Asian Business Review 2013 (Maiden Issue)

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PROPERTY BRIEFING: TIME TO BUY OR SELL?

ASIA STILL UNPREPARED FOR GRAYING MILLIONS

THE END OF THE COMMODITY SUPER-CYCLE

CHINA’S SHALE REVOLUTION AND ITS ASIAN AFTERSHOCK MICA(P) 244/07/2011 KDM No: PPS1645/3/2008

THE ASIAN BUSINESS REVIEW | AUGUST 2013 1

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THE ASIAN BUSINESS REVIEW | AUGUST 2013 3

CONTENTS

08

34

38 Golden Years coming to an end 39 StanChart: Where angels fear to tread 40 School scrambles for super rich kids 41 SMRT at risk of being a ‘fallen

dividend angel’

42 M&A hits the brakes

OPINION 16 Money Will Take You Far, But Not

38 ANALYSIS The end of the commodity

ANALYSIS Asia still unprepared for graying millions

FIRST

Far Enough

28 Injustice in Money Laundering

Published Bi-monthly on the Second week of the Month

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FIRST Sick business can be good business

SPECIAL REPORT

14 More Asian companies march

18 Startups to watch in Asia

2012 marked a high point in mergers and acquisitions with fast-expanding Asia-Pacific firms going on a Western buyout binge.

Check out how they managed with initial funding that ranges from as little as US$12,885 to as much as US$10 million

30 Asia’s lively art scene explodes Art Basel’s purchase of a well established art fair adds world significance to an already exuberant art market.

ANALYSIS 10 Asia still unprepared for graying millions

With the elderly Asian population set to explode, the region needs to play policy catch-up.

west to go global

22 Asian banks recovering

strongly post-crisis

The 2008 global financial crisis brought the banking industry to its knees, but Asian banks are heading to 2013 with notable resiliency.

REGULAR 26 CEO Interview 36 Legal Briefing 50 Numbers

For the latest business news from Asia visit the website

Asian Business Review Magazine

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News Daily news from Asia most read

ECONOMY

10 most in-demand jobs in Singapore revealed Manpower Singapore has released the results of 8th Talent Shortage Survey, which found that as the 47% of employers in Singapore are experiencing difficulty finding staff with the right skills.

Global results of ManpowerGroup’s Talent Shortage Survey reveal 35% of employers worldwide are reporting shortages, the highest level since prior to the global economic crisis.

ECONOMY

Hong Kong is world’s third most competitive country The IMD World Competitiveness Center in Switzerland said Asian nations are the most competitive in its rankings.

Hong Kong placed third, Singapore fifth and Taiwan 11th.

Malaysia and Australia both dropped one place to 15th and 16th respectively, while South Korea stayed at 22nd and New Zealand slipped one spot to 25th. USA regained its No. 1 ranking.

FROM THE BLOG

After the NTUC May Day Rally 2013, what now Singapore?

BY SEE WEE HENG When I first received the invitation to celebrate Labour Day at NTUC May Day Rally 2013 with government and union representatives at D’Marquee, Downtown East, I was a little hesitant. I expected a solemn, formal and probably pretty boring event.

6 THE ASIAN BUSINESS REVIEW | AUGUST 2013

RESIDENTIAL PROPERTY

How Ben Bernanke’s shocking statements affected Singapore REITs SREITs saw a broad-based selldown, alongside rising bond yields after Ben Bernanke’s statements left the market speculating that QE measures may be withdrawn earlier than expected, according to CIMB. “The defensive nature of the sector will hold up well in a tactically cautious environment while debt maturity is fairly well-staggered to minimise the impact of any spike in interest costs on refinancing.”

Finance

STOCKS

Here’s how CEOs of largest companies in Singapore are paid Singapore Business Review compiled the published annual reports of Singapore’s largest publicly traded companies for 2012.

We looked for the total remuneration of the chief executive officers found out that DBS’ Piyush Gupta receives the highest compensation package at $9.33 million. He has a basic salary of $1.2 million but received a cash bonus amounting to $3.5 million.

RESIDENTIAL PROPERTY

How Hong Kong banks are benefiting from spiking US interest rates Banks benefit from more net interest income initially as interest rates rise, according to Barclays.

The analyst looks at other potential consequences, including system liquidity, deposit competition, loan growth, asset quality, property prices and offshore RMB growth, including stress-testing our estimates under upside and downside scenarios.

Here’s why home prices in Hong Kong are creeping up again While residential property prices are still 2.8% below the peak recorded in mid-March, prices are creeping up again since mid-May (1.38% cumulative increase over four weeks).

DBS noted that the most fundamental reason is the demand-supply imbalance. Even discounting investment demand, pent-up demand from end-users is enormous.

8 types of annoying colleagues in Singapore

BY ADRIAN TAN There is a saying that you choose your friends but not your family. So where do colleagues fit in?

No one likes being manipulated, so what happens when you have to deal with the office jerk day in day out?

There is no escaping the people you spend 40 hours a week with.

Here is a totally different angle on Singapore property investment

BY ALEXANDER KNIGHT It’s no secret that the average price of property in Singapore is one of the highest in the world, no less than seven rounds of cooling measures implemented in recent years by the government in order to prevent a fully-fledged bubble from forming.

FIRST RMG’s purchase price is undemanding since medical suites at Novena were launched at S$3,588-3,828psf in early 2010.

According to Chow, medical suites at Orchard Medical Specialists Centre and Novena Specialists Centre are currently going for more than S$3,000psf. “Despite the Thong Sia setback, RMG remains keen on having a medical centre at Orchard Road and is on the lookout for potential sites,” adds Chow.

Sorry, We’re Closed – Forever

If you think your favorite restaurant has just disappeared, you might be right. Singaporeans seem to be losing their appetite for restaurant dining, with 537 establishments closing in 2012 alone. Only 686 restaurants opened in the same year, which translates to an average of just under two restaurant openings a day. Indeed, the F&B sector has been seeing alarmingly high casualties.

Colliers said Japanese restaurant group RE&S and the TungLok Group, which runs a chain of Chinese restaurants, had to close some of their eateries because of the manpower crunch.

Wok & Barrel closed its doors in March 2013 for the same reason.

When faced with a 15% rent increase, the three-year-old French bistro and deli along Bukit Timah, Le Bon Marche, decided to shut down in August 2012 for good and transform into an online store. French chef Julien Bombard closed his fine dining restaurant at Fullerton Water Boat House permanently on January 25, 2013 and now focuses on his online Gourmet Shop, which retails largely French food products.

It was also recently reported that Thomson V, a mixed development in Upper Thomson Road had a mere 25 of the strata-titled development’s 78 retail spaces occupied in early April, with tenants complaining of dismal trade and poor traffic.

Original tenants such as dessert shops My Garden Cafe, and the Ice Shop, and salon EZ Cut closed just months after Thomson V’s retail section opened in mid-2012.

8 THE ASIAN BUSINESS REVIEW | AUGUST 2013

Sick business can be good business

S

ingapore’s medical groups are on a tear at the moment, with many groups deciding now is the time to beef up and expand in Singapore and abroad. Q & M Dental, for instance, the largest private dental healthcare group in Singapore, is looking to increase its dental clinics to 60 outlets by 2015.

It has also acquired its first general practice medical clinic as a means of diversifying beyond its core dental practice, notes CIMB.

On expansion mode Larger groups are also expanding, with Raffles Medical Group (RMG) commencing construction of its Raffles Hospital extension this year to expand its capacity. This correspondent recently spent a few hours at Raffles visiting a good friend struck down with dengue. With spike cases and more medical tourism, beds are filling up fast.

Andrew Chow, an analyst with UOB Kay Hian reveals that the group continues to recruit specialists in various disciplines to build up its depth and width of services. As at 1Q13, RMG had 250 doctors and specialists and the plan is to have 280-300 doctors by year-end.

RMG had 250 doctors and specialists and the plan is to have 280-300 doctors by yearend.

Cost pressures Cost pressures still haunt the healthcare sector as the primary risk. “We see rising cost pressures as the main risk for the healthcare sector, as some of the healthcare companies recorded higher operating expenses as a percentage of revenue for 1QCY13,” says OCBC analyst AndyWong. This was due largely to an increase in staff and rental costs.

Companies are then expected to strive to grow their revenues further in order to drive their operating leverage.

IHH Group’s Novena hospital is still losing money despite some cost cuts. Novena has about 116 beds that are operational , but so far only a third are occupied. This means it’s unlikely more beds will be added by the end of this year as was earlier planned. The ailing economy in Singapore is seeing demand for elective surgery reduced.

But if Singapore is sick, Hong Kong is looking better. In that market hospital charges are typically 20% to 50% higher than Singapore. So it is no surprise that Singapore’s groups are looking to capitalise on the China health tourism market. Gleneagles will open its Hong Kong hospital in late 2016.

Inpatient Admission Volums (Number) PPL - Singapore

Source: CIMB

FIRST The size and the scale of China’s banking system and the risks mean that having an insurance scheme may actually calm nerves.

HK banks to benefit from China deposit insurance scheme

T

alks of a credit crunch in China are prompting depositors to think the unthinkable: what happens if my bank goes bust? Even those with a short memory will remember that depositors in Cypress woke up one morning facing the same issue, but at least the smaller depositors were saved by the European bank deposit insurance scheme. China has no such insurance scheme, so in effect depositors are hoping that the central government would come to the rescue by presumably printing RMB and shoring up the banks. That may not happen, and is even less likely so

now that China is in the final stages of preparing to launch its own insurance deposit scheme.

Calming frightened depositors Since the 1960s, more and more countries worldwide have adopted an explicit DIS with the total reaching 111 as of 2011. In China, the stakes are literally huge, with the big four banks - ICBC, CCB, ABC, and BOCaccounting for half of the country’s RMB97.8 tn in deposits as of March 2013, according to Barclays. Chinese banks have failed before, as in the case of Hainan Development Bank’s in 1998, when bank runs depleted

the bank’s reserve as a result of rising concerns about the bank’s operating condition, the PBOC injected RMB3.4bn to bail out the bank.

But the size and the scale of China’s banking system and the risks mean that having an insurance scheme may actually calm nerves than frighten depositors to leave smaller banks.

If it does go ahead, it will provide a level of solace to the 99% of depositors who have less than RMB250,000 in their accounts. But those with larger deposits must now also be wondering if this is setting them up for something more ominous, should their bank go bust.

This is even more pertinent now that much bank deposits are really collected through wealth schemes, which would also not be covered by the insurance. With a distinction to be made between ‘insured deposits’ and those not insured, it is not unreasonable to think that those with more money and klout in China would be more worried.

Coverage limits and coverage to GDP per capita ratio around the world in 2010 (US$)

Source: FSB, World Bank, Barclays research

The Chartist: commercial property loans in hong kong Hong Kong banks just got a new reason to pop their champagne. Barclays said property development and investment loans account for between 12% and 25% of Hong Kong banks’ loan while the proportion covered by collateral ranges from 67% to 95%. They do not expect material losses in case of a commercial property downturn.

Hang Seng Bank’s Hong Kong Economic Monitor says negative real interest rate and rising property prices have played prominent roles in fuelling consumption growth over the last few quarters.

Investment will become a main source of uncertainty among the GDP components.

Leading indicators for business investment

Hong Kong commercial property development and investment loan as % of total loans - FY12

Sources: Census & Statistics Department of HKSAR, HSBC, Markit, Hang Seng Bank

Sources: Census & Statistics Department of HKSAR, HSBC, Markit, Hang Seng Bank

THE ASIAN BUSINESS REVIEW | AUGUST 2013 9

FIRST

Hong Kong’s CNY trades

THREE SCREENS YOU’RE IN

H

ong Kong may be the centre of the offshore renminbi market, but rivals Singapore and now Taiwan are catching up fast. The Singapore branch of Industrial and Commercial Bank of China commenced RMB clearing bank services on 27 May, making Singapore the third offshore RMB centre after HK and Taiwan.

About RMB1.6bn worth of transactions including trade-related remittances and foreign exchange trade were cleared on the first day.

Singapore further cemented its ambitions to become an offshore RMB centre as HSBC and Standard Chartered Bank took the lead to become the first banks in issuing RMB-denominated bond totaling RMB 1.5bn.

Taiwan CNY trades receive a boost Meanwhile, less than four months after Taiwan launched its offshore RMB business, over RMB60bn of liquidity has already been generated, with RMB162bn expected by yearend. Taiwan’s efforts to promote itself as an offshore RMB centre received another boost as Deutsche Bank became the first foreign financial institution to issue RMBdenominated bonds (named Bao Dao or Formosa bond, after the Chinese words for ‘Treasure Island’, a popular reference for Taiwan).

The outstanding of RMB deposits in Taiwan reached RMB60 billion in May, just three months after Taiwanese banks started to offer RMB accounts.

Trading of offshore RMBdenominated bonds in Singapore had a strong and impressive start.

Only a week after the kick-off of the clearing service, three banks (including DBS) collectively offered RMB2 billion worth of bonds that were quickly snapped up.

Hong Kong’s position Hong Kong is still the pre-eminent CNH trading centre, but needs to do more to innovate to stay ahead.

The Treasury Markets Association recently announced the launch of

10 THE ASIAN BUSINESS REVIEW | AUGUST 2013

Hong Kong is still the preeminent CNH trading centre, but needs to do more to innovate to stay ahead.

CNH HIBOR fixing.

This will provide a reliable benchmark to price loan facilities and facilitate the development of the offshore RMB interest rate swap market. Meanwhile, banks’ net open positions and statutory liquidity requirement for RMB have also been lifted. Given the loosening of lending restrictions, the demand for offshore RMB financing activities is expected to become more robust going forward, reckons DBS. There are no RMB remittance limits to regions outside of Mainland China, meaning transfers between different clearing banks are allowed and there is no daily limit for RMB remittance back to HK, Macau, Singapore, or Taiwan. Essentially, there is no restriction in offshore RMB fund transfers within countries outside Mainland China.

RMB trade settlement to China’s total trade

Source: DBS

9 in 10 Hong Kongers have purchased online, according to reports by research company GfK, and 1.4 million shopped in 2012 alone. That’s a 6-fold increase in a decade, made even more convenient with over half of purchases now made on a tablet or smartphone or personal computer.

It’s called the three screens, and for e-commerce players having a format for each is a must. While personal computers are the most common platform used for online shopping with over 4 in 5 online shoppers saying they have used either their laptop or desktop computer to make purchases, more than half used smartphones and 40% have done so using their media tablets.

Click ‘n shop It is interesting to highlight that Gen Y adoption of smartphone for online shopping is highest.

“The number of online shoppers has grown by leaps and bounds from 218,000 in 2002 to 1,383,000 in 2012,” said Walter Leung, Managing Director for GfK Hong Kong.

Among the top 10 online shopping categories, clothing came out top, followed by accessories, shoes, handbags, facial skincare products, books, hotels, flight tickets, and electronic products. While one-third of the online shoppers spent around HKD200-499 during each transaction, mainly on clothing, accessories, and shoes, over 80% of the total online purchases of local consumers are for items which cost below HK$1,000.

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FIRST Brace yourselves for measly wage hikes in 2014

Singapore developers focus on China

I

t is not easy being a property developer in Singapore, and despite all the restrictions on purchases, things may even get tougher should interest rates rise.

Right now interest rates are below 1% but a more normal rate for Singapore is 4%, as it was back in 2006.

Given the high prices of homes now, every 1% increase in mortgage rates would add $600 a month or $7,200 a year to the average mortgage cost. Affordability, and investors’ perceptions of it going forward will continue to impact the local market, reckons Maybank Kim Eng analyst Wilson Liew.

Well-diversified developers This will also affect developers with a large exposure to Singapore. Only CapitaLand, CMA and KepLand have good exposure to property markets outside Singapore. According to Liew, the three developers are well-diversified within China, which account for 40-45% of their individual asset base.

They are so well-diversified that based on Liew’s analysis of a 10% residential property price decline and a 50 bps increase in Singapore commercial property cap rates, the RNAVs of CapitaLand, CMA and KepLand are only negatively impacted by 2.3%, 2.8% and 2.2% respectively Singapore now only accounts for ~35%, 34% and 49% of their respective total assets. As at 1Q13, China marks CapitaLand’s most heavily invested market, accounting for 39% of the Group’s assets, slightly 12 THE ASIAN BUSINESS REVIEW | AUGUST 2013

ahead of Singapore’s 35%.

Dominating China More specifically, China residential and China retail malls under CMA account for 22% and 13% of the Group’s total assets respectively.

China accounts for 52% of CMA’s total assets, but meaningful NPI contributions only began in FY12, mainly with the completion of Minhang and Hongkou malls.

KepLand is a big builder of townships in China having sold more than 20,000 homes in China since 2000. It still has a pipeline of another >42,000 homes with a total GFA of 7.7 sqm. Currently, it is developing a 100,000 sqm predominantly office project in the heart of Beijing’s CBD, as well as Seasons City.

“As the world’s most populous nation with 1.3b people, China’s urbanization rate has consistently grown at ~1 ppt p.a. over the past two decades to 53% as of 2012 and targeted to hit 60% by 2020. There will therefore be significant demand for good-quality housing.”

China marks CapitaLand’s most heavily invested market, accounting for 39% of the Group’s assets.

CapitaLand’s asset allocation (excluding cash) as at 31 Mar 2013

Source: Maybank KE estimates

Next year, Singaporeans will have to face smaller-than-normal pay increases. In a survey of over 190 Singapore-based firms, consultancy firm Hay Group found that the average salary increase for 2014 is forecasted at 4.4%, or lower than the actual average salary increase of 4.7% for 2013.

The top 3 sectors with the highest average salary increases of over 5% in 2013 are Life Sciences/Pharmaceuticals and Services, Utilities and Oil & Gas. Looking ahead, the highest salary increases in 2014 will be in Life Sciences/Pharmaceutical, followed by Services and Insurance.

“Organisations are feeling the need to manage business cost in a slower economic environment this year and a substantial part of operating business in Singapore is managing the cost of employment,” said Victor Chan, regional general manager for productized services at Hay Group.

Chan added that this was a top business priority for nearly a quarter of the surveyed organisations when asked about their organisation’s key business focus this year.

The report also showed that the actual average variable bonus (i.e. performance-based bonuses excluding annual wage supplement and contractual bonuses) is 2.3 months for a 12-month period.

This is 0.2 months lower than the average of 2.5 months seen in March 2012.

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FIRST

Debt markets signal dangers ahead for Singapore

I

t has been a great time for Singaporean equity investors, with the STI Index on a roll and blue skies ahead. But there are a number of warning signs that markets may be about to take a turn for the worse.

Quantitative easing and the drop of interest rates to almost zero may have helped ailing economies along, but they also pushed investors into riskier assets with higher yields.

That may be about to come to an end, and if so will have major implications for Singaporean investors in leveraged debt equities such as S-REITs. So what is going on? Bank of America Merrill Lynch reckons that the trough in US real estate proved the true game-changer for financial markets and the real economy. Ever since, we’ve seen a rotation from safe havens to more leveraged, risky assets.

The real game-changer “Our private client data base has reduced its gold holdings (the world’s favorite “tail risk” hedge) by 30% since late 2011. History shows that major breakouts in equity markets tend to coincide with major inflection points in bond yields. The ideal scenario would be a repeat of the early 1960s, when both equities and bond yields rose in an orderly fashion, a ‘Velvet Rotation’. But risks of a bond crash are high,” noted the bank.

A host of “canaries in the bondmine” (mortgages, REITs, utility stocks, lumber), are indicating that markets are getting nervous about 14 THE ASIAN BUSINESS REVIEW | AUGUST 2013

Over the last two years especially, offshore holdings of Singapore bonds have increased a fair bit but a lot of Rising real that increase is due to central bank interest rates and sticky real money inflows. “If and a USD/SGD continues to head higher weakening we could see more near term pain Singapore dollar in long bond positions, however over the medium term SGS will could outperform USTs on technicals. fundamentally SGD stands out as having the highest change the correlation historically in Asia to both game for US Treasuries, and the USD TWI. corporates Furthermore, it has among the lowest and property real yields in the world (and negative investors spreads to USTs). in Singapore.

Both the safe haven bid and FX gains, which motivated inflows even at poor yield levels, are increasingly losing steam. We thus see SGD as vulnerable in this new environment.”

Singapore’s vulnerability Rising real interest rates and a weakening Singapore dollar could fundamentally change the game for corporates and property investors in Singapore. Much of South East Asia remains vulnerable to a sudden outflow of cash, the same thing that caused the last Asian Financial crisis. The Malaysian Ringgit and the Indonesian Rupiah are vulnerable given a high percentage of offshore ownership in government bonds, at 47% and 34% respectively.

Reserves cover relative to offshore holdings is also the weakest in these two. Singapore and Thailand are next in line with 20% offshore holdings, but have more substantial reserves cover. It is also important to consider the composition of offshore owners reckons Spencer. For instance, 40% of the foreign holdings in Korea are held by central banks, which should be stickier, versus only 20% in Indonesia and likely far less in the Philippines.

The canaries are not chirping so loud

QE tapering, and suggest the next move in bond yields is more likely to be up than down. Let’s take a walk down financial history lane. Less than 7 years ago, housing was booming, Treasury yields were above 5% and the share price of Lehman Brothers was $86. Then the roof fell in.

Aggressive central bank actions in response to the bursting of one asset bubble often contribute to the creation of a new bubble. The unprecedented 2007-08 collapse in home prices, financial asset prices and the global economy has been followed by an unprecedented (and ongoing) monetary policy response. In the past 6 years, central banks around the world have cut interest rates 515 times, increased global liquidity by $12 trillion and crushed bond yields, notes the bank.

When debt goes out of fashion The last year has seen a lot of “hot money” flow into emerging market bond funds which has kept currencies and yields strong (and hence interest rates low), but that may be about to change.

Deutsche Bank chief economist Michael Spencer warns that Emerging Markets Foreign Exchange is waking up to the threat of a more “vicious channel” of adjustment, via an unwind of the golden period for emerging markets debt flows.

Emerging markets local currency bond funds have received heavy inflows this year, in excess of those preceding the 2011 sell-off.

Canaries in the coalmine (REITs, mortgages, utilities and lumber)

Source: Bloomberg

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FIRST The Analysts’ call

Will Prada’s 75-store opening plan work?

Nomura – Tanuj Shori

The devil buys Prada

W

hen times get tough, the tough goes shopping. That at least is the conclusion one could take from Hong Konglisted Prada, the Italian makers of handbags and accessories desired and purchased by women across the world. The group continues to perform well despite or perhaps because of financial uncertainties.

One interesting point of note is that leather goods - by which one may read handbags - remain the stellar

The cost to make a Prada item is only a quarter of the final selling price. line item posting a growth rate of 29% over the year. By comparison apparel sales were down 5% and footwear was down 12%. Perhaps a switch to Charles Louboutin or Jimmy Choos could be blamed for the footwear sales, but analysts reckon that when times are tough nothing says “I’m doing OK” than a new handbag.

In fact, bag sales are so important to Prada that despite the fall in shoes and apparel, the group managed to increase sales by 18% over the year.

And if you have ever wondered why those bags are so expensive, the answer is explained in part by the gross margin, which actually increased 1.3% to 73.6%. That means that the cost to make a Prada item is only a quarter of the final selling 16 THE ASIAN BUSINESS REVIEW | AUGUST 2013

price. Retail sales for the group grew an impressive 19% and even Europe chipped in with a 7% growth in sales.

The devil may be buying Prada, or having it bought for her, but the same cannot be said for subsidiary brand MiuMiu, which disappointed with a mere 5% increase in sales.

Barclays analyst Candy Huang said management indicated ‘Miu Mius’ development will take more time to see results owing to the uncertain economic situation. While Prada achieved 18% in net sales to EUR638.8mn, ‘Miu Mius’ growth was at 5% to EUR112.7mn. Nomura analyst Tanuj Shori says management will continue to invest in Miu Miu and has confidence on the brand as the brand awareness has been improved. The margin difference between Prada and Miu Miu mainly comes from operating leverage because there is little different pricing strategy between the two brands. “But Prada does not expect any near-term turnaround for Miu Miu,” added Tanuj.

He also reckons that wholesale rationalisation will continue and wholesale revenue may decline high single digit in FY13. Wholesale as a percentage of total sales would gradually drop to less than 10% by 2015, from the current ~15%.

Wholesales revenues are mostly generated in Italy and the US department stores. Prada is converting wholesale doors to retail in US and Russia.

Prada maintains the guidance on high-singledigit SSSG in FY13 and 70-75 store opening plan including targeting several new markets such as Qatar, Copenhagen, Stockholm, Indonesia, etc. Prada brand’s total store target would be around 400 globally (in line with matured global peers). New stores would be ~60% Prada and rest Miu Miu. Do note that Prada is facing tough comps (1Q12 organic growth of 42% and SSSG of 19%), which would make it difficult for Prada to potentially surprise in coming results.

However, high-single-digit SSSG would still be faster than weighted average of 3% for the luxury sector thus far (for the luxury sector average, SSSG slowed down from 6% in 4Q12 to 3% in 1Q13).

Growth has picked up in the US and Japan. In Japan, despite facing weaker yen headwinds, Prada is not raising the prices.

Instead, Prada’s strategy is to put through more higher-price items to support the margins in the country. There was some inflation adjusting price hike in HK and none in Europe.

Barclays – Candy Huang

Prada delivered 13.5% y/y earnings growth, 6% below our forecast due to weaker than expected wholesale (down by 9% y/y) and currency losses. Retail sales were solid at 19% y/y (+21% organic).

Nevertheless, EBIT margin increased modestly by 1ppt y/y despite additional contribution from higher margin retail business (88% vs 85% in 1QFY13 from net sales). Going forward, further margin upside could be limited given moderate SSS outlook and high base (management-guided high-single-digit SSS for FY14, from 14% in FY13).

Prada opened a net of one self-operated store in 1QFY14 to 462 stores. The only store opened is a ‘Prada’ store. For the past 12 months, the company opened a net of 67 stores, or 17% y/y. The company has also opened four franchise stores in 1QFY14, hence total number of stores reached 491.

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ANALYSIS: ASIAN M&A

geographical region, ahead of Europe (33%), North America (29%) and Latin America (2%).

Compare this to five years ago, in 2006, when only 24% of the Fortune Global 500 companies came from Asia-Pacific. In half a decade the region’s companies, predominantly from China, catapulted to the list and bumped off the stagnant giants from Europe and North America.

charts and causing a shift in global M&A capital flows,” said Andrew Heard, managing director, Asia Pacific Benefits at Towers Watson in the consulting firm’s 2012 M&A yearend report. Flush with capital and driven by ambitious global expansion plans, Asia-Pacific companies increasingly prefer to engage in outbound M&A activities rather than in joint ventures or greenfield investments, outside of a combination of the three.

Asia-Pacific companies previously preferred greenfield investments, valuing its safer and studied approach of expanding overseas from scratch.

But now, these same companies who were averse to risk now seem more willing to forge ahead with M&A deals, valuing the quicker results and promise of total control compared to time-consuming greenfield investments or compromise-ridden joint ventures.

“In the increasing flood of globalization, M&A serves as a path of rapid expansion into new markets and operational capacity abroad, and Asia Pacific is no different,” said the Towers Watson report.

“With many Asia-Pacific companies having grown organically and sufficiently scaled-up through intra-Asia-Pacific acquisitions, many are now turning outward to non-Asia-Pacific nations in Europe, the Americas, the Middle East and Africa,” it added.

North America is the most popular target market for outbound regional expansion among Asia-Pacific companies, said Towers Watson, citing an Asian Traiblazers survey where 37% of the respondents chose North America as the most important region for their future growth. This was followed by a preference for Latin America (31%), Africa (30%), Central and Eastern Europe (19%), Western Europe (18%) and the Middle East (16%).

Why M&A is increasingly preferred Asia-Pacific companies feel they are ready to step up as global players, and M&A activities offer the fastest way to reach their grand growth targets. “More and more, Asia-Pacific multinationals are using M&A to expand, finding top spots on deal

Rising M&A outbound activity Towers Watson cited data from mergermarket, an M&A intelligence service, which show that outbound M&A volume from Asia-Pacific companies reached an estimated 464 deals in 2012, the highest ever in the past decade, and the third straight

More Asian companies march west to go global 2012 marked a high point in mergers and acquisitions with fast-expanding Asia-Pacific firms going on a Western buyout binge.

I

n what analysts are noting as an aggressive shift in attitude, capital-rich companies in AsiaPacific who have spent the last decade expanding in the region are now on the prowl for strategic and bargain acquisitions in North America and Europe. The reason for hunting outside the region is two-fold: AsiaPacific companies are now looking to establish a Western presence in order to go global, and Asian M&A targets are becoming prohibitively more expensive.

Asia-Pacific companies also seem more willing to wield their growing financial clout. Around 36% or more than a third of Fortune Global 500 companies in 2012 came from Asia-Pacific, the largest from any 18 THE ASIAN BUSINESS REVIEW | AUGUST 2013

“Asia-Pacific companies feel they are ready to step up as global players, and M&A activities offer the fastest way to reach their grand growth targets.”

ANALYSIS: ASIAN M&A year of growth for the region.

Companies based in Asia-Pacific ramped up M&A activity outside of Asia-Pacific by an average of 20% year-over-year between 2003 and 2011, experiencing an annual growth rate of 37% in terms of value over the same period, merger market data also showed.

There was a brief decline in outbound M&A activity in 2009 as companies became more cautious following the global financial crisis, but the following year in 2010, deals spiked with a vengeance. Total value grew a whopping 176% year-overyear from 2009 figures, an annual growth trend that has continued until 2011.

2012 proved to be a watershed year, because for the first time on an annual basis, Asia-Pacific has seen more outbound M&A than inbound activity, said Towers Watson. Japan and Australia, in particular, continue to lead the region in outbound M&A deals value, but China has been catching up.

“Chinese activity outside of Asia-Pacific has eclipsed Australia’s share of M&A outside the region, as Chinese bidders are pushed abroad by insatiable demand from China’s domestic economy as well as encouragement from the PRC government’s 12th Five-Year Plan to expand abroad,” said Towers Watson.

It will take years though for China to overtake Japan in terms of deal value, especially given that Japanese firms now heavily rely on outbound M&A to drive their growth in the face of slowing domestic markets. Chinese

bidders also still have a lot to learn on deal negotiations, which has hindered them from clinching more highprofile deals.

Towers Watson highlighted how in January 2012, RBS rejected a bid from China Development Bank (CBD) for RBS Aviation despite posting the highest offer. RBS reasoned that CBD failed to pay enough visits to the RBS Aviation headquarters, which led to the deal ultimately closing in favor of the Japan-based Sumitomo Mitsui Financial Group in June 2012 for $7.3 billion.

Favorite targets, notable deals On the whole, acquisitive AsiaPacific companies have been most interested in the Industrials & Chemicals, Energy, Mining & Utilities, and Technology, Media and Telecommunications (TMT) sectors, according to Towers Watson. But in terms of money spent, they have funneled the most to Energy, Mining & Utilities, with 2011 being a particularly strong year as the sector made up 17% of deal volume and 54% of deal value annual totals.

The energy sector also saw the largest deal of 2011: BHP Billiton’s $15.5 billion acquisition of US-based Petrohawk Energy Corporation in July 2011. The Australia-based global energy and resources giant was looking to enhance its position in the exploration, development, and production of natural gas properties, and so it purchased Petrohawk’s roughly 1 million acres

Asia-Pacific outbound M&A volume

Source: mergermarket

“2012 proved to be a watershed year, because for the first time on an annual basis, Asia-Pacific has seen more outbound M&A than inbound activity.”

in Texas and Louisiana.

Another large deal of 2011 involved Hong Kong-based Cheung Kong Group’s successful $7.8 billion bid for the listed UK-based water utility Northumbrian Water Group Plc, a deal which closed in October 2011.

In 2012, Asia-Pacific bidders also flocked to the Western European consumer sector. China-based Bright Foods acquired a 60% stake in Weetabix Limited, a UK-based company producing and selling breakfast cereals and bars, for $1.2 billion. Towers Watson said the acquisition will allow Bright Food to expand its business in UK as well as the international market, and will help Weetabix strengthen its business in China.

Slowdown in 2013?

The brisk pace of 2012 outbound deals could slow down this year though, if 1Q 2013 data is any indication.

Japan, for instance, saw its outbound volume plummet 69% quarter-on-quarter to $5.8 billion in 1Q 2013, from $19.1 billion, according to Dealogic. This is the lowest quarterly total for Japan outbound M&A since 2Q 2010 ($5.7 billion) with US targeted volume recording the largest decline, down 93% to $654m compared to $9.5 billion in 1Q 2012 In Singapore as well, overseas acquisitions from Singapore companies remained flat as deal value reached US$3.1 billion to date, slightly lower by 1.4% from the first quarter period in 2012, and witnessing its third quarterly decline since 2Q 2012, according to Thomson Reuters.

If it is any consolation for AsiaPacific countries, the sluggishness in M&A deals – both outbound and inbound – seems to affect most other world regions. Dealogic reports that even if Global M&A volume reached $596 billion in 1Q 2013, up 2% on the $584.2 billion recorded in 1Q 2012, it was down 34% on 4Q 2012 ($906.2 billion).

The Americas was the only world region to see an increase on 1Q 2012 ($248.1 billion), up 34% to $331.3 billion in 1Q 2013.

THE ASIAN BUSINESS REVIEW | AUGUST 2013 19

opinion

Tim hamlett

Love your locusts

tim hamlett Former Editor of Sunday Standard and Associate Professor of Journalism

A

nasty little accident befell Mr Alex Lo the other day. Mr Lo has often provided provocation for a piece here, because the poor man has to write every day. This is a lot. Bernard Levin used to write three days a week. In my prime I could manage seven columns a month.

Mr Lo has to do his thing on Page 2 five days a week, so thought is sometimes a touch hasty. Anyway on Monday he did a piece on the international story which announced that Hong Kong people were global leaders in racism. It then transpired that there was a mathematical error in the original information. So Hong Kong people are not racist after all.

On Tuesday Mr Lo apologised and will, perhaps, be more sceptical about social science in future. Still, this is the sort of accident which could happen to anyone. As a columnist, you comment on what appears in the news. If that turns out to be wrong then your comment may turn out to be unjustified. It’s a normal hazard.

However, on the tail of his musings on racism, Mr Lo wandered into another matter. Hong Kong people, he said, like to “direct their animus towards the mainland Chinese”. This was not racism by the dictionary, but “just as shameful”. And he went on “we think we are just morally, politically and culturally superior, mostly because we know little or nothing about what’s really happening on the mainland beyond cliched narratives found in the mass media.”

I cannot resist the thought at this point that the last sentence qualifies as a cliched narrative in itself. I am not sure which part of this to disagree with first. Let us start with the cliched narratives.

Turning to the China pages on the same day we find stories on pollution in Beijing, graduate unemployment, the suspected hijacking of a fishing boat by the North Korean navy, local governments cracking down on environmental protests, an academic suggestion that the Chinese Communist Party would be healthier if there was an official way to leave it, a graft scandal, and a long story about a security equipment exhibition which notes among other things that China spends more on internal security than it does (officially) on defence. This is a normal day’s crop, I suppose.

And it would, perhaps, lead Hong Kong people to suppose that in some ways we are superior, because we have the rule of law, fair elections and freedom to protest, and in other ways we are not. That does not look like a particularly misleading picture to me. China is a police state. That is not a cliched narrative; it is a fact.

In any case, why should we suppose that Hong Kong people get most of their ideas about the mainland from the mass media? Most Hong Kong people are free to visit the mainland any time. Many of them do so at least once a year.

Some of them go much more often. Mainland friends, relatives, fellow students and recent immigrants are all over the place. It seems to me extremely unlikely that “we know little or nothing” except what we can glean from the media. In fact, most people have no difficulty in detecting that the picture of the mainland presented in, say, the China Daily is missing some important features.

20 THE ASIAN BUSINESS REVIEW | AUGUST 2013

Trudging on through the errors we come to the claim that having a jaundiced view of mainlanders is not quite racism but just as bad. No it isn’t. Racism is a poison which leads to prejudice, discrimination and oppression. Having a derogatory stereotype about people from some parts of your own country is a minor sin as long as you can keep a sense of humour about it.

Hong Kong people do, I agree, have a somewhat derogatory stereotype about mainlanders who turn up in Hong Kong. This has nothing to do with ignorance of the mainland.

It is because of the spectacle of whole blocks of flats sitting empty while the mainland moneylaunderers who own them wait for prices to go higher, of whole streets devoted to selling overpriced luxury goods, and people behaving badly on public transport. Like all stereotypes, this is unfair, and like most stereotypes it contains a grain of truth. Most of us have been elbowed aside by a pushy PTHspeaker on the MTR by now.

But this sort of friction is an almost universal consequence of mass tourism. When I worked in Blackpool they had a thing about Glaswegians. The Glaswegian reputation for excessive drinking and ensuing violence was not entirely unjustified. During the relevant fortnight the Glasgow police used to send a deputation down to the Blackpool railway station so that those of their regular customers who were already fighting drunk when they got off the train could be sent straight back home.

But on the whole, people did not take this too seriously and sober Scots were treated just like anyone else. The situation is more delicate if the visitors are conspicuously well off. As a student my favourite holiday playground was Yugoslavia, as it then was. It was important when visiting there to establish that you were not German.

The Germans visited in large quantities and they were all much better off than the average local citizen. This does not go down well.

So in some ways it may be convenient that Hong Kong people are not too impressed by mainland visitors. At least we are not jealous. We love our locusts.

We are not jealous.

ANALYSIS: CHINA’S SHALE GAS

China’s shale revolution and its Asian aftershock China is making a big push for shale gas, which could help stabilize energy prices for import-heavy Asia.

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een as a sleeping giant sitting on huge untapped reserves of shale natural gas, China has the potential to catch up and even overtake the US, currently the world’s largest producer of shale resources.

The Chinese government, keen on easing its growing energy imports, has greenlighted policies to expand shale gas exploration that experts believe will lead to massive annual production in as short as a decade.

With China joining the US in championing shale production, world energy prices could start to flatten – and it will be the majority of Asian countries who import their energy that will stand to benefit.

Shale revolution China has the largest technically recoverable reserves of shale natural gas in the world at an estimated 1,275 trillion cubic feet (TCF), or 50% more 22 THE ASIAN BUSINESS REVIEW | AUGUST 2013

“In 2001, crude oil imports represented just under 30% of total oil demand. That’s grown to about 60% in 2012.”

than the United States who comes in second with 862 TCF reserves, according to data from the US Department of Energy and Deutsche Bank.

Taimur Baig, Ph.D, chief economist at Deustche Bank, predicts that when China taps heavily into these vast reserves, the global energy landscape could shift dramatically. And it has every incentive to do so. Faced with rapid economic expansion that demands tremendous energy resources to sustain, the Chinese government has fast-tracked the exploration of its shale reserves to augment and effectively lessen the country’s dependence on crude oil imports.

“China’s energy needs are considerable. Its crude oil imports averaged 5.5mn bbl/day in 2012, up nearly 70% since 2007. Indeed, China started this year by importing

6mn bbl/day, which was about 2mn bbl/day less than what the US imported in January. The US-China crude oil import gap has narrowed dramatically in recent years,” said Baig.

“As Beijing observes its oil import dependence rising every year, energy security has taken greater priority for policymakers. In 2001, crude oil imports represented just under 30% of total oil demand. That’s grown to about 60% in 2012.”

Baig said there is no lacking in the number of Chinese companies willing to charge into the shale frontier.

China has already launched two auctions of shale natural gas blocks that attracted much commercial interest, and has set a bold target of producing 6.5 billion cubic meters of shale per year by 2015.

But many experts doubt that China will be able to meet this ambitious production target, said Baig. China is still considered to be technologically deficient in commercially viable methods to extract shale gas. These same skeptics say a more reasonable timeline for China’s emergence as a leading shale gas producer would be in the next decade – enough time in which China could master

ANALYSIS: CHINA’S SHALE GAS the technology and know-how to effectively extract shale gas from its reserves. British oil and gas company BP estimates that shale natural gas will account for about 20% of total Chinese natural gas production by 2030.

Baig said China is allocating substantial funds for infrastructure development and mobilizing its state-run energy companies to tie up with more knowledgeable shale gas partners, particularly in the US. “Large state-owned Chinese energy companies are investing in the US with expectations of picking up shale-related skills and expertise, and they are setting up joint ventures with major global energy companies for the same reason,” he added.

In February, the state-owned giant China Petroleum & Chemical Corp (Sinopec), the country’s largest producer and supplier of oil and petrochemical products, invested around $1 billion in Oklahoma-based Chesapeake Energy Corporation, the second-largest producer of natural gas and most active driller of new wells in the US. Baig said that once China applies what it has learned from its Western tie-ups, and adopts reforms for its still-volatile natural gas pricing system, the country could well enter into “a shale revolution.”

Asian aftershock Baig stresses that Chinese shale developments could have a big impact on Asia. The emergence of shale as a precursor for energy price stability, which for a region that primarily imports energy save for a few producers, will prove to be economically advantageous.

“The structural change that is ongoing may well end the commodity supercycle, thus ushering an era of energy price stability. Most Asian economies are importers of energy, with Australia, Malaysia, and Indonesia three notable exceptions, but all are likely to be profoundly impacted by shale related developments.”

Baig cited India and Japan as two big beneficiaries from a possible energy price stability.

“For a country like India, which spends nearly 40% of its total import

bill on coal and oil, and runs a large current account deficit, energy price stability or decline would bring significant dividends in terms of external stability and domestic disinflationary dynamic,” said Baig.

In 2012, India imports jumped 40% to a record $140 billion, mainly because of skyrocketing oil prices, as imported crude oil increased by as much as $27 per barrel, according to government ministers.

“For Japan, lower energy pricing, combined with access to cheaper LNG [liquefied natural gas] imports from the US, could provide a significant boost for an economy that was left increasingly exposed to energy costs following the Fukushima disaster (as imported power fuel has been used to offset the loss of nuclear power),” said Baig.

In March 2011, an earthquake and subsequent tsunami devastated the Japanese nuclear plant in Fukushima, which led to nuclear meltdowns and release of radioactive materials in the surrounding areas. The disaster is widely considered to be the largest nuclear disaster in the 21st century, pushing the Japanese public to demand the phase out of nuclear power altogether and the government to explore alternative “safer” sources of energy.

With few domestic energy resources and the impairment of its nuclear power production, Japan is now the world’s largest importer of LNG, second largest importer of coal and third largest net importer of oil,

“Natural gas will account for about 20% of total Chinese natural gas production by 2030.”

based on US Department of Energy’s Energy Information Administration.

Lower energy pricing will do much to lower the costs of its massive energy import bill, with LNG imports alone hitting a record $6.5 billion, according to Reuters.

While more stabilized energy prices could boost most other Asian nations that import energy, the few producers in Asia are looking at the China’s nascent shale boom with trepidation.

This includes Australia and Indonesia, said Baig, whose LNG producers have invested heavily in recent years with Asia’s seemingly insatiable demand in mind.

China’s increasing energy independence could further affect Australia and Indonesia who have thrived in recent years on the back of soaring coal exports, with coal making up about an average of 15% and 14% of total exports, respectively.

China imported 30.55 million tons of coal in January alone, according to official customs data, but this could lessen gradually as domestic shale natural gas production hits its full stride.

“Over the long term, a meaningful shift away from coal to cleanerburning natural gas driven by environmental as well as energy diversification imperatives, notably in China, could have significant ramifications for the global coal market and key exporting countries that have depended on China’s rising coal appetite,” said Baig.

Shale natural gas reserves: wait till China gets into the act

Source: US DOE/EIA, Deutsche Bank

THE ASIAN BUSINESS REVIEW | AUGUST 2013 23

legal briefing

Singapore takes steps to protect itself from cyber attacks Some specified persons are authorised to take necessary counter attack measures.

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ingapore has recently passed the Computer Misuse (Amendment) Bill in view of the rising threats of cyber attacks. Winnie Chang, partner at Colin Ng & Partners, said that the Computer Misuse Act which has been renamed the ‘Computer Misuse and Cybersecurity Act’ adopts measures that are broadly in line with those considered or implemented by countries such as the United States and Israel.

In particular, the Amended Act empowers the Minister of House Affairs to authorise a person or organisation to take such measures as may be necessary to prevent or counter attacks that may threaten Singapore’s national security, essential services, defense, or foreign relations. Here are the highlights: How is the Minister empowered in the case of a cyber attack or a potential cyber attack?

According to Chang, several powers were given to the Minister. First, the Minister can require the specified person to access both a computer reasonably suspected of being used in connection with an offence and decryption information for the purposes of investigating an offence.

The specified person is also required to direct another person to disclose any information that is necessary to identify, detect, or counter a cyber

“Offence involving ‘consent’ or ‘connivance’ results in criminal penalties, while an offence involving ‘negligence’ results in the payment of civil penalty only.” threat, including details of the design, configuration, operation, and security of any computer or computer service. Any information, including real-time information obtained from their computer, that is necessary to identify, act, or counter any threat must also be provided by the specified person to the Minister.

Finally, the specified person is required to report cyber security breaches/attempted breaches to the Minister or authorised public officer. “Generally, the Minister will seek only information that is of a technical nature, such as firewall rules, network design architecture, and software algorithms, in order to detect an attempted or ongoing cyber attack, address system vulnerabilities, and to prevent threats.”

24 THE ASIAN BUSINESS REVIEW | AUGUST 2013

Winnie Chang

Chia Ling Koh

Woon C. Yew

What constitutes ‘essential services’?

According to Chang, the amended law expands the definition and scope of ‘essential services’ to include services directly related to land transport infrastructure, aviation, shipping, and health services.

The term ‘essential services’, she added, is now defined as “services directly related to communications, infrastructure, banking and finance, public utilities, public transportation, land transport, infrastructure, aviation, shipping, or public key infrastructure, or emergency services such as police, civil defense, or health services.”

What if the specified person failed to comply with the directions?

According to Woon C. Yew, partner at Rodyk & Davidson, specified persons are expected to take the necessary measures and comply with the Minister’s orders at their own cost. Any person who, without reasonable excuse, fails to comply with the directions of a specified person, will also be guilty of an offence, she said.

What is the penalty?

ATMD Bird & Bird partner Chia Ling Koh clarified that the new law explicitly confers immunity from any civil or criminal liability that may be incurred while fulfilling an obligation under the new law.

A specified person who fails to comply with the Minister’s directions without reasonable excuse will be guilty of an offence and be liable on conviction to a fine not exceeding S$50,000 or to imprisonment for a term not exceeding 10 years or to both.

How would the changes affect companies?

Yew cited the following as an example of the effect of the Amendment Act: When the Government receives intelligence of a planned cyber attack against Singapore’s banking system, the Minister can order telecommunications companies and banks (i.e. the “specified persons”) to provide information on their computer systems and networks and to take such measures as the Minister shall direct.

If the information is not in the possession of the telecommunications companies or banks, they will have to direct their IT vendors to release the information. The telecommunications companies, banks, and their respective IT vendors are not excused from compliance on the basis that the information constitutes trade secrets, or that they are under a duty of confidentiality. If they do not comply, they will be guilty of an offence.

legal briefing

Labor law changes to hurt HK employers The first pay rise in over two years will benefit around 200,000 workers in the city but leaves employers wailing over increased cost.

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n an aim to make Hong Kong a little more “employee-friendly”, the city’s statutory minimum hourly wage rate was increased effective 1 May 2013 by 7.1% to $30 per hour. Experts note that the first increase since the statutory minimum wage was introduced in 2011. It is set to benefit about 223,100 workers in the city but will certainly hurt employers over increased cost. Employers are also warned over proposed two significant changes to employment law in Hong Kong which are likely to lead to increased difficulties and costs if passed.

Who are to benefit from the adjusted statutory minimum wage?

Hogan Lovells partner Allan Leung said that the ordinance covers all employees, except livein domestic helpers, student interns, and work experience students during a period of exempt student employment.

What are required of the employers?

The method of calculation and the key requirements of the Ordinance will not change but starting May 1, employers must keep records of the total number of

“Another increase in the minimum wage is likely to push wages up further, possibly by as much as 10%.” hours worked by employees whose net wages in any wage period are less than $12,300 or an increase of HK$800 from the previous minimum said Leung.

Where an employee is ordinarily receiving on average more than $12,300 per month, Leung said that the exclusion of paid unworked time - e.g. paid rest days, paid annual leave, etc - may reduce the employee’s “net wages” to less than $12,300, so that the record keeping requirement under the Ordinance will apply.

What’s the penalty for employers not complying with the new rule?

Leung explained that if the salaries paid in a wage period are less than the statutory minimum wage, the employee is entitled to be paid the differential.

Failure to pay the statutory minimum wage, he said, renders an employer liable to a fine of HK$350,000 and imprisonment for 3 years.

How will the increase affect employers?

According to Nicholas Chan, a partner at Squire Sanders, since the introduction of the Statutory Minimum Wage, average wages in the Hong Kong retail industry have increased by 13% and concerns have been expressed that another increase in the minimum wage is likely to push wages up further, possibly by as much as 10%.

Allan Leung

Nicholas Chan

Gareth Thomas

What are other proposed changes to employment law that could hurt employers?

Gareth Thomas, partner at Herbert Smith Freehills first mentioned of proposed changes that will make it more difficult for employers to dismiss an employee without having a recognised good reason. Under the existing provisions, Thomas explained that if an employee is found by the Labour Tribunal to have been unreasonably dismissed, the Labour Tribunal may either make an order for terminal payments or make an order for reinstatement/re-engagement but only if the employer consents.

The proposed change, he said, envisages that, in a situation where the Labour Tribunal considers that reinstatement/re-engagement of the employee is appropriate, it will be able to make a compulsory order for reinstatement/re-engagement without securing the consent of the employer. In the event of non-compliance with the order, the employer, he added, will be ordered to pay a further sum of three times the employee’s monthly wages, capped at HK$50,000.

The second change, Thomas said, will significantly increase the cost of terminating a long-serving employee’s contract. According to Thomas, currently when an employer makes either a severance or long-service payments, it has the right to off-set the amount of such severance/long-service payment by the amount it has contributed throughout the employee’s employment to that employee’s MPF fund. This said, can be done by either reducing the amount of the severance/long-service payment by the amount of employer MPF contribution or by paying the full amount of the severance/long-service payment and then applying to the MPF provider for reimbursement of the employer’s contributions from the employee’s MPF fund. Thomas said that this invariably means that employees often walk away with little or no severance/long-service payment despite years of service.

According to Thomas, the change currently being debated would mean that this off-set mechanism would be abolished and employees would be entitled to receive their full severance/long-service entitlement as well as their MPF fund in full.

THE ASIAN BUSINESS REVIEW | AUGUST 2013 25

opinion

richard branson

Money Will Take You Far, But Not Far Enough

Q “In many cases, it can be better to start with very little money, since the skills you’ll develop as you overcome the challenges of growing your business will be invaluable.”

26 THE ASIAN BUSINESS REVIEW | AUGUST 2013

: Does starting a business always require a big pot of money?

A: No. While you will need a few core ingredients to launch a business and then make a success of it, a big pot of money is not one of them.

In fact, having substantial financial backing can actually slow or stop you from identifying your business’s problem areas and coming up with ways to fix them.

In many cases, it can be better to start with very little money, since the skills you’ll develop as you overcome the challenges of growing your business will be invaluable – you’ll notice your mistakes earlier and adjust more quickly, which will make for a healthier company.

Let’s face it: Your first few attempts to start a business are not likely to go according to plan. I have launched my share of businesses that didn’t get off the ground, and looking back, these were useful experiences.

Smaller capital means smaller risks. When I was a schoolboy I tried to launch a number of different schemes – for example, when my friend Nik Powell and I tried to grow and sell Christmas trees, but we lost our crop to hungry rabbits. It was disheartening at the time, but had we more capital to begin with, we would probably have made the same mistakes on a bigger scale, and we’d have lost more money.

So money can only get you so far. If you’re a beginning entrepreneur launching your first startup, a big pot of money may only mask

problems that will eventually catch up with you. From my first experience of failure I began to understand just how much I didn’t know about starting a business, and that even ideas that I thought couldn’t fail wouldn’t necessarily work out.

Passion and cause And gradually, by making mistakes over time and learning from them, I hit on what became my key guiding principles: That you must only launch businesses that will improve people’s lives and that you are passionate about. You must try to create something different that will stand out. When things go wrong (as they often do), don’t give up – be tenacious.

Try to be visible – it’s important to get out there and sell your product. Many great ideas fail just because their potential customers don’t hear about them.

A perfect example of how far you can go without financial backing can be seen in the Tenner competition held by the business and enterprise education charity Young Enterprise, in which young school kids in Britain are given 10 pounds and challenged to use it to do something enterprising within a month. Children have used the money for everything from helping musicians and artists to promote their work to setting up a course on feeding and grooming horses.

It is amazing to see how much some are able to do with their tenner.

Help for entrepreneurs With the creativity and spirit

of those kids in mind, I am thankful that my team and I are in a position to help other entrepreneurs find funding these days. Through a public-private partnership including Virgin Money, Virgin Unite, and Project North East, we are helping to manage a government program in the North East of England and in Cumbria that makes small loans available to emerging businesses – up to 25,000 pounds at reasonable rates of interest. The program is only a few months old but we have already seen some wonderful people and ideas, in businesses ranging from pet shops and hardware stores to digital animation studios and dance schools.

The StartUp Loans program doesn’t just provide sensible levels of funding but also mentorship and advice for those who are given loans – invaluable insights from people who have been there and done it. In business, the best way of learning is through doing, so I always encourage young people to start a business over going to business school – it’s cheaper and you’ll learn a lot more about what it takes to run a successful company.

Entrepreneurship is a great leveler, since having the benefit of a wealthy background or a generous investor isn’t always an advantage. The wonderful thing is that money is not the sole currency when it comes to starting a business; drive, determination, passion, and hard work are all free and more valuable than a pot of cash.

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ASIA’s hottest start-ups

20 Startups to watch in Asia

Check out how they managed with initial funding that ranges from as little as US$12,885 to as much as US$10 million

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sian Business Review brings you 20 of the hottest start-ups in two major cities in the region -Hong Kong and Singapore that started operating from 2011. Find out how the founders of these new ventures with regional and global reach managed to make their business flourish with initial funding that ranges from as little as US$12,885 to as much as US$10 million. We have gathered some exclusive information on who the founders are, how much funding each startup received and what products they offer. Read on and see how each startup can best serve you this year. They are arranged based on the amount of funding disclosed.

1. 8 Securities Country: Hong Kong Founders: Mathias Helleu and Mikaal Abdulla Funding: US$10 M; Velocity Capital B.V. and Leitmotif Private Equity Start of operation: April 2012 8 Securities bills itself as Asia’s first socially networked trading portal.

According to founders MathiasHelleu and Mikaal Abdulla, the company was born from a mission to empower individual investors and reinvent the way people trade.

Through a personalized trading portal, the founders are proud to give their customers global trading, market data and research and a private social network on a single dashboard.

2. TalkBox Voice Messenger Country: Hong Kong Founders: Sunny Kok, Danny Kok, Jacqueline Chong Funding: US$2M; Shanda Capital Start of Operation: January 2011 TalkBox Voice Messenger bills itself as the world’s first voice messenger with its patent-pending signature “hold to talk” button. It is a smartphone application that enables users of iPhone, Android, Windows Phone and Blackberry to easily communicate via push-to-talk instant voice messages as well as sharing geo-location, pictures and group chat with one another. A user’s voice is carefully curated and delivered by TalkBox voice bubbles of maximum 1 minute in length. “TalkBox makes asynchronous voice chats possible,” the founders said. TalkBox has grown to a global user base of 13 million.

3. Enterproid Country: Hong Kong Founders: Andrew Toy, Alexander Trewby, David Zhu Funding: US$1.68M; Comcast Ventures, Google Ventures, and Qualcomm Ventures Start of Operation: 2011 Enterproid helps organizations and individuals get the most out of mobile technology and corporate BYOD policies.

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The company’s flagship ‘Divide’ platform combines cloud-based management with advanced ondevice technology that according to founders ensures enterprise security and control without compromising personal freedom and privacy.

4. LuxoLa Country: Singapore Founders: Alexis Horowitz-Burdick; Camille Schu Funding: US$1.01M; WaveMaker Labs and National Research Foundation Start of operation: September 2011 Luxola bills itself as the first legitimate online beauty store in South East Asia. It competes with other online beauty stores selling grey and black market products. It boasts itself as the only online beauty store in the region selling 100% authentic products and being backed by every single brand they work with. A year after its founding, Luxola started shipping to Malaysia, Indonesia, Thailand and Brunei. It plans to ship to more countries in 2013 such as the Philippines and Vietnam

5. TraveLMob Country: Singapore Founders: Turochas Fuad; Prashant Kirtane Funding: US$1M, Jungle Ventures Start of operation: September 2012 Travelmob is a social stay marketplace where people can find, offer, and book unique accommodations in Asia Pacific. Founders said that travelmob provides a secure platform for property owners in Asia Pacific to list as many properties as they like for free - Travelmob only collects a service fee when an actual booking is made. The site

“Dream Cheeky was the inventor of the USB Missile launcher or so-called office warfare.”

asia’s hottest start-ups facilitates the entire booking process by offering a secure payments system as well as private messaging platform for guests and hosts to contact each other.

“Kites is dedicated to creating products that redefine how users discover stores and merchants market to customers. On the consumer side, it is building a “personalized Yellow Pages in your pocket.”

Start of operation: January 2012 TradeGecko Beta is a cloud-based inventory and sales management SaaS application for small-to medium-sized enterprises (SMEs). It is designed to pull together the administration that goes with running a wholesale business in a more social and engaging way.

6. PhoneJoy Solutions Country: Hong Kong Founders: Martin Kessler, Alexander Moro Funding: US$966,367.50 seed fund; US$75,000 Kickstarter; private investors Start of Operation: 2013 PhoneJoy Solutions is currently working on a unique game controller dubbed the PhoneJoy PLAY that turns mobile phones into portable game consoles. The PLAY does that with a patented sliding mechanism that allows attachment of any smartphone (Android, iOS & Blackberry 10) right into the controller’s centre. “Thanks to the physical buttons and analog nubs console, games can be played in a much easier and comfortable way than by using the phone’s touch screen,” say the founders. The PLAY was announced in January 2013 in Las Vegas and is launching soon in major retail and online stores in America and Europe, as well as Asia.

7. Luxe NoMad Country: Singapore Founder: Stephanie Chai Funding: US$800,000; Tigris Capital, Spring Seeds Capital Start of operation: July 2012 The Luxe Nomad is a flash deals site offering discounts of up to 70% on the most luxurious hotels and resorts across Asia.

The deals are only available to members and usually only remain open for one or two weeks. According to William Klippgen, venture capitalist at TigrisCapital and BAF Spectrum, the business model of Luxe Nomad is ‘very scalable’ and the CEO, herself a famous Malaysian model, has signed up a number of other celebrities across Asia sharing their travel insights on the site.

8. TradeGeCko Country: Singapore Founders: Cameron Priest; Carl Thompson; Bradley Priest Funding: US$650,000 WaveMaker Labs and NRF, Golden Gate Ventures

9. DropMySiTe Country: Singapore Founder: John Fearon Funding: US$650,000; Crystal Horse Investments, Stanley Street Labs, and individual investor Start of operation: August 2011 Dropmysite bills itself as Asia’s fastest growing startup for attracting 630,000 users within 50 days, faster than Twitter, Pinterest,and Fab.com. The company backs up the Internet, with a focus on backing up Cloud data, such as websites, emails, chat, social media, and more. The company has developed and launched two websites: Dropmysite.com and Dropmyemail.com. The latter is a Cloud-to-Cloud backup solution for emails, which has signed up over 650,000 users in less than 50 days since its launch at DEMO Asia in March 2012. After the recent acquisition of OrbitFiles, a cloud data backup site, Dropmyemail is now at 911,000 users.

10. GuShCLoud Country: Singapore Founders: Vincent Ha; Althea Lim Funding: US$500,000; F&H Fund Management Start of operation: 18 February 2012 GushCloud runs the website GushAd which bills itself as the only platform that brings consumers into the advertising game through incentivised engagement. It allowsthem to perform actions on behalf of brands in exchange for a cash reward - tweeting a message and a link, completing surveys for marketing research companies, signing up or downloading apps and even buying and THE ASIAN BUSINESS REVIEW | AUGUST 2013 29

ASIA’s hottest start-ups sharing about products. The range of rewards is between $0.50 to $100.

11. Tradehero Country: Singapore Founders: Dinesh Bhatia; Dominic Morris Funding: US$487,000; TNF Ventures through the Technology Incubation Scheme under Singapore’s National Research Foundation Start of operation: Mid-December 2012 TradeHero is a free stock market simulation app which draws real-world data from stock exchanges to create an unrivalled global social investment network. Users can compete with friends from their social networks, or on the global leaderboards with users from across the world. According to founders, the app brings novice and knowledgeable traders together, allowing novice traders to subscribe for stock tips via push notifications, and top traders to earn subscription fees from followers.

12. FETC Country: Hong Kong Founders: Di Wu, Lu Qin Funding: US$450,972; angel investors, Innovation and Technology Commission, The Innovation and Technology Fund(ITF) and Cyberport Hong Kong Start of operation: 2012 FETC provides financial engineering services to individual investors. It specializes in developing financial models,trading strategies, algorithmic trading solutions, and other trading technologies. Its very first product, ProVesor, is an online stock investment management tool.

It combines risk management mechanism and investment strategies and provides retail investors, who manage their own stock investment, a one-stop solution to achieve reliable and consistent trading performance, according to founders.

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13. Sprooki Country: Singapore Founders: Michael Gethen; Claire Mula Funding: US$325,000; Australia/US/Singapore private equity Start of operation: February 2011 Sprooki offers a locationbased promo alerts from malls and retailers. It bills itself as Asia’s first proximity marketing and mobile commerce service for the retail sector. Sprooki shoppers receive access to exclusive offers and alerts from nearby and favourite stores and malls; pay conveniently through phone; and instantly redeem in-store or at customers’ convenient time 14. LovebyTe Country: Singapore Founders:Steve Sng; Amelia Chen Funding: US$243,000; Ruvento and Crystal Horse Investments, under Media Development Authority (Singapore)’s iJam programme Start of operation: April 2011 Lovebyte aims to help couples to keep their relationship strong by creating an avenue for them to spend more quality time together even when apart. Founders said that LoveByte is designed to enrich the relationship between couples by creating a private space for both of them to easily communicate, share, and store memories.

It also encourages couples to spend more time together offline by recommending interesting date ideas and things to do. “In simple terms, Lovebyte is like a Facebook for couples. Within a month, we’ve accumulated 20,000 downloads for the app. To us, it is an indication that people love the idea,” the founders shared.

15. App Green Country: Hong Kong Founders: Kenneth Lee, Carter Lam, Eric Tang Funding: US$162,350 research funding from Hong Kong Innovation and Technology Commission (HKITC), Four Directions Start of operation: 6 October 2011 AppGreen is a self-help portal for corporates to create their own mobile catalog application. Founders said that AppGreen aims to have its own unique mobile catalog application with focus on product display. “We believe texts are a bore to people, and that’s never the case for graphics.Yet, most of existing mobile catalogs are more focused

asia’s hottest start-ups on complicated functionalities that they rarely give attention to the graphic presentation of the products which could easily help draw customers’ attention,” the founders said. Currently, AppGreen has over 800 catalogs generated from its platform and customers coming from over 140 countries around the world.

16. Bagosphere Country: Singapore Founders: Zhihan Lee; Ivan Lau; Ellwyn Tan Funding: US$120,000; Kickstart, private investors Start of operation: 2011 BagoSphere launched a pilot call center class in a suburb area in the Philippines in 2011 with a 90% success rate of getting trainees into call centers. According to the founders, the company provides the quickest way for rural youths usually living on US$3 a day to gain access to a full-time job in a multi-national company which pays them about US$250 a month. To do this, the company offers a two-month Call Center Course which trains rural youths in English communications, IT skills and provides basic call center exposure.

17. Perpetu Country: Hong Kong Founder: Ryanne Lai and Andrea Livotto Funding: US$68,290 from Cyberport’s Incubation Programme; US$12,885 from Cyberport’s Creative Micro Fund Scheme Start of operation: 2012 Perpertu bills itself as ‘a final will for online accounts’.

It provides management tool for people’s collection of digital contents. Perpetu lets users decide how they want to be remembered, and gives them control over their online content.

For example, it can help them hand over their photo albums to their friends and family. It can delete their emails, or forward them to someone who can handle them for them, including future incoming emails. It can let them leave final messages to their loved ones, which will only be emailed or posted to social networks in case they pass away.

18. Start Now Country: Singapore Founders: Keith Tan; Ivan Chang Funding: US$70,000; SPRING Singapore YES! grants Start of operation: January 2012 Start Now launched a volunteerism social platform in February 2012.

It bills itself as Singapore’s first non-governmental volunteerism advocacy social enterprise. Start Now aims to connect volunteers from schools, corporate organisations, and the public with a range of volunteering opportunities, from professional services, administration, fund raising, welfare and social work to independent projects through its online portal. Start Now claims that over 120 nonprofit organisations have come on board boosting user base to over 28,000 in just under 100 days.

Founders also boast that it has over 6,200 users logging in one week alone.

19. AfterShip Country: Hong Kong Founders: Teddy Chan, Andrew Chan, Dante Tsang Funding: US$12,885 micro funding from Cyberport Micro Fund Program, and undisclosed amount from Australian company “Business Switch”.

Start of operation: March 2012 Aftership helps online merchant stores to auto-track packages in one place from dispatch until delivery and notify customers with updates through email, SMS and social media. The service supports USPS, UPS, Fedex, DHL and 40 other major couriers worldwide. Aftership also provides online stores a reporting tool detailing any problems incurred during shipping and delivery.

20. GOIDD MARKETING Country: Hong Kong Founder: John T. Wong Funding: less than US$12,885; Softlayer Incubation Program in US/Asia.

Start of operation : August 2012 GOIDD is a mobile VOIP telecommunication services company that claims of providing a ‘very affordable’ and ‘convenient’ for consumers and small businesses tomake international calls and SMS on the go. This service is offered worldwide, but with an Asia focus, through an easy- to-use iOS and Android app.

GoIDD’s unique value proposition and competitive service advantages include: IDD rates up to 95% less than major mobile carriers and 60% less than Skype; Ability to call any mobile phone or landline; Capability to call without the need for WiFi/3G & 4G data through Call-Through; Virtual Numbers from 60+ countries call-forwarded to any phone/fax; and 24/7 real-time webbased self-managed customer account dashboard fax for selected territories It is offered through pricing subscription plans starting from just US$2 per month, or can also be purchased as an easy pay-as-you-go plan.

THE ASIAN BUSINESS REVIEW | AUGUST 2013 31

CHRO Briefing A large part still depends on the company and the individual.

Why parental leave is ‘too complicated’

Experts complain over paperworks involved with new leave types.

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he road to amending the Marriage and Parenthood package was paved with good intentions but many CHROs doubt whether new additions could encourage a change of mindset for Singaporeans to have more babies. Bee Bee Tan, HR Manager of IndoChine Group, believes that the shared parental leave may not work as he thinks the criteria for availment are ‘too complicated’.

“The father has to seek agreement from the mother in order to get a week leave from her 16-week maternity leave. Paper administration of this from a standpoint as an HR administrator is timeconsuming. I am a mother of two, personally I felt the 16 weeks maternity leave is not sufficient to care for a newborn baby. Ideally, a six-month period could be better but mothers now have to share her maternity leave.”

Overwhelming paperwork Ms Tan also cautioned that with the introduction of various leave types, when staff members apply for these leaves of absence at the same time, the company will need to cope with the job allocation of responsibilities and this may be too overwhelming, not to mention the paperwork involved. “I cannot tell my employees since she is pregnant, the rest of you please do not get pregnant until she has given birth!”

Alicia Chin, HR Manager at Nuance-Watson, believes likewise and said that the shared maternity leave is a challenge from an employer’s perspective as there are no clear guidelines as to how such benefit is to be carried out and verified. “My concern will be that of too much complexity in the administration aspect.”

JVC Electronics Singapore Kim Seng Tan said that the effect will be more pronounced to SMEs. “Business may have to rewrite their policies but

32 THE ASIAN BUSINESS REVIEW | AUGUST 2013

The father has to seek agreement from the mother to get a week leave.

somehow I do feel it may affect more the SMEs rather than the MNCs. I believe most MNCs may have such parental leave scheme, it is just an add-on. SMEs, with fewer workers, may feel the pinch if any of their workers is on leave. The M&P package may be a good incentive scheme but somehow there is an indirect cost to the business.

A great deal of admin work is required to claim the reimbursement. Forms have to be filled and HR has to keep track of such leave. More work hours are needed and I don’t think SMEs could afford that.”

Non-monetary measures The government can introduce non-monetary measures to address falling birth rates, suggested Mohd Dzulqhilfly, Sime Darby Singapore’s general manager for HR/ “In my 30 years experience in managing HR in developed and developing countries, I have seen a range of measures taken by Governments to raise falling birth rates as countries become more affluent. Whilst these measures make it easier for working parents to bear and raise children, they seldom significantly improve the birth rates. In countries which have been successful in maintaining birth rates there are more than financial incentives.”

Brenton Ong, HR Manager of Concorde Hotel Singapore, believes on rethinking government stand on foreign labour. Ong said that from an employer’s perspective, these enhancements in maternity, paternity, and childcare provisions would further intensify the pressure on the existing workforce resulting in disruption in operations, reduced productivity, increased turnover, and higher operating costs. He said given the current government stand on reducing foreign labour dependency, employers, are given little option but to restructure operations, redesign jobs, and implement technology in order to stay in business.

The primary concern to employers, particularly the SMEs, are therefore related to timing and cost, he said. “As these measures are mandated immediately, employers do not have the luxury of time or budget to take appropriate actions. Ideally, the government should relax the tightening of foreign workers and freeze the foreign worker levy for a grace period of, say, three years to grant employers sufficient time to automate, innovate, or restructure their operations whilst the enhanced maternal and paternal provisions are in operation.”

Meanwhile Pat Tian Koh, HR Vice President at TÜV SÜD PSB, believes that government policies can only do so much. A large part, he said, still depends on the company and the individual.

THE ASIAN BUSINESS REVIEW | AUGUST 2013 33

ANALYSIS: ASIAN AGEING

Asia still unprepared for graying millions With the elderly Asian population set to explode, the region needs to play policy catch-up.

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he number of elderly Asians is set to double or even triple by 2050 to close to a billion 65 year olds. Unfortunately, Asian countries still lack policies and programs to support this fastincreasing cohort, said economists.

Asian economies have been booming in the past decades, a spectacular growth pace that has been partly driven by the region’s mostly young and healthy workers.

Yet the demographic tides are turning – and maybe turning faster than governments and the private sector are prepared for.

Asia aging fastest in the world “Populations are aging in Asia far more rapidly than anywhere else in the world,” said Julia Wang, Economist at HSBC. Wang pointed 34 THE ASIAN BUSINESS REVIEW | AUGUST 2013

Populations are aging in Asia far more rapidly than anywhere else in the world.

to data from the United Nations Population Division (UNPD) and HSBC which suggest a doubling or even tripling number of 65 year olds across Asia by 2050, barring a few exceptions such as Japan.

“In China for example, this ratio will rise from 9.9% to 30.8%, less than elsewhere, but still a significant increase, while in Korea, the over 65 ratio will jump from 13.8% currently to 40.2% in 2050. This implies that nearly 1 in 2 Koreans will be over the age of 65,” said Wang.

In this decade alone, Asia-ex Japan will see the number of 65 year olds rise almost 50%, growing at about double the rate of Japan, according to a separate forecast from Amar Gill, Head of Asia Research at CLSA. HSBC’s Wang further predicted that the Asian region, including

Australia and New Zealand, will be home to close to a billion people aged 65 and over by 2050 from 300 million currently. The region’s ratio of 65 year olds to the total population by then will have spiked to 1:6 from 1:14 currently.

CLSA’s Gill said that for some countries like Hong Kong, Australia, Singapore and Taiwan, crossing the 1:6 elderly-to-population threshold will be reached even as early as the current decade.

Median age to hit mid-50’s UNPD and HSBC data also peg the median age in Asia to spike from the current low-20’s to early-40’s range to a much older mid-20’s to mid-50’s range. Countries like Taiwan, Japan, Korea, Hong Kong and Singapore will see the highest median age increases

ANALYSIS: ASIAN AGEING of more than ten years each.

“Although median age is set to rise throughout the region, smaller Asian economies are more at risk.

In particular, note that median age will hit around 55 in Taiwan, Japan, Korea, Hong Kong and Singapore. In contrast, US will stay relatively young at 40 thanks to a higher birth rate,” said HSBC’s Wang.

“A direct implication of rising median ages and over 65 ratios is a much larger old age dependent population vis-à-vis a shrinking workforce. In other words, dependency ratios – the number of 0-14 plus over 65 year olds to those aged 15-64 – will rise sharply. Over the next four decades, dependency ratios will more than double in Hong Kong, Japan, Korea, Singapore and Taiwan. The ratio will be higher than 1:1 in Hong Kong, Japan, Korea and Singapore,” added Wang.

The fast graying of Asia is not merely a possibility, but more an inevitability, according to Wang.

“Bear in mind that demographic projections are based on parameters such as fertility, mortality and life expectancy, which are largely known and unlikely to change short of major catastrophes or scientific breakthroughs. As such, demographics are more like projections than forecasts.”

Driving forces of aging Asia’s demographic transition toward older populations is part of a natural progression, said Donghyun Park, Principal Economist, Economics and Research Department at Asian Development Bank (ADB).

“The region is simply following in the footsteps of the advanced countries. As in the advanced countries, Asia’s demographic transition is driven by rising life expectancy - i.e. people are living longer - and falling fertility - i.e. women are having fewer babies,” said Park.

The biggest headline is not that Asia is getting older, it is that it is getting older at such a brisk pace that it might catch unprepared countries flat-footed. “What separates Asia from other parts of the world is the exceptional speed and scale of the demographic transition. This

is especially true in East Asian countries,” said Park.

Different strategies Asian countries, Park said, face different strategies for coping based on their stage of aging, which can range from early to advanced.

“Some Asian countries such as Korea and Singapore are at the advanced stage of aging. Other countries such as India and Philippines are still at the early stages while yet others such as China and Thailand are in between,” said Park.

Advanced-aging countries should be the most aggressive in addressing the impact of population aging, according to Park. Relatively younger countries have some more leeway, but it will do them well to begin preparing earlier than later.

“Addressing the impact of population aging is an urgent priority for advanced-aging countries. In contrast, the much more important priority for early-aging countries is to take full advantage of their youthful populations and thus reap the demographic dividend,” said Park.

“However, even for younger Asian countries, the time to prepare for population aging is now even though a greyer future may seem to lie on the distant horizon. This is because policies implemented today will affect the ability of individuals to prepare for their retirement two to three decades down the road.”

A direct implication of rising median ages and over 65 ratios is a much larger old age dependent population visà-vis a shrinking workforce.

Two socio-economic challenges ABD’s Park said population aging poses two strategic socio-economic challenges for Asia: Sustaining growth that has so far been driven by the now-shrinking youth cohort, and providing the rising number of elderly with sufficient support, financial or otherwise.

“First, the region must find ways to sustain growth in the face of less favorable demographics.

A relatively youthful population and consequently an ample pool of workers gave Asia a sizable demographic dividend in the past but, as a result of rapid aging, the dividend is gradually turning into a tax across the region,” said Park.

“Second, Asia must strive to deliver affordable, adequate and sustainable old-age income support for its fastgrowing elderly population. Failure to do so poses a serious risk to inclusive growth since a large and expanding segment of Asia’s population may become poor and marginalized,” said Park.

Underdeveloped public transfer payments There are three main forms of old-age income support, according to ADB’s Park. First is private transfer payment in which adult children support their parents financially. Second is asset draw down in which the elderly spend their savings to pay

Percentage over 65 in total population: graying fast.

Chart 1. Percentage over 65 in total population: greying fast 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%

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Source: UNPD, HSBC

THE ASIAN BUSINESS REVIEW | AUGUST 2013 35

ANALYSIS: ASIAN AGEING for post-retirement expenses. Third is public transfer payment in which the government directly supports the elderly.

Of these three, Park said public transfer payment is particularly underdeveloped in Asia compared to the advanced economies and Latin American countries. The fast graying of Asians though will likely spur the region’s governments to develop more comprehensive public transfer programs, if only to court their increasingly elderly – and influential – constituents.

“Due to the sheer speed and scale of population aging, agingrelated liabilities, such as those for public pensions and health care, are projected to rise sharply even if there are no big systematic increases in public transfers. But political economy considerations suggest that systematic increases are likely since the growing elderly population will yield more political power,” said Park.

Rudimentary public pension systems Park also said that Asian countries must strengthen their public pension systems which he said still remain “rudimentary and fragmented.”

“In the advanced economies, where concerns about fiscal sustainability have escalated due to the growth of public debt to unhealthy levels, there is a growing role for the private sector in the provision of health care insurance and pensions. This trend is likely to emerge in developing Asia as well, especially in middle and high

income countries,” said Park.

Asian governments face the challenge of forming sound regulatory frameworks that will ensure healthy competition in the insurance and pension markets while protecting the elderly consumers, added Park.

Better, more productive workers With much of Asia getting older, the region’s economies will rely less on their youth to drive growth. Instead, Asian countries should be looking at improving the productivity of future older workers, or tapping into untapped labor force groups such as housewives and mothers, or even raising the retirement age.

“The basic idea here is to make up for fewer workers with better, more productive workers,” said Park.

“Countries such as Korea, which have relatively low female labor force participation rates, can expand child care facilities to encourage more women to work and women to work longer. Yet another solution is to raise the retirement age and enable older workers to participate more actively in the labor market,” added Park.

“In many emerging markets, including in China, the retirement age is currently lower than 65. A rise in the retirement age to Western levels could thus restrain the increase in dependency ratios a little,” said HSBC’s Wang.

Asian countries can ill afford to twiddle their thumbs at implementing policies aimed at addressing the fast

Median age projected to rise across Asia Chart 2. Median age projected to rise across Asia 60 50 40 30 20 10 0

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Source: UNPD, HSBC

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The 65-andover age group will also spend more on housing, food and drinks, healthcare, household goods, hotels and leisure.

population growth, according to CLSA’s Gill.

“Even if this seems far off, the tracks need to be laid now. In essence, this entails setting aside an ever growing share of national income for the inevitable boom in retirees. For governments, this means less and less cash is available for generous infrastructure spending. For employers, this means higher wage costs as surcharges are applied to build up pension assets. To avoid a slowdown in growth as a result, as well as rising inflation pressures, productivity growth will have to rise,” said Gill.

With millions of elderly entering the consumer market in the next decades, there will also be a shift in economic spending patterns.

Demand for savings products, including life insurance, will be robust, said CLSA’s Gill.

The 65-and-over age group will also spend more on housing, food and drinks, healthcare, household goods, hotels and leisure. Meanwhile, expenditure on education, transport and communications will decline relative to the elderly’s overall spending.

Massive growth in elderly products CLSA’s Gill also noted specific product industries that will be emerging along with the rise of elderly Asians. These include robotics, which is expected to boost the productivity of the active labour force but also for the care of parents and grandparents “given the Asian cultural norm of avoiding placing ageing parents in homes.”

“Demand for incontinence products will follow Japan where the market for adults diapers is crossing over the number of units for infants. Anti-ageing skincare is set to be a fast-growing cosmetics segment as it has been in the developed world. China’s cosmetics market is already the largest globally, but per-capita spend is just one-quarter of the USA, indicating massive growth in the region for products catering for the elderly,” added Gill.

analysis: COMMODITIES and asia

The end of the commodity super-cycle

Commodity prices, after enjoying a historical bullrun, are likely to be in subdued territory for years to come, writes Deutsche Bank Chief Economist Taimur Baig.

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oft commodity price trend in the rest of decade will have profound impact on growth, inflation, geopolitics, and commodity producer-consumer relationship. In this piece we argue that commodity prices, after enjoying a historical bullrun, are likely to be in subdued territory for years to come. We examine the fundamental, cyclical, and structural factors driving this development, with special focus on the emergence of shale gas/oil as a game changer.We then delve into the implications of the end of the commodity super-cycle on Asia.

The risk for heavy exporters Since most Asian economies are net importers of commodities, a benign price outlook would unambiguously lower inflation, raise growth, and improve external balances. Countries heavily invested in the business of 38 THE ASIAN BUSINESS REVIEW | AUGUST 2013

As the supercycle ends, there will likely be see a considerable tapering of wealth transfer from commodity producers to importers.

exporting commodities, however, will face adverse headwinds.

China, making up for about 25% of global demand for key commodities, has played a key role in commodity price swings in recent years. However, China’s domestic structural changes in the coming decade will likely be a negative for the global energy price outlook. An important factor here is the rapid growth of shale production and technology in the US and potentially sizeable shale gas production in China in the next 4-8 years. China, which imports 60% of its oil needs, will become a major beneficiary of the resulting easing in oil prices as well.

Growth and inflation forecast Our CGE model shows that a 10% reduction in oil prices would push up China’s growth potential by 0.3ppts and reduce its long-term

CPI inflation by 0.2ppts. We obtain similar results for SE Asia. Note that we are not forecasting a commodities “bust.” Notwithstanding the various factors flagged in this piece, there are sufficient pockets of demand and supply side uncertainties globally to provide a floor to commodity prices.

Still, as the super-cycle ends, there will likely be see a considerable tapering of wealth transfer from commodity producers to importers.

Macro implications The All Commodity Price Index of the International Monetary Fund rose by 339% between January 2002 and June 2008, a magnitude not seen since the oil shocks of the 1970s. The index corrected severely with the onset of the 2008/09 global financial crisis, but as crisis-mitigation policies were rolled out globally, and emerging market demand appeared to be

analysis: COMMODITIES and asia No major pipeline technology or event was seen to improve supply or lower costs of fuels and food.

growing insatiably, commodity prices rebounded, and by the end of 2010 prices were close to their all-time highs.

The boom in prices was, strikingly, across the board. Breaking down the broad index into food, metals, and fuel reveals remarkably similar patterns of price movement. No wonder the term “super-cycle” was used liberally to discuss the phenomenon, and flows surged to commodity funds.

What drove the cycle?

There were good reasons for the price increase. Overall emerging market demand was strong through the past decade, as China led the way with seemingly insatiable demand for food, fuel, and metals. It was tempting to look at China’s high-growth track record (with little variation) as a surefire indication of robust demand to persist for years to come. Emergence of India, which also saw accelerating economic growth, was seen as another source of persistently sizeable demand.

The global oil consumption was robust through decade. While nonOECD demand was particularly strong, even OECD countries, seen as mature economies with modest growth and declining energy intensity, saw oil consumption rising each successive year. The dynamic was affected only with the onset of the 2008 global crisis, although even then China’s demand appeared robust through 2011.

There were also palpable Malthusian fears, with commodity

bulls claiming that oil production had peaked precisely when demand was surging in the emerging economies.

As far as food was concerned, arguments were made that the world’s farm lands were reaching their full potential, and that climate change was going to create more frequent weather-related volatility and associated crop failures. No major pipeline technology or event was seen to improve supply or lower costs of fuels and food, and hence it followed that rising commodity prices were likely to be the norm.

An additional argument entered the discourse with the onset of the global financial crisis. Unprecedented policy response to mitigate tail risks raised concern that such exceptionally large injections of liquidity was bound to cause high, if not hyper, inflation, with associated surge in commodity prices.

Most strikingly, gold price rose sharply as inflation hedging and flight to safety became a popular strategy, and flows to commodity funds surged as “real assets” were considered a safer bet.

Global geopolitics was not helpful either. From production disruption on various parts of the middle-east, international sanctions on Iran, Iraq’s slow recovery of production capacity, and fears of an Israel-Iran conflict, there were sustained concerns about oil supply.

What is driving the correction?

There has been a discernible turn in commodity prices since early-2011.

Despite some signs of global tail-risk

abating and recovery of economic growth, the once-irrepressible rise of commodity prices began to lose its momentum, and the trend has been downward over the past two years.

Just like it was the case during the super-cycle, the correction has also been broad-based. Price weakness began with metals in Feb-2011, and was followed by fuel from April-11 onward. Since then, the former has corrected by 28% and the latter by 14%. Food prices have declined by a somewhat morem modest 7%, but their rise was the least during the super-cycle. Futures markets suggest no respite to commodities correction for the time being. The evidence seems to be clear—the commodity super-cycle is over.

Cyclical factors Many of the factors and fears that drove the super-cycle have dissipated in the last few years. EM demand is robust but not as insatiable as once thought, especially with China’s appearing to be slowing down, with a strong recovery becoming increasingly elusive. Fear of a global spike in inflation due to exceptionally loose monetary policy has proven to be unfounded, with expectations remaining muted in both advanced and developing economies. As a result, using commodities as an inflation hedge has lost its attractiveness as a strategy.

Global policy makers also deserve credit for not making any major errors that would have caused trade related friction, tail events in financial markets, or a loss of faith in the existing system of payments and settlements. As the risks abated, commodities began to lose their attraction as a defensive bet. Finally,

Oil consumption growth through 20122

Source: BP 2012 Annual energy report, Deutsche bank THE ASIAN BUSINESS REVIEW | AUGUST 2013 39

analysis: COMMODITIES and asia Top 10 holders of shale natural gas reserves

Source: DOE, EEIA, Deutsche Bank

while there has been a global cyclical recovery, it has been anything but muted, allowing demand to remain well under check.

Structural factors While expectations of a rather soft global cyclical recovery has become entrenched, and consequently commodities have been losing steam, we argue in this paper that powerful structural factors are at play that would cause commodity prices to remain lacklustre for many years to come.

Firstly, demand projections are muted beyond the cycle. Below are projections of global oil demand, published in the 2013 Medium-term Market Report of the International Energy Agency (IEA). It shows negative oil demand growth in OECD countries for each of the 5 forecast years. Recall that in the past decade, even as growth and energy intensity declined, OECD demand growth was positive.

Now, with an anaemic recovery from the global crisis expected to persist perhaps that rest of the decade, and both environmental regulations and technological advances leading to increased consumption of alternative energy, OECD is seen to be structurally prone to declining oil demand. Even after adding fairly strong non-OECD demand, global oil demand is expected to grow by no more than 1-1.5% a year for the time being.

Secondly, exploration, extraction, and refinement picked up vigorously as the high prices seen during the energy boom increased the profitability and feasibility of various 40 THE ASIAN BUSINESS REVIEW | AUGUST 2013

projects. Consequently, the supply side began to mitigate any shortages there may have been. Among many other areas, dramatic developments have taken place in the global capacity for refining oil.

The following chart shows IEA’s forecast of new refinery capacity in the pipeline, as well estimates of existing capacity being upgraded in the coming years. The projections point out that between 2013 and 2016 alone, about 7.6mn bbd of capacity will come on stream in the refining industry, a substantially positive supply shock.

A rather striking conclusion can be drawn with latest available data and projections—global oil supply is likely to outstrip global demand for the rest of the decade.

Thirdly, decline in commodity intensity has not been isolated to the advanced economies. Even China, the strongest source of commodity demand, has begun to make efforts toward using alternative energy.

The country has proposed banning the import of low-grade coal, and announced strategies to boost energy production through solar, wind, biofuel, and nuclear means.

Another example is China’s steel consumption intensity. Once a source of seemingly insatiable demand for iron ore, China’s demand has begun to wane, and will likely remain so as we believe the economy’s steel consumption intensity is beginning to peak, just as it had been for Japan when it went through a 15-year cycle of industrialization.

Shale shock: A game changer The fourth factor is so disruptive that

“Powerful structural factors are at play that would cause commodity prices to remain lacklustre for many years to come.”

it warrants its own section. From an obscure technology a decade ago to presently seen as a profound change agent in gas/oil production, shale technology has had a dramatic impact on the commodity industry.

Shale has already fundamentally transformed the US energy landscape, and more changes are in store as the US begins exporting natural gas to the rest of the world and China begins to harvest its own shale natural gas/oil. Energy security, global geopolitics, and patterns of trade could be profoundly altered in the coming years as shale technology matures, environmental concerns are contained, and a hard ceiling is imposed on energy costs.

Exploiting shale resources requires a combination of horizontal drilling and hydraulic fracking (fracking is a technique that involves pumping water, chemicals, and sand to open up cracks in the shale rock), allowing the gas or oil trapped inside to flow.

Initially, natural gas has been the focus of shale development, but oil can be extracted using the same method.

Knowledge of the existence of shale oil and natural gas is not new, but extraction has been costly, both in absolute and relative terms, until recently.

Advances in horizontal drilling and

analysis: COMMODITIES and asia hydraulic fracking, as well as steep gains in US natural gas prices in the past decade made shale extraction feasible. Over the past 5 years, shale’s rise as source of energy production in the US has been dramatic. The US Department of Energy (DOE) projects that shale will continue to dominate US natural gas supply over the long-term, contributing over 50% of total US production by 2040, up from less than 10% in 2007.

China, shale, and the outlook for energy consumption Although its consumption growth has slowed, China’s energy needs are considerable. Crude oil imports averaged 5.5mn bbl/day in 2012, up nearly 70% since 2007. Indeed, China started this year by importing 6mn bbl/day, which was about 2mn bbl/day less than what the US imported in January. The US-China crude oil import gap has narrowed dramatically in recent years.

As Beijing observes its oil import dependence rising every year, energy security has taken greater priority for policymakers. In 2001, crude oil imports represented just under 30% of total oil demand.

That’s grown to about 60% in 2012.

From a demand perspective, China has pursued measures, including energy conservation/efficiency, aimed at curbing consumption growth rates.

From a supply perspective, China is pursuing a policy of diversifying its primary energy mix and its crude oil import sources. China is also looking at increasing its own domestic hydrocarbon resources, notably shale given the extent of its potential resources.

Although the US is the world’s largest producer of shale resources, it is China that is estimated tohold the largest technically recoverable reserves. Indeed, China’s technically recoverable reserves of shale natural gas could well be 50% greater than that of the US. Given technical challenges unique to China’s shale geology and water constraints, most expect that China will fail to meet its target of 6.5bn cubic meters (bcm) of shale/year by 2015 (this has been set by NDRC in the 12th Five Year Plan). Many experts predict that China’s shale

boom is more likely to materialize not this decade but from the next.

BP predicted that outside of North America, China will be the most successful in developing shale natural gas, which is estimated to account for about 20% of total Chinese natural gas production by 2030. Still, BP asserts that even with shale natural gas development, China’s natural gas/ LNG import needs will remain strong given expectations for rapid demand growth.

Optimism China’s domestic estimates, conducted by NDRC, are much more optimistic, essentially looking at 20-40% shale output in total gas production by 2020. This optimism comes from the abundant reserves as well as smooth experiment. As of now, more than 100 wells have been drilled in Sichuan, Chongqing and other areas, yielding a daily production of more than 0.6mn cubic meters.

Several sweet points have been found, among which many wells yielding more than 20,000 cubic meters per day. Local industry experts estimate that by 2015, Shell, PetroChina and Sinopec could each contribute 1bcm, 1.5bcm and 3bcm of production, making the national 6.5 bcm target achievable.

This is confirmed by PetroChina management that Chinese companies are aiming at 1.5bcm by 2015, 20bcm by 2020, and 50bcm by 2030.

Beyond that, as the scale of production and use of new technology will likely to reduce the cost of extraction and production, together with natural gas price reform and production subsidy, we believe the incentives for gas and oil companies will become stronger China’s track record shows that it places very high weight to energy security, so one should expect substantial resources being devoted in the coming years to overcome key constraints like water, expertise, and pipelines. Large stateowned Chinese energy companies are investing in the US with expectations of picking up shale-related skills and expertise, and they are setting up joint ventures with major global energy companies for the same reason. Social and

“Crude oil imports averaged 5.5mn bbl/day in 2012, up nearly 70% since 2007.”

environmental frictions are likely but the authorities have demonstrated in the past that they are capable on overcoming them.

The potential for China’s shale development to exceed expectations in terms of timing and production volumes cannot be discounted. A combination of supportive policy measures – a key one being the reform of natural gas pricing – and technological advances could prompt a shale revolution in China. The Chinese government, together with the private sector, will invest heavily in R&D, exploration, production, pipelines and infrastructure. China has held in June 2011 and October 2012 two rounds of shale gas block auctions, in which the exploration right of 23 blocks have been handed over to successful bidders, with a total shale gas reserve of 20+tcm.

In the second round bidding especially, both non-state owned Chinese entities and Sino-foreign joint ventures were encouraged to participate in the bidding. The third round of auction is expected to start in H2 this year, which will likely include more resource-rich blocks in Northern China.

US vs. China crude oilimport trenda

Source: DOE, EIA, C1, Reuters, Bloomberg Finance LP, Deutsche bank

The super-cycle of food, metals, and fuel prices

Source: International Monetary dun, Deutsche bank

THE ASIAN BUSINESS REVIEW | AUGUST 2013 41

ECONOMICs

Ian Perkin

Hong Kong’s modest growth not surprising

W

ith half the 2013 calendar year almost over there is precious little sign of a boost external demand coming to the rescue of Hong Kong growth, leaving the domestic economy to carry the burden.There was little surprise therefore that Hong Kong SAR growth in the opening three months of the year came in at a modest 2.8% in real terms when the Government’s First Quarter Economic Report was issued on May 10.

It confirmed that while the external sector still faced an unsteady global economic environment, the domestic sector was relatively resilient. This was despite an obvious slowdown between the final quarter of last year and the opening quarter of this year.

The government figures showed that on a seasonally adjusted quarter-to-quarter comparison, real GDP expanded only by 0.2% in the first quarter, after a 1.4% growth in the preceding quarter.

Total exports of goods grew by 8.8% in real terms in the first quarter over a year earlier, with the Mainland and some other Asian markets showing solid growth. Developed markets, however, were still weak spots, with exports to the US, the EU and Japan all showing year-on-year declines.

Major growth drivers It was the domestic economy that again underpinned growth. Private consumption expenditure grew by a fairly impressive 7.0% in real terms over a year earlier, on the back of good labour market conditions.

Unemployment edged up to 3.5%, household incomes grew 2% in real terms and earnings of lowest income earners were up 3.4%. Investment expenditure however fell back by 2.2% from the

“There was little surprise that Hong Kong SAR growth in the opening three months of the year came it at a modest 2.8% in real terms.”

distinctly high level last year.

The government said the global economic environment, albeit relatively improved from the dire situation in mid-2012, was adversely affected by “a considerable number of uncertain factors”. These included the weak EU economy and continued restrained growth in the US. “In view of the continued sluggishness in demand in the advanced economies, which would continue to 42 THE ASIAN BUSINESS REVIEW | AUGUST 2013

IAN PERKIN Independent Economic Consultant perkin888@hotmail.com

Table 1. Hong Kong budget estimates and forecasts

put a drag on economic activity in Asia, Hong Kong’s trade performance is likely to see some fluctuations in the period ahead,” according to the first quarter report.

“Nonetheless, the sustained solid growth of the Mainland economy should continue to lend some support to intra-regional trade going forward, to the benefit of Hong Kong,” it added.

The annual trade review of the World Trade Organisation issued last month – a report that rarely attracts the same attention as those from the International Monetary Fund or World Bank – confirmed the sluggish global trade situation.

It estimated global trade growth at a mere 2% in 2012 (see table 1). Worse, for economies plugged so deeply into global trade like Hong Kong, it forecast trade growth this year to be just 3.3%. This is well below the 20-year average growth for world trade of 5.3% annually.

The sharp slow down in world trade growth in the past three years (after the initial recovery from the global financial crisis) is primarily attributed to the weaknesses in the developed economies, especially the difficulties in the European Union and the Eurozone.

The impact of the EU is compounded by the slow down in intra-EU trade as well as the EU’s trade with the rest of the world. And the WTO does not see much improvement in the near term.

“Improved economic prospects for the US in 2013 should only partly offset the continued weakness in the EU, whose economy is expected to remain flat or even contract slightly this year,” the WTO says.

Importantly for Hong Kong, however, China is expected to perform relatively well, as its recent trade data has shown.

Global trade growth estimates

CMO Briefing

Do Facebook ‘likes’ translate to sales?

Find out if a HK company’s Facebook presence actually makes or breaks its brand.

W

ith Coca-Cola recently admitting that having close to 62 million fans on Facebook does not actually drive direct sales and in fact only affects it by 0.01%, we set out to investigate if Hong Kong companies are actually benefitting from their Facebook presence. Eric Schmidt, senior manager-marketing strategy and insights at Coca-Cola, said in a conference, “We didn’t see any statistically significant relationship between our buzz and our short-term sales.” So the question is, do Facebook ‘likes’ translate to sales?

Or is Facebook just an avenue for customers to vent out their complaints and offensive comments for the entire world to see?

Trends in Facebook marketing With high smartphone penetration in Hong Kong and more users accessing social media platforms from their mobile devices, more brands are actually engaging with customers on the platform to grow its business, says Doug Stotland, Director at Facebook.

Facebook gives brands the opportunity to interact with their customer and thereby directly address their concerns. Bastian Purrer, CMO at Zalora Southeast Asia, says this helps them to facilitate individual purchases, to build trust and to understand trends and demand. It also strongly increases their visibility, because Facebook is where users really spend a bulk of their time. “This also gives us the opportunity to positively influence the perception of our brand. Additionally the targeting opportunities enable us to dive deeper and analyse our users based on their demographics and interests,” he adds. Purrer reckons it is crucial to have a multi-leveled communication - not just the brand speaking to the consumer, but to also spark conversations and to reach out to the customer and

44 THE ASIAN BUSINESS REVIEW | AUGUST 2013

70% of ad campaigns on Facebook show a return on ad spend of 3x or better.

listen to his or her needs and concerns. In some of Zalora’s markets, customers are used to purchasing products directly on the platform, in so called “Facebook Shops”. Therefore, Purrer reckons it is crucial for an e-commerce company to have a strong presence and fast access to the products directly from the user’s feed. “Of course the high influence on brand perception also includes high risks, whereby one wrong sentence or post can strongly affect your reputation,” he warns.

According to Facebook’s Stotland, on average, 70% of ad campaigns on Facebook show a return on ad spend of 3x or better, and 49% of campaigns show a return on ad spend of 5x or better. “We have worked with some of the biggest global brands that include Samsung Mobile USA, Nissan Australia and Ocean Park Hong Kong, and we have seen great results generated out of their ad campaigns on Facebook.”

Zalora’s Purrer argues Facebook is indeed driving significant sales - directly and indirectly. “The key to this is to get engagement around the content we create and the products we offer, and not solely to rely on increasing the number of fans of our page - especially due to the way the Edgerank algorithm works. If we solely focus on the latter, it is akin to having a full-house concert, but with everyone plugged into their music players/phones,” he adds.

Success stories through Facebook Facebook helps brands to reach their target consumers more effectively through Facebook’s 3R approach – Reach (How many people saw my message, who are they and how often), Resonance (Brand awareness, brand recall, and purchase consideration) and Reaction (sales). “We have developed features that allow brands to maximize their marketing budgets by reaching audiences that matter and deliver measurable outcomes,” says Stotland. Brands that are seeing great results on Facebook include Ocean Park, a theme park in Hong Kong. For the first time, they promoted an annual event on Facebook using Offers, discounting the standard price by 20%. In one month the Offer reached 2.7 million users, which represents 70% of the internet population in HK, and 162,000 claims were made. “We are overwhelmed with the campaign results as it truly proves the power of social media. By understanding our consumer insights and behavior, we created a strong communication platform on Facebook and with the use of Facebook Offers, managed to convert a simple social action into real business sales,” said Vivian Lee, Marketing Director, Ocean Park Hong Kong.

Interacting with customers is a given advantage for using Facebook, but more than that, the site helps companies to facilitate individual purchases, build trust and understand trends and demand.

Though we do not have tools yet to accurately measure Facebook’s effectiveness and impact on sales, having millions of fans or likes must definitely have some value in it. Besides, which company wouldn’t want to be ‘liked’ by their customer?

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ANALYSIS: ASIA PROPERTY

What you need to know about investing in Asian property While most people buy homes to live in, many in Asia buy them as investments, writes DBS Chief Economist David Carbon.

O

ften they are blamed for driving house prices higher than they ‘should’ be. Singapore and Hong Kong are home to Asia’s wealthiest investors and highest home prices. Is there a connection? More generally, from an investment return perspective, how have home prices compared to, say, equities?

In Hong Kong, equities and property have offered similar returns over the long haul. Since 1985, equities have risen by 10.6% per year, a tad more than the 9.8% return delivered by property. Rental payments and equity dividends are missing from this picture but assuming they are broadly similar then the conclusion wouldn’t change: from an investment point of view, property does not appear overvalued rela-

46 THE ASIAN BUSINESS REVIEW | AUGUST 2013

“Singapore property prices do not appear overvalued relative to equities.”

tive to equities.

Ditto for Singapore In USD terms, (to make returns comparable with Hong Kong), both property and equities have returned 8.1% per year since 1985. Assuming again that rental payments and equity dividends are similar, then like Hong Kong, Singapore property prices do not appear overvalued relative to equities. As long as we have these long-run pictures in front of us, it’s worth making a couple of additional points.

The first regards Hong Kong, and the fact property prices there have climbed so much more in recent years than in other countries. It seems reasonable to view much of Hong Kong’s rise as a rebound from the SARS epidemic

that peaked in mid-03. Yes, prices have soared by 4x since then but compared to 1997, they are up by only 40%.

Moreover, from a purely technical / price perspective, 1997 does not appear overvalued looking back over the data today.

Similarly for Singapore. It is often exclaimed that property prices (and rents) have soared of late. And they are, in fact, up by 55% since mid-09. But that puts them only 18% higher than 1996 levels. Of course one could argue that Singapore’s prices were ‘too high’ in 1996. To some extent we’d agree. But deflate the 1996 levels to something ‘more reasonable’ and today’s prices still don’t seem out of line with what prevailed 17 years ago.

ANALYSIS: ASIA PROPERTY How much is that house in the window?

Price changes are one thing. What about prices themselves – the levels? How much does a house cost in Chinese yuan, or Indonesian rupiah or Sing dollars? And can anyone afford to buy one anymore?

Asia’s houses aren’t cheap, that’s for sure. The average 100 sq meter (1055 sq ft) home in Hong Kong would run you US$1.4 million today. And that’s not a big house, either, even by Asian standards.

But it’s already so expensive that the average family in Hong Kong lives in a 60 sq meter house instead. That’s barely one quarter the average US home size (208 sq m / 2200 sq ft). Prices are lower in Singapore but the average 100 sq meter home will still run you US$870k.

In Taipei, 100 sq meters costs half a million USD and in Bangkok, $180k. In spite of all the hoopla, China is still cheap. A 100 sq m home costs less than $100k.

A bargain at twice the price?

Perhaps. But much of the apparent economy owes to the China figure being a national average.

A home in Beijing or Shanghai would cost 3 times more. That’s still cheap compared to Taipei, HK or Singapore and only 30% more expensive than Bangkok.

By this gauge, China doesn’t appear overpriced at all. Homes are still cheapest in Malaysia ($42k per 100 sq m) and the US ($85k), where land is abundant. Again,

though, these are national prices; houses in Kuala Lumpur or New York City would cost 2.5x-4x more.

How many years to buy a house?

Numbers are just numbers until you put them next to something, like wages or income. How many years do you have to spend behind a desk in Singapore or Bangkok before you can buy one of these houses? That’s the ‘real’ price of a home (and one measure of the ‘real’ wage). We’ve already seen that Hong Kong’s houses are by far the most expensive in Asia in nominal dollar terms. But the gap is even wider in real terms.

In Hong Kong, it takes almost 40 years for the average person to buy the average 100 sq m house.

That’s 2.5x longer than it takes in China. And here, measures are not being distorted by national averages. Prices in Shanghai may be three times the national average but so are wages. Hong Kongers really do have to work 2.5x longer than they do in China before they can buy that 100 sq m home. This puts a whole new spin on ‘real’ income. Hong Kong is purported to be far richer than China, and most other places in the world.

But in terms of houses/housing, Hong Kong’s ‘real’ wages are 2.5x lower than China’s! Elsewhere in Asia, ‘real’ wages in housing terms are comparable to China’s.

It takes the same number of years (15) for the average Singaporean to buy a 100 sq m home. Ditto for

“Plainly, something’s missing – housing prices alone, either in nominal or ‘real’ terms, tell us nothing about what’s about to blow.”

Thailand. Prices are cheaper (real incomes are higher) in Taiwan, where it takes only 9 years to buy a home. Incomes are higher yet in Malaysia (4 years to buy a home) and the US (1.7 years).

Housing compression It comes as no surprise that where housing is expensive, people live in smaller houses, and viceversa. In Hong Kong, where it takes 40 years to buy a 100 sq m home, people live in 60 sq m homes instead. In Singapore and Taipei, the norm is in fact 100 sq m. In Malaysia, where houses are cheaper, people opt for 130 sq m homes.

And in the US, where housing is the cheapest of all, 208 sq m is the norm. When you recalculate how many years of work it takes to buy what people actually buy, the expenditure range gets compressed. At the high end, Hong Kong’s number shrinks to 23 years from 39; at the bottom end, the US number stretches to 3.5 years from 1.7. But it’s still a wide range and it begs an immediate question.

Real home prices as a bubble gauge If Hong Kong’s house prices are so high, and US prices are so low, why did the biggest bubble cum collapse in 100 years occur in the US and not in Hong Kong?

Plainly, something’s missing – housing prices alone, either in nominal or ‘real’ terms, tell

Singapore - property prices and equity markets

House price to income ratios times, median home price to per capita GDP, ‘12 - 1Q13

Source: DBS Group Research

Source: DBS Group Research

THE ASIAN BUSINESS REVIEW | AUGUST 2013 47

ANALYSIS: ASIA PROPERTY HK and SG - house price to income ratio

Source: DBS Group Research

us nothing about what’s about to blow. That hurts. If you can’t compare Hong Kong or Singapore to Thailand or the US, how do you get a feel for risk?

You do the only thing left: compare Singapore today with Singapore yesterday, Thailand today with Thailand yesterday, and so on. Let’s start with Asia overall.

We began this report by showing a chart of Asian property prices – reproduced below left for convenience – rising to US crisis levels and asked if Asia might be headed for a crash too.

Deflating prices by incomes the answer would seem to be ‘no’.

Asia’s home prices have risen rapidly since 2000 but incomes have risen even faster. Today, home prices are 22% lower, relative to incomes, than they were they were back in 2000. By this gauge, Asia has little to fear on the property front – homes are become more affordable, not more expensive.

Importantly, this is true for most individual countries, not just for the average. In Singapore, price:income ratios have drifted upward a little bit since 2006 or 2009 but not by very much. Prices are 10% higher than they were in 2006, but they are 15% lower than they were in 2000. In the 5 years since 2007, prices have essentially run parallel to incomes. Asia’s exceptions are Taiwan and Hong Kong.

The situation is more serious in Hong Kong. There, prices are up by 78%, relative to incomes, 48 THE ASIAN BUSINESS REVIEW | AUGUST 2013

compared to 2000 levels. When affordability drops so far so fast, something needs to be looked at.

The first thing to check is whether 2000 is a good base year for comparison. If one takes a longer-term view, for example, does the picture change? The answer is, yes to some degree.

Expensive housing Prices (relative to incomes) today are no higher than they were in 1997 and not much higher than what prevailed for the six years between 1991-1997. One could argue that the Asian financial crisis of 1997 brought prices down to where they “ought to be”. But that’s too simplistic. The Asian financial crisis was not about Hong Kong (or Singapore).

It was about Thailand, in the first instance, and then Malaysia, Indonesia and Korea. The drop in currencies values and asset prices in Singapore, Hong Kong and Taiwan was collateral damage – spillover from the “Crisis-4” countries. Hong Kong, Singapore and Taiwan weren’t the center of anybody’s attention.

The question remains: were prices in Hong Kong too high in 1997 (on the cusp of the Asian financial crisis) or too low in 2003 (at the peak of the SARS epidemic)? Mostly the latter, we think, but housing there is still among the most expensive in the world, in absolute terms and relative to income.

Home ownership rates for

“Asia’s housing debt as a percentage of income has risen steadily over the years.”

residents are only 59% compared to Singapore’s 90%, a fact that is surely related to affordability and probably to a less equal income distribution as well. Thus, while from a financial market perspective, Hong Kong’s housing situation is probably not best described as a bubble, social tension related to housing affordability appears to be on the rise.

Leverage Housing risk isn’t necessarily about prices per se. In the US, the bigger problem was the underlying build up of leverage and debt, which ultimately could not be sustained.

How does Asia look from a debt perspective? How burdensome are housing payments today and how burdensome might they become once interest rates start to rise?

Who in Asia is most vulnerable to a potential ‘interest rate shock’?

Asia’s housing debt as a percentage of income has risen steadily over the years. For the most part, that’s normal. Housing is a ‘superior’ good. As incomes go up, housing expenditures tend to go up even more. The fact that housing debt, even as a percentage of income, is rising across the region is not, by itself, cause for alarm.

As always, it’s a question of ‘how

ANALYSIS: ASIA PROPERTY far how fast’ and whether the debt can be serviced in bad times as well as good.

In Singapore and Hong Kong, Asia’s richest countries, housing loans have grown to about 45% of GDP. Singapore’s debt has clearly grown faster than Hong Kong’s but Singapore’s per capita income has grown faster too. Back in 1967, both countries had a per capita income of US$5200 (at today’s prices and exchange rates).

Today, Singapore’s GDP per capita is US$57k, 50% higher than Hong Kong’s US$38k.

Debt has risen steadily in China and Korea too, though it’s much lower than in the wealthier economies. China’s debt load is about half as large as Korea’s; Korea’s is two-thirds as large as Singapore’s and Hong Kong’s.

Beyond illustrating the ‘superior good’ aspect of housing across countries, the key message of this is that US housing debt, even 5 years after the crisis, still stands at 85% of GDP – nearly twice as high Singapore, Hong Kong and Taiwan, and 3x to 5x higher than other Asian countries.

High debt/leverage is what caused the US bubble and its collapse. When interest rates rose –

Fed funds rose by 425 basis points between mid-04 and mid-06 – borrowers found it increasingly difficult to service their debts.

By mid-06, the jig was up.

Home prices began to fall. Banks would not / could not extend refinancing. The value of mortgage backed securities plummeted.

Companies that couldn’t possibly insure against such losses but did anyway went broke. The rest is (not yet) history.

For Asia, the good news part of the story above is that regional debt loads remain far lower than they were in the US. It is not unreasonable to conclude that risks in Asia are lower accordingly.

Debt burdens and interest rates Debt loads aren’t a big problem when interest rates are zero. (“Roll it over Joe, and call me next year.”)

It’s when you can’t make the payments that trouble begins and what used to be a hidden bubble isn’t so hidden anymore. How burdensome are Asia’s housing payments today and who will be in trouble when today’s rockbottom rates start to go up?

To answer the first question, we calculate the annual payment required to retire the stock of

“In Singapore and Hong Kong, Asia’s richest countries, housing loans have grown to about 45% of GDP.”

outstanding housing loans in each country, at the prevailing interest rate and subject to the condition that principal and interest are repaid in full over the next 20 years.

Who’s got Asia’s biggest payments? By this gauge, it turns out to be Taiwan, where 2.9% of GDP goes to pay housing principal and interest. But Hong Kong and Singapore are almost identical, paying 2.8% and 2.7% of GDP to service housing debt each year.

Malaysia’s and Korea’s burdens are in the low 2 percent range.

Thailand’s burden is an even lower 1.8% of GDP. Where does China fall on this ladder? Near the bottom with annual housing payments of only 1.4% of GDP. Worry? It wouldn’t seem so.

Especially when one compares Asia’s debt burdens with the US. There, payments are running at 5.4% of GDP, nearly 6x higher than in China, and 2x higher than in Hong Kong, Singapore and Taiwan.

Again, this has to be good news for Asia. The US seems to have blown for a reason and, for the same reason, Asia seems unlikely to.

Who’s vulnerable in Asia?

When rates go up, RRisks remain.

Interest rates have been on the floor for 5 years. What’s going to happen when they go back up?

Who’s vulnerable in Asia?

The simplest way to answer this question is to re-calculate the housing payments made above under the new assumption that interest rates have returned to their pre-crisis level. Who suffers most will depend partly on debt loads and partly on whose interest rates fell the most and will now rise the most.

The key variables behind these calculations are shown in the table below. It comes as no surprise that interest rates in Singapore and Hong Kong have fallen comparatively the most in Asia - by a factor of 2x to 2.1x. Singapore and Hong Kong run currency pegs, which means their interest rates track US rates (in the case of HK).

THE ASIAN BUSINESS REVIEW | AUGUST 2013 49

numbers

Freshness now a top consumer concern Is environmentallyfriendly

Keeps food fresh longer 55%

55% Makes it easier to eat/drink on-the-go

31%

Keeps food/ beverages at right temperature

33%

Global Consumers Willing to Fork Out More for Fresh and Sustainable Packaging

Is re-usable

Countries most interested in packaging that keeps food fresh longer Source: IPSOS

42%

Countries most interested in packaging that is Environmentally-Friendly

Is easier to use

Prevents mess or spills

34%

39%

Source: IPSOS Source: IPSOS

Servings of fruits & vegetables consumed on average per day

Source: Nielsen Global

For more information contact: Ipsos, Tim Hill (tim.hill@ipsos.com) and  Nicolas Bijuk (Nicolas.Bijuk@ipsos.com); Nielsen,  Ellen Cuijpers (Ellen.Cuijpers@nielsen.com) 50 THE ASIAN BUSINESS REVIEW | AUGUST 2013

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