Hong Kong Business June-July Issue by Charlton Media Group

Display to 31 July 2014

THE 2014 SALARY SURVEY see which jobs are most in-demand

macau vs hk: who wins?

demand for central office spaces cools down whatis neededto drive venture capital in hk?

lack of crowdfunding laws bewilders hk

global trade unbundled

HONG KONG

FROM THE EDITOR

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In this issue, we bring you the yearly Salary Survey report where you can find the latest trends and challenges in Hong Kong’s hiring and employment market. We already know that great candidates are hard to find. And when a company finds one, it’s even harder to keep that top talent loyal. We found out that retention of the best performers will be the biggest challenge for organisations in Hong Kong to overcome, considering the average tenure of professionals in a role is only one to two years. We also added a special section in this year’s Salary Survey where you can check out which country offers a higher pay for expats – is it Singapore or Hong Kong? Our channel checks also reveal that demand for mid-range serviced apartments soared in Hong Kong as cost-conscious employers prefer to house their staff in more modest accommodations. Meanwhile, in the retail segment, Macau is rising up to be a luxury shopping hub to Hong Kong’s chagrin. It turns out Mainland Chinese shoppers are looking for a more enriching travel experience than just shopping. Analysts say Macau has this extra appeal due to its gaming industry. In this issue you will also find the inaugural ranking of the 20 largest MBA programmes in Hong Kong based on total enrolment. Enjoy!

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CONTENTS

COVER STORY Employers struggle to keep their best talent loyal

FIRST 08 Is HK set for a Chinese

investment surge?

09 Cheaper housing demand soars

10 most expensive hotel suites

16 HPHT stays afloat after escaping a brutal pummeling

Chicago Booth EMBA in HK opens pioneering class of 180

ANALYSIS 40 Demographic Techtonics:

18 Financial Insight

The rise of ASEAN affluence ASEAN 5’s growth is still outstripping the global average.

30 Legal Briefing 28 Rankings

cheaper to hire?

14 Find out more about Hong Kong’s

Macau vs Hong Kong: Who wins?

REGULAR

10 Why are fresh grads in HK

44 Go-go investing: How low

ANALYSIS 20 Why has demand for Central

office space cooled down? There has been a big influx of office spaces in cheaper non-central CBD locations.

OPINION

36 Global trade unbundled

Trade has been weak since the 2008-09 crisis. Is there a looming structural slowdown?

can you go Do you keep selling glamorous growth stocks, or do you buy them back now?

46 Ian Perkin: Surplus points 48 Tim Hamlett: Off the rails 50 Hemlock: HK retailers glimpse

Published Bi-monthly on the Second week of the Month by Charlton Media Group Pte Ltd, 19/F, Yat Chau Building, 4 262 HONG KONG BUSINESS | JULY 2014 Des Voeux Road Central, Hong Kong

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ECONOMY

Median household income grows 6.2% in Q4 of 2013 UBS notes that median household income increased 6.2%y/y in 4Q13. Households in different housing tenure fared differently. “While households in public rental housing and subsidized sale flats saw income improved, reflecting the increase in statutory minimum wage in May 13 and strong demand for lower skilled workers, household in private housing saw income stagnated,” UBS adds.

ECONOMY

Employment growth remains miniscule at almost 0% According to UBS, the labour market has been weakening despite the steady unemployment rate. In particular, employment growth has slowed very sharply to almost 0%y/y in 1Q14, driven in part by job cuts in the financial sector. “Changes in the labour market provide important clues about income growth and inflation in Hong Kong. A rise in unemployment implies weaker wage growth.”

Fiscal surplus plunges to 6% of GDP The fiscal surplus is estimated to have narrowed to HK$12bn in FY2013-14. This is 0.6% of GDP, which is sharply down from 3.2% in FY2012-13, says UBS. Hong Kong remains one of the most fiscally conservative economies in the world, which is reflected by the fact that government debt hovers around 1% of GDP. “In order for the currency peg to be credible, Hong Kong keeps fiscal deficits in check.”

Website redesign mistakes Hong Kong companies are making BY JOSHUA STEIMLE Each year hundreds of companies in Hong Kong redesign their websites. I met with one recently that had just relaunched their website and was excited to show it off and get started with an online marketing campaign. Sadly, this company, and many others here in Hong Kong and elsewhere, make critical mistakes during the redesign and launch of their new website, erasing value that has been built up over time. There are three mistakes you should avoid.

What you need to know when starting an online business BY AJIT MELARKODE With the rise of co-work spaces like CoCoon, incubators and accelerators including Startups Unplugged and Accelerator Hong Kong, the startup ecosystem in Hong Kong is just beginning. Building a successful start-up is no small feat. It takes years to prepare and thoroughly develop a business idea. And once the idea comes into fruition, time is needed to ensure all the pieces of the puzzle are in place before you can hit “go”.

most read commentary Marketing strategies in Hong Kong’s new retail landscape: online, offline, or both? BY LAWRENCE CHIA Hong Kong is world famous for being a ‘shoppers’ paradise.’ Despite the recent reports of sluggish retail performance and changing visitor spending patterns, the steady growth in the number of tourists who come to Hong Kong to shop for basic necessities, high-end luxury items, and the millions of products in between is proof of Hong Kong’s enduring power to attract shoppers from around the world.

FIRST DEBT ROW

If you are sinking in debt, chances are you have a couple of friends going into the mire with you. A survey of 500 locals by Zogby Analytics revealed that 52% of Hong Kongers currently have personal loans, 18% have to repay between HK$10,000 and HK$60,000, and 14% owe more than HK$100,000. This is in addition to those who maintain several credit cards and are simultaneously incurring debt for each card. Managing director Angus Choi of TransUnion, the credit reference agency that commissioned the survey, says 33% of the respondents admitted they do not regularly keep track of their debts, and fail to make personal loans and credit card payments on time. Survey findings also show that 23% have incurred credit card debt between HK$5,000-10,000 per month, while 17% have repaid over HK$10,000 in outstanding credit card payments per month over the past six months. The danger of late payments Despite a time of low interest rates in the city, debt servicing for 27% of those surveyed takes up around 20-40% of the average respondent’s income, greatly reducing their disposable incomes. The observed patterns do not bode well for the common debtor, as Choi adds that those who are into loans are in danger if they fail to maintain good credit health. He explains that late payments not only incur higher interest rates, but also impact credit score. “A low credit score can significantly affect future credit card, personal loan or mortgage loan applications,” says Choi. Those who have lower credit scores usually have reduced chances of securing lowerinterest credit.

8 HONG KONG BUSINESS | JULY 2014

pressure on HSBC’s revenue ALimited new share-trading schemeCIB is introduced

Is HK set for a Chinese investment surge?

hinese retail investors who have long salivated at the chance of investing in the Hong Kong stock market can finally have their bite in a few months. China announced recently the trial of a two-way cross border equity direct investment program between Hong Kong and Shanghai, which basically allows investors from both cities to trade stocks in each other’s exchanges, albeit to a limited extent for now. “Although the initial quota of CNY300bn for Shanghai listed stocks is relatively small compared with the total market cap of CNY14.7tn by the end of March in Shanghai, it does mark another significant step for China opening its capital account,” says Tommy Xie Dongming, analyst at OCBC. He says the connection between the Shanghai and Hong Kong equity markets is also likely to narrow the gap for dual listing companies.

Two-way benefit Both Hong Kong and Shanghai stand to benefit from this new program, but not to the extent of creating a bull market single-handedly, says Alicia Garcia-Herrero, chief economist for emerging markets at BBVA. “Hong Kong will probably receive more

The connection between the Shanghai and Hong Kong equity markets is also likely to narrow the gap for dual listing companies.

investment, at least in the early stages, since Chinese individual investors may want to diversify away from the Mainland as they have not had an opportunity to do so yet,” she says. “On the other hand, although the marginal impact of the program on the Shanghai equity market could be modest, it may help harmonize rules and regulations, especially investor protection issues, to the benefit of the Shanghai stock exchange. On balance, the program is a good thing for both Hong Kong and Shanghai. But we don’t expect it to be strong alone enough to boost a bull market in China.” Alastair Chan, economist at Moody’s Analytics Australia, sees the program as a “clear positive” for both exchanges and believes it will help improve capital allocation efficiency over time, although that advantage should be muted because of the twoway nature of the program. Macroeconomic impact Despite what he sees as the program’s small impact on both markets, Chan considers the program significant when viewing it as the sum being greater than its parts. “The cross border investment program is just one of a number of reforms that the Chinese government has announced in recent weeks. I think the government is trying to maintain the momentum of steady reform in financial markets, and this is broadly positive for the economy and also for the equity market over the long run.” As for Hong Kong, Dongming says the cross border direct equity investment scheme is a clear signal that the territory remains “unambiguously important” for China.

HSI and A-share

Source: BBVA Research

FIRST Soaring demand for these standard serviced apartments has propped up the sector to 15% growth in the past three years.

Mid-range and low-end serviced apartments are all the rage in HK

Cheaper housing demand soars

he time for extravagant serviced apartment living seems to have passed in Hong Kong. Now, mid-range and low-end serviced apartments are all the rage on the island, with cost-conscious employers increasingly preferring to house their staff in more modest accommodations. Soaring demand for these standard serviced apartments has propped up the sector to 15% growth in the past three years, and has more than offset the drop in demand for luxury serviced apartments, according to the latest serviced apartment market report from Jones Lang LaSalle Hong

Kong. “Currently, the banking and finance sector, one of the largest user groups of serviced apartments, is still in the midst of ‘rightsizing’, resulting in lower housing budgets for expatriates and a growing trend of corporates moving employees onto personal leases,” says Dennis Ma, head of research at Jones Lang LaSalle Hong Kong. Accordingly, demand from the financial services sector has nosedived, accounting for just 54% of all leasing requirements, compared with 73% in 2009. Ma also notes that tenants have been heavily trading down in the

market. Leasing requirements for boutique and standard serviced apartments, which encompass mid-range and lower-end properties between HKD 40,000 and HKD 80,000, rose from 39% in 2009 to 43% in 2013. Landlords for luxury rental homes have had to cut rents and offer more incentives such as increasing the rent free period to secure tenants, according to Joanne Lee, manager of research and advisory at Colliers International Hong Kong. Still despite these measures, it seems mid-range and low-end serviced apartments will be the most sought-after properties for tenants and investors alike. Lee says those on the hunt can find more of these apartments situated outside of Central in non-core districts in Hong Kong Island as well as Kowloon territory. “The best strategy for investors is to seek acquisition opportunities for buildings which can be converted into serviced apartments,” adds Lee.

Then and Now: Serviced Apartments Stock (2009 vs 2013)

Source: JLL

The Chartist: private consumption Household income is the usual culprit behind a private consumption slowdown, but not this time. Hang Seng Bank notes that with the exception of a period spanning from late 2011 into early 2012, household income has lagged behind GDP growth since 2010. “Our view is that the main factor behind the weaker performance of private consumption has been the decline in the tendency to consume given the same amount of income. At an aggregate level, the average propensity to consume, defined as the ratio of consumption to income, has remained fairly steady – standing at 0.60 in 1Q14.”

Real Median Household Income and Real GDP (% YoY)

Average Propensity to Consume and Marginal Propensity to Consume

Source: CEIC, Hang Seng Bank

HONG KONG BUSINESS | JULY 2014 9

FIRST

Why are fresh grads in HK cheaper to hire?

STARTUP WATCH

Stress-free wedding

n Hong Kong, you can give a lower starting salary but need to offer plenty of opportunities to move up in salary and position. Meanwhile, you can hook Singapore fresh graduates with a high starting salary then keep them satisfied by offering high work-life balance. These were the findings of Universum’s global survey conducted in Singapore and Hong Kong which interviewed 13,000 university students from both countries. Hong Kong new graduates have a lower average expected monthly salary of $2,798 compared with their Singapore counterparts who require an average of $3,308 per month for their first job.

Fresh grads evaluate jobs beyond high salary

especially “good reference for future career” and “high future earnings” – that their future employers may provide. Sharmini Wainwright, regional director, Michael Page Hong Kong, Costlier to retain shares, “In our experience, when However, Joakim Ström, Asia Pacific an organisation invests in hiring a managing director at Universum, says graduate resource, they are more despite fresh graduates in Singapore concerned with the demonstrated expecting higher starting salaries than track record of achievement of that those in Hong Kong, it might cost less individual (in university, sports, to retain them in the long run as they travel etc) and attitude, rather than place greater emphasis on the “people what they will pay – this will largely & culture” of their future employers. be dictated by the market, and In contrast, Gen Y in Hong Kong organisations purely then identify still value the “remuneration & whether they want to offer a premium advancement opportunities” – to that market salary.”

Hong Kong new graduates have a lower average expected monthly salary of $2,798.

SURVEY

Hong Kong SMEs need proactive cash management A recent study by Western Union Business Solutions reveals that 49% of SMEs in Hong Kong are concerned about their cash flow, 8 points up from August 2013, but only 12% of them fix the cost of their international invoices when they receive them. These findings are slightly higher than the numbers in Singapore, where 31% of SMEs are concerned about their cash flow, and 32% strive to fix international invoices as they arrive. “Developing a structured plan can provide improved budget certainty and reduce business risk,” says Peter Scully, Asia-Pacific regional divisional director of Western Union Business Solutions. “These concerns can be alleviated through engaging with a financial partner and implementing a proactive cash management or hedging strategy,” Scully adds. 10 HONG KONG BUSINESS | JULY 2014

Shana Buchanan got the inspiration for iDecorate Weddings (IDW) when she was engaged and got overwhelmed. Like most brides, she spent countless hours online searching for products and inspiration but was frustrated that she couldn’t buy them. When she learned there were other engaged couples experiencing the same problem, she quit her finance job, took a leap of faith, and started the journey to make designing a wedding more fun and stress-free. “We see our site evolving almost like Pinterest for weddings but with a key difference – you can buy the décor you see in styled images and have it delivered to your door.” IDW now has US$200,000 in funding from private investors in Australia and Hong Kong and is looking to raise the balance of the seed to US$300,000-500,000.

Easy flight search

Two Western geeks had partnered with a local web guru who returned from Canada a few years ago to form Social Agent, billed as the first global social connector marketplace for companies and “mobile social agents” to help the former gain more sales leads and customers in their business. Michael Michelini, who acts as the CEO, is a China-based American who has run web businesses since 2004, both in the US and China. Dant Sont is a Canadian programming guru who came to China about a year ago. The local partner is Chris Li who is a self-taught programmer. They saw a huge opportunity for SMEs to leverage the power of social media in managing their marketing campaigns. Social Agent currently has US$15,000 in total funding from China acellerator incubator.

Fujitsu Hong Kong For inquiry: 852-2827-5780 http://hk.fujitsu.com

FIRST NUMBERS

Women on boards Hong Kong 2014

Mainlanders prefer luxury shopping in Macau

Macau vs Hong Kong: Who wins?

acau is primarily known as a gaming mecca and uses its glitzy casinos to draw in tourists, but many are increasingly flocking to the region to shop for Cartier watches and Prada bags after hitting the betting tables. This trend could spell trouble for Hong Kong, warns a couple of analysts, although more optimistic observers believe the threat of Macau is overblown. The neighbourly competition between Hong Kong and Macau is heating up as both try to woo Mainland tourists to visit and spend on luxury goods. So far, Macau seems to be gaining ground in this contest for consumers with mainland Chinese visitor arrivals in Macau during the Labour Day holiday surging by a notable 20.3% year-on-year, whereas those in Hong Kong dropped by 1.6%, according to Colliers International data. “Mainland Chinese have now travelled more than before, and they are looking for a more enriching travel experience than just shopping. Macau has this extra appeal, due to its gaming industry,” says Helen Mak, senior director of retail services at Colliers International Hong Kong. “In terms of luxury retail offers, our research showed that convenience is one of the reasons 12 HONG KONG BUSINESS | JULY 2014

why Mainlanders prefer luxury shopping in Macau. They think all luxury malls and luxury brands are centralized in a couple of spots,” adds Wesley Wu, project director at IPSOS in Hong Kong. Not a zero-sum game But Nick Debnam, Asia Pacific chairman, consumer markets at KPMG China, says that the competition between the two territories is a not a zero-sum game. “I think Macau and HK offer different things. Many of our clients have retail in both locations and Macau has been performing well in recent years. However my personal belief is that Hong Kong still has a lot to offer, in terms of dining, shopping and tourist attractions, and I haven’t heard any retail clients particularly worried about this issue.” “But still, they will not turn away from Hong Kong since sightseeing and shopping remain very important to them. They like to go to theme parks and also to experience the cultural and heritage sites in Hong Kong. At the same time, they also appreciate the professional advice from sales representatives in Hong Kong.” Still, it would not hurt Hong Kong to take a page from Macau’s expansion play book, says Mak.

Helen Mak

Wesley Wu

Nick Debnam

Convenience is one of the reasons why Mainlanders prefer luxury shopping in Macau.

Source: Community Business, Standard Chartered Bank

FIRST transfers by limousine. A minimum of 2 nights stay, however, is required. 6 Presidential Suite, The Landmark Mandarin Oriental Hotel Hong Kong: HKD55,000 The 185sqm suite overlooking Hong Kong’s fashion district has a huge bathroom with private spa. Equipped with a large sunken bathtub and walk-in rainforest shower, there is also a separate treatment room for luxurious therapies.

Find out more about Hong Kong’s 10 most expensive hotel suites

f money is no object, these are the best places to sleep, have a shower, and leave your belongings while you go about your day. Hong Kong Business surveyed luxury hotels in town on the features and cost of a one-night stay in their most expensive suites. 1 Ritz Carlton Suite - Victoria Harbour, Ritz Carlton Hong Kong: HKD158,000 At 415-sqm, the suite located on the 117th floor offers 270-degree panoramic city views. There is a telescope in the living room for guests to enjoy the unbeatable view of Victoria Harbour and Hong Kong Island. It comes with a chauffeur-driven RollsRoyce or limousine service throughout the stay, private massages, a 24-hour personal chef and custom-monogrammed bathrobes, towels and pillows. 2 The Peninsula Suite, Peninsula Hong Kong: HKD128,000 Located on top of the Peninsula tower on the 26th floor, the 377-sqm suite offers breathtaking views of Victoria Harbour from the double-height living room floor-to-ceiling windows and the exclusive landscaped terrace. Opened in 1928, the Peninsula is Hong Kong’s oldest hotel. The CIA and MI5 were consulted on the design of the suite to ensure maximum security, since many of the guests are diplomats and heads of state. It comes with a security guard’s room down the hallway.

14 HONG KONG BUSINESS | JULY 2014

The Presidential Suite, Intercontinental Hong Kong: HKD98,000 Set against the stunning backdrop of Victoria Harbour and Hong Kong Island, this exclusive 650sqm suite is billed as the largest in the city. It promises to hold up to 60 guests for cocktails and 36 for a private intimate dinner. This five-bedroom suite comes with a 2,500 square foot rooftop terrace boasting an infinity pool and jacuzzi. The master bedroom also features a large jacuzzi and rain forest shower with views of the harbour, as well as a private sauna and steam room. 3

4 The Mandarin Suite, Mandarin Oriental Hong Kong: HKD68,000 At 292-sqm, the suite comes with a couple’s spa suite adjoinining the bedroom. It also has many of the usual big suite highlights including luxurious linens by Josephine Home. With double height ceilings and a wall of glass in the living room, this stunning presidential suite enjoys mesmerising views of the surrounding skyline and Victoria Harbour. 5 Presidential Suite, Four Seasons: HKD65,000 Located on the top floor, this 319sqm suite offers panoramic views of Victoria Harbour and Kowloon. It includes the services of a butler and round-trip airport

7 Extreme Wow Suite, W Hong Kong: HKD51,700 The suite which also offers panoramic City and Harbour Views boasts a mindblowing entertainment system – a gigantic 65” plasma display with DVD/AV centre, 40” LCD TV including DVD player and expansive CD library of hand-picked W favourites. 8 Presidential Suite, Grand Hyatt: HKD43,000 The 285-square-metre suite features living room, study with complimentary wired and wireless Internet, dining room for 12, kitchen, service entrance, baby grand piano and two king bedrooms. The deluxe master bath offers a sauna, shower and spa tub overlooking the city.

King Presidential Suite, Conrad Hong Kong: HKD39,500 The 234sqm Suite offers stunning views of Victoria Harbour, Victoria Peak and the city skyline, thanks to floor-to-ceiling windows. It comes with a bedroom furnished with a king-sized bed and adjacent walk-in closet, living room, dining area, bathroom, separate powder room, a fully equipped pantry and a fitness room. Guests can enjoy exclusive access to the Executive Lounge on the 59th floor, offering a complimentary breakfast, afternoon tea, evening cocktails, and tea and coffee throughout the day. 9

10 Presidential Suite, Island Shangri-la Hotel: HKD38,200 The 210-sqm suite on the 55th floor commands magnificent views of Victoria Harbour and the Kowloon district. It comes with a marble bathroom glassenclosed shower, sauna or jacuzzi. It includes a private entrance and a handpainted dining room large enough to entertain up to 12 guests.

FIRST The Analysts’ call

Is the worst really over for HPHT?

There’s a surge of outbound cargoes to the US

HPHT stays afloat after escaping a brutal pummeling

he worst of the financial storm threatening to topple over Hutchison Port Holdings Trust (HPHT) has already passed, with optimistic projections that the firm’s terminals will experience decent volume growth over the coming year. A subsidiary of Hutchison Whampoa, HPHT has seen a surge of outbound cargoes to the US and the Eurozone with growth outlooks remaining favorable for the rest of the year based on the firm’s assessment, notes

HPHT has seen a surge of outbound cargoes to the US and the Eurozone. Eli Lee, analyst at OCBC. HPHT managed to squeak out a HK$558.9mn net profit for the first quarter of 2014 (1Q14), up 47% from the previous quarter despite a challenging operating environment. Even after excluding the gain on partial divestment of Asia Container Terminals of HK$244m and forex losses of HK$65m, operating performance in 1Q14 held on with a largely flat year-on-year (YOY) performance, says Suvro Sarkar, analyst at DBS. Revenue was also up 3%, boosted by a 2% volume growth year-to-date at the growing Yantian Port, but margins were blunted by higher operating expenses due to increase in wages and staff costs, notes Sarkar. 16 HONG KONG BUSINESS | JULY 2014

Looking forward, HPHT will be buoyed by a sequential improvement in HK volumes. “The Trust is looking to deliver at least stable distribution per unit in 2014, driven by mid-single digit volume growth at its terminals. The Trust’s HK operations especially, look set to post encouraging growth numbers over the following months, due to the low base effect caused by labour disputes in FY13,” says Sarkar. Most recently, HPHT has benefited from a significant pickup in throughput during the second quarter of 2014 even despite the crippling labour strike last April to May, according to Claire Teng, equity research analyst at Standard Chartered Bank. “Hong Kong’s throughput increased by 15% in April 2014 and by about 10% so far in May 2014, respectively. Yantian’s volume also rose strongly by 9% in April. We believe that our forecasts of 7% and 5% throughput growth in Hong Kong and Yantian in 2014 should be achievable, as both transpacific and Asia-Europe trades have been improving gradually.” But Lee cautions that while HPHT has escaped a brutal pummeling, it still faces strong headwinds ahead in terms of rising cost and inflation. “We continue to see upward pressure in terms of cost of services rendered, which increased 11.0% YoY due to higher external contractor costs. Capex in 1Q14 also rose 27% YoY to HK$311m, and management indicates that it would revive expansion plans to add one berth each year at Yantian from 2015.”

Suvro Sarkar - DBS Proxy to global recovery theme; prospective yield of close to 8% for FY14 is attractive. We maintain our view that the worst is over for HPHT and reiterate our BUY call. While core EPS growth in FY14 is likely to be negative due to the impact of higher taxes at Yantian Port, earnings growth trajectory should resume from FY15 onwards. Our TP is unchanged at US$0.76. Eli Lee - OCBC We update our valuation model for the latest data-points and our fair value estimate increases marginally to US$0.68 from US$0.63 previously. While conditions remain challenging due to a mix of rising labor costs and taxation increases, we see the downside to be limited here due to an attractive FY14F dividend yield of 8.1%. Claire Teng – SCB HPHT has maintained its capex target of HK$2bn for 2014, despite spending only HK$331mn in 1Q14. The company plans to use about HK$3.2bn for West Port expansion during 2014-16 and has kept its maintenance capex unchanged at HK$300-350mn p.a. HPHT has started investing in semi-automation systems for cost control, as skilled labourers (such as crane drivers) in Hong Kong are ageing. HPHT’s management expects Hong Kong’s transhipment volume to decline after the launch of the P3 alliance. However, we think both Yantian and Hong Kong are natural deep-water ports and can handle mega vessels; hence they are likely to win higher volume. We think our 2014E dividend yield of 7.7% remains attractive.

FINANCIAL INSIGHT

Tech startups will be the talk of the town

What is needed to drive venture capital in HK?

The tech sector has untapped opportunities ready for VCs to seize.

ome local drumbeaters may have you believing that Hong Kong’s tech sector is on an explosive growth path, but looking closer, there is a big untapped potential just waiting for more entrepreneurs and venture capitalists to capitalize on. For all the excitement and huge profit potential a startup offers, both groups remain wary of the market risks – enough to hamstring the young but solidly supported startup scene. According to Joshua Steimle, Founder and CEO of MWI, an aggressive estimate of 1,000 tech startups can be expected in the near future. Impressive? Not really. That’s only about 5% of the number of startups needed in order to have HK’s startup ecosystem ‘up and running’. So, what gives? Why aren’t venture capitalists investing

18 HONG KONG BUSINESS | JULY 2014

The startup ecosystem in Hong Kong is still young, really only about 3-4 years old. It needs a few more years to develop across the board but all of the key ingredients are in place.

more aggressively in HK tech companies? We’ve gathered the insights of industry leaders to give the low-down on venture capital in HK (or the lack of it), what venture capitalists are possibly missing, and what’s needed to drive the future. To be sure, we wouldn’t call HK’s tech sector necessarily barren – a thousand startups is definitely better than, say, ten. More importantly, the expected growth in startup tech companies is being accompanied by a growing effort to organize the community and actively attract venture capital into Hong Kong. Denis Tse, Head of Research and Board Member at the Hong Kong Venture Capital Association, notes that startup communities like StartBase are emerging and being more systematically organized, which is a good sign. StartBase is

an open-source database where startups can upload their public profiles for viewing by potential investors. Arranging communities like this is important in making the startup ecosystem more visible, as well as in activating the conversation regarding ideas on sourcing capital, and ideas in general. This also allows the ecosystem to gain traction on matters like perceived maturity. Despite this, HK’s start-up ecosystem apparently still has a long way to go. The good news is, most believe all the basics are in place. As Tytus Michalski, Managing Director for Fresco Capital believes, “The startup ecosystem in Hong Kong is still young, really only about 3-4 years old. It needs a few more years to develop across the board, but all of the key ingredients are in place.” Indeed, taking steady baby steps is a good strategy. The question is, what’s the next baby step to be taken, and what’s holding the tech sector from taking that step? Of course, it’s not enough to measure the growth of the sector based merely on the number of

FINANCIAL INSIGHT startups emerging. The quality of these eventual investments is probably the more important part of the equation. As Michalski puts it, “High quality startups are always the best way to attract VC investors. The good news is that there are an increasing number of high quality early stage companies already and the coming years should result in many more as a result of a more mature ecosystem.” But this still raises the question, what is a ‘quality startup’ made of? Both Tse and Steimle believe that the greatest gap that needs to be filled in order to infuse the local tech sector with venture capital is the attraction and retention of ambitious and competent talent. Steimle specifically notes that the problem is not so much about waiting for venture capital to flow because it eventually will. “I don’t worry about bringing [venture capitalists] here, I worry about getting young, smart people to create startups rather than going into mind-numbing work they don’t enjoy. If young people follow their passions, we’ll have more tech startups, and the [venture capitalists] will come here and bring their investment dollars.” The nitty-gritty Paul Orlando, Co-founder and Director of AcceleratorHK, has a more concrete take on the matter of enticing venture capitalists. According to him, it is less likely that venture capitalists will go out of their way to look for worthy startups to invest in, especially given the fact that equally worthy opportunities exist elsewhere. “VCs tend to be conservative and often follow on when investing in new locations. It is not their responsibility to invest anywhere new.” Thus, Orlando believes that assuming a proactive role in making a startup attractive to foreign venture capital is key to achieving just that – “If you wait until the situation changes you’re probably already on to your next business. Smaller steps can

lower the risk of investing, such as investing through a startup accelerator.” Denis Tse complements this by suggesting that another way to take a more aggressive and proactive approach is engaging the wider startup community through channels that already exist. In other words, startups need to utilize more aggressively existing communities designed to catch the attention of venture capitalists who are already on the prowl. “The key really comes down to reduction of search cost. The fact that databases exist already, that is one way to reduce the search cost. If you have a searching mechanism that has a life of its own, it can help people to facilitate potential investors finding good companies, technologies and products more systematically and easily, and that’s the best way to entice people to see your company.” Some more than others Some technology trends are more prominent than others when it comes to HK’s larger tech sector. From the perspective of venture capitalists, some tech trends are more noteworthy than others, which also deserve the attention of aspiring startups. One of these technology trends has to do with initiatives that place a focus on positive social impact. For instance, as far as Fresco Capital is concerned, “we end up investing in people who are on a mission to change the world and see great opportunities in education, healthcare and the environment during the next several years.” This essentially emphasizes the importance of running a social enterprise, versus one that’s simply for technology’s sake. Mobile technology is also, obviously, a noticeable area of interest that many venture capitalists may want to capitalize on. According to Joshua Steimle, the development of mobile apps could be a particularly fruitful area. “Hong Kong is an ideal place to develop and test mobile

Denis Tse

Joshua Steimle

Tytus Michalski

apps. With the high rate of mobile penetration here we should be at the forefront of mobile because what we see here right now, with everyone walking around glued to their phones, is what the future will look like everywhere else.” This, however, has to be taken in the appropriate context. Although Hong Kong’s mobile community is quite mature, the same is true for many of HK’s Asian counterparts as well. This is where HK’s startup ecosystem also has to consider proactive measures for placing attention specifically on Hong Kong. On the other hand, Denis Tse is looking at the support infrastructure for online retail as one of the potential areas of opportunity for HK’s tech sector. Online retail has to deal with the tricky challenge of driving people to change their ways to adapt effectively to online retail. “Consumers will require a better experience with [online retail]. It would take as much intelligence as possible to be able to capture [consumption] behaviour online. You wouldn’t want a cluttered website where you can’t find what you really want.” Although it may be too early to tell what mega trends will really thrive in HK’s tech sector given its infancy, the positive note on the outlook for increased venture capital in HK’s tech sector is the fact that the groundwork has at least been laid. The only problem is, there are not enough brave souls taking advantage of that and putting this groundwork to good use.

Venture capital investment in tech sector, in millions of USD

Source: Asian Venture Capital Journal Research/Wall Street Journal

HONG KONG BUSINESS | JULY 2014 19

ANALYSIS: the rise of micro CBDs Central may be increasingly the exception than the rule over the next decade what with office development shifting from the crowded Central CBD to the fast-growing East and North East districts.

Majority of new office spaces will launch in peripheral districts

Why has demand for Central office space cooled down? There has been a big influx of office spaces in cheaper non-central CBD locations such as Kowloon.

utside of Mainland Chinese firms, most companies no longer seem as obstinate in securing an office space in the prime central business district (CBD) of Hong Kong, commonly known as the Central district. More costconscious businesses are starting to reject the sky-high Central office rent prices which are now one of the highest in the world. There has and will also be a big influx of office spaces in cheaper non-Central CBD locations, specifically in Kowloon, with the majority of new spaces expected to launch in these peripheral districts in the next half-decade. These factors will likely result in a dispersion of tenants from Central to emerging micro-CBDs in other districts, analysts predict. Demand for Central office space

20 HONG KONG BUSINESS | JULY 2014

Around 11 million square feet of supply will become available across all districts in the next five years, with nearly 80% of this supply launching in Kowloon and the New Territories.

has been cooling in recent months driven in part by multinational corporations who have been downsizing in response to lower business activity levels, according to according to Simon Smith, senior director, Asia Pacific at Savills Research Hong Kong. Central Grade A office rental growth dipped 0.9% in the first quarter of 2014 following a 1.3% decline in the previous quarter. In fact, for these past two quarters Central suffered the biggest drop in rental growth across Hong Kong. It is important to note that Grade AAA offices are still highly valuable and coveted among firms who can afford them. Grade AAA office rents in Central fell by only 0.1% compared to the 0.9% decline in overall Central rents over the quarter. Still, cash-flush holdouts in

Shift to East and North East The forecasted explosion of new East and North East offices “is primarily due to limited supply in core districts such as Central and increased supply pipeline in Causeway Bay and Quarry Bay as well as Kowloon. With the completion of the CentralWanchai Bypass and Island East Corridor Link, this will further enhance the accessibility between the East side of the island and the core CBD area, Central,” says Brian Brenner, head of tenant representation, markets, at JLL Hong Kong. “The improved infrastructure will reduce traffic times and will open up these opportunities to Central occupiers that are searching for buildings that can support their requirements such as larger floor plates, higher ceilings and modern mechanical and electrical support.” Around 11 million square feet of supply will become available across all districts in the next five years, with nearly 80% of this supply launching in Kowloon and the New Territories, notes Brenner. And he says that although recent data has shown that Central rental growth has been moderating, the supply situation is not about to ease anytime soon. Hong Kong remains very attractive for foreign businesses looking to enter the China market while benefitting from world-class talent, and high ease of doing business led by low corporate and personal income tax rates. “With limited stock on Hong Kong Island, we envision rental growth will continue and the rental gap between Hong Kong and Kowloon will widen and the trend of tenants from HK side shifting to Kowloon will

ANALYSIS: the rise of micro CBDs continue,” adds Brenner. He says that as CBD occupiers consider moving to the micro-CBDs in the East, the occupiers in Island East that are margin sensitive will shift North due to rising prices across Hong Kong Island. Supportive government policies have also pushed Kowloon East to emerge as a so-called CBD 2 but with cheaper rents compared to Central. “Although it may take some time, with the district and facilities getting more mature, Kowloon East will potentially transform into a successful office location in the long run and become the largest office district in terms of square feet in Hong Kong.”

The government plans to transform Kowloon East into Hong Kong’s CBD 2 in face of Hong Kong’s evolving cityscape.

Flocking to lower cost Brenner says companies contemplating a move from Central will likely do so primarily to cut down on costs and move their staff into roomier floors in newly constructed buildings. These emerging micro-CBDs offer starkly lower office rental costs compared to Central, which has the one of the highest costs in the world. Non-Central locations have also seen a groundswell of newer buildings with larger floor plates and modern specifications compared to the older, cramped buildings in Central. But plenty of corporations will choose to stay in Central, at least until prices remain narrower than usual, says Joanne Lee, manager of research and advisory at Colliers International Hong Kong. Central offices remain unmatched in terms

of having a prestigious location, as well as their travel convenience and proximity to hotels and other amenities, so the decision to relocate even with a substantial cost reduction might not be worth it when all factors are considered. “Cost sensitive tenants used to look for office accommodations with lower cost options in decentralized areas. However, with rental gap between core and decentralized districts narrowing, the rental savings is not justified for taking the relocation option. With very few other leasing options available, companies would prefer to stay at the same place and refer to other cost savings options like increasing their floor efficiency ratio,” says Lee. It is only a matter of time though before Kowloon East and other micro-CBDs rise as viable alternatives for even the most stalwart Central tenants due to the rapid pace of government support and financial investment flowing into the areas. “Companies continue to see Hong Kong as a key business location and demand for cost effective space should keep vacancy rates low across many submarkets. As such, the need for major developments, such as that outlined by the government in relation to Kowloon East, remains strong. The recent acquisitions by Swire and Mapletree represent new investment into the Kowloon East submarket by major developers. These acquisitions are likely to

represent and contribute further to improving market sentiment surrounding Kowloon East,” says Lee. “The government plans to transform Kowloon East into Hong Kong’s CBD 2 in the face of Hong Kong’s evolving cityscape. The government outlined the plans for developing Kowloon East in which they would initiate development of the vacant Kai Tak airport area together with Kwun Tong and Kowloon Bay into another central business district. A current lack of office space in Hong Kong could cause a serious threat to Hong Kong’s global competitiveness.” Changing market profile With its cheaper and larger office spaces, micro-CBDs outside of Central will likely become a hotspot for a specific subset of firms that place more value on reduced rent costs over a prominent and well-placed address. Already, Lee is observing a changing market profile in Central. Medium sized companies that signed up for 5,000 – 7,000 sq ft of space now dominate new lease agreements, she says, whereas banks and financial institutions previously rented 10,000 sq ft. “The evolution of front office users outside Central is likely to materialise at first in Island East, which is attractive to corporate occupiers due to its existing portfolio of offices, retail outlets, hotels and serviced apartments,” predicts Lee.

Savills Grade A offi ce rental indices by district, Q1/2003–Q1/2014

Source: Savills Research & Consultancy

HONG KONG BUSINESS | JULY 2014 21

SALARY SURVEY 2014

Employers struggle to keep their best talent loyal To retain Hong Kong’s top talent, high compensation is just the beginning.

oney no longer talks as loudly as it used to in Hong Kong – at least for firms who want to keep their best and brightest from jumping ship. You can offer wads of cash to highperforming employees, but so will other rival companies desperate to poach top talent in today’s tight labour market. So offer plenty of non-monetary perks on top of a big cash bonus, advise employment experts, to make sure your waverin g staff member rejects that competing offer. Going the extra mile to keep your staff loyal is one of the top themes in Hong Kong’s labour market this year, as employers continue to focus on ensuring they have the very best person for the job. According to the 2014 Michael Page Salary & Employment Forecast report for Hong Kong, the recruitment market continues 22 HONG KONG BUSINESS | JULY 2014

As an employment market, Hong Kong remains somewhat immature with regards to employee benefits.

to become more competitive and the retention and attraction of high performers remain key challenges for employers. “Great candidates are hard to find and the best talent will have multiple job opportunities. Companies will therefore need to work on making the recruitment process as efficient as possible and balancing the interview process in terms of being thorough and testing potential employees in a relevant way, while moving quickly to secure good talent,” the report says. Retention of best performers will be the biggest challenge for organisations in Hong Kong to overcome, considering the average tenure of professionals in a role is only one to two years. Employee benefits fulfil a crucial role in ensuring that the best stay. Hiring managers are also tasked with ensuring that the interview

process is as effective as possible, employing the right mix of testing applicants and acting quickly to secure talented professionals. According to Michael Page, however, monetary benefits are not the only carrots employers should dangle when selecting and getting the best staff for the job. “As an employment market, Hong Kong remains somewhat immature with regards to employee benefits – the prime motivator used is money and companies in Hong Kong have not grasped the importance of non-financial benefits such as workplace flexibility to the extent employers in more developed regions have,” the report says. Peter Yu, director at Randstad Hong Kong, says that, in light of the talent shortage, it is vital for companies to invest extra time and effort in their human capital strategies and build a strong employer brand. “In addition to a competitive remuneration package, our research shows that employees in Hong Kong also highly value job security, a pleasant working atmosphere, and strong management. Employers need to understand what employees want in order to best attract and retain them,” Yu says. Pallavi Anand, director of Robert Half Hong Kong, says that on average, over 95% of their respondents are both concerned about losing top talent and believe that finding skilled talent in their respective industries in the next six months in Hong Kong is a challenge. To tap into an increasingly competitive market while also retaining strong talent, firms are looking to offer nonmonetary incentives and rewards, she says. “Companies must demonstrate a commitment to work-life balance, which is a key topic that has been widely discussed in Hong Kong,” she adds. Matthew Bennett, managing director for Greater China at Robert Walters, says employers should take note of candidates being much more cautious about moving and will do their due

SALARY SURVEY 2014 diligence in terms of establishing a firm’s stability and speaking to current or previous employees of the firm to learn about the work culture. In addition, most great candidates will receive other offers so it is important to prepare for this. What to keep in mind On the part of jobseekers, it is needless to say that they should be on the top of their game. The most prepared and focused will get the best opportunities, Michael Page says. “Hong Kong is known to be a competitive and fair market and one that rewards great performance, so hiring employers not up to scratch will be beaten by competitors, while unprepared jobseekers not at the top of their game will miss out on the best opportunities,” the report says. Recruitment is expected to be active in a number of areas. in 2014 As international retailers head to Hong Kong to establish their presence in Asia, they create a demand for skilled staff. Active consumer spending activity also translated into demand for experienced sales professionals across all industries; particularly those with experience working in China. Meanwhile, in the banking sector, improved conditions have led to hiring within mid tier financial institutions setting up in Hong Kong, primarily small to medium sized international banks. Employers will be scrambling for talents in areas that include compliance, audit and risk, while within retail banking, experienced relationship managers are in short supply. There is also an extremely high requirement for application developers, especially in commercial technology and banking technology, as well as UI/ UX designers for smart phones, tablets and web applications. Michael Page says the information technology and digital space continue to develop at a fast pace due to the evolution of technology – social media, web applications, smart phones and

tablets. Companies are developing applications in-house ,however the skills and expertise in the market are lagging as technology grows faster than the pool of talent with the skills to deliver it. As for employees, Yu says they can expect salary increments and/ or bonuses to varying degrees across industries, depending on the financial performance of their company. Recent surveys are citing up to 5% increases, however, increases will vary according to performance. Bennett says that, for good positions, there is a lot of competition among candidates applying for jobs. He adds that some candidates may be forced to take other positions if there are competing offers, to avoid losing out on roles. Recruitment and salary forecasts Among the firms surveyed by Michael Page, five out of 10 say their hiring activity has been steady compared with the last 12 months. About 21% of surveyed companies say it is slightly stronger; 12% say it was slightly weaker; 11% say recruitment was stronger; while 4% say hiring was weaker. Four out of 10 say they expect a professional skills shortage in the next 12 months, while 38% disagree. Twenty-one percent have no idea. About six out of 10 companies say the skills shortage will have an upwards pressure on salaries above the rate of inflation, while 3% say salaries will likely increase but only at the rate of inflation. Eleven percent of firms, meanwhile, believe the skills shortage will not have an impact on salary levels. In terms of the impact of the skills shortage, 44% believe there is a need to develop more targeted attraction strategies. Twenty-six percent say it will be difficult to maintain headcount while 18% say it will be necessary to source talent from overseas. Seventy-four percent say all their employees will receive an increase, depending on their performance. About 13% say only the best performing employees will receive a raise, while 9% say all their workers will have the same percentage increase.

HK trumps Sg in expatriate pay Hong Kong still offers higher expatriate pay, but Singapore is catching up. Companies looking to post expatriate middle managers and top-level executives to Hong Kong and Singapore should be prepared to pay slightly more for the former posting than the latter due to Hong Kong’s relatively more expensive benefits component, which includes costs of accommodation, international schools, utilities or cars. Hong Kong ranks as the fifth most expensive location for expatriate packages, with an average annual cost of US$273,000, edging out sixth-place Singapore where the average expatriate package is US$257,000 per year, according to the latest MyExpatriate Market Pay Survey from ECA International. While total expatriate packages remain lower in Singapore than those typically awarded in Hong Kong, Singapore, packages have increased at a faster pace than Hong Kong’s over the past year largely due to the cost of benefits rising more quickly in Singapore, the survey notes. Package components The expatriate package was computed using three components: cash salary, benefits, and tax. In both countries, the benefits component is much larger than the cash salary component as Hong Kong offers the most expensive benefits package in terms of value in the region while Singapore offers the second highest. “Depending on how the package is put together, the cost of providing benefits such as housing to employees sent to Hong Kong can be considerable, often dwarfing the cash salary element,” says Lee Quane, regional manager at ECA International Asia. “This is easy to see if benefits are taken out of the equation – when we compare only the net cash salary of an average middlemanager sent to Hong Kong, the city drops from fifth to 15th in our ranking. If tax levels in Hong Kong weren’t comparatively low, the costs to companies of posting staff here would spiral.” The same holds true for Singapore, where the benefits component is typically the most expensive part of the expatriate package. The low cash salary component in both countries results from companies increasingly aligning the salary of expatriates to local market terms instead of home pay levels, says Quane. “Although they may still provide benefits beyond what a local national would receive , such as assistance with children’s education costs, they are nevertheless more likely to offer a leaner benefits package overall. There are a number of reasons for this, but the main driver of this trend is the employment of expatriate staff on a permanent ‘one way’ basis rather than on a fixed length assignment.” Still, it is still significantly cheaper to post expatriates to Singapore and Hong Kong than Japan, which is still home to Asia’s highest expatriate packages, averaging at US$379,000 due to high living costs and tax levels. Australia is in second place, followed by India, then China. Quane also encourages companies to take into account whether equity with the expatriate’s home country is more desirable; salary levels and typical benefits in both the home and host locations; and how generous the business needs to be in order to incentivise talent to accept an international posting. HONG KONG BUSINESS | JULY 2014 23

SALARY SURVEY 2014 COMMERCE & INDUSTRY ROLE

YEARS OF EXPERIENCE

SALARY HK$’000

Assistant Accountant (PQ / Qualified)

2-5

220-320

Accountant (PQ / Qualified)

3-7

320-440

Commerce & Industry

Financial Analyst / Business Analyst

3-8

340-520

Senior Accountant (Qualified)

5-10

420-550

Senior Financial Analyst

5-10

420-670

620-780

Regional Finance Manager

10+

620-875

Financial Planning and Analysis Manager

10+

650-875

Country Finance Manager

Regional Business Unit Controller

12+

840-1,200

Plant Controller, China

12+

800-1,100

Country Financial Controller

12+

800-1,000

Head of Financial Planning and Analysis

12+

950-1,400

Head of Mergers and Acquisitions

12+

1,200-2,000

Regional Financial Controller

15+

950-1,250

Country Financial Director

15+

1,000-1,300

Group Financial Controller (Listed Group)

15+

1,200-1,600

Regional Finance Director

15+

1,200-2,000

Chief Financial Officer (Established Company)

18+

1,800-3,000

Business Development Manager

10+

620-920

Business Development Director

15+

950-1,600+

BUSINESS DEVELOPMENT (FINANCE)

FINANCE

SALARY

BONUS

YEARS OF EXPERIENCE

HK$’000

LOW%

MEDIUM %

HIGH%

Analyst

1-3

300-500

Associate / Assistant Vice President

3-6

500-750

ROLE FINANCE: Financial Control – Investment Banking

Vice President

6-10

750-1,000

Senior Vice President / Director

10+

1,000-1,500

Country Chief Financial Officer

12+

1,500+

Regional Chief Financial Officer

15+

2,000+

1-3

300-500

Management Reporting / FP&A Analyst Associate / Assistant Vice President

3-6

500-750

Vice President

6-10

750-1,000

Executive Director

10+

1,000-1,500

Head

15+

1,500+

1-3

320-450

Regulatory Finance Analyst Associate / Assistant Vice President

3-6

450-750

Vice President

6-10

750-1,000

Executive Director

10+

1,000-1,500

Head

15+

1,500+

1-3

300-450

Product Control Analyst 24 HONG KONG BUSINESS | JULY 2014

SALARY SURVEY 2014

FINANCE ROLE

1,700+SALARY YEARS OF EXPERIENCE

BONUS

HK$’000

LOW%

MEDIUM %

HIGH%

Product Control Associate / Assistant Vice President

3-6

450-900

Vice President

6-10

900-1,200

Executive Director

10+

1,200-1,600

Head

15+

1,600+

1-3

350-450

Valuations Analyst Associate / Assistant Vice President

3-6

450-900

Vice President

6-10

900-1,200

Executive Director

10+

1,200-1,500

Head

15+

1,500+

1-3

250-550

TAX Analyst Associate / Assistant Vice President

3-6

550-750

Vice President

6-10

750-1,000

Executive Director

10+

1,000-1,600

Head

15+

1,500+

1-3

250-450

Project Accounting Analyst Associate / Assistant Vice President

3-6

450-650

Vice President

6-10

650-1,100

Executive Director

10+

1,100-1,400

Head

15+

1,400+

Analyst

1-3

180-300

Associate / Assistant Vice President

3-6

300-480

Vice President

5-7

480-720

Executive Director

7-10

720-960

Head

10+

960+

Analyst

1-3

250-400

Assistant Manager

3-5

400-650

Manager

5-7

650-900

Senior Manager

7-10

900-1,300

Director

10+

1,300+

Country Chief Financial Officer

12+

1,500+

Regional Chief Financial Officer

15+

1,800+

Analyst

1-3

180-300

Assistant Manager

3-5

300-500

Manager

5-7

500-750

Fund Accounting

Financial Control – Investment Management

Financial Control – Insurance

Senior Manager

7-10

750-900

Director

10+

1,000-1,500

Country Chief Financial Officer

12+

1,500+

Regional Chief Financial Officer

15+

1,700+

HONG KONG BUSINESS | JULY 2014 25

SALARY SURVEY 2014 FINANCE

1,700+SALARY

BONUS

YEARS OF EXPERIENCE

HK$â&#x20AC;&#x2122;000

LOW%

MEDIUM %

HIGH%

Analyst

1-3

350-450

Associate / Assistant Vice President

3-6

450-900

ROLE INTERNAL AUDIT: Investment Banking

Vice President

6-10

900-1,200

Executive Director

10+

1,200-1,500

Head

15+

1,600+

Analyst

1-3

320-450

Associate / Assistant Vice President

3-5

450-650

Investment Management

Manager

5-7

650-1,000

Senior Manager

7-10

1,000-1,400

Director/Head of Audit

10+

1,400+

Auditor

1-3

180-350

Assistant Manager

3-5

350-540

Insurance

Manager

5-7

540-800

Senior Manager

7-10

800-1,400

Director / Head of Audit

10+

1,400+

1-3

280-480

RISK MANAGEMENT: Operational Risk Analyst Associate / Assistant Vice President

3-6

480-800

Vice President

6-10

900-1,200

Executive Director

10+

1,200-1,500

Head

15+

1,500

1-3

380-500

Market Risk Analyst Associate / Assistant Vice President

3-6

500-850

Vice President

6-10

850-1,400

Executive Director

10+

1,400-2,000

Head

15+

2,000

1-3

380-500

Credit Risk Analyst Associate / Assistant Vice President

3-6

500-900

Vice President

6-10

900-1,400

Executive Director

10+

1,400-2,000

Head

15+

2,000

1-3

380-500

Quantitative Analysis Analyst Associate / Assistant Vice President

3-6

500-800

Vice President

6-10

800-1,400

Executive Director

10+

1,400-2,000

Head

15+

2,000

26 HONG KONG BUSINESS | JULY 2014

SALARY SURVEY 2014 FINANCE

1,700+SALARY

BONUS

YEARS OF EXPERIENCE

HK$’000

LOW%

MEDIUM %

HIGH%

Analyst

1-3

320-500

Associate / Assistant Vice President

3-6

500-900

Vice President

6-10

950-1,400

Executive Director

10+

1,400-2,000

Head

15+

2,200+

Analyst

1-3

320-450

Associate / Assistant Vice President

3-5

450-700

ROLE COMPLIANCE: Investment Banking

Investment Management

Vice President

5-7

700-1,000

Executive Director

7-10

1,000-1,400

Head

10+

1,400+

Assistant

1-3

150-350

Assistant Manager

3-5

350-600

Insurance

Manager

5-7

600-1,000

Senior Manager

7-10

1,000-1,400

Director / Head of Compliance

10+

1,400+

Analyst

1-3

320-500

Associate / Assistant Vice President

3-6

500-900

Vice President

6-10

900-1,400

Executive Director

10+

1,500-2,000

Head

15+

2,200+

AML

HUMAN RESOURCES YEARS OF EXPERIENCE

Salary HK$’000

BANKING & FINANCE Human Resources Officer / Coordinator

3-5

250-400

Training and Development Officer

3-5

250-400

Payroll Specialist

3-5

250-400

In-house Recruitment Specialist

3-5

250-700

Learning and Development Advisor

3-5

400-700

Global Mobility Specialist

3-5

350-700

Compensation and Benefits Specialist

3-5

400-800

Human Resources Advisor / Assistant Human Resources Manager

5-7

450-650

Payroll Manager

5-7

500-850

In-house Recruitment Manager

5-7

800-1,000+

Learning and Development Manager

5-7

800-1,000+

Global Mobility Manager

5-7

900-1,400

Compensation and Benefits Manager / Head of Large size organisation

5-7

950-1,500+

HRIS Specialist

7-9

500-850

Human Resources Manager / Business Partner – Medium size organisation

7-9

700-1,000

HONG KONG BUSINESS | JULY 2014 27

HONG KONG’S 20 LARGEST MBA PROGRAMMES is not unique to other foreign providers also grabbing huge market shares in the city. Hong Kong Business’ inaugural survey of MBA programmes in the city found that University of Wales, Newport MBA conducted by the International Academy of Management attracted 800 parttime students. The $108,000 worth programme and the largest on the list has UK university lecturers coming to Hong Kong to deliver some modules face to face.

Chicago Booth EMBA in HK opens pioneering class of 180 Hong Kong MBA providers keep up with the competition through relatively lower costs.

ong Kong’s effort to become an Asian center for higher education was boosted by the recent relocation of a top-ranked American MBA programme from Singapore to the city to be closer to the booming China. For 13 years, The University of Chicago Booth School of Business has run a successful campus in Singapore that serves as platform in Asia for the school’s executive MBA programme (EMBA). The decision to move its EMBA programme in Hong Kong is proving fruitful with many students from Asian region interested in taking the course, said the school’s associate dean for global outreach William W. Kooser. “Hong Kong is an easy city to reach, it is convenient to live and work here, and it has a very international atmosphere that is comfortable for many prospec28 HONG KONG BUSINESS | JULY 2014

University of Wales, Newport MBA conducted by the International Academy of Management attracted 800 part-time students.

tive students,” he said. According to Kosser, the school’s EMBA programme started in June with a pioneering class of 180 students. He also reported nearly completion of the work on their interim campus in Cyberport. “Our architect is working on the design for our permanent campus which we hope to open in 2017,” he said. The school’s MBA is the most expensive at $1.175 million. Kosser said that to ensure the quality, they are managing the programme themselves and not with a partner. They are using only regular Chicago Booth faculty to teach in the program. Chicago Booth will carry on teaching the 166 students enrolled in Singapore until 2015. The competition The success story of Chicago Booth

The Local providers The local providers meanwhile are keeping up with the competition by offering quality programmes at much lower costs. According to Lawrence Chan, director, marketing & student recruiting at Chinese University of Hong Kong (CUHK), Hong Kong programmes are generally quite competitive given the fact that most schools follow the American MBA approach -which normally offers extensive elective courses, overseas exchange programme, etc. The fees, however, are significantlylower when compared with similar programmes in the U.S. CUHK’s traditional MBA has 306 students and offered at $317, 280. Its EMBA conducted in English has 119 students while the one in Chinese has 97. The EMBA programmes cost half of Chicago Booth’s. HKUST Business School manager from the marketing and admissions Pauline Cheung concurred saying that while their MBA programme is among the top tier of programmes around the world, its tuition is much lower than those top tier programmes in the US. Financial Times now ranked HKUST MBA no.1 in Asia and no.14 in the world. HKUST has 310 students enrolled in its MBA programme costing $545,000. “Program duration is also relatively shorter in Asia. At HKUST, students can gain what a 2-year MBA program offers in just 12 months. They can also go for an internship and an exchange if they opt for a 16-month option,” she added.

183

Andrew Chan Timon Du Michael John Ferguson

The Chinese University of Hong Kong

Henley Business School

Institute of Advanced Learning

The University of Hong Kong

Hong Kong UST Business School

Ivey Business School

The Hong Kong Management Association

Manchester Business School East Asia Centre

The Hong Kong Polytechnic University

Kaplan Higher Education

Hopkins Training & Education Group

University of Iowa's Henry B. Tippie School of Management

Hopkins Training & Education Group

International Academy of Management

The Hong Kong Management Association

CUHK EMBA

CUHK EMBA (Chinese)

CUHK MBA

Henley Business School Flexible Executive MBA

Holmes Institute MBA

HKU MBA

HKUST MBA

Ivey EMBA

Macquarie Graduate School of Management MBA

Manchester Business School MBA

PolyU MBA

The University of Hull EMBA

The University of South Australia (UniSA) MBA

Tippie Hong Kong MBA

University of Northern Iowa (UNI) MBA

University of Wales, Newport MBA

University of Wales, UK MBA

*Survey period is from January to March 2014.

352

Kevin Chiang

City University of Hong Kong College of Business

CityU MBA

William Chow

Charles Huang

Daniel Molloy

Mac Mak

Richard Petty

Janet De Silva

Sean O Ferguson

Sachin Tipnis

Neil Logan

Richard Johnson

The University of Chicago Booth School of Business

Chicago Booth EMBA

106

119

180

400

800

300

500

112

300

204

240

187

114

100

Part time

Australian Graduate School of Management Australian School of Business

Full time

400

800

300

500

112

183

352

300

310

300

306

114

108

180

100

TOTAL

Total number of students

AGSM MBA, The University of New South Wales

HEAD OF HK OFFICE

MBA PROVIDER/ LOCAL PARTNER

MBA PROGRAMME

$545,000

$468,000

$489,780

$222,400

$1,175,000

Full time

$104,000

$108,000

$147,600

$249,600

$145,500

$130,000

$211,500

$368,000

$281,920

$780,000

$335,250

$336,000

$61,600

$295,000

$317,280

$550,000

$512,600

$222,400

$302,880

Part time

Minimum Cost (in HKD)

2 Years

18 months

20-24 months

15 to 18 months

18 months

2 years (Max: 4 years) 24 months

2 2.5 years

2.5 years

18 months

24 months

No. of Intakes per year

12 to 16 months

15 months

2 years

24 months

2 years

21 months

1.5 to 7 years

Part time

14 months 24 months

12 or 16 months

1 year

Full time

Duration

HONG KONGâ&#x20AC;&#x2122;S 20 LARGEST MBA PROGRAMMEs

HONG KONG BUSINESS | JULY 2014 29

legal briefing

Lack of crowdfunding laws bewilders HK Crowdfunding looks like a promising frontier. But is it really safe to ride out?

ong Kong’s crowdfunding (CF) scene is looking more like the Wild West these days with CF activities running rampant without legislative support or regulation. Participants may take the lack of governing rules as a green light to go all out on CF advertising, among other activities, but legal experts warn that the current murky regime has its share of pitfalls. Does Hong Kong have a strong legal framework for regulating crowdfunding? What specific laws govern crowdfunding in Hong Kong? “There is currently no specific legislation or rule enabling or governing crowdfunding activities in Hong Kong. Although crowdfunding appears to be generating interest, we are not aware whether the government will provide any support,” says Eddy So, partner at Reed Smith Richards Butler. Under current laws, So says offerings of investment products to the public in Hong Kong are generally governed by the Securities and Futures Ordinance (SFO) and the Companies (Winding Up and Miscellaneous Provisions) Ordinance (C(WUMP) O). Advertising of crowdfunding activities is also restricted by the SFO, wherein any advertisement, invitation or document which to the issuing person’s knowledge is or contains an invitation to the public to acquire securities or to acquire an interest in a

“Significant amendments would need to be made to Hong Kong law to implement such a comprehensive scheme.” collective investment scheme must be authorized by the Securities and Futures Commission (SFC), unless an exemption applies. Platform operators may also be subject to certain licensing and conduct requirements. Are there exemptions to crowdfunding in HK equivalent to the US JOBS Act? How about exemptions under the current regime? Any other legal ambiguities? Gareth Pyburn, managing director at InsightLegal Asia Consulting, says there is no equity or debtbased crowdfunding exemption equivalent to the US JOBS Act. Those contemplating advertising equity CF targeting professional investors and are banking on an exemption should proceed with caution. “Any advertisements, invitations or documents made in respect of securities, or interests in any collective investment scheme which are intended 30 HONG KONG BUSINESS | JULY 2014

Eddy So

Ellie Siu

Gareth Pyburn

to be disposed to only professional investors, from authorization by the SFC. Equity crowdfunding arrangements relying on these provisions need to be considered carefully. Although this provision allows certain advertisements to be exempt from authorisation requirements, they do not allow such offers to be made without the appropriate SFC licences,” says Pyburn. So concurs with this assessment: “Offerings to professional investors may be exempted from the requirement to obtain authorization from the SFC in relation to any advertisements, invitations or documents made in respect of securities or interests in collective investment schemes, but the crowdfunding operator may still be required to obtain a license if its activity constitutes a regulated activity under the SFO.” Are the ambiguities unique to Hong Kong or are they experienced by other countries in Asia? While Hong Kong has to play catch-up when it comes to clarifying crowdfunding laws, so does the rest of the Asian region. “These ambiguities are not unique to Hong Kong. Jurisdictions in Asia Pacific are yet to enact clear legislation and guidelines on crowdfunding, and until then, there remain legal uncertainties in this area,” says Ellie Siu, partner at Reed Smith Richards Butler. What do you suggest to resolve the ambiguities and ensure clear regulatory treatment? Siu says the clearest way for Hong Kong lawmakers is to roll out legislation analogous to the US JOBS Act for any exemption on equity crowdfunding. It would also be helpful if before new legislation is passed, the government or market regulators can issue clarification or guidance notes in relation to the application of the SFO and other rules and guidelines on crowdfunding. “Equity CF can trigger a whole slew of SFC regulations,” predicts Rebecca Yip, partner at Deacons. She notes that they are already governed by traditional Securities laws and refers to a recent Notice issued by the SFC in early May regarding CF activities. But CF exemptions could take some time to formulate. “Until there is more traction in the CF marketplace I don’t foresee the SFC putting too many resources into creating CF exemptions, and in this current format the HK equity CF activities will be spearheaded by traditional venture capitalists and corporate finance firms who are willing to embrace technology, want to have a marketing edge, want to automate part of the process and have all the licences required by the SFC to raise funds,” she adds.

interior design 連續八年榮獲 Hong Kong Business 頒發

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design for the elite

Interior Design

Architecture

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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

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HONG KONG BUSINESS | JULY 2014 31

CIO Briefing Principal among those risks is the general unwillingness of cloud service providers to provide transparency.

The breakthrough (and heartbreak) of cloud The disruptive technology delivers productivity leaps and operational headaches.

loud computing may be the future of business, enabling advantageous economies of scale by moving critical information and programs to the Internet instead of storing and accessing them on a physical server, but not everyone is keen to take this next big leap forward. Because, while cloud computing promises immense rewards to adopters, it may also expose them to increased risks mainly in data security, according to industry analysts. Agility and efficiency Cloud computing has risen to prominence for providing organizations heightened agility and efficiency. “CEOs are attracted to the flexibility and ability of cloud to quickly respond to changing customer needs,” says Tan Shong Ye, IT Risk and Cybersecurity Leader, PwC. Tan cites PwC’s 17th Annual Global CEO Survey which revealed 90% of CEOs plan to change their technology investments in an attempt to become more agile and create innovative new business models around the cloud. This allows any enterprise to enhance time to market and productivity, unlock operational efficiencies through the use of shared on-demand services, reduce costs, and increase customer engagement “Cloud computing allows organizations the ability to quickly leverage capabilities that would be more expensive and difficult to create on their own. Instead of acquiring fixed assets, companies pay for the services they need, when they need them. The economies of scale within cloud providers allow better utilization of technology assets,” says Tan. By gaining efficiencies through cloud computing, businesses will be able to free up valuable IT 32 HONG KONG BUSINESS | JULY 2014

CEOs are attracted to the flexibility and ability of cloud to quickly respond to changing customer needs.

resources and redirect them to new initiatives instead of maintaining existing systems and applications, he adds. Despite the palpable advantages of cloud computing, many enterprises hold back from using the technology because of steep barriers to adoption, says Bruce Dahlgren, senior vice president Enterprise Services, HP Asia Pacific and Japan. He cites HP research which found 59 percent of enterprises are concerned about vendor lock in. Also, more than two thirds of respondents say security concerns are a significant barrier to adoption. Meanwhile, 62 percent of those polled said that finding the right strategic partner to get them started was a barrier to cloud adoption. These survey data suggest that enterprises are approaching cloud computing with a high level of caution – and they are right to do so given the mission-critical applications and processes that they will be moving to the cloud. Real and imagined risks As with any new technology, cloud computing comes with real risks. But analysts warn that businesses may be overestimating the dangers, or worse, focusing on the wrong drawbacks altogether. “Lack of transparency, uncertain regulatory landscape, security concerns, loss of control, and other factors can hinder adoption,” says Lenny Levy, Director at PwC. “While many of the concerns are unfounded, risks do exist.” One real risk in cloud computing is how benefits derived by cloud can quickly evaporate in the event of a security breach. Another risk is haphazardly jumping into the cloud computing bandwagon without a clear and nimble cloud strategy that easily adjusts to regulatory changes. “While it is true the cloud provides today’s businesses with exciting opportunities for productivity gains and significant savings, its very nature also brings with it significant risk,” says Mark Silver, Global Project Lead Information Security, Invensys Rail Integration Project, Siemens. “Principal among those risks is the general unwillingness of cloud service providers to provide transparency into their operations and security maturity, leaving the customer in a quandary as to the security status of their own information and whether it is truly confidential,” he says. Businesses are often left in the dark when it comes to cloud vulnerabilities which can be exploited by hackers to gain access to client information. It will often be too late before businesses are alerted that their data has been compromised, if they ever are.

HONG KONG BUSINESS | JULY 2014 33

co-published Corporate profile

Bose SoundTouch Wi-Fi Music Systems: the world’s playlist at your fingertips

Bose Home Entertainment Vice President Phil Hess says their SoundTouch Wi-Fi Systems will change the way people listen to music.

Bose SoundTouch 30

one are the days when people had to rely on earphones or poor quality computer speakers to listen to music streams online. Today’s music systems have been equipped with technology that allows instant connection to the Internet to access numerous radio channels and music services available online. Producing quality audio equipment since 1964, Bose Corporation is now banking on what is believed to be the future of home sound systems. Phil Hess, vice president of Bose Home Entertainment, says their “SoundTouch Wi-Fi systems are unlike any home sound system available today.” They let you stream your favourite stations, playlists or artists in the easiest way imaginable, and they sound amazing. Touch of a button SoundTouch Wi-Fi systems are being marketed for both audio quality and ease of use. Each can immediately be connected to the Internet for music streaming. Changing channels or playlists can be easily done with a touch of the button. “They

feature six presets on the system itself or the system’s included remote, and each can be personalized to an Internet radio station, music service channel, or stored playlist. Set a preset, and it only takes one press – one second – to your favourite songs,” Hess says. Three sizes Bose is offering three one-piece systems, each created to deliver the best audio performance available from speakers of their size: The SoundTouch 30 Wi-Fi music system is a sleek black and silver device, which features exclusive wavelength technology. It has a new proprietary woofer that is said to deliver a deep and rich sound, perfect for a home’s main music system. The SoundTouch 30 Wi-Fi music system has an OLED display that provides source and song or station info, an infrared remote, an Aux input that allows other audio connections, a USB port and an Ethernet port for those who prefer wired connection to the home network. Meanwhile, the SoundTouch 20 Wi-Fi music system is a more compact speaker. With

Producing quality audio equipment since 1964, Bose Corporation is now banking on what is believed to be the future of home sound systems. 34 HONG KONG BUSINESS | JULY 2014

a natural, room filling sound, it can be placed anywhere in the house. Its custom-designed transducers produce clean mid and high frequencies, making vocals and instruments sound lifelike, while an advanced ported enclosure enables the sound to fill the room. Lastly, is the SoundTouch Portable Wi-Fi music system. As large as an average book, it has a full-range audio and rechargeable, lithium-ion battery. The speaker can be carried around the house without interrupting the audio streaming. The battery will last for hours while its patented dual opposing passive radiators and four lowprofile drivers produce a clearer and fuller sound compared to other portable devices. Each of the speakers can be used separately though customers could add more for a multi-room experience. When using more than one SoundTouch Wi-Fi music system at home, there is an option to play the same music or different tracks in every room. Mobile app Another unique feature is the Bose App for

co-published Corporate profile

SoundTouch. “The Bose SoundTouch app lets you use your smartphone, tablet or computer for powerful capability and control: browse and discover content, operate any system in any room wirelessly, and combine all music services and stations with one look and feel.” The app is compatible with most Android, iOS, Mac OS and Windows systems, allows users to drag and drop any music source to the six presets. The systems themselves are AirPlay enabled, allowing owners to stream content from their iPad, iPhone and iPod Touch. Wi-Fi ready Hess says each of the SoundTouch systems directly connect to the Internet through the existing Wi-Fi network. It can play stored music, Internet radio and other online music services. The devices are further designed to automatically receive software updates that add functionality and content. Hess adds that their SoundTouch systems already have Pandora in USA and will soon offer access to popular music services like Deezer and iHeartRadio. Pioneer in audio equipment Bose Corporation has always been a pioneer in audio equipment. Founded in 1964 by Dr. Amar Bose, then a professor of electrical engineering at the Massachusetts Institute of Technology, the company is driven by long-term research that aims to develop new technologies catering to customers.

SoundTouch Wi-Fi Music Systems

Bose innovations, including noise cancelling and audio headphones, have spanned decades and industries, making them iconic devices. “SoundTouch systems will change music at home the way Bluetooth speakers changed music on-the-go,” he adds. Future products New products will also be made available during the third quarter of 2014: The Wave SoundTouch music system, the SoundTouch Stereo JC system, SoundTouch controller, SoundTouch SA-4 amplifier for select Bose products, and SoundTouch wireless adapter for Lifestyle entertainment systems. With the seemingly unlimited selection of

songs available on the Internet, users can have the world’s music at their fingertips. Owners of SoundTouch systems do not need to use up several gigabytes of space to store their favourite songs, duplicates of which are saved in different devices. They will just have to access online music services or connect to their laptop or mobile device. Connection and playback is instant and hassle-free. “With SoundTouch systems, Bose has made Wi-Fi music easier and better – for any need, any room and anyone. They offer performance only available from Bose, and continue nearly 50-year history of innovation.” For more information, visit the website at www.bose.com.hk HONG KONG BUSINESS | JULY 2014 35

REGIONAL ANALYSIS 1: GLOBAL TRADE (i.e., harmonised regulations) or the single currency had been established. Over the last decade, the EU is still the largest source of trade growth, but accounts for only around a quarter of the total increase. Excluding intra-European trade, Asia is the largest contributor to trade.

Global trade has increased more than four-fold

Global trade unbundled

Trade has been weak since the 2008-09 crisis. Is there a looming structural slowdown? By Madhur Jha, Macroeconomic Research, Standard Chartered

lobal trade patterns have changed dramatically in the last two decades. Emerging markets (EMs) now account for 42% of world exports, up from 19% in 1990, or 52% excluding intra-EU trade. Asia has firmly established itself as the centre of the ‘made in the world’ vertical global supply chain, with China emerging as a mega-trader. Historically, trade growth has averaged about 1.4 times GDP growth. But since the 2008 peak, world exports have risen only 5%, while nominal GDP is up by more than 10%. Some fear that this slowdown is structural. We, however, believe trade growth will pick up and this ratio will be restored. Growth in developed countries is accelerating, while manufacturing, still the driver of goods trade, is coming out of the doldrums. Constraints such as lower trade finance availability and rising protectionism are 36 HONG KONG BUSINESS | JULY 2014

The 1990s were a golden age of trade expansion, with the volume of trade growing twice as quickly as real GDP.

fading. Numerous bilateral trade pacts have been agreed in recent years and new multilateral trade pacts are in the works. The rise of emerging markets Global trade has increased more than four-fold in value terms since the 1990s, touching USD 18tn in 2012 or about 25% of global GDP. The expansion in trade shows three important trends: the rise of EM economies as important trading partners; the growing importance of regional trade, particularly in Asia; and the expansion of global supply chains, usually with China playing a key role. In the 1980s the EU accounted for almost half of global trade growth. This reflected the pulling down of trade barriers within Europe, encouraging both vertical and horizontal trade integration. It shows what can be achieved by comprehensive trade liberalisation; this was before the single market

The rise and rise of Asia The 1990s were a golden age of trade expansion, with the volume of trade growing twice as quickly as real GDP. This partly reflects trade liberalisation, as the Uruguay Round concluded in 1994 was the most comprehensive to date. There was also the fall of the Berlin Wall in 1989 and the collapse of the Soviet Union in 1991, which led to the opening up of Central and Eastern Europe. Asia is often characterised as following a ‘flying geese strategy’, where the production of manufactured goods continuously moves from the more advanced countries to the less advanced ones as labour costs rise. Elements of this approach are visible elsewhere in the world too, particularly in Europe. A key issue for trade and development in the long run is the extent to which India and eventually Africa will join the formation. Asia’s growing role in SouthSouth trade has been fuelled by rising trade within Asian economies. Asia’s intra-regional trade accounts for nearly half of all of Asia’s trade with emerging markets. Much of this relates to the expanding supply chains, though especially as trade is liberalised, Asia is likely to see increasing horizontal trade, as is seen most notably in the European Union. This will include both intermediate goods and final products. The extent to which this happens will be another key factor in the development of trade in coming years. Most countries have seen a profound shift in the proportion

REGIONAL ANALYSIS 1: GLOBAL TRADE of their exports going to emerging markets rather than developed markets. Some of the most dramatic shifts include Korea, up to 60% from 16% since 1990, Brazil to 57% from 25% and Thailand and Indonesia, also both up about 30ppt over the same period. Among developed countries, Greece stands out with an increase to 52% from 17%, while the US has increased to 46% from 24%. African countries have also reoriented, with Nigeria’s share up to 35% from 8% and Uganda’s up to 66% from 10%. India’s share has increased to 54% from 34%, while China’s share, perhaps reflecting its role in final assembly, has increased only to 32% from 16%. Is trade slowing on a structural basis? The GFC was accompanied by the sharpest collapse in world trade in the post WWII period. World merchandise exports fell nearly 38% from peak to trough, much more than the roughly 5.0% drop in global output. Massive fiscal and monetary stimulus aided a V-shaped recovery in trade in 2009, but trade growth has been weak in the post-GFC period, with world exports only 5% above the 2008 peak even five years into the recovery China led the surge in exports during the 2000-08 period, with exports rising nearly 700% from 2000. The peak-to-trough drop in exports was broadly similar across most regions, though Africa and China’s export/GDP ratio has fallen % share of exports to GDP

Source: IMF, DOTS, Standard Chartered Research

China led the surge in exports during the 2000-08 period, with exports rising nearly 700% from 2000.

MENA saw the largest declines, reflecting the fall in commodity prices. Still, overall world trade is only about 5% higher than the preGFC peak, whereas GDP is now higher by more than 10%, driven by strong growth in emerging markets and especially China. Unsurprisingly, the trade weakness reflects anaemic trade growth in the advanced economies, which have not recovered pre-GFC export levels (still about 5% lower than pre-crisis peaks). While US exports are above pre-GFC levels, Japan and Europe have seen a substantial weakening in export growth, partly related to the recession in the euro area. But another reason why GDP has grown so much more than trade since the pre-GFC peak is that the value of trade in China’s GDP has fallen significantly since then, to 25% most recently from 35% in 2007, a point to which we return below. The end of the commodity boom Exports of fuels and minerals increased as a share of global exports from 14% in 1990 to 22% in 2011. Over half (52%) relates to fuel exports. This partly reflects greater demand from emerging markets, whose economic growth is commodity-intensive as they build factories, cities and infrastructure, but was mainly due to rising commodity prices that magnified commodity export values. This demand-led rise in commodity prices has spurred a supply response that is expected to help moderate oil-price gains over the next few years, or even allow them to fall back. Worries about a 1980s-style oil supply glut might be overdone as demand from commoditydeficient emerging markets is expected to push up volumes traded, while political uncertainty in the Middle East is holding back supply. The IEA estimates that global energy demand will grow by 33% by 2035 (compared with 2011). Emerging markets will account for

90% of this increase in net energy demand, with India replacing China as the primary demand driver after 2025. This increase in demand will offset some of the rise in availability and will likely keep price declines in check over the coming period. Offshoring and ‘flying geese’ At the same time, vertical global supply integration likely has further to go, while claims that developed world producers will look to bring back or onshore production seem over-stated. It is very hard to find reliable data that would help disentangle the impact of re-shoring/onshoring on world trade from that of the steep crisis-led decline in global demand. However, according to a survey conducted by the Boston Consulting Group (2013), around half of 200 US companies with sales of over USD 1bn is considering the possibility of bringing production back to the US. Still, a much smaller percentage (20%) of these companies is actually looking to bring back production over the next two years. Moreover, even if some companies bring back factories from overseas, their suppliers may still be in cheaper wage countries. What is evident is that the rise in labour costs in China and other countries has led to the inclusion of more countries in the global supply chain. Anecdotal evidence, as well as rising trade, shows that countries such as Vietnam, Bangladesh, the Philippines and several others are now being viewed as alternative offshoring destinations by companies no longer finding China and other East Asian companies profitable. As already noted, this is known as the ‘flying geese’ pattern of trade, where industrialisation in one country and resulting wage increases trigger further offshoring to other economies. Not only does this process help low-income countries to develop, it also lowers the costs for consumers and thus improves global welfare. HONG KONG BUSINESS | JULY 2014 37

co-published Corporate profile

A case study on perfect timing

See how Hyperlink Consultant Suite was able to lead their market in just four years.

f you want to know what it looks like to be able to spot an opportunity and capitalise on it just in time for the boom, consider the case of Hyperlink Consultant Suite. Hyperlink is an investment advisory firm based in Hong Kong. It caters to individuals and groups seeking to migrate to Hong Kong. Established only in the year 2010, it has grown to be one of the most reputable players in the niche market of immigration investment consultancy in a span of just four years. From starting out only with ten employees, the company has more than quadrupled that number as it stands with around fifty employees currently. What makes Hyperlink such a sly example of perfect timing? The opportunity Hyperlink’s business was borne out of a trend toward increasing immigration to Hong Kong, mostly people from Mainland China. Of course, the trend started way back in the past - as far off as the Shang Dynasty (which ended 1046 BC!). Since then, immigration to Hong Kong increased, thus forming a 38 HONG KONG BUSINESS | JULY 2014

Samson Cheung, Vice President, Hyperlink

“From starting out only with ten employees, the company has more than quadrupled that number as it stands with around fifty employees currently.”

trend. But when did Hyperlink know when to enter? And how did they see that as the entry point? Hyperlink’s business was set up in 2010. According to Samson Cheung, Vice President at Hyperlink, the trend toward immigration to Hong Kong was at its height during that time. And their entry point? The threshold of investment for admission into Hong Kong was raised during that year, from HK$6.5 million to HK$10 million. This is more than 50% in increase. Also, at the same time, real estate was momentarily suspended as a class of Permissible Investment Assets under the Capital Investment Entrant Scheme, limiting the investment category to financial products. As you might have already pieced together, this paved the way for a massive opportunity for financial services companies and immigration consulting firms. And Hyperlink was probably one of the first to grab that opportunity. The service So how did Hyperlink solidify their entry into this market after that signal? According to Cheung, they made sure that every need that a

client in this market could have would be met by their services. Thus, the strategy of the company was to be a one-stop provider of immigration investment services. Being a one-stop service firm entails an end-to-end service where even the minutest of needs of any client should be met. Indeed, Hyperlink has been true to that strategy to this day. Among the services that Hyperlink offers are professional immigration information services. This service allows clients to get a comprehensive view on the requirements necessary for their immigration to be successful and hassle free. Other services of the company also includes providing assistance in the areas of in-house purchasing, in the establishment of businesses or companies, child education plans, special shuttle services, and daily-use products purchasing. The company has also set-up its own regulatory service to provide its client with top-notch regulatory knowledge and security. Besides having a comprehensive menu of services already, Hyperlink has managed to expand its business with superb organizational efficiency in such a short span of time.

co-published Corporate profile

Hyperlink has set up two subsidiaries - Hyperlink Motors Limited and Hyper Link Property Consultancy Limited in order to better facilitate their client’s integration into Hong Kong. The company gains tremendous efficiency of operations through the various synergies that take place between these subsidiaries. Hyperlink Property offers sale, purchase and leasing of property services, while Hyperlink Motors offers sale and purchase of vehicles services. Clients are referred to these departments seamlessly according to their needs. The brand Although Hyperlink’s service portfolio has made it very convenient for its clients, what really caps off Hyperlink’s leading performance is their attention to building a solid brand. Cheung shares that their competitive advantage is really the way they serve their clients. Their philosophy is to always deliver their services from the point of view of their clients. This is probably how they were able to come up with their comprehensive, one-stop style service portfolio. One way that the company exercises this brand philosophy is through the service-orientedness of all their sub-services. For example, it is worth noting that its subsidiary Hyperlink Motors not only provides sale and purchase services, but also assists their clients in getting familiar with the traffic situation in Hong Kong. It’s very rare that a company of that nature would go the extra mile to

provide other services that you would actually only expect from a friend. The company’s attention to its service brand has earned it the tremendous benefit of word-ofmouth marketing. Cheung shares that a good number of their clients were gotten through unsolicited referrals from their past clients. Truly, only the companies with a genuinely good brand of service get to maximize the tool that is word-ofmouth marketing. This brand philosophy is especially crucial in Hyperlink’s business since it deals with clients that are in the process of migration. Thus, naturally, individuals and groups in pursuit of relocation may not necessarily be able to articulate what exactly their needs are as of the moment since the place they are migrating to may require things of them prior to immigration. As a foreigner, one may not be aware of what exactly these requirements may be. This is why Hyperlink’s service philosophy is important. Putting your business in the perspective of the client allows you to anticipate what those needs may or should be, and allows you to articulate to the client why exactly they would benefit from availing of your services. Hyperlink’s track record of excellent customer service proves the importance of this philosophy, and why it pays to apply it to any business. The lesson There are several key things that can be learned from how Hyperlink was able to grow its business solidly in only four years. Firstly, spotting a lucrative opportunity in the form of trends does not necessarily mean catching the trend at its peak. Indeed, the trend that Hyperlink was able to spot was a trend that has been forming for years before 2010. It was only during the point where the trend reached a crucial turning point that Hyperlink decided to capitalize. Therefore, what this means for aspiring success stories is that even mundane trends forming today could prove to be lucrative business opportunities in the future. Secondly, playing in a niche

“The company’s attention to its service brand has earned it the tremendous benefit of word-of-mouth marketing.”

market does not necessarily require narrowing your services too much. As what Hyperlink has illustrated with its business model, expanding the service portfolio pays well and heftily, especially when dealing in a market where clients have various wide-ranging needs and are seekers of convenience and ease. Lastly, good customer service can never be overappreciated. Hyperlink’s attention to top notch customer service has proven to be most beneficial to the company, especially since a good part of the business that Hyperlink generates comes from referrals from past satisfied customers. This is also important when taken into the context that these clients and prospective clients are at a crucial juncture in their lives. It is indeed a business of trust, and Hyperlink has shown that it knows fully well that trust is something you earn from your clients. HONG KONG BUSINESS | JULY 2014 39

REGIONAL ANALYSIS 2: ASEAN’S RISING AFFLUENCE

ASEAN’s key advantage is its young and growing population

Demographic Techtonics: The rise of ASEAN affluence ASEAN 5’s growth is still outstripping the global average. By Conrad Werner, Analyst, Macquarie Capital Securities

SEAN 5’s total income growth is slowing markedly over the next five to ten years, versus the last five to ten. As we outline in next section, this is due to the underinvestment in Fixed Capital per Worker over the last five years, a key driver of productivity alongside Education. We expect investment to pick up, and this is the first key investment theme we’d highlight, with Indonesia and the Philippines set for the biggest pickup. The good news is that, despite this slowdown, ASEAN 5’s Total Income growth is still healthy. The Global Demographics model elicits a +3.6% CAGR in Total Income for the ASEAN 5 over the next five years (2014–19). Whilst that lags China (+6.3%) and India (+4.3%), it is ahead of Affluent Asia (+1.6%) and the global average (+2.3%). Total Income already stands at a

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The Global Demographics model elicits a +3.6% CAGR in Total Income for the ASEAN 5 over the next five years (2014–19).

significant US$1.7tr in 2014, which is about 20% larger than India’s, but ASEAN 5’s Income per capita is 3.4 greater. When coupled with its solid growth rates, ASEAN 5 is a key consumer spending and savings market globally. Looking at it another way, ASEAN 5’s Total Income is growing by ~US$330bn in the next five years, which is close to India’s ~US$350bn (China is Asia’s monster market with a ~US$1.9tn increase). Indonesia is the largest and set to grow the most in absolute terms. Malaysia and Singapore grow fastest in percentage terms. The Philippines is an “inbetween” market in terms of size and growth. Thailand is the region’s laggard over the next decade. Affluence is rising, giving birth to an ASEAN ‘Aspirational class’ The ASEAN 5 countries are also

seeing good growth in Total Income per capita, a key measure of affluence. The Philippines is an exception, as its metrics are diluted by a high birth rate. Rising affluence is driving upward class mobility as the higher income classes swell, opening new growth markets. Aspirational class is where the action is: The group of 20 million people in ASEAN 5 households earning over US$50,000 is set to rise by 25–50% in the next five to ten years. Moreover, all countries’ markets bar the Philippines are seeing their fastest Total Income growth in the Aspirational segment. Indonesia and Malaysia are key markets. As highlighted later, Indonesia’s Aspirational class more than doubles over the next decade in Income terms, while Malaysia is set to be ASEAN 5’s largest Aspirational class over that same period. Selective Middle class opportunities: The group of 61 million persons in households with an Income of US$20,000–50,000 is set to rise by 16–28% to 71–78 million in the next five to ten years. But ASEAN 5’s Middle Class Income is only growing in line with its overall Income. Two markets of interest: Indonesia’s Middle class market is both large and outgrowing all of its peers, while the Philippines’ Income is growing fastest in its Middle class segment. Lower class is a dull “1% growth” opportunity. People in households with Total Income of US$1–20,000 represent the bulk of the region’s population at 374mn out of a total of 455m. This group’s size stays significant over time, but it is declining as a percentage. We see virtually no growth in Lower class Income in ASEAN 5 over the next decade. Adding the Age overlay: Empty Nesters are the sweet spot The Working Age Empty Nester cohort is the most valuable. This group encompasses persons 40–64 years of age. They tend to be working and have high disposable income due to below-average dependents. This cohort is already

REGIONAL ANALYSIS 2: ASEAN’S RISING AFFLUENCE the largest Income generator in ASEAN 5, and it is set to deliver the highest absolute growth. Tying in with the discussion above, we would further highlight the Aspirational Empty Nesters. That category looks especially attractive in Indonesia, Malaysia and Singapore. Thailand has a large Empty Nester segment today, but it doesn’t grow especially fast, and within that the Middle class Empty Nester opportunity looks about as compelling as the Aspirational segment. In the case of the Philippines, the Empty Nester category is growing fastest in the Middle class segment. The Retired market is growing fastest across all income classes in percentage terms. Whilst ASEAN 5 is relatively young, it is also ageing, and large numbers of persons are entering the Retired cohort over the next decade. Total Income growth is thus high in this segment, across all three income classes, but it is coming off of the lowest bases. Malaysia and Singapore are the best opportunities in terms of market size and growth, although we would still favour the Empty Nesters categories in those countries. The retired market does look reasonably compelling in Thailand. Kids, Young Adult, Young Family: In general these markets are not especially big and not growing all that fast in Total Income terms, although there is an opportunity in The Philippines, where growth looks more balanced across age groups.

ASEAN 5’s productivity (GDP per worker) is also set to rise faster than the global average, but the rate of growth is slowing sharply.

Key Sectors A final overlay we can look at: Income per capita is growing fast enough to drive rising Affluence

Source: Global CEIC, HSBC Source: Demographics, Macquarie Research, April 2014

Persons 40-64 years of age are the largest income generators in ASEAN 5

Total Income can be allocated to three areas: 1) Personal Consumer Expenditure (PCE), 2) Savings and 3) Taxes. The Global Demographics model has deep intelligence on spending trends across these categories. In a nutshell: PCE tends to dominate Total Income spending across ASEAN 5, and Indonesia is the heavyweight by some distance. PCE is also the key market in Thailand and the Philippines by size. Within PCE, Retail is the biggest opportunity across all the markets, as highlighted in the next section. Retail includes Food, Clothing, and Personal Care. Malaysia and Singapore are key Savings markets not just in terms of absolute size, but also in terms of growth potential. Given the high levels of affluence, this would suggest good opportunities in financial and wealth management areas. Demographics drive affluence ASEAN 5’s population profile is a powerful demographic tailwind. The region’s key natural advantage is its young and growing population. Assuming no technological disruption to labour demand (eg robotics), this should result in ASEAN 5’s workforce growth continuing to outstrip the global average. Immigration policy can alleviate demographic headwinds. For example, Thailand has allowed an influx of immigrant workers from neighbouring countries to relieve the pressure of the tight labour market. The number of officially registered

immigrant workers is ~2 million. There is also a large contingent of unofficial immigrant labour, which some agencies estimate to be up to a further 2 million. The total immigrant workforce could be as high as 10% of the existing Thai workforce. Having said that, too big a dependence on immigration can carry negative externalities leading to a disaffected electorate, as we can see in Singapore’s case today. But its productivity needs some work ASEAN 5’s productivity (GDP per worker) is also set to rise faster than the global average, but the rate of growth is slowing sharply. This comes on the back of a period over the last five years when Productivity was well ahead of the global level, as one would expect given the low starting base in most ASEAN 5 countries. The Global Demographics model identifies the key culprit as the underinvestment in Fixed Capital Investment per Worker (FCI) in most ASEAN 5 countries over the last five years, which results in lower productivity for the subsequent five year period. ASEAN generally ranks well on the other key driver of Productivity, Education: Singapore, Malaysia and The Philippines rank well above the global average, and are poised to maintain this advantage. In Indonesia and Thailand, the Education Index is not far off the global average, with the gap is set to narrow over the next decade. HONG KONG BUSINESS | JULY 2014 41

REGIONAL economy briefing: indonesia

Manufacturing decline is one of the major concerns

What’s hobbling Indonesia’s economic growth?

With the oil trade balance dilemma, excessive fuel subsidies and burgeoning external debt,the next government has a lot of work to do.

he winner in Indonesia’s presidential elections will be facing a number of crucial reforms and policies that need to be implemented to ensure economic growth in the world’s third biggest democracy. Gundy Cahyadi of DBS Group Research says three factors need attention from the next government: persistent deficit in the oil and gas trade balance; excessive fuel subsidies; and the decline of manufacturing. Cahyadi says the main factor behind Indonesia’s gaping current account deficit since the second quarter of 2012 is the problem in the oil trade balance. Consumption continues to rise among millions of Indonesians, yet the daily production of crude oil has been in gradual decline over the past decade. As a result,

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A cut in fuel subsidies would help lower consumption, which has caused the deficit in the oil and gas balance to reach $9.7 billion in 2013.

net imports of refined oil have continued to grow as the consumer base expands. “Higher production of oil, both crude and refined, will take time to bring about. More investment in oil and gas is needed, and lags abound. Moreover, the oil and gas sector is still heavily regulated. Bureaucracy and inefficiency of the regulators are partly behind the falls in production. Re-negotiation of existing oil and gas concessions as well as exploration contracts is something that markets will be watching very closely,” he says. Excessive fuel subsidies, which has been eating 25 to 30% of the government budget for the past three to five years, is also a problem. On average, the subsidies went beyond their targets by about 60% from 2011 to 2013. Had fuel prices not been

raised by 45% in June last year, overshooting would have been worse. Cahyadi says a cut in fuel subsidies would help lower consumption, which has caused the deficit in the oil and gas balance to reach $9.7 billion in 2013, accounting for 35% of the overall current account deficit. This is a huge number compared to the amount spent on development spending, including infrastructure, which only made up 10 to 15% of the total fiscal spending. Infrastructure issues remain as top concerns for Indonesia’s potential investors, and bottlenecks don’t help the country’s case. The decline in the country’s manufacturing over the past decade is also a concern. “There is a need to re-energize the manufacturing sector and to re-diversify away from commodities,” he says, adding that while the share of mining in gross domestic product has been on the rise since 2004, the share of non-oil manufacturing has been falling since 2001. Michael Spencer, Deutsche Bank’s chief economist, says

REGIONAL economy briefing: indonesia the Indonesian economic outlook has been favourable for the past few months, with inflation easing, strong domestic consumption demand, trade balances stabilizing and exchange rate appreciation. However, even though these feelgood data will likely persist for the time being, downside risks still exist. What challenges will the new government face? The trade balance could worsen in the coming months if export growth remains subdued while imports rebound. Other factors include demand pull inflation, especially of food, worsening of the fiscal balance in the absence of fuel price adjustment, turmoil in the global financial market which causes a shortage of dollar liquidity, and a series of populist measures which may prove unfriendly for investors. “Some of these factors manifested last year; we don’t think the risk of a recurrence this year is trivial,” Spencer says. External debt is also seen as a problem. While the public sector exposure seems manageable, the pace at which external private sector leverage has risen is worrisome. “In just four years, the private sector’s exposure to short-term external debt has doubled to over $40 billion. To put this in perspective, note that the amount is roughly twice that of the projected current account deficit for 2014,” Spencer says. According to Alicia GarciaHerrero, chief economist for emerging markets with BBVA Research, Indonesia’s economic growth faces a ‘soft landing’ in the wake of the recent aggressive monetary tightening to stem high inflation and a deteriorating external balance. The Bank of Indonesia hiked policy rates by 175 bps in 2013, and appropriately so. Moreover, in its bid to contain the fiscal deficit below 2.5% of gross domestic product and augment macro stability, the government has cut public spending and initiated fuel subsidy reforms.

“Given a limited monetary and fiscal space, kick-starting growth requires the next government to expedite structural reforms, which have been fraught with bureaucratic delays. These include removing infrastructure bottlenecks, tackling land acquisition issues, liberalizing trade and investment policies and enhancing labour productivity through skill development. On the fiscal front, measures to boost tax revenue and cut wasteful expenditure through further fuel subsidy reforms are key,” GarciaHerrero says. What are the prospects for FDI? To ease external funding concerns, Cahyadi says the government should attract more foreign direct investment (FDI). Indonesia’s FDI reached a record $28.6 billion in 2013, but the current government has previously noted the potential of Indonesia attracting up to $35 to 40 billion in FDI per year. An increase in the amount of FDI could be channelled into easing various constraints the economy, he says. Infrastructure works are important, and apart from the proposed liberalization of airports and seaports, there are also talks on the possible revision of foreign ownership limits, especially in the construction sector. Foreign ownership is currently limited to 67%. “Further liberalization of these key sectors has been eagerly awaited but progress has been slow. In 2013, plans were made public to open up power plants as well as airports and ferry terminals to foreign investors. These changes have not been formalized and it remains to be seen if the new government will continue to push for this to happen,” Cahyadi says. What does the presidential frontrunner have in store? The future of Indonesia is likely in the hands of Jakarta governor Joko Widodo of the Indonesian Democractic Party of Struggle (PDI-P), who is currently leading

In just four years, the private sector’s exposure to short-term external debt has doubled to over $40 billion.

the poll surveys as of the time of writing. If he wins, Jokowi, as he is known, faces the responsibility of leading a fractured parliament to implement a big wave of structural reforms. “We think Jokowi’s track record looks encouraging, by and large – but a quick panacea for Indonesia’s macro rebalancing process is unlikely. The tangible impact from any reform agenda is likely a story for 2015 (or at best late 2014),” says Hozefa Topiwalla, a Morgan Stanley Research analyst. In his two terms as mayor of Solo from 2005 to 2012, Jokowi adopted a style of engaging in policy dialogue with the grassroots, making significant progress on many fronts. He is also perceived to be collaborative and approachable. Topiwalla adds that he also has a distinct hands-on approach with his “Blusukan” or impromptu visits to government offices and poorer districts as he gets in touch with everyday concerns on food prices, housing and transportation. Jokowi has also taken steps to improve the investment climate, by creating a one-stop shop, reduced bureaucratic procedures, better fiscal resource management and budget transparency. He helped propel Solo into becoming a World Heritage City in 2006, which gave a boost to tourism. Aside from this, he also made reforms in infrastructure connectivity and healthcare. He replicated his reforms when he became governor of Jakarta.

Outstanding private sector external debt

Source: Bank Indonesia, Deutsche Bank. End-year data.

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REGIONAL ANALYSIS 3: markets & investment often asked now-a-days in our conversations with clients.

Investors are advised to keep selling stocks

Go-go investing: How low can you go

Do you keep selling glamorous growth stocks, or do you buy them back now? By Ajay Singh Kapur, Equity Strategist, Merrill Lynch (Hong Kong)

he Great Winfield was a speculator/investor/fund manager commenting on the 1967-68 go-go growth stock bull market to ‘Adam Smith’, the author of the Money Game: “My boy,” said the Great Winfield over the phone”. Our trouble is that we are too old for this market. The best players in this kind of market have not passed their twenty-ninth birthdays”…“My solution to the current market” the Great Winfield said. “Kids. This is a kids’ market. This is Billy the Kid, Johnny the Kid, and Sheldon, the Kid”… “The strength of my kids is that they are too young to remember anything bad, and they are making so much money they feel invincible” said the Great Winfield. “Now you know and I know that one day the orchestra will stop playing and the wind will rattle through the broken

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We are not done in the growth/ glamour stock sell-off – and expect about another 30% downside in these names in EM.

window panes, and the anticipation of this freezes us”. (‘Adam Smith’, in The Money Game, Random House, 1967, pg 206, 211.) This quote first came to our attention from the late Barton Biggs, writing during the 1999 Tech bubble. Having past our 29th birthday a long time ago, and firm believers in the Harry Truman quote that there is nothing new in the world, only the history you do not know, we examine the current go-go growth stock bull market. The year 2014 is a onedecision market – do you keep selling glamorous growth stocks, or do you buy them back now? We believe you need to keep selling. We believe we are not done in the growth/glamour stock sell-off – and expect about another 30% downside in these names in EM. Here we try to answer queries

Question: We are in the midst of a new economy growth stock boom. It seems to have been interrupted over the past few weeks. How many times have we seen these growth stock booms in the US? And in emerging equity markets? How big did they get, and how much did they fall, once they peaked? Answer: Growth stock booms are nothing new. They just seem new. Humans are conditioned to extrapolate new technologies and innovations into the future, until enough money is lost doing this and we have forgotten those losses. Sometimes the scars last very long, other times not so long. Coming into 2014, the median P/B of the mostexpensive decile of stocks in the US was 9.4x (on our estimates), the highest since 1926. Spikes in this line are growth stock booms. Use high P/B as a proxy for growth – and don’t get all snarky and technical about high P/Bs not being exactly equal to growth; we just want to be roughly right, not precisely wrong. You can see nine go-go growth stock booms: the great 1929 boom, the echo boom from the New Deal in 1937, the endWW2 growth stock boom, the 1961-62 electronics/healthcare boom, the 1967-68 “go-go” boom involving data processing/ computers/and (ironically) shale oil names, the 1972-73 “nifty-fifty” euphoria, the early 90s consumer staples boom, the famous technology, media, telecoms (TMT) bubble of 1999, and the latest “new tech/social media/biotech” growth boom. Clearly, the new technology of the time, and advances in healthcare seem to dominate investor imaginations during these go-go growth stock booms. Figure 1 shows the eight prior growth stock booms once they peaked (only known in hindsight). Figure 2 shows this average trajectory for growth

REGIONAL ANALYSIS 3: markets & investment stocks over these eight episodes that on average these stocks fall 30% from the peak, and take 18 months to do this. Of course, no cycle is the same, we are just talking averages, and as always this time could be different. Stock prices for US high-momentum stocks have fallen 10% in this sell-off, compared with the 30% average drop. Savita Subramanian, our US strategist, recommends underweighting this group. Question: And in emerging equity markets? How big did these growth stock booms get, and how much did they fall, once they peaked? Answer: We have less history here. This is the fourth growth stock boom. The first one was in 1993 – the Barton Biggs “maximum bullish/maximum overfed” call that saw many markets almost double in the second half of 1993; the TMT bubble of 1999, the BRIC boom of mid-2007, and the current “consumer / internet / healthcare” growth stock euphoria. From the 1994 peak, P/B multiples fell 50%, from the 2000 peak, 54%, and from the 2007 peak, 62%. Recollect that in 200102 and 2008 recessions followed growth stock peaks. P/Es fell 44% from 1993 euphoria, 55% from the 2000 apogee and 66% from the BRIC summit. Assume we don’t have a recession, and that 1994 is a guide rather than 2001/02 or 2008, the EM growth stock multiple could drop 50% from its peak. In the recent sell-off, the P/B of the expensive quintile has dropped by 10% and P/E by 20%. The key message is that if indeed we have seen the peak in growth stock multiples, the declines are not done yet: expect multiples to contract another 30% or so. If there is no recession, and we do get to this further downdraft, we would be prepared to buy again. Question: Ok, so what are the global or common drivers of the go-go growth stock bull market? What do we need to track, and

have a view on? Answer: There are four drivers: 1) All these stocks are united by their extremely high revenue and EPS growth rates – in the past, or those expected in the future. As in most growth stock booms, these names come from the technology and healthcare sectors. Throw in a few consumer names, and some alternative energy (really new tech names) and the picture is reminiscent of history. 2) The relative EPS abundance of these names versus all other stocks could also be a plausible reason for the relative re-rating of growth stocks versus the rest. The story is about the relative scarcity of earnings – in this EPS drought, investors are ready to pay massive multiples for revenue and EPS growth where they can find it. 3) The US Fed’s balance sheet. The Fed has unleashed its balance sheet, and various asset classes have benefitted – in EM it is corporate bonds, property and growth stocks. Also, EM country-sectors with the highest correlations to the Fed’s balance sheet are consumer, tech and healthcare. For DM, these would be software, consumer and transportation. These are the country-sectors with the highest correlations to the Fed’s balance sheet for Canada, Hong Kong and New Zealand, respectively. On the other hand, DM countrysectors with the highest negative correlations to the Fed’s balance

Stock prices for US highmomentum stocks have fallen 10% in this sell-off, compared with the 30% average drop.

sheet are consumer durables and apparel, capital goods and insurance for Netherlands, Denmark and Ireland, respectively. As the Fed’s balance sheet flattens out from this October, this source of fuel for growth stocks is going to run dry. Investments that worked over the past five years mostly worked in consonance with the growing balance sheet of the US Fed – that source of sustenance and mojo is going to be gone soon. Growth stocks need that fuel to keep going. We have written about this story in detail in Pig in the Python, 17 February 2014. 4) The sharp rise in global policy certainty. There have been sharp rises in the US, European, Japanese, Chinese and Indian policy certainties over the past years. Worries about fiscal cliffs, sequesters, political transition in Japan and China, etc seemed passé, and so unnecessary in hindsight.

Figure 2: US: Go-go, expensive stock booms dropped 30% from their peak, on average

Source: BofA Merrill Lynch Global Research, http://mba.tuck.dartmouth.edu/pages/faculty/ ken.french/data_library.html, Bloomberg

Figure 1: From their peak, go-go growth stock booms have fallen on average 30%, and taken 18 months to do it

Source: BofA Merrill Lynch Global Research, http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html, Bloomberg

HONG KONG BUSINESS | JULY 2014 45

ECONOMICs

Ian Perkin

Surplus points to healthy growth

he Hong Kong economy may be motoring along in first gear but those sectors of it that play a key role in government revenues – especially property-related taxes and duties – have been powering ahead. More will be known on the economic situation when first quarter Gross Domestic Product (GDP) growth is revealed on 16 May. Provisional government financial results for fiscal 2013-14 (the 12 months to 31 March) issued recently showed the government with better-than-expected revenues and a surplus of $21.8 billion for its financial year (see table). These figures also cover the three months to 31 March, or the last quarter of the government’s 2013-14 fiscal year. Judging by the government revenue outcome for that period, growth must have been quite respectable. For the fiscal year as a whole, the government finds itself $9.8 billion better off than it thought it would be in the 2014-15 budget presented to the Legislative Council just ten weeks ago. And part of that is clearly down to a better final quarter outcome. The big annual surplus is also despite outlaying (and/or foregoing revenue of) $33 billion in the 2013-14 budget in “one-off” measures to boost the economy and improve community welfare. It is almost entirely due to better than expected revenue Expenditure for the year was $433.54 billion, only $2.3 billion less than the estimate contained in February’s 2014-15 budget and $6.5 billion less than the forecast in the 2013-14 budget. Revenue, on the other hand, soared. At $455.34 billion it was $7.5 billion up on the 2014-15 budget estimate and $20.2 billion higher than the original 2013-14 budget forecast. This was largely due to the buoyant property market (land sales and real estate transactions). Of the $7.5 billion revenue difference between this year’s budget estimate and the provisional results (which are for all intents and purposes the final numbers for the year, usually subject to only modest revision), a full $3.3 billion came from buyer’s stamp duty. A further $0.5 billion came from other stamp duties, $0.14 billion from profits tax, $0.6 billion from salaries tax, $0.5 billion from tobacco duty and the same from vehicle first registration tax. All reflect the more buoyant economy during the year. Growth in calendar 2012 was a mere 1.4% and increased to 2.9% in calendar 2013. This year growth is expected to be in the range 3-4% (according to the government) and should be closer to 4% than 3%. This should underpin the government’s revenue and surplus outlook for the 2014-15 fiscal year, despite global economic and political uncertainties. In the meantime, in the wake of the findings of the Working Group on Long-Term Fiscal Planning, delivered at budget time, the Financial Secretary, John C Tsang, has outlined plans to implement its recommendations, including the possibility of new taxes. “I must emphasise that Government does not have any plan at this time to introduce new taxes, but in principle, we always keep 46 HONG KONG BUSINESS | JULY 2014

IAN PERKIN Independent Economic Consultant perkin888@hotmail.com

Budget Outcome 2013-14 HK Government consolidated account, provisional numbers $HK billion

Source: HK Government Budget Papers

an open mind,” he told a meeting of the Business and Professionals Federation. He ruled out a Goods and Services Tax (GST), looked at in 2006, and said any consideration of broadening the tax base would have regard to three principal criteria: • First, the option must be effective in broadening the revenue base and in providing stable income to meet Hong Kong’s future needs. • Second, the option must be fair and generally in line with the “capacity to pay” principle. • Third, the option must remain faithful to Hong Kong’s simple and low tax system in order to maintain the SAR’s competitiveness in attracting capital and talent. He said the Working Group made clear the need to promote economic growth while containing excessive growth in expenditure and broadening, or at least safeguarding, the revenue base. In formulating a fiscal strategy to achieve this simple and common-sense objective, we need to strike a proper balance between allowing flexibility and upholding fiscal discipline, as well as between coping with immediate community needs and preserving longer term fiscal sustainability. “We are taking a multi-pronged approach, involving expenditure, revenue and savings, to ensure that fiscal sustainability and economic competitiveness can be maintained,” he said. The intention is to maintain public spending at about 20% of GDP and establish a “Future Fund” to set aside a portion of the fiscal reserve and annual surplus, invest them on a longer-term basis, and release the provision after a designated period to help relieve the pressure on future generations. We have now enjoyed ten successive years of budget surpluses, with our fiscal reserves exceeding $700 billion,” he said. “Looking ahead, we expect continuing, albeit slower, economic growth.”

OPINION

Tim hamlett

Off the rails

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

ell,I hope none of you were surprised to hear that the great new White Elephant High Speed Railway to Shenzhen is running two years late already. Large projects of this kind often succumb to what is called the Planning Fallacy: over-optimistic assessments of the prospects for early and belowbudget completion. Academic controversy continues over whether this is due to an innate bias in the human brain towards optimistic projections of the future, or it should more properly be blamed on unscrupulous contractors who make unrealistic promises, knowing that once the project has started it is unlikely to be cancelled however bad the news gets. I must congratulate the MTR on contributing to the great tradition of offering limp excuses for rail delays, pioneered by the UK’s former Southern Region, which was often paralyzed by autumnal avalanches of fallen leaves. The MTR’s problem, it seems, is that it rained. What a shock that must have been. Also the tunnelers ran into some rocks under Lai Chi Kok. The great international example of this sort of catastrophe is the Sydney Opera House. Work on this started in 1958, at which time the budget was AUD7million. When the building opened in 1973 it had cost AUD102million. A more recent example is the building which houses the Scottish Parliament. Work started in 1997, with the projected cost at GBP40 million. When it was completed in 2004 the estimated final cost was GBP431million. Rail projects are the specific hobby of a Danish prof called Bent Flybjerg. He has been trying to foster more pessimistic planning by beating people over the head with the past statistics, like these: between 1969 and 1998 the average over-estimate of passenger numbers for major new rail projects was 105 per cent. The average (not the maximum, the average) cost over-run was 45 per cent. Interestingly, the early casualties did not produce any more caution in the later estimates. The error rate remained the same. This suggests that it is probably the same now. More recent international examples are equally ominous. Barcelona’s ninth underground line was supposed to cost EUR1.9 billion. It came in at EUR8.7 billion. The modernisation programme for the UK’s West Coast line was originally supposed to cost between GBP2 and 3 billion. Revised estimates effortlessly zoomed to GBP14.5 billion, at which point the track company became insolvent. A new rescue strategy was brought in in 2003 which would, it was hoped, keep costs down to GBP8.3 million. These hopes have not been entirely realised; work is still in progress and the final bill is expected to surpass GBP9 million. In this company the Edinburgh tram system, which should be opening next month, looks a bargain. When work started in 2006 the budget was GBP498 million. The final bill with financing costs is expected to be only GBP1 billion. But this is deceptive. Nearly half of the originally planned network was cancelled to save money. What can we hope for, then, from the MTR’s Great White Elephant? Well there was no competitive bidding for the contract (our two

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railway companies having been merged with each other) so the original number offered – $80 billion – can be considered an honest guess. Unfortunately this was considered politically unacceptable so it was massaged down to $68 billion. This is now the figure used in hand-outs and press reports, although the project was not trimmed in any way; all that happened was that some parts which could plausibly be inserted elsewhere in the public works budget – like roads – were excluded from the headline figure on the grounds that they “would have to be built anyway…” The MTR has now produced a $4 billion contingency fund, which is going to cover the latest glitches. So this is now presumably a $72 billion project. It is difficult to believe protestations that the two-year delay now expected will have no further impact on costs. I infer two things. Firstly about suggestions from Shenzhen that the Hong Kong Government should accept some financial responsibility for disappointing ridership on the already existing line between Shenzhen and Guangzhou: these should be resisted strenuously. Two years may not be the end of it. Secondly there is the position of the responsible minister, who despite being on the MTR Board of Directors professed himself totally surprised by last week’s news. If I were you, mate, I would resign now. It’s all downhill from here.

It’s all downhill from here!

OPINION

Hemlock

HK retailers glimpse possible future; wet themselves

did very well out of jewellery chain Chow Sang Sang, buying it at around $6 a share and selling it at over $20 when the number of Mainland shoppers coming to Hong Kong started turning into a flood. While I held the stock, I felt pretty good seeing new branches open and more customers pouring in to buy the shiny baubles. I could even stomach the loathsome puke that passed as the company’s marketing on the grounds that, hey – if it works… But soon after selling, I developed a deep hostility to the phenomenon of Mainland visitors, and the outlets aimed at them, displacing residents and their traditional retailers. It would probably have happened anyway, just as it happened to most other people (the first anti-‘locust’ protests started within a year, as I recall). But there is no denying the fact that the presence or lack of a financial interest helps shape your outlook. So it may well be that the retail lobby are sincere in believing that a reduction in visitor numbers would do huge damage to the Hong Kong economy, as they are now claiming in response to Chief Executive CY Leung’s comments about cutting arrivals by 20%. The landlords’ arguments are nonetheless self-serving. With tight supplies of both labour and commercial space, the massive influx of Mainland shoppers has simply squeezed other jobs and businesses out. You only have to look at how median household income has largely stayed flat for the last 10 years to see that only a few are making more money from this, while the rest suffer tremendous annoyance and inconvenience. We should also consider the possibility that the sharp rise in rents could do permanent damage to Hong Kong by killing off smaller businesses and opportunities for innovative entrepreneurs, thus further narrowing our economic base. Basically, we need all the ‘pharmacies’, jewellers, cosmetics and other shops that opened over the last five years to shut. The idea that the government could even mention a cut in numbers has freaked out the vested interests. So accustomed are they to an administration that serves them and not the population as a whole, that we see denial and cognitive dissonance setting in. Today’s Standard editorial tries to make sense of it thus… That’s right: the ‘20%’ idea is a government scare tactic to get complacent landlords off their 50 HONG KONG BUSINESS | JULY 2014

backsides and join officials in battling the rest of the community, which idiotically opposes the swarms of Mainland visitors. In your dreams. The government is under siege on this issue, and it would probably sooner form an alliance with the rest of the population against the landlords than vice-versa. Not that we will see that, sadly. The issue concerns face (CY played a role in convincing Beijing to let more Mainlanders visit Hong Kong). It concerns public opinion across the border, where many people now feel a right as fellow citizens to access cheaper/safer Hong Kong goods and would resent Beijing pandering to the spoilt and selfish colonial running dogs. But, looking on the bright side, it also concerns popular feeling in Hong Kong, which never seems to manifest itself as undying love for Party and Motherland, whatever carrots and sticks are waved at it. This is why Beijing’s officials in Hong Kong picked up the Individual Visit Scheme issue a few months back and said they’d study it, by which they mean ‘defuse it’. It will be interesting to see who hands down the final decision on what to do. The more it is seen to come from officials at the national level (which is where authority over exit permits for Hong Kong lies), the less the ‘patriotic’ shoeshiners of the retail/landlord lobby will be able to whine. Indeed, the rest of the population will on balance probably have more respect for anything coming from Beijing than from CY and his team.

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

What will become of HK retailers?