Hong Kong Business (December 2014 - January 2015)

Display to 31 January 2015

outwitthe wiliest investment wolves this Year of the Sheep

filling the

sandwich class hk jewellery loses

high-end lustre been there, done

that, got the t-shirt a journey to lantau island

if land prices are falling, why aren’t house prices?

MICA(P) 244/07/2011 KDM No: PPS1645/3/2008

HONG KONG

FROM THE EDITOR

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In this issue, we give you 15 smart ideas to outwit the wiliest investment wolves this Year of the Sheep. We talked to a diverse pool of financial guides and came up with 15 investment ideas from which you can choose. Find out where best to put your money in 2015.

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Meanwhile, Hong Kongers and expats might find themselves heading over to Lantau, an island being groomed to become the city’s second CBD, and one that will make China even more accessible via the Zhuhai-Macau bridge. Find out more about the big ambitions to make one of the new centrepieces of Hong Kong.

We also take a look at Hong Kong’s falling land prices, and why house prices refuse to budge and fall as well. Speaking of cost, Hong Kong’s high-end jewellery market seems to be losing lustre. The mainland Chinese, its biggest fans, are shifting from expensive jewellery to mid-range products as even more middleclass Chinese find themselves travelling.

Finally, this issue also tackles how the city is riding on global growth to push its economy forward amid a slew of domestic issues. Zooming out, the booming Asian private equity market is something that we all must be excited for.

Go on, start reading, and enjoy!

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CNH: Will Qianhai jeopardize Hong Kong’s position? 6 Sep 2013

Interest rate strategy

CNH: Will Qianhai jeopardize Hong Kong’s position?

DBS Group Research

6 Sep 2013

In mid-2012, the China’s State Council approved the development of the Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone. Four industries were focussed upon: finance, logistics, information services and science & technology services. Particular emphasis was placed on finance, for which the government designated Qianhai to be built into an experimental zone for financial innovation and further opening-up to the outside world.

Back then, market watchers found it difficult to associate the mudflat with such bold plans. We, however, have been optimistic about the project. Specifically, we stated in earlier report that the zone’s development would be kicked off by the launch of a cross-border RMB lending scheme (see “CNH: RMB lending set to cross border in pilot plan”, 16 April 2012). In Jan13, only nine months after the approval has been granted, fifteen Hong Kong banks were authorized to offer a combined RMB2 bn of loans for Qianhai companies. More impressively, the first Qianhai land auction was held in July and construction is planned to start by October. It signals that the zone has already entered into an expansion period.

An analogy of Shenzhen SEZ in 1980s While many were previously skeptical about Qianhai’s future, they have now turned to the other extreme of worrying that its rise might jeopardize Hong Kong. Such fears are overblown. In our view, the Qianhai project is similar to the establishment of the Shenzhen Special Economic Zone (SEZ) in the 1980s, which has, in fact, bolstered Hong Kong’s competiveness.

Three decades ago, Hong Kong’s manufacturing industry was seriously hit by soaring costs

Three decades ago, Hong Kong’s manufacturing industry was hit by soaring costs. Factory rents and manufacturing labor wages ballooned 140% and 170% respectively during 1980-90. The city’s international competiveness was being challenged by several lower-cost developing countries in the region. For instance, the manufacturing labor costs in IndoneChart 1: Transformation of HK economic activities sia at the time was only during 1980-2000 one-fourth that of Hong Kong.

30% 90% Shenzhen became an expansion outlet for Hong Kong manufacturers and the timing could not have been better. The availability of abundant inexpensive land and labor in Shenzhen made it possible for Hong Kong manufacturers to move labor-intensive processes across the river. Meanwhile, more skill-inten-

Manufacturing 25%

Service (rhs)

85%

20% 80% 15% 75% 10% 70%

5% 0%

65% 1980

1984

1988

1992

1996

2000

Nathan Chow • (852) 3668-5693 • nathanchow@dbs.com 1

*If you’re reading the small print you may be missing the big picture    

CONTENTS

Hong Kong jewellery market 20 analysis loses high-end lustre

STORY 22 CoVER 15 smart ideas to outwit the wiliest

ANALYSIS Rise of the Chinese: All hail 34 REGIONAL the Mainland traveller

investment wolves this Year of the Sheep

ANALYSIS

FIRST 06 Filling the sandwich class in

Hong Kong

07 A journey to Lantau Island 08 HK: Been there, done that,

32 If land prices in Hong Kong are

got the t-shirt work in Hong Kong?

12 Size does matter: 10 largest IPOs in

Hong Kong since 2008

falling, why aren’t house prices following suit?

38 SMEs in HK feel the chill

16 Financial Insight 18 Economic Insight 28 Legal Briefing 30 CMO Briefing

Published Bi-monthly on the Second week of the Month by Charlton Media Group Pte Ltd, 19/F, Yat Chau Building, 2 262 HONG KONG BUSINESS | JANUARY 2015Kong Des Voeux Road Central, Hong

44 Ian Perkin: How do the protests

impact the Hong Kong economy?

46 Tim Hamlett: An obstinate conflict 48 Hemlock: Space discovered on

REGULAR

10 Just how expensive is it to live and

OPINION

Hong Kong Island

RANKINGS 26 Due or undue diligence?

For the latest business news from Hong Kong visit the website

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News from hongkongbusiness.hk Daily news from Hong Kong most read

aviation

HK SMEs spooked by gloomy global air trade outlook The key finding of the DHL Hong Kong Air Trade Leading Index showed that air trade outlook had shrunk for two consecutive quarters due to weak demand from Europe and declining trade of high value commodities.

According to a release from DHL, the overall drop revealed by the index is indicative of cautiousness among air traders about the outlook of the global economy.

ECONOMY

Hong Kong’s underlying inflation climbs to 3.4% Netting out the effects of Government one-off relief measures, Hong Kong’s underlying inflation rate was 3.4% in October, compared to 3.3% in September.

According to a research note from Barclays, the increases were recorded for electricity, gas and water, alcohol and tobacco, housing, meals bought away from home, food, transport, and miscellaneous goods and services.

LEISURE & ENTERTAINMENT

Galaxy targets site investigation for Phase 3 & 4 by end-2014 Galaxy Entertainment Group is focused on table yield optimization, and it involves a three-pronged approach. According to Nomura, the optimization will be done through reducing Galaxy Macau’s mass tables count by ~30, which resulted in mass table yield up 27%.

The 2 new VIP rooms at Galaxy Macau are now expected to open in late 2014/early 2015—they had been expected to open by year-end.

most read commentary Hong Kong must embrace talent of all ages

BY DEAN STALLARD If Hong Kong is to remain competitive in the global economy it must find a balance between embracing its ageing workforce and continuing to develop new entrants to the labour market The number of people aged 65 and over is expected to surge from the current one million to 2.6 million in 2041, becoming one person in three.

As Hong Kong’s population ages, the pool of working age people aged 15 to 64 may start to shrink as early as 2018.

Better together? Social enterprises want to be partners with corporates

BY ALIX FARQUHAR Hong Kong is abuzz with all things social enterprise. This month we have seen the Social Enterprise Summit, UnLTD’s Hong Kong Jam, and CityU’s Project Flame Symposium bring together the latest ideas with the budding social entrepreneurs of the future. Government, philanthropists, charities, and educational institutes have been increasing their efforts in this space in the hope that social enterprise provides the sustainable answer to solving society’s problems.

Defeating identity fraud in Hong Kong banks

BY LAWRENCE TSONG Identity theft and fraud are on the rise in Hong Kong. The recent news, reported by a local newspaper, about the gentleman whose identity had been stolen to apply for a loan of HK$ 300,000 from a major local bank has brought the issue to the forefront.

The incident serves to highlight that banks are underestimating the seriousness of the issue. What’s worrying about this particular incident is the fact that the bank had not been negligent in any way.

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FIRST BAnker bucks

The banking and finance industry is a fresh graduate’s land flowing with milk and honey, a place where the first few paychecks make graduation such a fulfilment.

An online survey conducted by jobsDB revealed that companies offer the highest salaries to fresh graduates who perform job functions in banking and finance, professional services (compliance, consultancy and legal services) and information technology positions in Hong Kong, Singapore, and Thailand.

Apart from these three functions, education and building & construction jobs also rank among the top five in Hong Kong.

Quality jobs To sweeten the deal, the banking and finance related jobs are relying on good salary packages to attract and retain top talent from the universities.

“The banking and finance posts are undoubtedly the most stable and reliable source of quality jobs.

Good salaries, structured career path and perceived social prestige in association with bankers are all key factors that attract fresh graduates,” says Dr Andy Wong, assistant dean for undergraduate studies at The Chinese University of Hong Kong Business School.

Justin Yiu, general manager of Jobs DB Hong Kong Limited, comments, “The difference between the talent supply and demand is one of the key reasons behind the salary gap of fresh graduates.”

“The supply of certain job functions is relatively higher in the market, which will eventually result in a relatively low pay standard,” Yiu adds. He says that on the contrary, some job functions requiring professional qualifications are relatively short in supply, resulting in higher pay standards.

6 HONG KONG BUSINESS | JANUARY 2015

Building enough homes remains a challenge

Filling the sandwich class in Hong Kong

H

ong Kongers love sandwiches, from Pret’s Crayfish & Arugula to Oliver’s Master Club. But one sandwich that is really hard to find, even if you are eligible, is sandwich class housing. Despite trying for years to increase the number of affordable housing for the working poor to 20,000 new public rental housing units a year, the government is only able to rustle up enough land and will power to launch around 15,000 a year and that is set to remain the same until 2018.

Moreover, the number of homes available to purchase will remain at a paltry 10,600 in total to 2019. That’s a total number, not an annual one.

This is well short of the target needed and certainly not going to make life easier for those earning at the bottom end of the pay scale. There are plans to build 77,100 rental apartments over the same time period, but that won’t satisfy the housing aspirations of the working class.

What is the sandwich class?

The definition of a sandwiched class is a dual income family earning under HK$14,700. That’s less a BLT sandwich than a cucumber sandwich, and in today’s Hong Kong there are many earning more than

There are plans to build 77,100 rental apartments over the same time period, but that won’t satisfy the housing aspirations of the hard working classes.

those who would consider themselves well and truly sandwiched. That may explain why the government is mulling over plans to butter their bread on both sides with subsidised housing for the upper crust of the sandwiched class. There is as yet no clear definition of what the new income caps may be, but it is likely these will be in less developed areas like Tai O where the government recently sold some HOS flats at a relatively affordable price of $641,000 to $897,300 for homes of 478sf to 482sf.

Denis Ma, JLL’s head of research, Hong Kong, says setting the monthly household income level for “White Form” buyers to $46,000 has the potential to draw buyers from the private housing market. However, if an annual quota of 2,500 eligible applicants is adopted in 2015, that represents less than 5% of all private housing market sales transactions in 2014. He notes that the Housing Authority is currently building the first batch 2,160 units of new HOS projects in Shatin, Tsuen Wan, Tsing Yi and Yuen Long. These projects are expected to come online in 2016/17.

“It’s worth noting that this amounts to less than 5% of the new supply of private housing units built between now and end-2017,” adds Ma. According to market sources, the majority of new HOS units will be sold at about 30% below market value with steeper discounts offered to those deemed unable to afford the new homes.

It looks like there may now be more meat in the government’s definition of a sandwiched class, but coming up with the dough to meet demand will remain a challenge.

Total private housing supply versus units sold during the quarter

Source: Transport & Housing Bureau, Centaline, Barclays Research

FIRST infrastructure planned to connect the Mainland to Lantau.

“The construction of a third airport runway at Chek Lap Kok, should it go ahead, would strengthen the city’s competitiveness in the face of the rising challenge posed by other airports in the PRD region, whilst the proposal to reclaim 1,000 hectares of land to create an East Lantau Metropolis would help Hong Kong to cement its status as a regional hub for commerce and tourism,” adds Chan.

How about a second CBD, Hong Kong?

A journey to Lantau Island

T

here is nothing Hong Kong land developers like more than a chance to build a bridge and do some land reclamation. And with restrictions on filling in even more of the small strait that separates the island from Kowloon, the question for developers and government is “where next?”

Lantau seems to be the answer, with big ambitions to make it the centrepiece of second central business district to rival Central and surpass Kowloon. According to Marcos Chan, head of research at CBRE Hong Kong, Macau and

Taiwan, once the Hong KongZhuhai-Macau bridge is completed, the city will be just 30-40 minutes away from Qianhai, the special economic zone in Shenzhen to be used as a test bed for China’s Yuan liberalization and financial reform; and Hengqin/Macau, which has been earmarked as a strategic hub for tourism development.

Sitting between these two important nodes, Chan says Hong Kong can facilitate the flow of business, knowledge, money, people and trade between the three locations, leveraging on the cross-border railway and road

Once the Hong KongZhuhai-Macau bridge is completed, the city will be just 30-40 minutes away from Qianhai.

Further developments in Lantau John Siu, managing director at Cushman and Wakefield Hong Kong, notes that current transportation infrastructure including the airport, Airport Express and MTR Tung Line will facilitate further real estate development in Lantau Island.

“Some opportunities for the development include tourist/ traveler related facilities such as shopping malls, hotels, sightseeing spots, air flight passenger transit facility and logistics related facilities such as warehousing and container terminals,” he adds.

Another CBD in Hong Kong would mean more diversified locations for business activity in Hong Kong, more choices for office occupiers in different industry sectors, less burden on Central which is the current CBD in HK.

The Chartist: a bumpy road ahead for hong kong It could be the end of the consumptiondominated growth model, as the soft consumption demand seen in the second half of 2013 is likely to extend into 2014.

According to a report by Hang Seng Bank, the factors that boosted spending growth in years past are unlikely to drive growth as much in the years to come. Rapid expansion in consumption over the past few years can largely be explained by 1) the positive wealth effect being passed on to consumers, and 2) easier access to credit.

While consumption has been expanding too fast and is becoming unsustainable, Hang Seng does not anticipate a sharp downturn. Continued real wage gains and the low degree of income uncertainty will keep consumption on course for growth.

Projections for consumption growth (quarter on quarter)

Source: Hang Seng Bank

Private consumption growth (quarter on quarter)

Source: Hang Seng Bank

HONG KONG BUSINESS | JANUARY 2015 7

FIRST

HK: Been there, done that, got the t-shirt

Survey

Digging for data

W

hilst 40 million mainland visitors to Hong Kong a year may be a bane to some Hong Kongers, they are certainly a boon to the hospitality industry. As at YTD October 2014, the number of international (including Mainland Chinese) visitor arrivals reached 50 million, which is a 12.1% increase over the same period last year.

Yet concerns are growing that, having been to Hong Kong a few times and done the obligatory sights, How do you capture millenial tourists?

Hong Kong is not doing enough down by Mainland China (from 3.7 to woo the new millenials who are increasingly important to the industry. days to 3.4 days). Given Mainland China accounts for a significant portion of overnight visitors, this Symptoms of a new syndrome has had downward pressure on the A kind of “been there, done that” syndrome has set in, and Hong Kong average length of stay,” adds JLL. Lothar Nessmann, COO of Hotel is failing to attract enough musical, Jen, notes that China’s new consumers sporting or other cultural events are very well travelled and educated, that would provide a reason for making them know what they like. these people to make the extra trip He says they can, and will, compare to Hong Kong. In a recent report on what’s on offer. “These people have the outlook for the tourism industry also travelled to London, Rome and from JLL, the company notes that New York. They’ve seen international Hong Kong must adapt to keep its edge in Asia’s increasingly competitive standards. What we are seeing is a new wave of visitors who are slightly tourism market. younger than those we saw several “There was a reduction in the years ago,” notes Nessmann. overall average length of stay, pulled

There was a reduction in the overall average length of stay, pulled down by Mainland China (from 3.7 days to 3.4 days).

Survey

Hong Kongers prefer job hunting via mobile devices Hong Kong companies would need to step up their game and optimise their mobile websites, as Hong Kong job seekers are increasingly using mobile devices when looking for a new job.

A survey of 584 Hong Kongers by recruiting company Hays reveals that job seekers still do most of their job searching and applications on their desktop, but a growing number are using their smartphones.

In the survey, 41% of respondents said they do their job searching mostly by desktop but sometimes by mobile, while 56% said they search mainly by mobile and sometimes by desktop. As demand for mobile services continues to grow, companies without the ability to receive applications by mobile are increasingly at a disadvantage when competing for talent.

“When job seekers find a job of interest on

8 HONG KONG BUSINESS | JANUARY 2015

their smartphones, they will often wait until later to apply via a desktop computer,” says Christine Wright, managing director of Hays in Asia. “This is because one of the current hindrances to applying via a mobile device is that most people do not have a copy of their resume stored on their smartphone.” Wright adds that from job sites, it’s easy to access a number of different versions of one’s resume and apply for jobs from an app or a mobile website.

How would you like to be tracked down for your purchases? Each time you use a card to make a purchase, whether through a credit or loyalty card, it is highly likely that the company you are transacting with is capturing data on you.

A new survey by Robert Half has found that Hong Kong companies are among the most prolific users of data mining and analytics to drive business decisions.

Almost 1 in 9 Hong Kong companies are capturing customer details for use in data mining. When captured, the data is used by 17% of these companies to make most of their business decisions.

Meanwhile, 45% use customer data some of the time when making decisions, and 26% are capturing data but are not using it yet.

Tailor-fitting services Robert Half polled 810 Chief Technology Officers (CTOs) from a range of industries, including 104 from Hong Kong. Pallavi Anand, managing director of Robert Half Hong Kong says, “When a business understands the buying habits of its customers, it can effectively target the right products and services to them.

This is particularly prominently used for customising messages and campaigns for online and social media platforms such as Facebook, Google and Twitter.”

Conducted across Hong Kong, Australia, Germany, Singapore, Japan, Switzerland and the United Kingdom, the survey sheds light on the potential of utilising data to enhance marketing efforts for companies.

FIRST

Just how expensive is it to live and work in Hong Kong?

H

ong Kong has been dethroned as the most expensive place to do business, replaced by London which has seen a significant pickup in rentals, according to a 12-city survey conducted by Savills. The Savills Live/Work Index shows that the current average price of renting residential and office space in Hong Kong is back to 2008 levels, at US$116,000 per employee per year.

“A combination of falling residential rents and, most importantly, a weakening currency, has boosted Hong Kong’s competitiveness, with total real estate costs down -5.6 per cent in the first six months of this year, an annualised rate of -11.2 per cent in dollar terms,” says Yolande Barnes, director at Savills World Research.

cities, according to Savills.

“The city remains by far the most expensive city in which to buy residential property, with prices 40% higher than London - but the gap is narrowing,” says Barnes.

A different spin on the story When entrepreneur Joshua Steimle moved from Salt Lake, Utah to Hong Kong in 2013, he felt it would be the easiest place in Asia to get started because of the ease of doing business, the low crime rate, and widespread use of English. As he warmed up to the new environment, Joshua found the ease of doing business to be the best perk, followed by the fast-paced culture that is almost similar to the Western one he was used to, and the advanced technology.

London vs Hong Kong Joshua believes that living and working London has now become the most expensive in Hong Kong is not as complicated as it is world city in which to accommodate staff, at made out to be. In fact, in his opinion, the US$121,000 per year. This was largely due to idea that Hong Kong is an expensive city is the UK pound’s recent appreciation against a myth. the US dollar. But despite its climb in the “Yes, if you want to live in the center of rankings, London is still a way off the record things and be able to walk to work then be live/work cost set by Hong Kong in 2011 at prepared to pay for it. From where I live to $128,000 per annum.

Central is a commute of well under an hour, Hong Kong remains the only ‘New World’ I can work while on public transport, and city, from a recently-emerged or emerging our rent is actually less than it was in Salt national economy, to feature in the top five Lake which is far from being an expensive

HK’s not so expensive after all

place to live,” he says.

Practicality could be the answer, as Joshua found a way to work around his budget. As the CEO of an SEO firm, Joshua thinks that a virtual office can be a good alternative to paying rent.

Hiring talent in Hong Kong is also one way to keep the costs down low, as hiring in other countries like the US could be 50-75% more expensive. “Hong Kong is expensive if you choose to live expensively, just like anywhere else,” he concludes.

office WATCH

Check out Capco’s new office in Hong Kong

Capco, a global business and technology consultancy, opened its new Hong Kong office covering 2,500 sq ft. The new space includes four large meeting rooms, two Partner offices, a sizeable reception area and an ‘American kitchen’ style buffet area for staff to enjoy their lunch or tea and coffee.

Located on the 31st floor of the Henley Building, Capco’s new office has a lot of open desk space ideal for team collaboration and consistent with Capco’s non-hierarchical culture. The office has a corner space, which has floor to ceiling windows, offering plenty of natural light and amazing views of the Peak.

According to a spokesperson, Capco is planning to open in Singapore early in 2015.

They also look forward to adding more office locations across the globe in the next 12 – 24 months.

10 HONG KONG BUSINESS | JANUARY 2015

Neil Ramchandran, Peter Schurau and Christopher Hamilton

Meeting room

Capco office interior

Meeting room

FIRST oversubscribed. Despite strong demand for the stock, Minsheng closed its trading debut at HK$8.80 per share, down 3.1%.

6 The People’s Insurance Company (Group) of China The PICC Group, a Chinese stateowned insurer, debuted on the HKEx in December 2012 with an offer size of US$9.1 billion. Like the Agricultural Bank of China, the PICC Group raised equity capital in line with China’s economic liberalization. The stock closed its first day up 6.9% to HK$3.72 per share, outperforming the Hang Seng index.

Size does matter: 10 largest IPOs in Hong Kong since 2008

T

he Hong Kong Stock Exchange, one of Asia’s largest and most premier equity markets, has seen its share of sizeable Initial Public Offerings over the past decade. But this comes as no surprise given HKEx’s stature in the global capital market.

Using data from MergerMarket, Hong Kong Business compiled the top ten largest IPOs in HKEx’s recent history – with offer sizes as much as US$19.3 billion.

1 Agricultural Bank of China The Agricultural Bank of China listed on the Shanghai and HK Exchanges in July 2010, raising a total of US$22.1 billion from the dual listing – then the second largest IPO in world history. In Hong Kong, ABC closed its first trading day with a 5.9% gain to HK$3.20 per share. ABC’s IPO was issued to lift its capital ratios following an industry overhaul.

According to reports, the original forecasts for ABC’s IPO was up to $30 billion, but weak market sentiment decreased the value.

AIA Group Ltd. AIA Group, an insurance and financial services firm, listed on HKEx in October 2010 with an offer size of US$14.9 billion after exercising an over-allotment option.

The stock closed its first trading day with a 17% gain to HK$23.05 per share, even after it priced the offering at the top end of its offer range.

2

12 HONG KONG BUSINESS | JANUARY 2015

Citigroup Inc., Deutsche Bank AG, Goldman Sachs Group Inc and Morgan Stanley are joint global coordinators for the IPO. Glencore Plc Glencore Plc, a diversified commodities trading firm based in Switzerland, listed on the HKEx in May 2011 with a US$10.1 billion offer size. Although Glencore was then one of the year’s largest IPOs, the stock fell 2.5% to close at HK$64.90 per share on its listing date, due to concerns over the global commodities markets.

Stock in London was priced at 530 pence per share while HK$66.53 was the Hong Kong price apiece.

3

4 China Railway Construction Corp.

China Railway Construction Corp., another Chinese state-owned firm, listed its shares on the HKEx in March 2008 which raised a total of US$5.7 billion.

Prior to its listing date, the company’s offering was oversubscribed by over 80 times the allocation for institutional investors. The stock surged 12.2% on its first day, to close at HK$12.02.

China Minsheng Banking Corp.

China Minsheng Banking Corp. debuted on the HKEx in November 2009 to raise US$3.9 billion in fresh capital. Prior to listing, its institutional allocation was over 40 times oversubscribed, while its retail allocation was over 154 times 5

7 China Everbright Bank Co. China Everbright Bank Co., then one of China’s largest banks in terms of assets, raised a total of US$3 billion for its IPO in December 2013. Everbright debuted on the HKEx to raise capital to meet stricter capital adequacy ratio requirements by regulatory authorities. Everbright Bank’s shares fell 3% on its first trading day, closing at HK$3.87 per share.

8 Sands China Sands China, a large gaming complex developer in Macau, debuted on the HKEx in November 2009 with an offer size of US$2.5 billion. Sands China’s capital raising activity was intended to fund its then-new properties in Macau.

Despite the company’s offer size, the stock fizzled on its debut, closing at 10.2% lower than its offering size of HK$10.38 per share.

9 China Cinda Asset Management Co. China Cinda Asset Management Co., a state-owned bad-loan manager, listed on the HKEx in December 2013 to raise US$2.5 billion in fresh capital. On its listing date, Cinda surged over 26% to close at HK$4.50 per share. Part of the company’s raised equity capital was for the improvement of its core business, which is the management of distressed assets.

10 Metallurgical Corporation of China The Metallurgical Corporation of China, an engineering and construction company, debuted on the Hong Kong Stock Exchange in September 2009, raising up to US$2.4 billion in its maiden share sale. Like some issues on this list, the company saw a weak first day as its stock lost 11.5% to close at HK$5.62 per share due to valuation concerns.

startups

How is Affashion delivering fashion the smart way?

I

f Netflix has become the standard when it comes to movie recommendations, Affashion strives to become the last word in apparel. Think of Affashion as delivering fashion in an intelligent way. Bosco Lam, together with Ronald Kwok and Andy Lam, founded Affashion to empower fashion e-commerce to display dynamic relevant contents according to the unique preferences of customers.

Affashion’s plug-n-play predictive analytic engine identifies correlations between the impulsive purchases of the shoppers and dynamic fashion

elements (style, pattern, color, size, material, among others). “Affashion is the data science department specific for fashion e-commerce site.

It empowers retailers to stay ahead of the market and helps boost traffic, conversion, and average basket value through creating a personalized shopping experience for fashion lovers,” says Bosco.

Bosco adds that the value of fashion can be delivered in an intelligent and innovative way. At present, only market giants such as Amazon have a competitive advantage when it comes to creating personalized online shopping experiences. Many regional e-commerce sites and international brands do not have a team of in-house data scientists and are not comfortable using complex products from IMB or Adobe to analyze shopping behaviour and fashion tastes.

With its team’s strong background in customer intelligence and data science, Affashion, which started at StartupWeekend Hong Kong 2014, currently has US$45,000 funding, with Cyberport and HK Science Park counting among their investors.

Revolutionizing Hong Kong’s online landscape Tam, director and co-founder of Rush Hour Media. “We want to be known as the ‘go-to guys’ for anything webrelated in Hong Kong; that is our goal.”

Jerome, with co-founder Jake Sharp, established Rush Hour Media to bring simple, responsive and well-designed websites – developed using popular Content Management Systems in Hong Kong at a reasonable price point.

Rush Hour Media’s starting capital Founded in 2011, Rush Hour Media was HK$10,000, after securing a has one goal: to revolutionize the project with a client. At present, it has online industry landscape of Hong Kong. Many business websites are too one investor, Alymer Capital, an Asiabased food and beverage and hotel heavy with words and images; Rush investment firm.

Hour Media wants to replace these “They were our client to begin with cleaner, more elegant, and more with but we saw an opportunity to user-friendly ones. fundraise and we took it,” says Tam. He “Businesses in Hong Kong are now reveals that Rush Hour Media was able realizing the importance of digital presence and they are willing to spend to raise approximately HK$750,000 – money to make it happen,” says Jerome HK$1 million.

14 HONG KONG BUSINESS | JANUARY 2015

Expressing emotions via music

Mobile startup Sensbeat believes that music not only evokes a thousand pictures but also expresses one’s heart. In this day and age, where social networks and mobile connectivity have become the norm, emotions expressed through music will occupy a central place among consumers.

Sensbeat provides a platform where people can share their feelings and empathize with their friends’ emotions through music – anytime, anywhere.

With Sensbeat, a user can share a “beat” (similar to a tweet on popular microblogging site Twitter) on the mobile application and social media. While Facebook and LinkedIn create social and economic graphs, Sensbeat wants to build an emotion graph that builds on the power of music – known as the language of emotions – and engage people through this universal language.

Co-founder and CEO, Leo Wong Lu Yeung, Ben Chan Ho Pan, CTO, and Conrad Lo, CPO, believe that the future of social lies in emotions. “We’re creating a new way of expression that makes sharing emotions incredibly easy through music. Music is universal; while we all have different stories to tell, it is the emotions that tie us all together,” says Leo. Sensbeat aims to represent a new way of expression, expressing life events through music and emotion. Leo argues that capturing emotion is something that a number of social networks are trying to integrate without success.

The app captures the emotions of people and finds clusters of other users who have similar or even opposite emotions. The app allows users to see emotions shared by others in a location and then look at music stories with emotions.

According to Leo, the phrase “I can’t explain how I feel right now but I can find a song that can” has been one of the biggest elements in inspiring them to make the application.

Started with pure passion and no money in the early days of the app, the founders were able to secure initial funding by joining and winning different competitions to support its development.

Today, the startup has US$500,000, the largest ever first-round financing for a student-founded mobile startup in Hong Kong. It also has six investors from Silicon Valley and Hong Kong. At this stage, Sensbeat is focusing on the product, on user experience, happiness; and hence user growth.

HONG KONG BUSINESS | JANUARY 2015 15

FINANCIAL INSIGHT: PRIVATE EQUITY

Who is taking the lion’s share of the pie?

Can Asian private equity outgrow the west?

With its swelling size and influence, the Asian private equity market may leap into a leadership position sooner than later.

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f you asked investors and private equity (PE) managers a couple of years ago what they thought of Asian PE, some would have dismissed it as a fledgling market fraught with risk. And yet its potential has blossomed amid this supposedly bust period, and it will continue to mature and challenge Western markets as the likes of Southeast Asia, Hong Kong and India open the doors to high-return investment opportunities.

Resilient Asian PE As a testament to its resiliency, not even the downturn in recent years could douse investor interest in Asian PE. The number of Asia-focused funds currently in market has risen to 353, seeking an aggregate capital of $113 billion, says Mark O’Hare, chief 16 HONG KONG BUSINESS | JANUARY 2015

91% of Asia-based investors believe that PE is becoming increasingly important to their portfolios.

executive officer at Preqin. In fact, among emerging marketsfocused PE, Asia-focused funds have consistently taken the lion’s share of capital raised, accounting for nearly three-quarters each year since 2008.

“The past two to three years have been challenging for emerging financial markets,” says O’Hare, referring to the way limited partner (LP) appetite for Asia waned in that period as investors refocused their interests on North America and Europe. “But despite the macro headwinds, private equity in Asia is clearly continuing to mature and grow.”

The resilience and expected resurgence in LP interest can be attributed to the impressive performance of Asia-focused PE funds, which has closely matched

that of US and European funds over the long term.

Preqin data suggest strengthening commitment and confidence in Asian PE, with around three-quarters, or 74%, of Asia-based investors expecting to commit the same amount of capital or more to PE in the next year compared with last year.

Also, 91% of Asia-based investors believe that PE is becoming increasingly important to their portfolios.

In five years, O’Hare expects the Asian PE growth momentum to create a competitive Asian PE firm that can break into the top 20 global rankings in terms of dry powder, an exclusive club currently filled with firms from North America and Europe.

The Western dominance in global PE should also be contested as Asian LPs look to expand their portfolios outside their local regions and raise their relatively small market share of 5-10%.

“The overall conclusion must be that Asia is a core part of the global PE story; it has a vital role to play in putting capital to work in the region; it has a vital role to

FINANCIAL INSIGHT: PRIVATE EQUITY play in diversifying the portfolios of global LPs; and Asian LPs will have an increasingly vital role to play in funding PE’s global development,” says O’Hare.

Southeast Asia attracts attention Which countries will drive Asian PE growth? PE firms are starting to take notice of Southeast Asia, with their number in the region mushrooming in the past halfdecade by roughly 25% to 127 firms in 2011-2013 from 96 firms in 2009-2011, according to a Bain & Company report in May. Investors’ interest has been piqued by a set of unique drivers; namely attractive market characteristics, significant amount of available dry powder, an environment where they can exert more control over deals, and a track record of successful exits, says Bain.

Bain adds that this combination of factors has made LPs confident that they can achieve superior returns in Southeast Asia, with 68% expecting net returns of 16% or greater from 2012 vintage funds. This is compared with only 54% expecting such returns from similar funds from China, Latin America (52%) and India (38%).

But as more investors flood into the Southeast Asia PE market, the stiffer the competition. There will be a fallout where only the fittest can survive. “The region is poised to break through, but only a subset will emerge as winners,” says Bain. For GPs, the competition will be defined by who can corner a sweet spot for plays and differentiating fast enough in the dynamic and relatively erratic market to leave rivals in the dust. Among the Southeast Asian countries, Vietnam and Indonesia are particularly attractive, says Eric Marchand, vice president at Unigestion and responsible for the company’s Asian private equity investments.

Investors looking to break into these lucrative markets will need to identify managers well equipped to source and manage

deals locally, says Marchand. They must also prepare to withstand potential geopolitical risks such as those in Thailand where recent political upheavals have impacted investor sentiment.

Yong adds that sellers and investees in less sophisticated PE markets like Southeast Asia are often unwilling to relinquish control. Many do not fully appreciate the benefits that PE investors can bring to their business.

This, combined with the availability of other financing options such as bank lending, capital and debt markets, means that sellers and investees have a harder time warming up to PE offers.

Hong Kong hits a mega deal PE in Hong Kong experienced a spike this year with Temasek’s US$5.7 billion privatelynegotiated investment in AS Watson, the largest health and beauty retail group in the territory. This huge blip aside, PE activity in Hong Kong has been relatively small – PD deal value averaged around US$0.5 billion from 2009 to 2013. Still, Hong Kong’s unique regional position in certain industries attracts the attention of sectorspecific specialty private equity investors, according to the Hong Kong Venture Capital and Private Equity Association.

HK also serves as a comfortable home base for GPs and LPs. As of September 2014, three of the top five Greater China-based PE GPs in estimated dry powder and two of the top five Greater Chinabased PE GPs in total funds raised in the past decade are based in HK. Preqin data also show that the territory hosts 8% of LPs in Asia.

Discussions about Asian PE will always include India and China, but analysts express disappointment at their recent performance, where returns have not met expectations.

In India’s case, investors have spent the past decade pouring

Eric Marchand

Mark O’Hare

significant amounts of capital into its PE market, which appeared promising on paper. But time and again, investors have been shortchanged on returns, partly due to a softening macroeconomic situation and a lack of exits, says Marchand. This has kept capital tied up and tanked fundraising prospects.

But the situation could improve soon, as new trends could help renew interest in Indian PE. “Firstly, the new government under Prime Minister Narendra Modi has developed reforms which should greatly improve the country’s economic perspective,” says Marchand.

“Secondly, PE managers are under pressure to exit deals, thereby creating opportunities for investors with fresh capital to buy assets at attractive prices off firms keen to generate liquidity,” adds Marchand.

PE investors in China have had a similar experience where the returns paled in comparison to projections, despite sustained growth over the past decade.

“When benchmarked to more mature markets such as North America or Europe, these returns do not necessarily justify taking the additional risk. This negative arbitrage and China’s softening growth has adversely impacted investor appetite,” says Marchand.

This is not to say that PE managers cannot strike gold in the market. Rather, firms will need to work much harder to earn desired returns by driving operational change within their investee companies.

The APAC PE market declined for the second consecutive year and LPs are not backing new funds

Source: AVCJ; Preqin

HONG KONG BUSINESS | JANUARY 2015 17

economic INSIGHT: growth drivers

The world is at your fingertips

Global growth buoys HK

The territory’s economy should expand faster in 2015 despite weak domestic demand as US demand rebounds.

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ong Kong may be sinking in domestic demand quicksand, but it can thank the rest of the world, especially the recovering US economy, for pulling it out of the mire in 2015 and nudging it onto an expansive growth trajectory. And although the looming rise in interest rates may snag on the territory’s external-led momentum, the headwinds could be manageable if the home front holds up and averts any rapid unravelling.

Analysts expect Hong Kong’s gross domestic product growth to come in around the range of 2.3-2.6%, an improvement from the 2014 forecast.

Derrick Kam, analyst at Morgan Stanley, says Hong Kong is expected to post 2.3% GDP growth, up from the 2.1% growth forecast in 2014.

He says while domestic demand will remain anaemic, external demand will provide strong support to growth, although the acceleration will be capped by the slower growth in China.

Meanwhile, Ryan Lam, senior economist at Hang Seng Bank, says 18 HONG KONG BUSINESS | JANUARY 2015

Analysts expect Hong Kong’s gross domestic product growth to come in around the range of 2.3 to 2.6%.

Hong Kong’s 2015 GDP growth will come in at 2.6%, which represents a modest increase from the 2.1% growth forecast for 2014. Lam says a critical supportive factor will be the tailwinds from stronger demand in the United States, which is still the largest end-demand market for Hong Kong exports. “Virtually all indicators suggest that the US economy is well into recovery and is likely to extend its strength into 2015.”

Still, Lam says that while Hong Kong’s export growth will benefit from a faster US economic expansion, any gains will be fairly subdued. He predicts Hong Kong export growth in 2015 will remain broadly in line with 2014, coming in at around 5%.

Lam attributes this sombre forecast to the fact that the US share in the world’s economic activity had fallen to 22.4% by the end of 2013, down from 31.3% in 2000. This means the ability of the US to single-handedly lift up global trade has been blunted, especially as the rest of the world’s four

largest economies – Mainland China, the Eurozone and Japan – are sputtering. Another factor supporting Hong Kong’s growth is that domestic household balance sheets have remained healthy, even as household debt has risen sharply over the past five years.

This is because liquid assets have risen even faster than household debt over that period.

In fact, household debt-to-deposit ratio currently stands at a near decadelow of 14.3%, “suggesting that domestic household balance sheets still look healthy in aggregate,” says Lam. Over the past several years, Hong Kong has relied on private consumption to rev up its economy, which has resulted in high levels of debt.

Hong Kong’s private consumption explosion has been a result of positive wealth effects being passed on to the consumer, and easier access to credit.

“However, neither of these two drivers is likely to sustain. It seems unrealistic to assume equity and house price appreciation will continue to be as vigorous as it has been in the recent past, and the pace of these wealth gains should ebb in 2015,” says Lam. The good news is that, even though Hong Kong’s consumption has been expanding too fast and is becoming unsustainable, it is not likely to experience a sharp downturn, according to Lam. A couple of counterbalancing factors, such as continued real wage gains and the low degree of income uncertainty, will continue to prop up consumption, albeit at a more moderate pace.

Tenuous growth Lam reckons Hong Kong’s growth story in 2015 will be quite tenuous since it hinges on many optimistic assumptions – growth could go south quickly without the territory having much say in it. “Looking at near-term growth prospects, if unexpected economic or social issues arise in Hong Kong, the realization of risk factors such as tighter credit conditions or an economic slowdown on the Mainland would result in an anaemic near-term growth profile,” says Lam. “We do not see much chance of a stellar reacceleration in growth for the Hong Kong economy over the next twelve months,” he adds.

HONG KONG BUSINESS | JANUARY 2015 19

analysis: jewellery

How about some diamonds?

Hong Kong jewellery market loses high-end lustre

Mass market is the new name of the game for Hong Kong jewellery brands as Mainland Chinese tourists hold on tighter to their cash.

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or a Mainland Chinese tourist shopping for jewellery in Hong Kong these days, the selection of ornaments on display will not be as breathtaking. The same can be said of price tags, prompting the tourist to open her wallet to purchase – one of millions falling into a fervent romance with relatively cheaper mass market jewellery.

“The Chinese before used to buy the most expensive jewellery, but after the government’s anticorruption policy, they have shifted to mid-range products,” says Joe Lin, executive director, Hong Kong retail services at CBRE. “We have seen a number of jewellers changing business models, where they will now offer more mid-range products in order to cope with changing consumer

20 HONG KONG BUSINESS | JANUARY 2015

Jewellers in Hong Kong have expressed plans to slow down their expansion, and even market leader Chow Tai Fook has promised to shrink its network of stores in Hong Kong.

preference.”

The rising preference for more affordable jewellery is linked with the shifting Chinese tourist profile as well. Tourists visiting Hong Kong are spending less time and money in the territory. Sameday tourists from Guangdong, for instance, have significantly outgrown overnight visitors with bigger spending power in the past few years, says Forrest Chan, analyst at CCB International.

“This trend, benefitting mass market retailers more than the luxury segment, looks likely to sustain,” says Chan. “In the long term, given increasing competition from overseas tourist destinations that are gradually opening up to Chinese passport holders, growth in overnight visitors with strong spending power will remain weak.”

While tourist numbers have

been holding up quite well, their overall weaker spending profile will force jewellers to consolidate their chain of luxury stores in Hong Kong in line with their new mass market focus in the territory. Lin says jewellers in Hong Kong have expressed plans to slow down their expansion, and even market leader Chow Tai Fook has promised to shrink its network of stores in Hong Kong, its first time to do so since listing. “We are seeing early signs of consolidation, with the jewellery and watches stores – the bellwethers of Chinese tourist spending – probably starting to retreat from the super prime shopping area,” says Sylvia Liu, economist at UBS. As early as April, Liu had been sounding alarm bells that Hong Kong’s jewellery stores would need to adapt to a retail environment of declining tourist numbers and affluence amid stronger pressure on the Hong Kong government to tighten Mainland tourist arrivals, due to overcrowding concerns.

“We think Hong Kong’s retail sector has already passed the peak of Chinese tourist-fuelled expansion,” she says. “The retail sector, which has transformed the last 10 years (most notably the last four) to ride on the Chinese tourism boom, may now be due for an adjustment.”

Mass market strategies With fewer tourists and less spending power, jewellers are betting big on mass market strategies that focus on bulk sales, says Lin. For some local chain operators, a mass market campaign requires maintaining a robust level of physical store presence, which explains why they accounted for nearly a quarter or 22% of the total number of leases known to CBRE in the third quarter of 2014. “These watch and jewellery retailers are now focused on mid-priced products and adopt volume strategies over big-ticket item sales in order to align with

analysis: jewellery tourists’ changing consumption patterns,” says Lin. But local chain operators will have to compete with specialist mass market jewellery brands that are determined to corner this emerging market. Lin notes that Pandora has leased 1,000 sq ft on the ground floor of iSQUARE in Tsim Sha Tsui, which will be their second store in the area.

The lease was signed at HK$1.6 million per month, or HK$1,600 per sq ft, which Lin deems “not unrealistically high.”

Rents are becoming an increasing concern for jewellery brands as they move into a higher-volume, lower-margin sales model in Hong Kong. The days of jewellery brands securing spectacular leases that exceed HK$2,000 per sq ft may be numbered.

A quick scan of Queens’ Road Central, a stretch of prime retail floor space that boasts one of the highest densities of jewellery and watch stores in Hong Kong, should confirm this, says Liu. “With one luxury watch store having recently moved out, the landlord is still seeking a new tenant. We note that a couple of years ago this particular shop made headline news by renewing its lease at a steep monthly rate of HK$2.4 million, or HK$2,400 per sq ft,” says Liu. Hong Kong advantage Hong Kong jewellers may be tempted to simply abandon the territory as well-heeled clients increasingly turn elsewhere for their vacations and big-ticket buys, but analysts argue that Hong Kong’s ease of doing business and reputation as a trusted jewellery hub should encourage brands to persevere. “The jewellery industry in Hong Kong is a very lucrative business,” says Lin. “The main reason is that in Hong Kong there is no consumption tax and pieces of jewellery here are regarded as very high quality products with good value guarantee.”

Lin says Mainland Chinese tourists also love to buy in Hong Kong because it is relatively

cheaper and has better quality assurance compared with purchasing on the Mainland – the latter advantage owing to Hong Kong’s stricter quality control. He argues as well that Hong Kong beats neighbouring peers in product quality.

Gold is timeless Gold products will also continue to be a strong demand driver for jewellery brands – even amid the mass market shift – due to the enduring gold-gifting tradition in Hong Kong and China. “Hong Kong people by culture want to buy gold as a gift for their loved ones and preserve the value of their money. It also helps that Hong Kong is very close to China so tourists can just come very easily to and from China,” says Lin. Mainland China’s demand for gold jewellery will continue to rise on the back of the growing disposable income of residents and the expansion of middle-income and high middle-income groups, concurs Kevin Guo, analyst at Guotai Junan International.

Hong Kong will benefit from this burgeoning appetite.

“The preference for gold jewellery in Chinese traditional culture and higher disposable income are the main drivers of jewellery consumption. We expect jewellery retail to maintain a fast growth rate in the coming years as the middle income group of China expands quickly,” says Guo. The demand for gold should also surge as soon as the cohort

“Filial Sheep” Pure Gold and Liuli Ornament

of citizens born in 1980s and 1990s – a relatively large group in China – reaches the eligible age for marriage. “It is common in traditional Chinese culture to buy gold and other jewellery as a wedding gift. Hence, a large number of newlyweds each year in China is a strong driver of jewellery consumption. We expect the newlyweds to maintain high single-digit growth in the next three years,” says Guo.

Joe Lin

The days of jewellery brands securing spectacular leases that exceed HK$2,000 per sq ft may be numbered.

China growth momentum While jewellery brands reposition and consolidate in Hong Kong, it should be noted that they are growing aggressively in Mainland China through a mix of e-commerce initiatives and rapid expansion in lower-tier cities to satisfy a growing demand for mass luxury jewellery.

This eventually could become a threat for Hong Kong-based jewellery stores. Brands operating in both Hong Kong and Mainland China may close down their Hong Kong shops in fear of market cannibalization, while local-run jewellery shops may see their quality advantage diminish as Mainland China operators catch up in production standards.

Chow Tai Fook is at the forefront of China’s growth momentum in providing mass market jewellery, revealing that mass luxury accounts for over 80% of the Group’s revenue. It has grown by tapping into social media platforms such as WeChat and Weibo to reach younger customers.

Cullinan Heritage rough diamond

HONG KONG BUSINESS | JANUARY 2015 21

COVER STORY

Keeping close watch on the ticker board?

15 smart ideas to outwit the wiliest investment wolves this Year of the Sheep Japan equities, 5-year US treasuries, gold, or oil – find out where best to put your money in 2015.

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015 is the Year of the Sheep based on the Chinese zodiac, and fittingly, one of its main investment themes is the flock mentality. There is a strong consensus on where investors should, on paper, put their money, such as equities, but there will be plenty of opportunities to break away from the herd and cash in on lucrative market opportunities. Compiled from our diverse council of financial guides, these top 15 smart investments in 2015 represent some of your best bets for a safer and more profitable investment year.

à Luxembourg’s Singapore branch. Japanese equities also have scope to rise further despite a strong rally in the stock market, says Simon Cox, investment strategist, Asia-Pacific at BNY Mellon Investment Management.

“Japanese corporate earnings have already bounced back strongly from the depths of the financial crisis – they are 280% higher than they were at their lowest point in 2009 based on most recent Ministry of Finance data – but share prices have yet to fully reflect this recovery. “The TOPIX still has some catching up to do,” adds Cox.

1. Japan equities Experts are bullish on Japan equities in 2015 due to a number of supportive factors such as Bank of Japan’s (BoJ) promise to expand its qualitative and quantitative easing, increasing emphasis on shareholder value, continued pension reform, and room for further stock market rallies.

“The divergent monetary policies between the US Federal Reserve and the BoJ will almost certainly continue to put downward pressure on the Japanese yen (JPY) against the US dollar (USD). This is very bullish for equities as the correlation between the USD/JPY exchange rate and the equity market is higher than 90%,” says Hans Goetti, head of investment Asia at Banque Internationale

2. Developed Asia equities Other developed Asian equity markets are also looking good. In particular Korea, Taiwan and Singapore seem especially promising and could benefit from the strengthening US economy, says Robert Rountree, global strategist at Eastspring Investments. “The developed Asian markets, having been ignored in 2014, now look attractively valued. Any uptick in export orders or a strengthening of world growth could lead to renewed attention on these markets.”

Among these, Korean equities may be one of the most attractive investments in Asia for the first half of 2015, says Dr Ekkehard J. Wiek, managing partner at Straits Invest. He says the Korea market holds an unusually

22 HONG KONG BUSINESS | JANUARY 2015

“The developed Asian markets, having been ignored in 2014, now look attractively valued.”

COVER STORY high number of stocks with a very low valuation paying high dividends which have started to rebound from their recent drawbacks, with especially attractive picks in the small and mid caps segments.

3. China equities Investors may be wary of China equities due to low valuations and several years of underperformance amid worries about slowing growth and other macroeconomic concerns, but Rountree argues that the opportunities exist for those looking at a longer view. “China’s value may not be priced out until more clarity appears in the macroeconomic data. Again, one to watch; when it does bounce back, it could be far, fast and furious.”

He points out that Korean companies are increasing their China investments in anticipation of a forecasted upswing driven by rising consumer demand.

“Slowing growth, concerns about over-indebtedness, a seemingly out-of-control housing market, opaque local government finances and the lack of a meaningful policy response have contributed to this malaise. Yet there are reasons to be more optimistic about Chinese equities,” says Daniel Murray, chief economist at EFG. He believes that, even though China’s gross domestic product growth has slowed to around 7.5% from previous double-digit highs, this is part of a “natural maturing” of its economy and is still a stronger growth pace compared with most other countries.

4. Hong Kong stocks Over in Hong Kong, investors should look into the Pharmaceutical, Green and Telecommunications, and Media and Technology sectors, which are trading at discounts compared to the A-shares market, according to Quam Asset Management.

The launching of the Shanghai-Hong Kong Stock Connect, which should boost investor access, together with better corporate governance, will likely trigger re-ratings in these sectors. Investors might also consider dipping into the slew of Chinese companies that are expected to list on the Hong Kong Stock Exchange due to its lower financing cost, better liquidity and more efficient fundraising platform.

5. US financial, tech and consumer sectors Given a forecasted acceleration in the global economy, The rally in Japan’s share prices has yet to match the recovery in corporate profits

Source: Ministry of Finance, Tokyo Stock Exchange, via Thomson Reuters Datastream.

Last data point Q3 2014(Topix)

Ekkehard Wiek

Shrikant Bhat

Hans Goetti

Robert Rountree

Jim Swanson

US equity markets should deliver a respectable performance, with especially attractive picks in the financial and information technology sectors, according to Shrikant Bhat, managing director, head of wealth management at Citibank Singapore. He says the US financial sector offers earnings momentum in line with the rest of the market, but valuations are well below.

Meanwhile, the IT sector scores well on free cash flow and balance sheets of firms that remain strong.

Investors in the US market may also want to take a long position on the consumer discretionary sector, one of the worst performing sectors in 2014, whose fortunes may start to turn around in 2015. As of mid-November, the S&P500 Consumer Discretionary index was up a mere 3.6% compared with 10.4% for the S&P500 in aggregate and 21.0% for the top-performing S&P500 Health Care sector index, yet there are signs that the fundamental backdrop is improving, argues Murray.

6. US large cap stocks Among the investment options in 2015, US large caps represent the dependable picks with excellent operating leverage that can deliver profit in spite of sluggish end markets in Europe and China. Large cap multinationals have also managed to raise their profit even as the rest of the US economy shrank in the first quarter of 2014, showing their earnings resilience. “The forward P/E for US large caps is lower than the broader market, so valuations are reasonable,” says Jim Swanson, chief investment strategist at MFS Investment. “Their operating leverage is being driven by low unit labour costs, which are much lower than those in Europe and Japan.”

7. Canadian equities Asian investors focused on the US market would do well to look further north to Canada, which despite requiring a bit more research work, holds a wealth of attractive undervalued stocks ripe for the picking.

“We find plenty of attractive undervalued stocks from all industries,” says Straits Invest’s Wiek. “Canada stocks for the next couple of months will make up the highest weighting of all countries in our global equity portfolio,” he adds, explaining that the Canada market is still some 20 % below its 2008 high.

8. European equities Across the Atlantic, European equities –especially those with a large proportion of overseas sales – should be a priority for investors, says EFG’s Murray. Investors are advised to shake off their fears and consider taking a long position on underperforming European equities as euro weakness translates to better results when overseas revenues are translated back to euro.

“Combining the lagged impact of a weaker euro with improved competitiveness in many of the countries that have experienced the most extreme economic malaise over the past few years should result in improving overseas sales volumes in the first half of 2015,” says Murray.

Europe may be grappling with a battery of macroeconomic concerns but policy action from the European HONG KONG BUSINESS | JANUARY 2015 23

COVER STORY Central Bank (ECB) will be a key catalyst for the region, which is why Citibank’s Bhat is also remaining optimistic on European equities. “The resulting improvement in macro backdrop and weaker currency should fuel companies’ earnings results.”

9. Unit trusts With most analysts preferring equities, investors seeking a more diversified exposure may consider buying gradually into unit trusts, says Vasu Menon, vice president, wealth management Singapore at OCBC Bank. “It’s best to buy gradually over several months next year instead of trying to time markets as volatility could increase once markets get wind of an imminent rate hike by the US Federal Reserve.”

10. Asian and US high yield bonds For investors chasing income, Asian and US high yield bonds will remain a strong option in 2015. Rountree says the expected increase in rates will unlikely be strong and leaves the door open for bonds as an option. “While US rates will likely nudge higher in 2015, it will unlikely be so strong as to undermine the income story.”

Menon believes bonds will allow investors looking to retain a semblance of prudence to balance out their portfolios, which could tend to be bulky in equities. He believes high yield bonds are superior to investment grade ones because of their wider credit spread which will cushion the impact of higher interest rates in 2015.

11. 5-year US treasuries The end of the aggressive US Federal Reserve balance sheet expansion will signal a rise in interest rates, and based on past rate hiking cycles, will lead to a flattening of the yield curve, most likely from shorter duration maturities, says Murray.

“Although the yield at the long end of the US government curve is low in absolute terms, the slope of the curve is relatively steep. This suggests that the flattening is likely to come from shorter duration maturities,” he says. “As confidence in the robustness of the US economy improves and expectations about policy normalization begin to solidify, so we expect the belly of the curve to sell off and the five year yield to rise.”

12. Low cost index funds and exchange-traded funds While most analysts are bullish on global equities and global bonds, more risk-averse advisers point to low cost index funds and exchange-traded funds as viable alternatives. These investment options are “excellent ways to minimize cost and obtain broad diversification” in any investor’s portfolio, says Rodney Comegys, principal, head of investments at Vanguard Asia-Pacific.

Based on his firm’s forward-looking projections, Comegys points to a median ten-year forecast of around 8% return for global equities and 3% for global bonds, both below their respective longer-term averages. Given this low-return environment in the next decade, investors are better off paying lower fees in lower cost funds – especially as, according to Comegys, they outperform 24 HONG KONG BUSINESS | JANUARY 2015

higher cost funds over time.

Albert Cheng

Cedric Tinguely

Simon Cox

Vasu Menon

13. USD against euro Consensus is bullish on the USD against various currencies, but will be especially strong against the euro as the future actions of the ECB will likely be “too little too late,” according to Cedric Tinguely, chief trader at Bordier & Cie (Singapore). “When the US Federal Reserve did all their quantitative easing, it did work well because they were ahead of other central banks, therefore the stimulus and liquidity they injected into their economy provided its full effect,” he says.

“Even if Mr Draghi announced his willingness to increase the ECB balance sheet to where it was at the beginning of 2012, by roughly 1 trillion Euro, they will do it overtime and will probably reach full speed only by the end of 2016.”

14. Gold For more prudent investors, gold remains a solid investment choice and remains a fundamental part of any long-term wealth preservation and asset diversification strategy, argues Albert L. H. Cheng, Managing Director, Far East, World Gold Council.

“The accessibility of the gold market along with its size and liquidity provide attractive benefits for investors in gold, particularly as a complementary asset alongside equities and fixed income securities,” he says. “The diversity of gold-backed and gold-related products means that gold can be used to enhance a wider variety of individual investment strategies and risk tolerances.”

15. Oil Oil prices have been coming down over the past few months due to reduced US reliance on oil imports amid rising domestic shale activities, among other factors, but they are unlikely to dip much further below $70 a barrel, says Murray.

Investors are advised to take a long position in the commodity as he expects the price price of West Texas Intermediate (WTI) crude oil, which has been down more than 30% over the past few months, is unlikely to dip much below US$70 a barrel.

Amid globalization, Asian equities are still on top

hong kong’s top 25 ACCOUNTING firms

Redefining accountability in banking & finance

Due or undue diligence?

Experts are worried now that the responsibility of deterring money laundering is now extended to financial institutions.

H

ong Kong’s Anti-money Laundering and Terrorist Financing Ordinance and related legislation, which has recently come to be effective, has boldly redefined accountability in the banking and finance industry of what is arguably Asia’s financial centre. The industry is still largely stumped over what the new legislations may imply for practitioners and firms, and whether those implications are justified. Key requirements of the AMLO, such as more rigid customer due diligence, and the required reporting to suspicious transactions or customers, have wide ranging implications for financial firms – issues that are, in general, difficult to distill.

For many practitioners and financial firms, the expansion of accountability for money laundering and terrorist financing crimes is one of the central controversies surrounding 26 HONG KONG BUSINESS | JANUARY 2015

Money Laundering and Terrorist Funding are very difficult to describe and identify, and Hong Kongrelated laws are not much help.

the law. Whereas previously, complacency was not equated with complicity, AMLO now extends the responsibility of deterring money laundering to financial institutions. Although many find this extension of accountability worrying, some believe that this level of accountability has already existed even before AMLO. “Regulators and legislators are now reminding the financial industry that they are fiduciary institutions,” says Martin Muirhead, Senior Advisor for Financial Crime at PwC Consulting Hong Kong.

Technical challenges are also a key consideration. Some professionals believe that the AMLO does little to draw the lines by virtue of the fact that the criminal activity is loosely defined. “Money Laundering and Terrorist Funding are very difficult to describe and identify, and Hong Kong-related laws are not much help because they are written so

wide such that individuals or organizations can potentially be held criminally liable for involving themselves in activities that are commonly regarded as legitimate,” states Paul Phenix, Consultant at Baker Tilly Hong Kong. Given AMLO’s many pragmatic considerations, a key challenge is the concern over how to reform compliance departments. “The increased regulatory scrutiny means the overall cost of compliance is boosting up. The biggest challenge so far has been in the sourcing of the right candidates and personnel to fill the expected compliance structure,” shares Manhim Yu, Partner at Fraud Investigation & Dispute Services, EY Hong Kong.

Lastly, Client Care may also be compromised in favour of compliance. “There is a potential friction between financial institutions and customers due to increased regulatory scrutiny.

Clients may feel more ‘controlled’ and inconvenienced because of rigid regulatory requirements regarding due diligence,” says Yu. Who made it to HKB’s list?

PwC emerged as Hong Kong’s largest accounting firm for 2014 and broke last year’s tie with Deloitte Touche Tohmatsu.

PwC’s total employment reached 3,500 this year but a spokesperson clarified that the 2,400 figure provided to HKB last year was only referring to its Assurance staff. To boost its employment, PWC has launched last September its 2014/15 Graduate Recruitment campaign with career talks hosted in campuses in Mainland China and Hong Kong. Around 2,000 places were on offer for suitable candidates in various PwC offices across Mainland China and Hong Kong for September and October.

On the other hand, Deloitte’s total staff dropped 4% to 2300.

All in all, the total employment of Hong Kong’s 25 largest accounting firms jumped by 10% to 14,343.

hong kong’s top 25 ACCOUNTING firms

The 25 largest accounting firms in HK Company Name

2013 Ranking

2014 2013 Total Staff Total Staff

2014 Accounting Professionals

Managing Partner

1

PricewaterhouseCoopers*

1

3500

2400

<3500

Cassie Wong

2

Deloitte Touche Tohmatsu HK

1

2300

2400

<2300

Clement Hung

3

Ernst & Young

3

2200

2100

<2200

Agnes Chan

4

KPMG

4

2000

2000

<2000

Andrew Weir

5

BDO

5

1000

1000

700

Albert Au

6

RSM Nelson Wheeler

6

430

430

<400

Wong Poh Weng

7

HLB Hodgson Impey Cheng

7

400

350

<380

Raymond Cheng

8

Crowe Horwath

8

350

300

250

Charles Chan

9

SHINEWING

8

300

300

250

Roy Lo

10

Mazars

8

280

300

<280

Stephen Weatherseed

11

Baker Tilly Hong Kong

11

268

255

240

Andrew Ross

12

Grant Thornton

12

200

200

200

Daniel Lin

12

Cheng & Cheng

13

200

180

<200

Andrew Cheng Hong Kei and Francis Cheng Hong Cheung

14

PKF Hong Kong

14

126

100

83

Henry Leung

15

Patrick Wong CPA**

14

100

100

<100

Patrick Wong Lung Tak

15

Pan-China

14

100

100

<100

Patrick Ng

17

Wong Brothers & Co.**

17

94

94

<94

Charles C L Chow

18

HLM CPA Limited

18

90

87

<80

Clement Leung

19

Ting Ho Kwan & Chan

19

85

85

20

Stephen Ting

20

FTW & Partners

20

68

70

48

Lawrence Wong

21

Philip Poon & Partners

24

60

45

50

Philip Poon

22

KLC Kennic Lui & Co.

23

47

47

42

Kennic Lui

23

C K Yau & Partners

22

45

48

8

Joseph Y K Yau

24

Lawrence Cheung CPA**

-

40

-

11

Lawrence Cheung Wa-Kou, MH JP

25

CCTH CPA

25

35

38

<35

David Yim Kai Pung

Data provided by companies *PwC’s 2012 numbers represent their assurance staff only **Data obtained from their website and media reports.

Total

14,318

13,029

HONG KONG BUSINESS | JANUARY 2015 27

legal briefing

Goading banks into better data privacy This latest summary of data privacy compliance literature serves as a sobering refresher.

I

f Hong Kong banks remain among the top offenders in personal data privacy breaches, it is not for want of legislation and reminders – the government has been creating more stringent rules and releasing regular guidance notes. But perhaps what banks need is a layman’s approach, prompting the Office of the Privacy Commissioner for Personal Data to issue its new Guidance on the Proper Handling of Customers’ Personal Data for the Banking Industry.

The 26-page guidance note covers all the important bases, uses simpler language and includes an array of real-world scenarios – and analysts believe it could help increase compliance among clueless bank staff.

Does the guidance note have any binding legal effect? What does it hope to achieve?

The guidance note has no binding legal effect, says Simon Deane, partner at Deacons, but its issuance is meant to help banks comply with the Personal Data (Privacy) Ordinance or PDPO in all areas of specific interest to banks such as the six data protection principles, proper collection and use of customer data, direct marketing to customers and dealing with data access and correction requests.

The guidance note highlights that there is an increasing number of complaints being made about the banking industry’s compliance with the Privacy Ordinance, says Laure de Panafieu, head

“The guidance note highlights that there is an increasing number of complaints being made about the banking industry’s compliance with the Privacy Ordinance.” of employment & incentives, Asia at Linklaters.

Its issuance is intended to reduce the frequency of complaints by providing practical advice and promoting good practices to assist banks and other financial institutions satisfy their Privacy Ordinance obligations when handling customer personal data.

“I think the guidance note consolidates the legal principles and past decided cases into one single document with real life example,” says Susana Ng, consultant at Allen & Overy.

What are the strengths of the guidance note?

The guidance note is especially useful because it explains the operation of the Privacy Ordinance in plain language and through the use of case studies and practical advice, says de Panafieu.

It also tries to clarify the interactions between 28 HONG KONG BUSINESS | JANUARY 2015

Laure de Panafieu

Susana Ng

Simon Deane

all previous guidances notes and the new guidance note and other HK ordinances affecting financial institutions, making it easier to observe compliance amid the growing complexity of rules.

Finally, the guidance note provides a very helpful indicative list of matters which should be addressed by a financial institution in its arrangements with third parties when outsourcing services which may involve the processing of customer personal data, to avoid data theft or leakage.

Ng says the beauty of this guidance note compared with previous ones is its exhaustive scope. It compiles a substantial number of practical personal data privacy issues faced by the banking industry and puts previously published standalone guidance notes into a helpful context.

What are the weaknesses of the guidance note?

The guidance note failed to address the issue of how a bank can properly satisfy its obligations under the Privacy Ordinance when personal data is collected by one of its offices or branches overseas and then transferred to Hong Kong, says de Panafieu. This area effectively remains a point of contention and confusion.

Despite its comprehensive nature and focus on real-world application, the guidance is limited by its status as a reminder. Staff could choose to ignore it without major repercussions, unless stronger internal audits and punishment are enforced. “In the banking industry, the biggest challenge is not about putting compliance programs in place, but how to ensure that staff follow through the compliance programs and internal procedures,” says Ng. “Significant effort needs to be made to educate the staff as to why data protection is relevant to them. The recommended precautionary measure of regular internal audits and random checks to ensure compliance should be used.”

Deane says the guidance note simply functions as an aide-memoire regarding proper compliance, and cannot substitute for a full understanding of the PDPO itself and the codes of practice relating to consumer credit data and identification cards.

What will non-compliance mean for banks?

While the new guidance note is advisory in nature and not binding, the banking sector should not take its recommendations lightly, as the Privacy Commissioner might be less lenient with erring organizations, says de Panafieu.

“Given the clear explanations and examples set out in the guidance note, we expect that future noncompliance by organizations in the banking sector will be treated more strictly than in other industries where such clear guidance is not available.”

CMO Briefing

Are daily deals a dying breed?

The marketers’ verdict on Daily Deals and how to use them to your advantage (or disadvantage).

W

hen daily deals – the promotional strategy of offering huge online discounts on third-party sites to encourage trial – first exploded into the marketing scene, it was touted by advocates as a powerful way to attract new customers and turn them into loyal advocates. But marketers are coming to the conclusion that daily deals can only do the former competently, which lowers its value from a quintessential customer acquisition strategy to merely a niche sales tactic for a narrower field of brands.

“Offering discounts helps attract new customers and providing daily deals effectively engages customers and reminds them about our service,” says Denise Wu, Hong Kong marketing manager at foodpanda, a global online food ordering marketplace with a website and mobile app. But offering daily deals may not be the first priority of foodpanda’s marketing campaigns in the long term, admits Wu. Instead, they are now focusing on providing high quality service – rather than giving eye-popping discounts – to attract loyal customers.

“The original assumption is that daily deals would lure new customers who would eventually become regular customers who pay full price simply hasn’t worked out. However, most of the merchants who tried found that even under optimistic scenarios, the payback periods are extremely long – which in term of years,” says Benny Liu, vice president, ChineseAn.com at Ignite Vision Limited.

Liu says the hype around daily deals is waning because of oversaturation and a faulty assumption that earned customers through daily deal sites can be easily converted into repeat buyers.

“Nowadays, consumers are getting too many daily deals. I don’t think the model will die—it’s actually a very useful strategy to drive immediate sales. But it’s

30 HONG KONG BUSINESS | JANUARY 2015

The groupbuying deal needs to be crafted so that it does not cheapen the brand since a perception of quality is required to retain a loyal following.

not nearly as big of a market opportunity as it’s been posited to be and it’s a strategy that is best used by a company for its own customers rather than going through a third-party,” says Liu. Daily deal sites are responding to this criticism by focusing more on tactics to increase customer retention. Liu says more than half of the merchants run deals to earn more customers, but lamented that traditional daily deals seldom focus on the retention of earned customers, so merchants ended up disappointed having spent so much only to end up attracting a group of so-called bounty hunters as customers “who are never loyal and hard to maintain.”

Marketers like Azure Lorraine, director of Moonstruck, recognise the strength of daily deals, especially group-buying variants. They can help fledgling start-ups expand into new markets and gain brand recognition even with a limited marketing budget.

Maintaining the brand’s quality The group-buying deal needs to be crafted so that it does not cheapen the brand since a perception of quality is required to retain a loyal following. “It is important to choose a deal that can reflect a positive image of your business and which can benefit from greater exposure,” says Lorraine. “Unfortunately, most group buying companies are stuffed full of deals and they are overshadowed by quantity, not quality. So when there are twenty or thirty active deals on, and when the novelty of group-buying has worn off, there may be no guarantee that a company gains a significant increase in turn-over.”

Lorraine says the group-buying tactic will mostly work for service-based businesses such as restaurants since pre-bought tickets can help gauge orders on a certain day and the deals will bring in customers likely to repeat if their dining experience is positive. But product-based businesses may have a harder time at it, says Lorraine, drawing from personal experience.

“We face challenges when working with group buying companies, as all three of my business models are focused on scents. How do you get someone to purchase something that they have never smelt before?” says Lorraine.

He advises businesses that want to engage in daily deals and group buying to carefully pick their affiliated group-marketing company, one with a reputation for high quality offerings and one that overlaps with a brand’s target market as each groupbuying site caters to distinctly different demographic audiences.

“I believe one should not solely maintain a business which relies on short-lived offers, as the longevity of a business really lies in the quality of products or services. How you keep those customers after the deal is over is really an art of creativity and perseverance,” says Lorraine.

HONG KONG BUSINESS | JANUARY 2015 31

analysis: hong kong property

Does land price determine home price?

If land prices in Hong Kong are falling, why arenâ&#x20AC;&#x2122;t house prices following suit?

Do primary home prices determine secondary home prices or is it the other way around?

T

he year 2014 has been full of surprises. The physical market defied our and consensus expectations and home prices have risen 9.3% by the end of November 2014. During this time, we note that several traditional relationships appear to have broken down.

Consequently, we find ourselves asking three crucial questions: Does supply and demand determine prices or is it the other way around? How about land price? Does it determine home price or does it work the other way? Also, do primary home prices determine secondary home prices or again, is it the other way around?

In this note, we examine the question of whether supply and demand determines home prices and the apparent disconnect that has emerged between falling land prices and rising home prices.

Recalling our lessons from Economics 101, price is set at the 32 HONG KONG BUSINESS | JANUARY 2015

intersection between the supply and demand curves. In the context of the Hong Kong housing market, with the Hong Kong Government committing in its Long Term Housing Strategy to build 470,000 new homes in the next 10 years, we believe the housing supply curve has shifted out.

Through the first 11 months of 2014, developers have sold 14,857 units. Although 2014 primary sales volume is likely to be the highest since 2009 when developers sold 15,913 units, the Hong Kong Government has supplied land at an even faster pace. We estimate that through the successful tender of Lohas Park Phase 5 on 26 November, total residential land replenishment has reached 19,443 units.

As a result, despite a faster pace of absorption, overall supply has increased. This dynamic can be observed in the quarterly â&#x20AC;&#x153;Statistics on Private Housing Supply in

Primary Marketâ&#x20AC;? from the Hong Kong Government which had shown overall primary supply rising by 1,000 units in each of the first three quarters and reaching 74,000 units by end-3Q 2014.

Where we find the increased land supply having its expected impact is on land prices. Although Hong Kong does not have a land price index, the trend of falling land prices can be An outward shift in supply is supposed to result in a lower price point

Source: Barclays Research

analysis: hong kong property readily observed in the various land tender results this year.

One example is the MTR tendered Lohas Park Packages 4 and 5 this year.

Package 4 was awarded to SHKP in April 2014 with a land premium of HK$2,059psf. Package 5 was awarded to Wheelock in November 2014 with a land premium of HK$1,874psf.

Compared to Package 3 which was awarded in November 2007 for HK$2,410psf, the land premiums for Packages 4 and 5 are 15% and 22% lower.

Also, two sites at Pak Shek Kok were sold via public land tender this year. TPTL 214 was awarded to Great Eagle in May 2014 for HK$3,300psf and TPTL 213 was awarded to Billion Development for HK$3,552psf in September 2014. Compared to the HK$7,215psf that Sino Land and K. Wah paid for TPTL 200 and TPTL 201 back in 2009, land prices in Pak Shek Kok appear to have fallen 51% and 54%.

Meanwhile, three sites were sold in the Ma On Shan area this year.

SHKP won the Whitehead site at STTL581 for HK$4,241psf while consortiums led by Wang On won two sites at STTL599 and STTL598 for HK$3,515psf and HK$3,719ps respectively.

Compared to the HK$5,160psf that Cheung Kong paid for a site in Lok Wo Sha (STTL574), land prices in Ma On Shan appear to have fallen by 18%-32%.

Six sites in Tuen Mun have been sold via public tenders in the yearto-date, with an average land price of

Sunshine City Phase 4 in Ma On Shan

HK$4,278psf. If we were to exclude the outlier in TMTL 513 that was sold for HK$11,599psf, the blended land price for the remaining five sites would average HK$2,814psf.

Compared to the average land price of HK$4,423psf for seven Tuen Mun sites sold in 2013, this suggests a drop of 36%.

Home prices not discounting rising supply to come Although the increased land supply has already resulted in lower land prices, the outward shift in the supply curve has yet to impact on home prices. In fact, instead of falling, home prices have actually risen by 9.3% in the year-to-date.

Frequently, some argue that since it takes four to five years to complete a project, housing supply remains constrained in the near term. While near-term supply is still low, we believe it is unrealistic to assume that the sites are never built. As these raw land sites are eventually converted into completed properties, we believe the same supply-demand dynamic that we have observed in the land sale market should repeat in the completed homes market.

What may add an additional dimension to the housing supplydemand dynamic in the coming years is the potential for demand to pull back in the face of rising rates. The combination of demand pulling back against an outward shift in supply should theoretically result in home prices dropping even more.

Although this dynamic makes

Hong Kong home prices have risen by 9.3% YTD

Source: Centa-City Leading Index, Barclays Research

Land price of recent land tenders in Ma On Shan

Source: Lands Department, Barclays Research

â&#x20AC;&#x153;Instead of falling, home prices have actually risen by 9.3% in the year-to-date.â&#x20AC;?

theoretical sense to us, judging by the fact that home buyers have readily snapped up 14,857 primary units and pushed up secondary home prices by 9.3% at this point in the year, this suggest that home buyers may not be that forward looking.

This brings us back to our original question of whether supply-demand determines price or if it is the other way around.

Prefer the net sellers of homes: Cheung Kong and Hang Lung As for us, we believe supply and demand matters. Despite the current disconnect between falling land prices and rising home prices, we believe these will eventually realign. As home prices fall, we believe companies that have net reduced their Hong Kong housing exposure will be less sensitive to the downward adjustment.

Through the first nine months of 2014, Cheung Kong and Hang Lung Properties have been the key net sellers of housing. While SHKP has sold a lot, it has also replenished a lot.

As we remain cautious on the outlook of home prices, we prefer the net sellers of landbank. By Paul Louie and Iris Poon, analysts at Barclays Bank HONG KONG BUSINESS | JANUARY 2015 33

Regional Analysis: asean tourism China looks to break the 100 million mark this year based on early data, driven primarily by the rising affluence of the growing middle class who have more inclination to travel overseas, with longer holidays and to spend more on their trips with their larger disposable incomes, according to Abhiram Chowdhry, Vice President and Managing Director APAC of the Hotels.com brand.

Sitting on top of the tourist world

Rise of the Chinese: All hail the Mainland traveller Hotels in Asian countries are scrambling to cater to their whims.

W

hen Chinese travellers step into a hotel these days, they are pampered with customized services such as free room Wi-Fi, local payment options like Alipay, and Mandarin-speaking staff at their beck and call. Hoteliers are rolling out the figurative – sometimes literal – red carpet for Chinese travellers, as more than half have seen an increase in Chinese guests in the last year, and a third believe that Chinese tourists will be the key to their hotels’ near-term success.

Should they choose to travel in Asia, Chinese travellers also hold the upper hand as neighbouring countries compete for their travel spending dollars. An enviable selection of affordable flights and tour packages are offered to Chinese travellers, and countries are constructing multimillion-dollar attractions in order to lure them to their shores. Analysts say this deluge 34 HONG KONG BUSINESS | JANUARY 2015

Last year, the total number of outbound trips organized for Chinese tourists rose to 97 million, up 14 million from 2012.

of perks for Chinese travellers comes at a time when they are beginning to usurp Western tourists as the most desired visitor market among hotels and Asian countries due to their fastgrowing numbers and wallets.

The outbound tourism segment saw the largest growth in China’s tourism and travel industry in the last decade, rising at an annualized rate of 17.1% during the period, says Hak Bin Chua, ASEAN economist at Merrill Lynch (Singapore). Last year, the total number of outbound trips organized for Chinese tourists rose to 97 million, up 14 million from 2012, overtaking the United States as the world’s largest outbound market, according to data from the Tourism Administration of China.

Chinese outbound tourists also overtook Germans and Americans as the world’s biggest spenders on international travel, with total outbound expenditure reaching US$102 billion in 2012.

Hotel pampering Hotels have long been cognizant of the growing Chinese outbound travel market, but now it is almost impossible to ignore if a hotel hopes to stay competitive. Sharing research from an extensive Hotels. com survey of hotel brands around the world, Chowdhry reveals that hotels remain the most popular type of accommodation amongst Chinese travellers, with 84% choosing it as their preferred option. More than half (53%) of the hoteliers surveyed say that they had seen an increase in the number of Chinese guests in the previous 12 months.

Like hotels, Asian destinations are also refining their tourism strategies to better attract the increasingly picky Chinese traveller with an ever expanding budget.

For Hong Kong, whose tourism and retail sector lives and breathes on the 40 million or so Mainland visitors annually – they accounted for 89.2% of total tourist spending and 34.2% of total retail sales last year.

As Hong Kong and Singapore lose some of their lustre, Southeast Asian countries are emerging as part of the Chinese traveller’s priority options due to their proximity, low travel fares, and improved infrastructure systems.

Prospects for inbound mainland tourism remain bright for Southeast Asian nations, says Marcella Chow, emerging Asia economist at Bank of America Merill Lynch (Hong Kong). She says China tourists account for a bulk of increase in tourism among ASEAN countries over the past decade, tripling from 1.9m in 2001 to 10.1m in 2013.

co-published Corporate profile

Mobility for the modern professional See how Hyperlink Holdings makes life easy for immigrants to Hong Kong.

I

n today’s business and professional environment, rapid globalisation is no longer uncommon, and is in fact already the norm. Advancing one’s career in a globalised environment often entails the mobility of leaving home and moving to other countries, and staying there for a significant amount of time. For many experienced expatriates, one of the hardest parts of migrating internationally is the aggregated frustration over the multitude of errands that have to be done for a smooth transition – finding a house, learning the commute, ‘migrating’ finances, etc. And as with any painstaking problem, a business opportunity is bound to arise eventually. And Hyperlink Holdings was the first to capitalise on it, successfully.

Hyperlink Holdings is an immigration services company that offers prospective immigrants to Hong Kong services that aim to ease the transition. These services, in broad strokes, involve assisting customers with documentary requirements, housing and transportation, as well as cultural assimilation.

36 HONG KONG BUSINESS | JANUARY 2015

“Hyperlink Holdings’ main value proposition is based on a classic principle wherein the whole is greater than the sum of its parts.”

Hyperlink Holdings brands itself as the one stop shop for professionals immigrating to Hong Kong. The company has a solid six years of experience in the industry, and it primarily serves immigrating professionals from Mainland China.

Hyperlink’s business model is no short of the gold standard in crisp simplicity: it is to be present in every step of the transition. This is so because the company was able to plot out the major considerations that are relevant to professionals immigrating to Hong Kong, and then organizing the business around that linear process.

Firstly, the company offers extensive services on everything that has to do with papers and documentation. Most professionals who have experienced immigrating to a new country would be very familiar with the tediousness of immigration bureaucracies, especially those concerning the immigration of finances and investments.

The regulatory differences and requirements that come with migrating finances and investments, and other paperwork can sometimes be very voluminous that only a lawyer would be able to navigate

the process. To this end, one of Hyperlink’s key services is offering one on one assistance on navigating the necessary paperwork in financial and investment transitions.

Aside from securing the status of finances and investments, one key concern for Hyperlink’s customers also involves logistics. Being able to find a suitable home away from home, as well as being comfortably acquainted with the surrounding vicinity, is key to a smooth and fulfilling transition. Hyperlink truly covers all its bases as the company has a Property subsidiary that assists immigrants in finding suitable housing. The company also provides automotive services for any customer wishing to familiarise themselves with the Hong Kong’s ins and outs.

Hyperlink acts as a broker for car sales for the customers, making sure to take care of other related matters such as insurance.

Acting on synergies Hyperlink Holdings’ main value proposition is based on a classic principle wherein the whole is greater than the sum of its parts. Whereas there are indeed other firms who also focus on immigration services,

co-published Corporate profile

it is only Hyperlink Holdings who has mastered the art of aggregating the entire immigration process into a single package deal. More than the fact that these customers’ are usually pressed for time, the exhaustion that comes about from the bureaucracies of moving is often regarded as something that is not worth the hassle. This is the reason behind why more and more professional immigrants are finding it a wiser decision to opt to avail the services of Hyperlink Holdings, instead of taking care of things themselves. The synergies that Hyperlink has created within its company also ensure that its customers don’t overlook other important details about their immigration that they may otherwise miss.

Attention to detail The reason most companies are stuck to deal with mediocrity is the fact that they settle with having just a solid backbone. This is another area where Hyperlink differs significantly.

The company complements their airtight business model with a focus on humanising their services. “For the mainland businessman, their concern is not just professional service, but requires us to provide for more humane and caring services to help them quickly adapt to the new environment, into a new life,” says Samson Cheung, Vice President at Hyperlink.

A clear example of Hyperlink Holdings’ commitment to a genuine service is the way they handle their property business. Unlike generic property companies that simply build

and sell, Hyperlink makes it a point to also focus on their customers’ housing-related needs like interior design, and assisting them with getting acquainted with the general living area – details that most other service companies would tend to overlook. As Cheung shares, “as our customers don’t have any idea about Hong Kong, we take care of them in every single matter like interior design, furniture, transportation, facilities in the living area, and others.”

There are other less formal examples of how Hyperlink Holdings makes known its genuine one on one commitment to its customers.

“For example, we have a customer from Shanxi, and his Shanxi accent caused others to misunderstand his intention. As such, we specifically looked for colleagues to teach him Cantonese,” Cheung shares.

As evidenced by their track record in service, Hyperlink Holdings makes it obvious what their competitive advantage is. Aside from convenience and efficiency, customers also value a personalised and humanised service because this helps make the big transition of immigration much easier. And it is to this end that Hyperlink Holdings has been successful. “We offer a personalised services to them. This is our advantage in the marketplace,” says Cheung.

Focused growth For companies in the industry of immigration services, it is easy to get sidetracked by the multitude of potential new service offerings – there are just so many needs to be addressed. Hyperlink Holdings makes it a point to stay focused on the core of the business model and only launch new services or products that are clearly and logically in line with the company’s brand and purpose.

Moving forward, Hyperlink aims to further personalise its business by offering services that cater to the softer or more cultural needs of their customers. One example of these new services that Hyperlink is eyeing is providing their customers with personal tutors to teach them

“The company complements their airtight business model with a focus on humanising their services.”

Cantonese. As illustrated by the example earlier, slight differences in accents could impair one’s ability to be understandable to new colleagues in a foreign land. Hyperlink has seen that more and more of its customers are having a problem with this particular cultural difference, so the company is planning to integrate this service more comprehensively in the future.

Another area in which Hyperlink is aiming to grow at is aiding the transition for their customers’ children. A sizeable portion of Hyperlink’s customer base caters to professionals who already have families, and whose families will most likely be immigrating with them. As such, Hyperlink Holdings has seen that smoothening the transition for their customers’ children is also an important aspect of the process. The company also provides its customers with advisory services on the local education system and culture, applications to kindergarten or primary schools, and others.

HONG KONG BUSINESS | JANUARY 2015 37

feature: hong kong smes

Never felt so little

SMEs in HK feel the chill

Find out why they are generally pessimistic about the last quarter of 2014.

T

he Standard Chartered Hong Kong SME Leading Business Index (SME Index), jointly released by Standard Chartered and the Hong Kong Productivity Council, fell to 47.9 in Q4-2014, the lowest since Q4-2012, from 51.3 in Q3. In particular, respondents felt much more uncertain about the global economic outlook compared to three months earlier – the corresponding sub-index plunged 19% to 38.0, the lowest in six quarter.

All five index sub-components worsened from Q3, led by an 8.9-point drop in the sub-index for the global economic outlook to 46.9. In Q3, this sub-index rose the most of all index components and reached a record high, suggesting that part of the Q4 drop may have been a correction from excessive optimism the prior quarter. While we believe that global demand is still improving and will remain an important contributor to Hong Kong’s GDP growth in the coming quarters, its 38 HONG KONG BUSINESS | JANUARY 2015

While global demand is still improving and will remain an important contributor to Hong Kong’s GDP growth in the coming quarters, its uneven nature and dependence on policy support mean that sentiment could be slow to recover.

uneven nature and dependence on policy support mean that sentiment could be slow to recover.

Sub-components that are more indicative of the longer-term outlook dipped modestly in Q4 but are still above 50, with hiring at 51.5 (-1.2 point) and investment at 52.2 (-0.9 point). On the other hand, sub-indices that are more reflective of current conditions – namely sales and profit margin – dipped 4.5 and 5.0 points, respectively. All subindices are now lower than they were a year ago.

The manufacturing sub-indices did fairly well considering the weak performance of the headline index and most other industry sub-indices. Coincident subindices (sales and profit margin) rose a healthy 12% and 13%, respectively, in line with China’s improving external trade numbers (export s grew 15.3% y/y inSeptember).

Sentiment among importers and exporters was especially hard hit; the sales sub-component for this

industry group fell 15% q/q to 45.6, the profit margin sub-component fell 22% to 35.8, and the reading for the global economic outlook fell 25% to 35.8%. The hiring sub-indices for both exporters/ importers and manufacturers dipped into contractionary territory (below 50) in Q4, but they are getting some relief on the cost side. Manufacturers expect their raw-material costs to come down; importers/exporters also felt lessening pressure across wages, rents and financing costs.

The retail performed well, all things considered, rising to 51.9 in Q4 from 47.7 in Q3. The global economic outlook sub-component was the only one that worsened.

Q4 has been a consistently strong quarter for the retail sub-index due to the seasonal factor of the holiday season. Compared with same period last year, the retail headline number fell 1.1 point. Costs were the bright spot, although pressure on rents appears to be building again on the back of a warming real-estate market since Q2-2014.

Among other industry groups, ‘accommodation and food services’ and ‘information and communications’ took the biggest hits. Both indices fell 12% q/q, led by deteriorating expectations for sales and profit margins. Respondents in the ‘accommodation and food services’ category were also particularly worried about the global economic outlook (-32%).

The survey was conducted over a two-week period from late September to early October. This period partly overlapped with the start of mass protests in Hong Kong, when political uncertainty was at its peak. We believe the impact of the protests probably exacerbated the decline in the Q4 index, as other sentiment indicators – including stock indices and the HKD spot rates – have regained most of the ground they lost after the initial sell-off, and the protests appear to have calmed down somewhat. By Kelvin Lau, Standard Chartered Bank

HONG KONG BUSINESS | JANUARY 2015 39

co-published Corporate profile

Bose’s SoundLink Color Bluetooth speaker: Fun-sized device for the loud experience

Bose has redesigned its SoundLink speaker to a more portable, fun-sized equipment that is sure to fit your handbag or knapsack, or even the palm of your hand.

Bose SoundLink Color Bluetooth Speaker

Y

ou do not have to lunge around with a huge speaker, or struggle with straggly chords, just to jam with your tunes. Today’s music system has downsized to portable equipment without losing much of its quality. It allows you to connect to your nearest smart phone devices without bothering with the wires, and instead just switching on the Bluetooth for easier and less hassle connection. Producing quality audio equipment since 1964, Bose Corporation put its music innovation up a notch as it rolled out its latest mobile audio solution product – The SoundLink Colour Bluetooth speaker.

Bose combined dual-opposing passive radiators with two high-efficiency transducers for SoundLink speaker to deliver its fullrange sound, including deep, low-note performance. Measuring 5 inches wide, 2.1 inches deep and just 5.3 inches high, and weighing just 1.25 pounds, the SoundLink Colour speaker is sure a small-wonder even as it belts out powerful tones for the best outloud listening experience.

The SoundLink speaker does not only connect wirelessly to a smartphone, tablet, or other smart devices – it is also equipped

with a voice prompt mechanism, available in several languages, to simplify the set-up and identify which source is connected. The speaker is even capable of recognizing the last eight devices it was connected to – just reswitch the SoundLink speaker, and it automatically connects to the last two devices it was paired to.

SoundLink speaker also enables the user to switch back and forth without having to disconnect, reconnect, or re-pair. The device is also equipped with essential controls, including a 3.55 mm stereo auxiliary input on the back of the enclosure.

Bose’s latest speaker is capable of outlasting even the wildest and loudest parties. With its lithium-ion battery, it can last up to eight hours of unplugged playtime. For the harried music-lover, SoundLink speaker can also get fully-charged using a USB power source in just a matter of three hours. The look is also sleek and attractive. Its housing is made of elastomer and plastic, and it comes in black, white, blue, red and mint.

Pair SoundLink Bluetooth speaker with Bose Corporation’s latest SoundLink On-Ear Bluetooth headphones and you can improve

The SoundLink Colour speaker is sure a smallwonder even as it belts out powerful tones for the best out-loud listening experience.

40 HONG KONG BUSINESS | JANUARY 2015

your music experience. The headphones are equipped with Active Equalization and TriPort Technology for a more balanced sound. It also belts out natural mid-high frequencies, and full, detailed low frequencies. Like the SoundLink speaker, the SoundLink on-ear headphones can connect to any smart device via Bluetooth. It can connect up to two devices at a time, and even enable you to switch from one device to the other. A voice prompt mechanism allows the user to identify a caller, the battery status of the device, and the source connection. The controls are also on the earcups – from turning it off and on, answering and ending a call, pausing or playing a track. It saves the hassle of reaching out to the phone for the commands.

The headphones are designed for the busy bee. It is made up of rugged, impact-resistant materials, glass-filled nylon, and non-corrosive stainless steel – all these weighing only 5.5 ounces.

Bose’s most portable product yet Bose Corporation has offered previous versions of the SoundLink speaker and now boasts of its most portable product yet. The original SoundLInk mobile speaker was first rolled out in 2011 and was immediately upgraded in 2012 for better sound performance. In June 2013, Bose Corporation launched its SoundLink Mini Bluetooth speaker, instantly leading in the ultraportable devices. This was later upgraded to SoundLink Bluetooth speaker III in early 2014.

Founded in 1964 by Massachusetts Institute of Technology professor Dr. Amar Bose, Bose Corporation continues to be driven by its principle of investing in longterm research to develop new technologies for the consumer. Bose has innovated its music system, from home entertainment systems, digital music systems, Bluetooth speakers and professional audio solutions.

The SoundLink Colour Bluetooth speaker is a great gift idea, be it for personal or corporate occasions. It will be sold for HK$1,188, while the on-ear Bluetooth headphones are priced at HK$2,100. All SoundLink products are sold at Bose retail stores and authorized Bose dealers.

For more information, visit www.bose.com.hk

HONG KONG BUSINESS | JANUARY 2015 41

OPINION

nick gronow

Fraud 101: How to spot a fraudulent Hong Kong company

What should we look out for?

F

raud among companies operating in Hong Kong is prevalent, like it is in many cities across the Asia region, but unfortunately it can seem rife in Asia’s world city given the jurisdiction’s strong connection to businesses in mainland China. From our experience, fraud is not always committed directly for personal gain; fraud is often initially committed to mask the true position of a struggling business. The most damaging form is financial statement fraud.

This is the deliberate misrepresentation, misstatement, or omission of financial information from the financial statements for the purpose of misleading the reader and creating a false impression of an organisation’s strength — in other words, making a business appear more profitable than it actually is.

Whilst the size of financial statement fraud can be large, the ways in which it occurs are actually rather limited. On an accounting level it can basically be broken down to the overstatement

42 HONG KONG BUSINESS | JANUARY 2015

BY nick gronow Managing Director FTI Consulting

of revenue and the understatement of expenses or the overstatement of assets and the understatement of liabilities.

So what should investors and Hong Kong CFOs look out for to ensure they aren’t engaging with fraudulent companies? There are common traits of fraud that our team has been privy to time and time again.

If financial statement fraud is to remain masked, a fraudster will usually need to implement what we call a false trading scheme.

This involves setting up a series of controlled companies as suppliers and customers (‘unrelated’ and ‘independent’ counterparties, preferably incorporated in jurisdictions known for their opacity, such as the BVI), which enables a ‘legitimate’ route for cash to be funnelled out of the company, usually at the expense of financiers through the provision of trade finance.

Siphoning money out of a business is of course an imperative part to committing fraud. So the purchasing of fixed assets or even an acquisition at an inflated price from an intermediary/ connected party is one way to overstate the size of a business, hide the initial fraud, and also funnel cash out of a business to an ‘unrelated’ party.

Paramount to a fraud enduring is surviving the annual audit, but a few easy steps can ensure this becomes part of a fairly routine process to cover up the fraud.

Choosing remote and difficult to access inventory sites to prevent on-the-ground site visits, controlling all postal addresses to manage obligatory debtor and creditor confirmation letters, and carefully timing repayments from fake debtors are all fairly simple ways to ensure that on the surface — and for the auditor — things are in order.

Less than 5% of financial statement frauds are detected by auditors, although many of the clues to raise suspicion of fraud will be present there.

In other words, investors should never simply trust audited accounts. A key aspect of these types of fraud schemes that one often doesn’t realise, is that fraud is expensive to conduct as it involves taxes to be paid on fraudulent gains, dividends to be paid to investors, interest to be paid on debt sourced to cover the real losses incurred by the business and those real losses must also be funded — by more debt.

HONG KONG BUSINESS | JANUARY 2015 43

ECONOMICs

Ian Perkin

How do the protests impact the Hong Kong economy?

I

t will be several weeks before there are any indications in official statistics of the impact (if any) of the pro-democracy protests on the local economy. Fortuitously for those obsessed with the numbers, the protests began in the final days of September, providing a neat dividing line – not just the end of the month but also the end of the third quarter of the year for statistical purposes.

Anecdotal evidence and complaints by some local businesses (and anti-protest groups) suggest that there will be some impact, but that it is unlikely to be significant.

The first numbers to emerge were October unemployment (17 November), the consumer prices (20 November) and external trade (25 November). None of these should show any major impact. Trade should surely not. The most telling early number seems likely to be the October retail sales figures on 1 December. If any number might be expected to be fairly quickly affected by protests and road closures it would be these.

There was, however, no sign of any impact on the September retail sales figures. Indeed they showed some improvement on earlier in the year when lower tourist spending, especially by Mainland arrivals, hit sales. The value of retails sales for the month was $37.6 billion, up 4.8% on a year earlier and faster than the 3.5% growth in August. The volume of sales is estimated to have risen 6.6%. Sales of new smart phones have helped to boost the numbers.

For the first nine months of the year, however, sales were down a modest 0.4% – reflecting the lower tourist spending. Volume for the nine months was down 0.3%. Restaurant receipts for the third quarter were also quite strong at $25.3 billion, up 4.8% on a year earlier. Even with new official figures emerging soon, however, it will be difficult to distinguish any protest impact from broader factors, whether the numbers concerned are individual monthly figures or December quarter numbers that will appear early 2015.

Certainly the HKSAR government is well aware of the prospect of protest impacts on the broader economy. In its third quarter economic report issued on 14 November it moved to pre-empt public concern about any negative impact by warning that what it described as “encouraging developments” in the third quarter might not extend into the fourth, “in light of disruptions” to economic activities due to the “Occupy Movement”.

“At this juncture, forecasting economic growth is subject to unusually large uncertainty, with the outlook hinging not only on the play-out of various downside risks in the external economic environment, but more crucially, on how the ‘Occupy Movement’ will impact economic sentiment and domestic demand,” it said.

As for the “encouraging developments” in the third quarter, they were fairly modest. Gross Domestic Product (GDP) grew by a real 2.7% in the third quarter compared with the same period last year, up from the 1.8% advance in the second and 2.6% in the opening three months (see table). All of the gain was due to a moderation in inflation in the quarter, with nominal GDP flat at 5.3% compared 44 HONG KONG BUSINESS | JANUARY 2015

IAN PERKIN Independent Economic Consultant perkin888@hotmail.com

Hong Kong growth 2014 Component

Q1

Q2

Q3

GDP - real

2.6

1.8

2.7

GDP - nominal

4.8

5.5

5.3

Private consumption

1.6

1.2

3.2

Government consumption

2.6

2.7

3.5

Investment

3.5

-5.7

-4.7

Exports - goods

0.5

2.4

1.3

Imports - goods

1.2

1.1

0.7

Exports - goods

3.2

-2.0

2.0

Imports - goods

-0.8

5.0

1.8

GDP deflator

2.2

3.6

2.5

CPI

3.8

3.5

3.3

Source: HK Government Statistics

with 5.5% in previous three months. The GDP deflator (the broadest measure of inflation) dropped to 2.5% from 3.6% and underlying consumer prices to 3.3% from 3.5%. There was no sign of any worries amongst domestic consumers with private consumption surging 3.2%, well up on the 1.2% growth in the second quarter and 1.6% in the first. Government consumption spending also showed good growth (3.5%), but investment spending was down (-4.7%) and external trade in goods remained flat, although services exports returned to positive territory.

Despite the “encouraging signs”, the Government revised its real GDP growth forecast for the full year down to 2.2%, the lower end of its previous 2-3% range. Depending on external impacts and any domestic slowdown (due to the protests or otherwise) this modest growth for the year seems achievable, as it requires only 1.7% growth in the final quarter. This suggests the government’s revised forecast has already taken into account some disruption to activity as a result of the ongoing protests. Nevertheless, the government would doubtless like to see an end to protests sooner rather than later – for political and economic reasons.

In the meantime, with the end of year inflow of taxes still to come, increased government spending has sent the budget into deficit – another reason the administration would like to see the economy improve. Total revenue in the opening six months of the year was $149.13 billion and expenditure was $187.04 billion, leaving a deficit for the period of $37.91 billion.

Including repayments of bonds and notes in the period the deficit totalled $47.61 billion. Income and profits tax flows in the next six months will reduce this substantially by the close of the financial year on 30 March.

OPINION

tim hamlett

An obstinate conflict

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

T

he political impasse in Hong Kong is beginning to resemble the Palestinian problem: everyone can see what needs to be done except the only people who can do it. The solution has to come from the government. This is after all what we grossly overpay them for. The people in the street are amateurs.

The solution must start with a recognition of the problem, which is that people will no longer follow a leadership they despise.

It is good that the government talks to the students, but this is not going to lead to an exit because many of the protesters are not students and do not accept student leadership. What is necessary is for the government to work out what needs to be done and do it, without supposing that it can negotiate a prior quid pro quo, and without listening to those people who will decry any change as giving in to illegality. When it appears that people have a government which is sensitive to their needs and desires, then people will go home.

The steps which might work, varying in difficulty, may be listed roughly as follows: 1. Mr Leung has to go. He is quite right in saying that this will not solve the political problem. But that is not why people want it.

They want it because they are fed up with him, his weasel words, his sleazy friends, his undisguised contempt for the political views of the majority of the population and his inability to appreciate, let alone articulate, the desires of Hong Kong people.

2. An easy one: the fence round the “Civic Square” should go. If the government is worried about the vulnerability of its front door, reinforce the front door.

3. There should be an inquiry into the handling and regulation of protests. This is not intended to pillory the police, but it has become clear that there is a very large gulf between what the police regard as a routine way of controlling crowds, and what many of us find acceptable. This has to be bridged somehow. People need to be able to demonstrate without, as a matter of course, having to wear goggles.

4. We should humbly ask the NPC Standing Committee to reconsider its decision on political development, in the light of the indisputable fact that the information on which that decision was based – supplied in good faith if you will – has turned out to be hopelessly wrong. Hong Kong people may have to put up with the arrangements currently on offer. They do not, however, have to put up with being told that those are the arrangements they asked for.

5. There should be an end to the politicization of appointments to advisory and other posts in the government’s gift.

The Chief Executive has the right to appoint people he likes and who support him to the political sinecures created by the “responsibility system”. There is no justification for allowing political history to influence appointments to tribunals, advisory councils or public bodies like the MTR board or the Airport Authority, and it is fatal for suspicions to arise about appointments to the leadership of the police and the ICAC. What is required is an

46 HONG KONG BUSINESS | JANUARY 2015

independent body like the one which appoints judges.

6. Another easy one: Mr Robert Chow should be quietly told to fold up his tent and go home. No petition or demonstration organized under his auspices can be taken seriously, and continuing attempts to conjure up a spurious “silent majority” are a symptom of an establishment which “doesn’t get it”.

7. The continuing erosion of freedom of the press needs to be addressed. The easiest way of ensuring that all voices can be heard might be to allow community radio.

8. Instead of displacing some hapless rural villagers the government could meet at least some of its land requirements by curtailing the huge acreage devoted to rich people’s hobbies. We do not need so many golf – or horse-racing – courses. Of course it would take years for anything along these lines to bear fruit, but it would be a move in the right direction.

9. The MPF needs reform to make it less friendly to financial landsharks. And a serious intention to introduce a small but universal pension would go down well.

10. Some serious undertaking about the arrangements for the Nominating Committee – which may after all be unavoidable – would show good faith. Let us have no nonsense about Legco having the last word. The Government’s tame majority will give it whatever it wants. An end to corporate votes

Recognize the problem first

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Interior Design

Architecture

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www.zchron.com

References: Commercial projects Carlsberg Escada Leica

12,000 S.F. 7,000 S.F. 5,000 S.F.

Residential projects House, Belleview Drive, Repulse Bay Apartment, The Mayfair Apartment, The Leighton Hill

6,000 S.F. 6,000 S.F. 2,200 S.F.

HONG KONG BUSINESS | JANUARY 2015 47

OPINION

Hemlock

Space discovered on Hong Kong Island

I

f you look at Kowloon’s skyline from Hong Kong’s Western waterfront, you can find the tops of old 11-storey housing blocks.

Before Kai Tak airport closed in 1998, few of the buildings in this scene would have exceeded this height level.

To add to the nostalgia, I took a tram recently and recalled a time when the fare was 60 cents.

And that, I’d like to think, is enough flashbacks from a bygone era for a while. But it is not to be. Today’s South China Morning Post has a letter from Hilton Cheong-Leen. (Whaddya mean, who? Wikipedia has a brief bio, and this SCMP profile from 2003 fleshes it out: a pioneer of Hong Kong electoral politics in a colonial time when people knew their place.) As a mark of respect to the 94-year-old, the paper gives him pride of place. In essence, he welcomes the formation of former Chief Executive Tung Cheehwa’s new think-tank and hopes that it can do good and positive things, though sadly he does not offer specifics.

The emphasis seems to be on convincing the community that all is well, rather than daring to consider the possibility that things are in fact massively screwed up and need fixing.

Housing becomes unaffordable An obvious example that things have gone wrong is the way that despite an increase in floor space – as seen in the Kowloon skyline – simple housing has become unaffordable to most of the younger generation. (Incidentally, the government is going to plan childcare facilities into future public housing projects. With the middle class able to afford only private-sector apartments of 200 sq ft or less, maybe public housing tenants will in future be the only people in Hong Kong able to have children.)

Then again – what lack of space? I took my photo of Kowloon from a sprawling and largely empty waterfront spot: Western Public Cargo Working Area. It is illegal to ‘loiter’ here, but you can jog (if you must), stroll, admire the view, fish, bring kids to cycle round, or (discreetly) sort of hang out.

It has lots of rusty pipes, grimy palates, scrap metal and other industrial-era stuff you don’t see up-close every day on Hong Kong Island.

And of course it’s where our supplies of gutter oil are landed.

48 HONG KONG BUSINESS | JANUARY 2015

Locals who know about the place like it so much they are against turning it into a real waterfront promenade with seats, ice-creams and dangerous trees. (In all fairness to paleoestablishment survivors like Hilton CheongLeen, it is amazing how hard to please Hong Kong people have become since the days when they were grateful to be assembling plastic flowers all night in their shacks.)

So many contradictions As if the Public Cargo Working Area weren’t perfection enough, it has two entrances – so you can go in one end and leave at the other, just where you expect a fenced perimeter to force you back, which is how the parks-designers would arrange it. Just outside, across the street, you’re back in the usual overcrowding and congestion of Kennedy Town. A ground-floor shop has been sub-divided into tiny business premises selling home-made fashion, pet toys and other suitably small items. One is a property agency, offering a (comparatively large) 100-sq-ft ‘elegant ensuite’. What happens when you sub-divide a sub-divided apartment, I guess. A bargain, apparently, at HK$7,800 a month.

So many contradictions. Maybe Hilton’s idea for a ‘mass campaign to repair social division’, being ‘a timely project to initiate at an early date’, would ‘stimulate more meeting of minds and consensus building within our polarised community’ and make everything right.

by hemlock www.biglychee.com Email: hemlock@hellokitty.com

Why have houses become so pricey?

5

Things You Should Ask Your Developer When Buying a Condominium in Cebu

Cebu, the second largest city in the Philippines, is the center of commerce, trade, education, and industry in the Visayas region of the country. Its prime location, rich history and tourism, and highly urbanized population has made it attractive for both investors and home buyers, and the choices for real estate investments in this city abound.

Rockwell Land, one of the most trusted real-estate developers in the Philippines, gives us 5 things that every consumer should ask their real-estate developer. With its first regional development, 32 Sanson, rising in Cebu, Rockwell shares indicators of quality that every home buyer and investor should look out for.

1

Where is the property located?

Will my surroundings be peaceful?

It is a reminder commonly heard when talking about property – location, location, location.

But it is time buyers went beyond just looking at the convenience of the property’s location and its surrounding establishments, and took into consideration the conditions of the environment as well.

At 32 Sanson by Rockwell, more amenities than usual are available for its residents’ relaxation and recreation. Two swimming pools, two clubhouses, a function room, a game room, children’s play area, lawn, multi-purpose court, gym, and jogging path, provide generous spaces for quality time with family and friends.

3

How many units are there in the development?

While living amidst a business district may mean easy access to retail and office spaces, peace and quiet are often compromised. It is advised that consumers choose a property that is conveniently located yet preserves the exclusivity and serenity of its surroundings.

The number of units and the density in each development is vital in the privacy and comfort of its residents. The higher the density of the development, the more crowded and less comfortable the living experience is for its occupants.

Strategically located on Sanson Road in Lahug, 32 Sanson by Rockwell is accessible by major roads and is only a few minutes away from Cebu’s Business District, prominent schools, exclusive villages, and retail and service establishments. At the same time, the property is set in a residential district and remains tranquil and calm.

32 Sanson by Rockwell features only around 350 units over a sprawling 3.2 hectares of land and 70% landscaped space, making it a low-density development that provides its community with space and freedom.

2

What amenities does it come with?

Amenities in any development must be wellmaintained and clean. While amenities are meant to be shared among neighbors, it is also important that they are not overcrowded and that you are able to use them at your own leisure.

4

How safe and secure is the development and its surroundings?

Safety and security is a non-negotiable when purchasing any property. It is vital that a consumer ensure that his investment or his new home, along with is occupants, is safe from any form of harm.

True to the Rockwell standard of safety and security, reliable and efficient fire response

and closed circuit television monitoring systems will be in place at 32 Sanson, while security personnel vigilantly watching the property guarantee the safety of the surroundings. Subterranean roads, a unique feature at 32 Sanson, divert traffic below ground and give residents additional privacy as they freely walk around the development.

5

Who is the developer behind the project?

More than a popular name or flashy branding, a developer must have years of experience, a veritable project portfolio, and a proven reputation for delivering as promised and providing committed service to clients. Buyers should look at the credibility of the developer of the project, to ensure that your future home or investment will be of guaranteed quality for years to come.

With almost two decades in property development, Rockwell Land has built for itself a solid reputation in the high-end and uppermid residential markets. After delivering quality in its flagship project in key cities in the capital of the Philippines, it now ventures to Cebu with yet another exceptional residential community, 32 Sanson by Rockwell.

In looking for your next investment or your family’s new home, it is important that you read between the lines and ask what other buyers will not. Ensure that you are investing in quality and getting the best deal.

For inquiries, call +63 2 7930088 or email inquire@rockwell.com.ph

50 HONG KONG BUSINESS | JANUARY 2015