Swatch upbeat despite slowing demand for luxury watches in China

Swatch Group struck a positive note as it presented its half-year results, predicting a “strong second half-year”, despite concerns about a slowdown in Chinese demand for high-end watches.

Amid a crackdown by the new Chinese government on corruption and ostentatious consumption, Swiss watch exports have fluctuated sharply in recent months, and have risen barely 2 per cent in total this year.

Despite this environment, Swatch, the world’s biggest watchmaker, said that in the first six months of the year its revenues came in at SFr4.18bn, up 8.7 per cent on the same period a year earlier.

Although this rate of expansion was more muted than the 14 per cent revenue growth Swatch achieved in the same period in 2012, it still exceeded analysts’ expectations.

“I thought the sales figures were a positive surprise,” said John Cox, head of Swiss research at Kepler Cheuvreux in Zurich. “The market overall only grew at around 2 per cent over the first half, so the key point is that Swatch is winning share.”

Swatch’s net income rose more slowly, however, climbing 6.1 per cent to SFr768m, or SFr2.83 per share, as the company spent heavily on marketing.

“A great deal of investment has been ploughed into the marketing activities of all of the brands, ranging from investment in new groundbreaking innovations to investment relating to the redesign of booths for the Watches and Jewelry Fair Basel,” the group said in a statement.

The watchmaker’s figures were also affected by the integration of the jewellery and watch division of Harry Winston Diamond Corp, which Swatch bought for $1bn in January, but whose impact it expects “will only really become noticeable in the second half of 2013”.

Thomas Chauvet, an analyst at Citi, described Swatch’s overall results as “uninspiring”, citing the pressure on the group’s operating margins, which declined by 180 basis points in comparison with a year earlier to 22.7 per cent.

However, Mr Cox said that while the narrowing was a “slight cause for concern”, the fact that it was because of Swatch’s increased marketing spending was reassuring.

“I thought Swatch explained it pretty well,” he said. “If you strip out the impact of the integration and increased marketing costs, Swatch’s [operating] margin would probably actually have improved.”

Shares in the company closed up 1.7 per cent a SFr538.50 in Zürich.

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