February 4, 2013 / 5:56 AM / in 5 years

Swatch's upbeat view stokes hopes China demand improving

ZURICH (Reuters) - Swatch Group SA UHR.VX said it was optimistic about 2013 as it reported higher margins, providing further evidence the luxury goods sector was set to benefit from improved demand in major markets such as China and the United States.

The group, which makes colorful plastic watches as well as Omega and Breguet timepieces, is targeting double-digit growth this year after having enjoyed “continued healthy growth in January.”

“The signals from the markets around the world clearly indicate continued healthy growth potential for the Swiss watch industry and the Swatch Group,” said the group which makes more than half of its turnover in Asia.

Looking ahead, it said it expected long-term growth in the Swiss watch industry of 5-10 percent per year.

Swatch’s comments come after sector peers such as LVMH (LVMH.PA) and Burberry (BRBY.L) said last month they expected good trading conditions in China helped by improved consumer confidence after the regime change.

Luxury goods sales at the end of 2012 have been affected by the timing of the Chinese New Year which falls in February this year as opposed to January last year, leading to expectations of pent-up demand this month.

Richemont, CFR.VX which makes Cartier watches and Montblanc pens, said sales had ground to a halt in the Asia-Pacific region in the fourth quarter. But industry analysts said they believed the lull was momentary.

China has become the main engine of growth for luxury goods makers thanks to the country’s rising purchasing power while Chinese tourists travelling in Europe have helped make up for lackluster demand from local consumers.

Swatch’s positive outlook and forecast-beating results helped lift the stock more than 3 percent, compared with an unchanged European sector index .SXQP.

The shares, which have risen more than 12 percent this year after a 31 percent gain in 2012, were up 2.8 percent at 532 Swiss francs by 1205 GMT.

    Swatch said it expected growth to come as well from the high-end jewellery arm of Harry Winston HW.TO which it acquired last month and which analysts expect to start lifting sales and profit in second half of this year.

    The acquisition boosts Swatch’s presence in the jewellery market - which is set to enjoy solid growth this year - as well as in the United States where it was not very present and where luxury executives see a rebound.

    The group underlined its optimism with a 17 percent increase in its dividend to 6.75 Swiss francs ($7.48) per bearer share from 5.75 francs in 2011, and 1.35 francs per registered share, previously 1.15 francs.

    “ Strong set of figures driven by improved profitability in watches and production. I presume much of that is down to upgrades in manufacturing, which makes the production process more efficient,” Kepler Capital Markets analyst Jon Cox said.

    Full-year results from Swatch, which also makes Tissot watches, showed net income rising 26 percent to 1.61 billion Swiss francs ($1.78 billion), far ahead of expectations according to analysts polled by Reuters.

    The group’s operating margin rose to 25.4 percent, versus 23.9 percent a year ago, which Vontobel analyst Rene Weber contrasted to the decline reported last week by the world’s biggest luxury goods group LVMH (LVMH.PA).

    “This margin increase will stand out in the luxury goods industry,” Weber said in a note, but added he expected no improvement in margin in 2013 due to the consolidation of the Harry Winston business.

    Additional reporting by Emma Thomasson; Writing by Astrid Wendlandt; Editing by Sophie Walker

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