trade receivables Other receivables, deposits and prepayments Inventories Total Current Assets

93,983 5,005 150,204 41,099 251,125 541,416

82,117 5,000 150,845 33,391 253,727 525,080

122 44,203 44,325

213 44,706 44,919

Non-Current Assets: Goodwill Intangible assets Investment in subsidiaries Investment in associates (Note A) Deposits paid for acquisition of investments (Note B) Other receivables and deposits Property, plant and equipment Investment properties Total Non-Current Assets

15,147 345 17,796 1,390 42,648 204,300 281,626

15,037 392 12,956 1,730 40,679 204,228 275,022

387,205 98 387,303

386,043 109 386,152

Total Assets

823,042

800,102

431,628

431,071

147,184 27,431 99,536 55,605 237 9,280 339,273

169,888 26,724 81,806 48,528 104 11,191 338,241

27,430 4,328 31,758

26,724 3,732 30,456

11,420 451 3,565 18,851 34,287

12,701 170 3,520 18,846 35,237

-

-

CAPITAL AND RESERVES Equity attributable to equity holders of the company Minority interests Total Equity

361,654 87,828 449,482

342,284 84,340 426,624

399,870 399,870

400,615 400,615

Total Liabilities and Equity

823,042

800,102

431,628

431,071

LIABILITIES AND EQUITY Current Liabilities: Borrowings Convertible loan notes Trade payables Other payables and accruals Current portion of finance leases Income tax payable Total Current Liabilities Non-current Liabilities Borrowings Finance leases Provision for long services payments Deferred tax liabilities Total Non-Current Liabilities

3

Notes: A)

B)

1(b)(ii)

The amount represented 13% equity interest in 3 entities, Fortune Concept Limited, pe.timedesign GmbH and Swiss Fashion Time GmbH (HK$17,276,000) acquired in July 2009 by two 51%-owned subsidiaries of the group, as well as share of results (HK$520,000) for the current period. Although the group holds less than 20% of the voting power in these entities, the group has significant influence by virtue of potential voting rights vested in the call option awarded to the group to require the respective vendors to sell up to 36% additional equity interests in these entities. No such option has been exercised to-date. The group is in process of obtaining a valuation report of the call option, as such, the fair value of such option has not been accounted for in the group‟s financial statements as at September 30, 2009. As at June 30, 2009, the amount represented the deposit paid to a related party for acquisition of 13% equity interest in Fortune Concept Limited, incorporated in Hong Kong. The acquisition was completed in July 2009 and accordingly, the amount was reclassed to “investment in associates”.

Aggregate amount of group’s borrowings and debt securities Amount repayable in one year or less, or on demand As at 30 Sep 09 Secured (HK$‟000)

As at 30 Jun 09

Unsecured (HK$‟000)

4,882

Secured (HK$‟000)

169,970*

8,905

Unsecured (HK$‟000) 187,811*

Amount repayable after one year As at 30 Sep 09 Secured (HK$‟000)

As at 30 Jun 09

Unsecured (HK$‟000)

451

Secured (HK$‟000)

11,420

170

Unsecured (HK$‟000) 12,701

* Included in this amount is a S$5 million convertible loan notes with a bank, under which the bank has the right to convert all or part of the bond into new ordinary shares at any time six months from the date of issue. The conversion price is agreed at S$0.275 per share.

Details of any collateral The borrowings are secured against the followings: 1)

pledged bank deposits of Winning Metals Products Manufacturing Company Limited (WMP) group; and

2)

corporate guarantees given by the Company and WMP group.

4

1(c)

A statement of cash flows for the group, together with a comparative statement for the corresponding period of the immediately preceding financial year Group First Quarter ended 30 Sep 09 30 Sep 08 HK$'000 HK$'000

Operating activities Profit before income tax

27,958

25,100

1,642 826 33 47 3,107 674 45 1,515 (43) (520) 230

347 (784) 33 47 2,236 (1,598) 3 2,008 (100) 1,745 498

Operating cash flows before movements in working capital

35,514

29,535

Trade receivables Other receivables, deposits and prepayments Inventories Trade payables Other payables and accruals

(185) (7,278) 960 17,730 7,078

(38,232) (14,148) 6,924 17,574 11,395

Cash generated from operations Interest received Income tax paid

53,819 43 (7,633)

13,048 100 (447)

Net cash generated from operating activities

46,229

12,701

Investing activities Proceeds from disposal of plant and equipment Purchase of plant and equipment (Note A) Purchase of investment properties Increase in pledged bank deposits Investment in associates (Note B) Deposit paid for investment

79 (4,810) (4,320) -

(4,323) (26,422) (41)

Net cash used in investing activities

(9,051)

(33,317)

(80) 87,805 (111,790) (1,515) -

(29) 131,763 (131,788) (2,008) 19,724

(25,580)

17,662

Net increase/(decrease) in cash and cash equivalents

11,598

(2,954)

Cash and cash equivalents at beginning of period

82,117

64,760

268

(1,824)

93,983

59,982

Adjustments for : Allowance for obsolete inventories Allowance/(reversal of allowance) for bad and doubtful debts (trade) Amortisation of expense on convertible loan notes Amortisation of intangible assets Depreciation expense of property, plant and equipment Exchange difference arising from convertible loan notes Increase in provision for long services payments Interest expense Interest income Loss on dilution of shareholding in a subsidiary Share of results of associates Loss on disposal of plant and equipment

Financing activities Repayment of obligations under finance lease Proceeds from borrowings Repayment of borrowings Interest paid Capital contribution from minority shareholders of a subsidiary Net cash (used in)/generated from financing activities

Effects of exchange rate changes on the balance of cash held in foreign currencies Cash and cash equivalent as at end of period Notes: A)

B)

(2,531)

During the period, the Group acquired plant and equipment with an aggregate cost of HK$5,303,000 (2008: HK$4,323,000) whereby plant and equipment with an aggregate cost of HK$493,000 (2008: HK$Nil) were financed via finance leases. The cash outflow on acquisition of plant and equipment amounted to HK$4,810,000 (2008: HK$4,323,000). During the period, the Group acquired 3 associates with an aggregate cost of HK$17,276,000. The Group paid a deposit of HK$12,956,000 as at 30 June 2009, and the remaining consideration of HK$4,320,000 during the current period.

5

1(d)(i)

A statement for the issuer and group showing either (i) all changes in equity or (ii) changes in equity other than those arising from capitalisation issues and distributions to shareholders, together with a comparative statement for the corresponding period of the immediately preceding financial year Properties

Currency

Share

Capital

Shareholder’s

Other

Revaluation

Translation

Accumulated Profits/

Minority

Total

Equity

Reserve

Contribution

Reserve

Reserve

Reserve

(Losses)

Total

Interests

Equity

HK$'000

HK$'000

HK$'000

HK$'000

HK$'000

HK$'000

HK$'000

HK$'000

HK$'000

HK$'000

570,051

(432,677)

544

116

5,291

43,043

155,916

342,284

84,340

426,624

-

-

-

-

-

1,726

17,644

19,370

3,488

22,858

Balance as at 30 Sep 2009

570,051

(432,677)

544

116

5,291

44,769

173,560

361,654

87,828

449,482

Balance as at 1 Jul 2008

570,051

(432,677)

544

116

5,430

44,828

104,212

292,504

32,999

325,503

-

-

-

-

-

11,042

16,410

27,452

1,436

28,888

-

-

-

-

-

-

-

-

19,724

19,724

-

-

-

-

-

-

-

-

1,745

1,745

570,051

(432,677)

544

116

5,430

55,870

120,622

319,956

55,904

375,860

570,051

-

-

116

-

-

(169,552)

400,615

-

400,615

-

-

-

-

-

-

(745)

(745)

-

(745)

Balance as at 30 Sep 2009

570,051

-

-

116

-

-

(170,297)

399,870

-

399,870

Balance as at 1 Jul 2008

570,051

-

-

116

-

-

(176,721)

393,446

-

393,446

-

-

-

-

-

-

673

673

-

673

570,051

-

-

116

-

-

(176,048)

394,119

-

394,119

Group Balance as at 1 Jul 2009 Total comprehensive income

Total comprehensive income Contribution from minority shareholders to a nonwholly owned subsidiary Dilution in interest of a subsidiary

Balance as at 30 Sep 2008

Company Balance as at 1 Jul 2009 Total comprehensive income

Total comprehensive income

Balance as at 30 Sep 2008

6

1(d)(ii)

Details of any changes in the company's share capital arising from rights issue, bonus issue, share buy-backs, exercise of share options or warrants, conversion of other issues of equity securities, issue of shares for cash or as consideration for acquisition or for any other purpose since the end of the previous period reported on. State also the number of shares that may be issued on conversion of all the outstanding convertibles as at the end of the current financial period reported on and as at the end of the corresponding period of the immediately preceding financial year Since the end of the previous financial year, there have been no changes in the Company‟s issued share capital. The total number of shares that may be issued on conversion of all outstanding convertibles is as follows: 30 Sep 2009 30 Sep 2008 Convertible loan notes Call option in connection with term and revolving facilities granted by a bank

18,181,818

18,181,818

-*

12,000,000

18,181,818

30,181,818

* The call option has expired upon full repayment of the term and revolving facilities in January 2009.

1(d)(iii)

To show the total number of issued shares excluding treasury shares as at the end of the current financial period and as at the end of the immediately preceding year The total number of issued ordinary shares as at 30 September 2009 and 30 June 2009 is 374,061,627.

1d(iv)

A statement showing all sales, transfers, disposal, cancellation and/or use of treasury shares as at the end of the current financial period reported on The Company has no treasury shares.

2.

Whether the figures have been audited, or reviewed and in accordance with which auditing standard or practice The figures have not been audited or reviewed by the auditors.

3.

Where the figures have been audited or reviewed, the auditors’ report (including any qualifications or emphasis of matter) Not applicable.

4.

Whether the same accounting policies and methods of computation as in the issuer’s most recently audited annual financial statements have been applied The accounting policies and methods of computation are consistent with those adopted in the most recent audited financial statement for the year ended 30 June 2009.

5.

If there are any changes in the accounting policies and methods of computation, including any required by an accounting standard, what has changed, as well as the reasons for, and the effect of, the change Not applicable.

7

6.

Earnings per ordinary share of the group for the current financial period reported on and the corresponding period of the immediately preceding financial year, after deducting any provision for preference dividends Group First Quarter ended 30 Sep 09 30 Sep 08 HK cents HK cents Earnings per ordinary share of the Group based on net profit attributable to shareholders: (i) Based on the weighted average number of ordinary shares (ii) On a fully diluted basis

4.72 4.54

4.39 4.23

The calculation of the basic and diluted earnings per share attributable to the ordinary equity holders of the company is based on the following data: Group First Quarter ended 30 Sep 09 30 Sep 08 Earnings Profit for the period attributable to equity holders of the company for the purpose of basic earnings per share Effect of dilutive potential ordinary shares: - Interest expense on convertible loan notes

HK$‟000

Earnings for the purpose of diluted earnings per share

17,644

16,410

166

169

17,810

16,579

„000

Number of shares Weighted average number of ordinary shares for the purpose of basic earnings per share Effect of dilutive potential ordinary shares from convertible loan notes Weighted average number of ordinary shares for the purpose of diluted earnings per share

7.

HK$‟000

„000

374,062

374,062

18,182

18,182

392,244

392,244

Net asset value (for the issuer and group) per ordinary share based on issued share capital of the issuer at the end of the (a) current period reported on and (b) immediately preceding financial year Group As at 30 Sep As at 30 2009 June 2009 HK cents HK cents Net asset value per ordinary share based on issued share capital

96.7

91.5

Company As at 30 Sep As at 30 2009 June 2009 HK cents HK cents

106.9

107.1

The net asset value per ordinary share as at 30 September 2009 and 30 June 2009 is based on the issued share capital of 374,061,627 shares in issue.

8

8.

A review of the performance of the group, to the extent necessary for a reasonable understanding of the group’s business. It must include a discussion of the following:(a)

(b)

any significant factors that affected the turnover, costs, and earnings of the group for the current financial period reported on, including (where applicable) seasonal or cyclical factors; and any material factors that affected the cash flow, working capital, assets or liabilities of the Group during the financial period reported on.

Overview Underscored by a stable HK$1.2 million increase in revenue for the first quarter ended 30 September 2009 (1QFY2010) to HK$281.4 million and stronger contributions from the Group‟s higher margin retail segment, Time Watch posted an 8% increase in gross profits to HK$98.7 million as compared to HK$91.7 million in 1QFY2009. In line with the Group‟s strategic shift towards its higher margin business, gross margin for the Group grew to 35% in 1QFY2010 from 33% in 1QFY2009. The Group recorded share of results of associates of HK$0.5m in 1QFY2010. Profit before taxation for the period reached HK$28.0 million, a rise of 11% as compared to the corresponding period for 1QFY2009. Profit for the period increased by 9% to HK$21.1 million from HK$19.4 million in 1QFY2009. Revenue Revenue by Business Segments

Business Segments

1QFY2010 HK$’m %

1QFY2009 HK$’m %

% Change

Trading watch movement Manufacturing & trading of watches Manufacturing & resale of OEM watches Leasing of a shopping mall

76.9 136.2 65.6 2.7

27 49 23 1

84.1 98.9 93.7 3.5

30 35 34 1

(9%) 38% (30%) (23%)

Total

281.4

100

280.2

100

0%

Revenue from the trading watch movement segment declined by 9% to HK$76.9 million as the Group strategically shifted its focus towards its higher margin segments. Benefiting from the sustained market demand for our timepieces in the PRC, coupled with contributions from the Group‟s Suzhou shops which commenced operations in October 2008, revenue from the manufacturing and trading of watches business segment grew by 38% to HK$136.1 million. The manufacturing and resale of OEM watches business segment recorded a decrease of 30% in revenue mainly due to lower orders received from OEM customers as a result of lower demand for watches in the European market. Profitability Gross Profit by Business Segments

Business Segments

1QFY2010 HK$’m %

Trading watch movement Manufacturing & trading of watches Manufacturing & resale of OEM watches Leasing of a shopping mall Total

2.5 80.8 13.1 2.3 98.7

3 82 13 2 100

1QFY2009 HK$’m % 3.5 63.6 21.1 3.5 91.7

4 69 23 4 100

% Change (29%) 27% (38%) (34%) 8%

The changes in the segmental gross profits are in line with the segmental revenues and led to a growth of 8% in the overall gross profit to HK$98.7 million. The gross margin improved from 33% in 1QFY2009 to 35% in 1QFY2010. 9

Other operating income declined by HK$0.5 million mainly due to translational losses arising from an appreciation of the SGD which was recognised in the translation of its SGD-denominated convertible loan notes. This decline was partially offset by sale of sample watches and advertising subsidy received during the current period. In line with the Group‟s strategic expansion of its retail network which included the new Suzhou shops which commenced operations in October 2008, distribution costs increased by 14% to HK$50.9 million. Finance costs declined by 25% to HK$1.5 million due to lower borrowings as well as lower interest rates. Income tax expense increased by 20% to HK$6.8 million, which was in line with higher taxable profits of the Group.

Balance Sheet As at 30 September 2009, the Group had net assets of HK$361.7 million representing an increase of HK$19.4 million or 6% as compared to 30 June 2009. Current assets increased by HK$16.3 million to HK$541.4 million as at 30 September 2009. Cash and bank balances increased by HK$11.9m to HK$94.0 million mainly due to net cash generated from operations partially offset by repayment of borrowings, purchase of plant and equipment, and payment of balance consideration for investment in associates. Other receivables, deposits and prepayments increased by HK$7.7 million mainly due to prepaid custom taxes, which is in line with the higher volume of goods shipped to PRC. Non-current assets increased by HK$6.6 million to HK$281.6 million as at 30 September 2009 mainly due to investment in three associates acquired in July 2009 (HK$17.8 million) partially offset by deposit placed (HKD13.0 million) as at 30 June 2009, as well as additions to plant and equipment. There was a slight increase in current liabilities by HK$1.0 million to HK$339.3 million as at 30 September 2009. This was mainly due to higher trade and other payables, which commensurate with the growth of the Group‟s business, as well as slower repayments. This was partially offset by lower borrowings and income tax payable due to repayment during the current period.

9.

Where a forecast, or a prospect statement, has been previously disclosed to shareholders, any variance between it and the actual results Not applicable.

10.

A commentary at the date of the announcement of the significant trends and competitive conditions of the industry in which the group operates and any known factors or events that may affect the group in the next reporting period and the next 12 months Driven by the sustained recovery of the PRC economy which saw GDP expanding 8.9% year on year for the first nine months of 2009, total retail sales of consumer goods rose 15.1% to RMB8.96 trillion for the first nine months of 2009 based on statistics released by the PRC National Bureau of Statistics. This continued increase in retail purchases and consumer confidence was underlined by key initiatives promulgated by the PRC Central government as part of its RMB4.0 trillion economic stimulus package to boost the economy and spur domestic consumption. Prospects and Outlook The Group believes that while uncertainty pertaining to the rate of global economic recovery may continue to place pressures on market demand and discretionary spending, the continued introduction of comprehensive economic policies by the PRC authorities will serve to encourage the sustained development of the PRC economy and bodes well for the continued growth of the retail sector. Capitalising on the long term prospects of the PRC retail sector, the Group will continue to leverage on its successful business strategies to further enhance its competitive advantages and drive the Group‟s sustained development. Brand development and product differentiation is fundamental for the continued success of the Group‟s high-margin retail business. With an established track record for the provision of highquality products and excellent after-sales service, Time Watch will continue to invest resources to augment the brand equity and mind share of “Tian Wang” and other key brands under its product portfolio “Balco” and “Police” through focused marketing campaigns and strict product quality control measures. In addition, the Group will continue to build on its distribution rights to the Police 10

brand of fashion apparels by introducing additional products such as sunglasses, leather goods, jewellery and other accessories as well as actively search out new opportunities to introduce other international brands to satisfy the lifestyle and fashion needs of its discerning customers. Leveraging on its in-depth understanding of the PRC retail market, the Group recognises that despite growing affluence, the PRC consumer is still largely confined within fixed geographical boundaries. To further enhance its market penetration, the Group actively seeks to extend its retail network. In 1QFY2010, the Group successfully opened 7 new stores raising the total point of sales to 901 across 35 cities in the PRC. Moving forward the Group will continue to increase the pace for new points of sales across China. In May 2009, the Group announced the acquisition of an initial 13% equity interest in three companies namely Fortune Concept Limited, pe.timedesign GmbH and Swiss Fashion Time GmbH which are principally engaged in the distribution and sale of timepieces and other related accessories. This acquisition is in line with the Group‟s strategic objective to widen its geographical reach outside the PRC into significant new retail markets such as Europe, the Middle East and Asia Pacific region. Building on our successes, the Group will continue to actively explore opportunities for alliances or joint-ventures that will further extend its distribution network both within and outside the PRC. The Group‟s OEM manufacturing business continues to be a key revenue contributor. Capitalising on its quality track record as the OEM of international brands such as „Police‟, „Swiss Military‟ and „Aigner‟, the Group will continue to initiate discussion and seek out opportunities to further enhance collaborations with international brands. Testament to the Group‟s growing maturity as a designer and manufacturer of quality timepiece, Time Watch was appointed by international brands French Connection “FCUK” and Cerruti to be the original design manufacturer (“ODM”) in 2008 and 2009 respectively. Moving forward, the Group will continue to seek out fresh opportunities to penetrate into the ODM business for other international brands. Barring any unforeseen circumstances, the Board of Directors is confident that the Group would continue its good performance for the next reporting period and the next 12 months.

11

11.

Dividend (a)

Current Financial Period Reported On Any dividend declared for the current financial period reported on? None.

(b) Corresponding Period of the Immediately Preceding Financial Year Any dividend declared for the corresponding period of the immediately preceding financial year? None.

(c)

Date payable Not applicable.

(d)

Books closure date Not applicable.

.

12.

If no dividend has been declared/recommended, a statement to that effect Not applicable

13.

Statement of Negative Assurance The Board of Directors hereby confirm that, to the best of their knowledge, nothing has come to their attention which may render the unaudited financial statements of the Group and the Company for the period ended 30 September 2009 to be false or misleading in any material respect.

BY ORDER OF THE BOARD

Mr. Tung Koon Ming Chairman and Chief Executive Officer 13 November 2009

12