Flash
Report
for


Conference
Call

Huang,Jackson
Jun

JaX
Watch
Company
Inc

Liu,
Shawn
Xuhang










Huang,
Shirley
Jingtian

 


Kaya,
Sahika


Wang,
Xenia
Xingxin

 


Agenda






JaX
Watch
Company’s
current
situation .........................................................................................2

Overall
2011
results.....................................................................................................................3


Arctic .......................................................................................................................................3


Compass ..................................................................................................................................4


Competitors
analysis
(including
market
share) ...........................................................................5


Company
1: .............................................................................................................................6


Company
3: .............................................................................................................................6


Company
4: .............................................................................................................................7


Company
5: .............................................................................................................................8


Factory
relocation .......................................................................................................................8


Strategies
and
decisions
moving
forward ...................................................................................9


Pro
forma
Financial
Statements ................................................................................................10


Compensation
results
from
2nd
year
of
operations .......................................................................12






JaX
Watch
Company’s
current
situation

Much of the industry activities in the past fiscal year have been overshadowed by the
global economic down-turn. Raw material costs and labour costs were rising, and, at least
in the watch industry, producers were not able to pass on the rising costs to the
consumers. As a result, revenue and profit figures among all companies fell dramatically.
Excluding our own company, the total industry revenue fell by 2%, while the total
industry profit declined by more than 70%.
For JaX, the past fiscal year was a year of transition, where we have successfully
transformed ourselves into the true luxury leader of the industry. At the beginning of the
year, our business was exposed to a number of potential risks that would undermine our
initial strategy. Therefore, throughout the year, we took a number of actions to tackle and
mitigate these potential risks and have solidified our position. Below we list the key
events that took place during the year:
• We had a very successful union negotiation at the beginning of the year, and as a
result we will face less total cost increase (in %) compared to all of our
competitors.
• After potentially being shut out of our price-sensitive market (Compass), efforts
were made this year to stabilize Compass’s revenue/contribution margin at a self-
sustainable level. We greatly value having the option to re-focus on the price-
sensitive market in the future.
• At the beginning of the year, the luxury segment had 16% in excess supply, and
inventory was rising for all companies. Despite the market down-turn, we made a
conscious effort to trim our inventory, and our inventory is now at a very healthy
8-10% of demand (down from ~70%)
• Unfortunately for our company, economic downturn hit Europe, the region where
we had the largest market share, the hardest. According to the latest Rotman
Times, demand should return to their normal level by next year.
• Perhaps our biggest potential threat was the possibility of our competitors reacting
to our strategy and challenging us by increasing their own R&D, marketing, and
competitive pricing efforts. During the year, all of our competitors stepped up
their spending, and two competitors moved their factories to Germany where the
factories there are better suited for producing high-quality products. To counter,
we decided to move our factory to Japan where we now have an equally high-
quality factory to produce our products. We estimate that our product quality will
still be the highest in the industry when we begin operating in the next quarter.
• Dividend was cut in the last quarter.
For the entire fiscal year, we recorded revenue of $125 million, up 8% YoY. We also
recorded net loss of $901 thousand, down from a net income of $1.6million one year ago.
The industry average revenue was $126 million, down 2% YoY, and the industry average
net income was $2.1 million, down 70% YoY.
Overall
2011
results

The rest of the report will provide a detailed breakdown of our results in the past fiscal
year, an overview of our strategy going forward, and our compensation plan entering
third year.
The recent slowdown in the economy has shown to have a significant impact in the
performance of the watch industry. Overall, as the management of JaX Inc., we have
managed to maintain our market dominance in our high-end Arctic watches and even
increased our market share in Compass.

Arctic

As the management of JaX Inc., we have kept true to our vision of sustaining the quality
and the value of our high-end product and have successfully ended the year with the
highest sales in the market among four of our competitors.
In the past year, the economic recession has played a major role in reducing our sales by
19% by the end of the third quarter to 314,000 units. In the last quarter of the year,
however, we have partially reversed this reduction by bringing our sales up by 6% to a
level of 332,000 units. Despite the fact that our sales have been negatively affected due to
the recession, we are still holding our reputation as the dominant player in the market
with a total market share of 24% that is above our competitors’. Overall, our market share
has shown a total increment of 6% in 2011.



Compass


The economic slowdown had a smaller effect on our low-end product than it did on
Arctic due to its affordability among our customers and as a result, the sales of our low-
end product have not been affected as largely as the sales of our high-end product. Over
the course of last year, we have managed to maintain our Compass sales at around the
same level with the exception of the last quarter where it showed a slight decrease since
we have lost the government auction to Company 5 for the first time during the year.
Currently, our overall image with the government is the highest among all the companies
which is the result of our continuous success in winning the government auctions. We
have sold a total of 165,000 units of Compass through those auctions.
Despite the economic downturn, the market share of Compass has improved since the
beginning of the year and we now hold approximately 16.5%.
 Competitors
analysis
(including
market
share)

There are four watch companies that compete with JaX in the world watch market. The
actions of JaX management always take into account the decisions made by our
competitors. 


Product 1 Market Share

JAPAN MEXICO CHINA UNITED GERMANY UNITED OVERALL
KINGDOM STATES
2010 15% 23% 18% 12% 14% 18% 17%
2011 15% 22% 17% 10% 14% 16% 18%

Product 2 Market Share

JAPAN MEXICO CHINA UNITED GERMANY UNITED OVERALL
KINGDOM STATES
2010 25% 15% 17% 20% 23% 23% 22%
2011 25% 26% 18% 20% 24% 24% 24%
 Despite the fact that entire economy has experienced a recession in 2011; JaX is still able
to increase its demand and revenue effectively. JaX’s revenue has increased by 8% while
other companies’ revenue has all experienced a decline in revenue. JaX’s market share
has increased 6% in Product 1 and 8% in Product 2; these increases are both larger than
the growth in world demand (approximately -0.4% in Product 1 and 1% in Product 2),
which shows JaX was effective in gaining customers from other companies.

Company
1:

Product 1 Market Share
JAPAN MEXICO CHINA UNITED GERMANY UNITED OVERALL
KINGDOM STATES
2010 19% 14% 16% 22% 21% 17% 19%
2011 18% 19% 19% 19% 18% 19% 18%

Product 2 Market Share

JAPAN MEXICO CHINA UNITED GERMANY UNITED OVERALL
KINGDOM STATES
2010 17% 18% 17% 21% 19% 17% 18%
2011 17% 24% 21% 17% 17% 18% 18%

In first operation year, Company 1 is our main competitor for Product 2. With a move to
Germany, Company 1 received the gains of increased R&D efficiencies, while leading in
quality at the same time.
Although Company 1 poses a threat in quality, financial levels of the company may be
unstable. With sales revenue decreased 0.4% and its profit decreased 68% in 2011;
Company 1 was forced to cut down R&D expenditure in Product 2. As Company 1
slowly cut down R&D investment they have become less competitive in Product 2
market, as their market share has decrease in UK and Germany.

Company
3:

Product 1 Market Share
JAPAN MEXICO CHINA UNITED GERMANY UNITED OVERALL
KINGDOM STATES
2010 22% 19% 26% 25% 20% 24% 22%
2011 19% 21% 26% 28% 23% 22% 22%
 Product 2 Market Share
JAPAN MEXICO CHINA UNITED GERMANY UNITED OVERALL
KINGDOM STATES
2010 19% 24% 26% 20% 18% 19% 20%
2011 17% 10% 27% 22% 19% 18% 19%

Company 3’s sales revenue and profit have decreased by 1.8% and 76%, respectively.
Because JaX’s strategy was to maintain market share in Product 1; Company 3 has pose
potential threat in UK and Germany market for JaX’s Product 1.
On the other hand, Company 3 has low Product 2 market share and show no signs of
improving as they have kept R&D expenditure constant, maintained a relative quality of
94% throughout the year. In addition, Company 3 exits Product 2 Mexico market due to
low contribution margin. The increase in Product 1 market share is mainly due to sudden
price cut in Quarter 3. JaX management believe this action is mainly due to its inventory
problem.
JaX sees Company 3 focusing heavily on price – sensitive markets such as Mexico,
China and UK. JaX and Company 3 have different target markets in Product 2 and
management does not see this company as a major threat to its product 2 target markets
of the Japan, US and Germany.

Company
4:

Product 1 Market Share
JAPAN MEXICO CHINA UNITED GERMANY UNITED OVERALL
KINGDOM STATES
2010 21% 18% 15% 18% 24% 21% 20%
2011 22% 17% 17% 16% 21% 20% 19%

Product 2 Market Share

JAPAN MEXICO CHINA UNITED GERMANY UNITED OVERALL
KINGDOM STATES
2010 21% 21% 19% 19% 20% 20% 20%
2011 22% 21% 16% 20% 20% 20% 20%

Company 4’s sales revenue has decreased 4.5% and profits decreased 81% compare to
first operation year. During Second year operation, Company 4 has cut their R&D
spending for product 1 and focused more on product 2’s marketing, as their product 2
sales have increased by 1% with no change in quality and price.
While cutting R&D in product 1, Company 4’s product 1 sales have decreased by 3%
compare to last year because they failed to realize that company 5 is catching up with
 their quality and at the same time offering a price discount in product 1. Therefore they
have mainly lost their product 1 market share mainly to Company 3 and 5.
JaX see Company 4 as a potential threat to its product 2 target markets (Japan, Germany
and US) since it has intensively invested in marketing at these markets.

Company
5:

Product 1 Market Share
JAPAN MEXICO CHINA UNITED GERMANY UNITED OVERALL
KINGDOM STATES
2010 23% 26% 26% 22% 22% 21% 22%
2011 25% 21% 22% 27% 23% 22% 23%

Product 2 Market Share

JAPAN MEXICO CHINA UNITED GERMANY UNITED OVERALL
KINGDOM STATES
2010 18% 23% 22% 21% 19% 21% 20%
2011 19% 19% 19% 21% 19% 19% 19%

With Company 5 earning the most profits over the last two years of operations, they may
pose viable threat to JaX in the future. Company is doing very well in product 1 in the
first operation year, and now Company 5 is also our main competitor in Product 2.
Similar to Company 1, moving Product 2 factory to Germany allow Company 5 received
the gain in R&D efficiencies and with heavy R&D investment in last year, Company 5 is
now the leading quality company in both product 1 and 2. JaX’s relocation to Japan has
proved essential terms of combating the threat of R&D war. With a current relative
quality index of 108% for Company 5 and JaX’s 101% relative quality index in product 2,
Company 5 poses the sole threat to JaX on the basis of quality with Company 3 and 4
keeping quality level of 95% and Company 1 cut down R&D investment.
On the other hand, with inventory levels rising in both products, this company will be
facing with high storage cost or inefficient production at less than full capacity.

Factory
relocation

R and D
In comparison to US, Japan has more technological resources and the right capital to
accommodate our desire to obtain as high return from our R&D expenditure as possible.
During last year, we have spent around $6 million per quarter and we believe that the
cumulative nature of our R&D spending will show its effect on increasing our product
quality more significantly as of the start of next quarter due to our factory relocation to
Japan.
Inventory - Arctic
The slow down in the economy has been a major obstacle in our sales performance which
resulted in an increase in our inventory levels. In the last quarter of the year, we have
decided to close down our factory in the United States. This has significantly lowered our
inventory levels and saved our company from high storage costs. As of next year, we will
be starting off the year with a new factory in Japan that will immediately increase our
quality and help us save on imposed tariffs.

Financial
From a financial perspective, the relocation makes sense as well. Although compared to
having a factory in the US, we would incur around $300,000 in additional tariffs and
taxes every quarter going forward. However, based our current R&D spending, the new
factory would provide a benefit that is equivalent to $600,000 every quarter going
forward. Therefore, although relocating the factory cost us approximately $1.5 million
now, we are actually gaining $300,000 quarterly into perpetuity. Based on our cost of
capital (WACC) of 9%, the NPV of the relocation is approximately $2 million.

Strategies
and
decisions
moving
forward

Strategically, we were very pleased with what we had achieved in the past fiscal year.
Despite the economic downturn and our competitor’s increased efforts in the luxury
market, we have solidified ourselves as the luxury brand leader. In addition, we
successfully tackled a number of key potential risks such as rising inventory levels, and
we now have a safer business model going forward.
Looking ahead to next year, we plan to follow through with our initial plan, but will make
a couple of minor changes to our overall strategy:
 • As the overall market demand returns to a normal level, we plan to slowly
increase our retail price for Arctic, as this price is justified by our superior quality
and intensive marketing campaign.
• We will take a number of initiatives to cut down our cost in order to improve our
bottom line. For example, depending on the actual quality we are able to produce
from our new factory in Japan, we may be able to cut down our R&D expenses
going forward.
Our strategic over the past two years have positioned our product advantageously. Our
financial results have been sub-par, but we believe we have successfully transitioned into
the luxury leader and we are now ready to reap the benefits.

Pro
forma
Financial
Statements




Income
Statement

2011 Q1 2011 Q2 2011 Q3 2011 Q4 2011FY 2012FY 2013FY

Total Total Total
Sales Revenues 33,741,621 31,901,474 29,563,799 29,974,619 125,181,513 135,196,034 148,715,637
Interest 154,140 149,100 116,340 258,580 678,160 678,160 678,160
Income
Currency 0 0 0 0 0 0 0
Trading
Income
TOTAL 33,895,761 32,050,574 29,680,139 30,233,199 125,859,673 135,874,194 149,393,797
REVENUES

Cost of goods 15,065,779 13,890,640 12,474,525 13,044,211 54,475,155 55,564,658 56,675,951

sold
GROSS 18,829,982 18,159,934 17,205,614 17,188,988 71,384,518 80,309,536 92,717,846
MARGIN

OPERATING EXPENSES
Transportation 924,783 915,041 847,653 874,189 3,561,666 3,561,666 3,561,666
Expenses
Marketing 5,179,567 5,343,038 5,508,974 5,424,330 21,455,909 21,455,909 21,455,909
Expenses
Warehousing 1,006,571 1,345,132 1,765,048 327,295 4,444,046 4,444,046 4,444,046
Expenses
Research & 6,000,000 6,000,000 6,000,000 5,000,000 23,000,000 23,000,000 23,000,000
Development
Interest 361,836 370,086 410,068 420,196 1,562,186 1,400,000 1,400,000
Expense
Factory 176,398 174,193 172,016 62,672 585,279 585,279 585,279
Depreciation
Factory Sale 0 0 0 1,286,319 1,286,319 0 0
Loss
Inventory 0 0 0 0 0 0 0
Write Down
Consultants 2,250,000 1,950,000 2,000,000 1,900,000 8,100,000 8,100,000 8,100,000
Insurance 0 0 20,000 0 20,000
Admin and 62,000 35,000 20,000 20,000 137,000 137,000 137,000
Misc Expenses
Bad Debt 162,356 157,008 179,340 166,585 665,289 800,000 800,000
Expenses
Import Tariffs 2,165,378 2,019,910 1,834,567 1,913,171 7,933,026 7,700,000 7,700,000
TOTAL 33,354,668 32,200,047 31,232,190 30,438,968 127,225,875 126,748,558 127,859,851
OPERATING
EXP

PRETAX 541,094 -149,474 - -205,769 -1,366,202 8,447,476 20,855,786

INCOME 1,552,051
(EBT)
TAXES 183,972 -50,820 -527,696 -69,960 -464,504 -2,534,243 -6,256,736
NET INCOME 357,122 -98,654 -1,024,355 -135,809 -901,698 5,913,233 14,599,050



Balance Sheet

2011 Q1 2011 Q2 2011 Q3 2011 Q4 2011FY 2012FY 2013FY

Total Total Total
Cash and 8,130,121 5,798,405 2,956,832 15,951,197 15,951,197 17,546,317 18,423,633
Securities
Receivables 13,113,757 12,890,220 11,859,611 12,056,846 12,056,846 12,780,257 13,163,664
Inventories 8,327,229 10,494,589 11,433,062 2,592,851 2,592,851 2,722,494 2,776,943
Shipping Cont 2,289,687 2,175,203 2,066,444 1,963,123 1,963,123 2,061,279 2,081,892
(Net)
Plant and Equip 13,935,458 13,761,265 13,589,249 4,951,109 4,951,109 5,347,198 5,507,614
(Net)
TOTAL ASSETS 45,796,252 45,119,682 41,905,198 37,515,126 37,515,126 40,457,544 41,953,746

Trade Payables 8,106,000 8,029,000 6,706,500 2,102,000 2,102,000 2,207,100 2,361,597

Taxes Payable 70,183 -50,820 -578,516 -648,476 -648,476 -700,354 -756,382
Loans and Interest 16,231,841 16,601,927 17,011,995 17,432,191 17,432,191 18,303,801 16,473,420
Common Stock 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000
Retained Earnings 20,388,228 19,539,574 17,765,220 17,629,411 17,629,411 19,039,764 20,562,945
TOTAL LIAB & 45,796,252 45,119,681 41,905,199 37,515,126 37,515,126 40,457,544 41,953,746
EQUITY
Debt/Equity 0.76 0.81 0.91 0.94 0.94
DIVIDENDS 750,000 750,000 750,000 0 0 0 0
PAID
Compensation
results
from
2nd
year
of
operations




Bonus: (in ‘000)

1. Relative Valuation (30%):
ROE (40%):
-48% of industry average: 0%*40%*30%*40,000 $0
Revenue (20%):
99% of industry average: 0%*20%*30%*40,000 $0
Stock Price (40%):
64% of industry average: 0%*40%*30%*40,000 $0

2. Absolute Valuation (70%):

ROE (40%):
Increased by -3%: 0%*40%*70%*40,000 $0
Revenue (20%):
Increased by 8%: 25%*20%*70%*40,000 $1,400
Stock Price (40%):
Increased by -8%: 0%*40%*70%*40,000 $0
Total Bonus per Executive $1,400

ROE industry average: 9.4% Our ROE: -4.58%

Revenue industry average: $126,126 Our Revenue: $125,182
Stock price industry average: $43.24 Our stock price: $27.63
ROE previous: -3% ROE current: -4.58%
Revenue previous: $115,926 Revenue current: $125,182
Stock price previous: $29.29 Stock price current: $27.63

Base Salary:
$80,000, same as previous year
Same method used to calculate the base salary, therefore no raise of salary.
Going forward, would like to maintain our current compensation plan, which is
highlighted below. Since we are confident in our company, products, and strategy, it
makes sense that we maintain our current compensation plan to best align our incentives
with that of our shareholders’. We believe that we will begin to reap the benefits from our
initial strategy sooner rather than later, and our current compensation plan will provide us
with a reliable measure of our relative performance and absolute performance.