Hong Kong Business (April-June 2020)

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Issue No. 58 Hong Kong’s Best Selling Business Magazine

usiness b in the time of

corona

How the city’s business leaders are coping, and adapting, in the face of a global pandemic Venture capital takes a dive MBA Programmes: Where are the students heading?

Corporate clients desert the banks THE PRIVATE EQUITY BOOM IN GREATER CHINA SUBSIDES

C2

HONG KONG BUSINESS | Q2 2020

HONG KONG

BUSINESS

FROM THE EDITOR

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It is no secret that the COVID-19 pandemic is knocking out the world’s economy and businesses began to shift their focus from dominating markets to simply just surviving this crisis. So for this issue, Hong Kong Business have spoken to several business leaders to know how they are weathering the storm. Head over to page 18 and learn how the big players are staying strong.

Publisher & EDITOR-IN-CHIEF Tim Charlton associate publisher Louis Shek MANAGING EDITOR Paul Howell production TEAM Nathanielle Punay Danielle Mae Isaac Giullian Navarra Clarist Mae Zablan Frances Jade Gagua graphic artist Tyrone De Los Santos ADVERTISING CONTACTS Louis Shek +852 6099 9768 louis@hongkongbusiness.hk Aileen Cruz aileen@chartonmediamail.com

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On the investors’ side, venture capital firms are bracing for worsening situations as funding gets postponed and logistical constraints continue to surface. However, some strongly believe that VC firms will stand strong despite economic downturns. Read more at page 12.

This issue delves into Hong Kong’s top universities that are offering MBA programmes and how they are coping after temporarily shutting down due to recent social disturbance and pandemic threat. To know more about this, flip over to page 26.

In this issue, we also cover our annual awards programme that is now in its 16th year: Hong Kong Business’ High Flyers Awards 2020, held at Hyatt Regency Hong Kong, Tsim Sha Tsui. Go to page 30 to see the highlights.

Enjoy the issue!

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HONG KONG BUSINESS | Q2 2020

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CONTENTS

18

COVER STORY Businesses adapt to the time of Corona

FIRST

REGULAR 10 Space Watch 12 Financial Insight

FINANCIAL INSIGHT 12 Hong Kong’s economic crisis spills

over to venture capital activity

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event coverage High flyers: Hong Kong Business salutes the crème de la crème at the High Flyers Awards 2019

RANKINGs

legal BRIEFING

06 Coronavirus cripples banks’ earnings 24 Hotels make further room rate cuts to survive 07 Majority expects Hong Kong’s 26 MBA providers turn to online economic situation to worsen 08 Luxury real estate may see new lows

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Industry insights Banks’ asset quality battered by COVID-19 and protests

42 FIL opens PRC doors to HK investors

schooling following unrests and outbreak

OPINION

marketing BRIEFING 40 What makes a great mobile ad campaign?

44 Benson chao: Understanding the

46 Brian Lo: Charting the explosive growth of Hong Kong’s Gig Economy

48 Hemlock: Is it time for universities

Published Bi-monthly on the Second week of the Month by Charlton Media Group Pte Ltd, 19/F, Yat Chau Building,Q2 2020 2019 2 HONG KONG BUSINESS | JANUARY 262 Des Voeux Road Central, Hong Kong

human side of working from the home office

to learn a valuable new lesson?

For the latest business news from Hong Kong visit the website

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HONG KONG BUSINESS | Q2 2020

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

Economy

Economy

Nearly 3 in 5 firms fear virus crisis could spur restructuring

Total cargo inched up 1.8% to 263.3 million tonnes in 2019

Private sector hits rock bottom as PMI sinks to 12-year low

Fifty-eight percent of Hong Kong’s companies are concerned that their employment may be vulnerable to possible business restructuring, according to a survey by Randstad Hong Kong. This was despite 63% of firms stating they will still hire staff.

The total amount of cargo that passed through Hong Kong in 2019 rose 1.8% YoY to 263.3 million tonnes compared to the 170.9 million tonnes recorded the previous year, according to data from the Census & Statistics Department.

Hong Kong’s private sector is in dire straits with the PMI sinking to a record low of 33.1 in February, from 46.8 in January, according to an IHS Markit report. This deepening recession was no thanks to waning business and consumer confidence.

Aviation

Cathay Pacific and Cathay Dragon slash passenger capacity by 96% Cathay Pacific and affiliated airline Cathay Dragon will cut their capacity across passenger networks by 96% in April and May, an announcement has revealed. There was a drop in demand caused by the coronavirus pandemic.

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Tranpsort & Logistics

HONG KONG BUSINESS | JANUARY Q2 2020 2019

ECONOMY

Permanent residents to get $10,000 each to boost spending power Hong Kong’s permanent residents aged 18 and above will receive $10,000 each from the government, financial secretary Paul Chan said in his budget speech. This is expected to benefit about 7 million people. It hopes to boost local consumption.

ECONOMY

Hong Kong sinks into fiscal deficit for first the time in 15 years Hong Kong recorded a deficit of $37.8b for 2019-2020 or about 1.3% of the city’s gross domestic product (GDP), finance secretary Paul Chan revealed in his budget speech. This is the first time that Hong Kong has run a fiscal deficit in 15 years.

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FIRST Only 1 in 10 local bosses bullish on global growth About 79% of CEOs have cited changing consumer behaviour as the top threat to their businesses’ growth.

Only 12% of the Hong Kong executives surveyed in PwC’s annual CEO survey are projecting global growth to improve in the next 12 months. This is in stark contrast to the 84% of CEOs who were optimistic in Mainland China, and is slightly lower than the 22% recorded globally.

About 79% of the Hong Kongbased respondents cited changing consumer behaviour as the top threat to their businesses’ growth, followed by availability of key skills to respond to crises at 76%, and cyber threats at 71%.

In line with this, only 29% of Hong Kong respondents stated that they are “very confident” that their revenue will increase over the next three years.

However, they showed slightly more optimism in another question, with 44% perceive that their current financial performance will outperform their competitors.

As for strategic goals, 15% stated that they allocate resources strategically, but fewer (9%) stated that they will be able to pursue new opportunities that emerge.

Right now, 65% stated that they are focusing on launching a new product or service, whilst 71% are generating operational efficiencies to fuel growth. Forty-seven percent of Hong Kong CEOs are also looking to create additional external growth strategies, such as forming new joint venture partnerships, whilst 44% of the respondents are aiming to expand to new markets.

Almost three-fourths (74%) said that Mainland China is still important for their growth prospects, whilst Singapore and the US followed at 24% and 21%, respectively. Meanwhile, 76% of Hong Kong executives stated that they aim to expand their market.

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HONG KONG BUSINESS | Q2 2020

Hong Kong Monetary Authority

Coronavirus cripples banks’ earnings

W

hilst local banks are still well-positioned to meet the conflux of operation and financial challenges even with the coronavirus compounding these pressures, the operating environment will deteriorate further the longer the outbreak persists, Fitch Ratings said in a note.

The sector’s outlook remains negative as the weaker economic growth since the beginning of 2019 continues to drag on banks’ profits, further compounded by the COVID-19 outbreak.

Bank earnings are expected to remain weak in the near term.

Around 20%-30% of bank branches in Hong Kong are expected to close temporarily or have shortened operating hours, according to the Hong Kong Monetary Authority (HKMA).

Banks in the city have sufficient capital and liquidity buffers or parental support to weather the current operating environment. Relief measures introduced by Hong Kong and Macao banks for residential mortgage loans and other types of

Banks are also introducing their own measures to alleviate the burdens of their customers given recent developments.

personal and SME lending should also alleviate near-term asset quality and profitability pressures caused by the nCov outbreak.

“The average common equity Tier 1 and impaired loan ratios across Fitch’s rated portfolio were estimated at around 16% and 0.6%, respectively, at end-December 2019. Moreover, less than 1% of mortgage loans were in negative equity compared with June 2003, when as much as 30% of these loans were in negative equity,” Fitch Ratings stated.

Further, the loan-to-value ratio for new mortgages was only 53% in December 2019 compared with 65% in June 2003.

The outbreak further adds to the economic challenges already faced

by Hong Kong since last year, the city having been hit by a triple whammy of protests, the trade war, and a slowdown in the Chinese economy, all of which has hurt business confidence and various sectors’ earnings.

Despite this, local banks remain more insulated from declines in property prices than they were during the SARS period after macro-prudential measures were implemented over the years and bank buffers were built up following the global financial crisis.

Banks are also introducing their own measures to alleviate the burdens of their customers given recent developments. Bank of China (Hong Kong) announced on 6 February that it will introduce special relief measures to help reduce the financial burden for selected mortgage, SME, insurance, credit card and unsecured lending customers. Selected mortgage customers from affected industries such as retail, restaurants, transport, tourism or hotels and entertainment can have the flexibility to repay interest only on their mortgage loans for up to a period of six months, which can be extended by another six months subject to conditions.

HSBC also announced relief measures of over $30b to its customers on 9 February, allowing taxi and public minibus operators to defer principal repayment for up to six months, and borrowers with secured commercial property mortgages to enjoy similar deferral terms for up to 12 months.

FIRST Job titles and salaries are very important to local employees, as these elements are seen as a direct measurement of how well they are doing compared to their peers.

Citizens scramble for face masks as pandemic spreads.

Majority expects Hong Kong’s economic situation to worsen

A

lmost seven in 10, or 69%, of Hong Kong residents expected the economic situation in Hong Kong to further deteriorate in 2020, even before the coronavirus pandemic, Randstad’s Workmonitor Q4 2019 survey revealed.

The percentage was highest amongst people aged between 55-67 years old, where 78% believed that the island’s economy would continue to weaken through 2020. Those aged 18-34 were the most optimistic, although 65% still indicated gloomy predictions for the economy this year.

As for the workforce, only 48% expected their employers to perform better in 2020, compared to last year.

“Hongkongers are aware of the negative impacts that the global trade war and local unrest have on the business environment and employment rate,” noted Natellie Sun, managing director of search and section in Greater China at Randstad.

“Even so, Hong Kong retains its position as the regional hub for many finance and technology companies, and there are still many unexplored opportunities for businesses to grow

through investments and innovation.

Hong Kong will also continue to benefit significantly from its highly resilient and diverse workforce.”

But whilst citizens remained circumspect on Hong Kong’s economic prospects, they were still expecting pay raises and bonuses.

Sixty-three percent of respondents expected to receive a pay raise during 2020, whilst 61% wanted to receive a one-time bonus at the end of their fiscal year.

“Hongkongers are very competitive in nature. Job titles and salaries are very important to local employees, as these elements are seen as a direct measurement of how well they are doing compared to their peers. A factor contributing to the high bonus expectations could also be from staff in customer-facing roles, who were instructed to take unpaid leave as a result of the local protests. This group of workers are hoping their employers will compensate them for their loss of income through a one-time bonus,” added Sun. Randstad did not observe a significant dip in hiring activities in Q1 2020. “Even as Hong Kong was expected to enter a period of recession in 2020 and with the COVID-19 outbreak, we have not yet observed a significant dip in hiring activities in quarter one,” said Sun in early March.

However, there is a significant decrease with face-to-face interviews following the outbreak, Sun added.

THE CHARTIST: Check out Hong Kong’s top fintech deals from 2015-2019 Hong Kong’s ten biggest fintech deals from 2015-2019 collectively raised $5.8b (US$743.5m), with three of those transactions coming from institutional investment and trading companies, and two from a payments and remittances company, Fintech Global reported.

Chinese online brokerage company Futu Holdings raised $1.13b (US$145.5m) in a private equity round led by Tencent Holdings in June 2017, the largest deal in Hong Kong since 2015. The company used the funding to do further R&D, develop its products, and strengthen their cooperation with NASDAQ and the Hong Kong Stock Exchange.

Meanwhile, cross-border payments firm Airwallex raised $778.84m (US$100m) in a series C round led by DST Global in March 2019. The company’s valuation reached over $7.8b (US$1b) due to this funding round, giving it entry to the coveted unicorn club, all within three years of launching. Airwallex has indicated that it plans to continue its expansion globally, targeting the US and UK. Other companies that made the list include insurtech firm CompareAsiaGroup, blockchain & crypto firm BNKToTheFuture, marketplace lending firm Oriente and wealthtech TNG FinTech Group.

Top 10 fintech deals in Hong Kong, 2015-2019

Source: Fintech Global

HONG KONG BUSINESS | Q2 2020

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FIRST Property vacancy rate widens

Luxury real estate may see new lows

W

eakening business prospects and the worsening economic environment are having a big impact on the overall job security of high net worth individuals (HNWIs), that is leading them to be cautious in buying luxury homes in 2020, according to a report by Savills Hong Kong.

The report noted that this was despite the increased volume in luxury apartments seen in H2 2019, as a result of continuous price adjustments that have pushed local investors, professionals and celebrities to enter the market in search of bargains. Volumes in Hong Kong Island jumped by 30% QoQ to 110 units in Q4, whilst the volume in Kowloon/New Territories markets saw an 18% QoQ rise.

These two markets are posting deeper price discounts, with new loan-tovalue (LTV) policies and the imminent vacancy tax continuing to fuel primary launches and sales. “Nevertheless, concerns over the impact of the vacancy tax on future launches as well as market uncertainties led to zero pre-sales consent applications in December 2019, following the zero-application month of August last year. For 2019 as a whole, new projects applying for pre-sales consent amounted to 10,360 units, 46.6% lower than the number of units in 2018, and the lowest number since 2013,” Savills stated.

A super luxury home in Mount Nicholson was sold for $722 million.

However, the falling volumes in the super luxury segment would likely counter the increase in volumes. Savills stated that the number of super posh deals recorded plunged 67.5% in H2 2019 to five transactions, from eight in H1 2019.

HNWIs being cautious on the investment front would likely filter through to the general public and deter other buying decisions. As a result, luxury prices may then dip by another 5% to 10% in 2020, whilst developers holding back on launches could lead the overall volumes to drop around 22,720 units in the first six months of 2020. This figure is said to be 10% below the H2 HNWIs being 2019 volume. cautious Still, Savills explained that these on the gloomy numbers will likely rebound in investment H2 2020, bearing in mind the possibility front would of stimulus measures from Mainland likely filter China, real interest rates still in the red, through to the and the fact that the market is severely general public supply-constrained currently. and deter “We therefore expect to see a moderate other buying correction in home prices of around 5% decisions. to 10% over the next six months.”

Hong Kong amongst priciest cities for expats

Source: JLL HK, Property Market Monitor

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HONG KONG BUSINESS | Q2 2020

Singapore, Hong Kong and Osaka are sharing the throne as the most expensive cities for expatriates globally, according to the Economist Intelligence Unit’s (EIU) Worldwide Cost of Living 2020. The cities’ index score is at 102.

The report noted that Asia’s key business centres’ continue to be the most expensive places for grocery shopping. For instance, a 1kg loaf of bread in Hong Kong costs $27.95 (US$3.60), whilst it costs $26.01 (US$3.35) in Singapore and $43.71 (US$5.63) in Osaka.

A beer bottle in Hong Kong is at $12.19 (US$1.57), $17.47 (US$2.25) in Singapore and $19.31 (US$2.49) in Osaka.

However, the survey results for 2019 highlight that on average, the fastest overall risers in recent years have been North American cities. In contrast, the euro weakened against the dollar in 2019, owing partly to sluggish growth in the eurozone as external headwinds, such as the US-China trade war, negatively impacted export-led economies such as

Source: The Economist Intelligence Unit

Germany. As such, all eurozone countries recorded lower index scores and rankings in 2019.

This pattern is said to have extended beyond the euro area, with the cost of living in other European cities also falling relative to New York. That said, European cities continue to dominate the top spots in individual category costs for personal care, household goods and recreation, reflecting high wages and household spending.

On the other hand, the four cheapest cities are Damascus, Syria; Tashkent, Uzbekistan; Almaty, Kazakhstan; and Buenos Aires, Argentina.

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EXCLUSIVE: SPACE WATCH

Check out JLL’s award-winning Hong Kong office in One Taikoo Place Amongst a host of features, it has a gym that employees can go to any time of the day.

J

ones Lang Lasalle’s (JLL) new Hong Kong office is now 5,000 sqft larger than their previous premises, but its size is not the only thing to get a boost. The space, in One Taikoo Place, was designed with wellness and environmental sustainability in mind, incorporating amenities such as vertical gardens, and even an employee gym.

On top of that, the office is designed with lowtoxicity and low-emitting interior finishes to maintain indoor environmental quality. Comfort was also kept in mind through interior lighting that

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Gavin Morgan

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minimises glare and height-adjustable desks.

“The focus on wellness in the office aligns with an increasing trend amongst JLL’s clients and companies to offer employees and clients across the board a greater feeling of hospitality,” JLL Hong Kong managing director Gavin Morgan told Hong Kong Business.

The office was awarded the Leadership in Energy and Environmental Design (LEED) Platinum certification with the highest score for the city and the secondhighest score globally under the Interior Design and Construction category.

1. Reception area The space is equipped with occupancy sensors, which automate lights and monitor screens by detecting movement.

2. Cafe Around the reception area is a cafe, which serves coffee, light refreshments, as well as breakfast and lunch meals.

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3. Workstations About 80% of the office’s workstations have heightadjustable desks. It allows staff to customise their desks to their comfort.

4. Gym The gym provides staff with 24-hour access to a treadmill, an elliptical fitness cross-trainer, spinning bikes, indoor rowers, and much more.

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5. Recharge Zone A recharge zone offers a place for employees to take a break, which incorporates massage chairs in individual pods.

6. Green Walls Along the walls are two lush, vertical gardens, which improves the air quality and infuses an invigorating feel.

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HONG KONG BUSINESS | Q2 2020

HONG KONG BUSINESS | Q2 2020

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FINANCIAL INSIGHT: VENTURE CAPITAL

Hong Kong’s economic crisis spills over to venture capital activity

VC investors have yet to see the end of their woes, even as domestic volatility has already dragged investment down by 39.02% YoY to $1.28b, from the $2.09m recorded in 2018.

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s Hong Kong has been beaten down by economic downturns, its venture capital (VC) and private equity (PE) sectors have followed suit. Data from the Hong Kong Venture Capital and Private Equity Association (HKVCA) revealed that between 2018 and 2019, aggregated investment crashed 39.02% YoY to $1.28b, from $2.09b, and the average deal size fell from $40.9m to $21.9m.

Volatility in the domestic economy for the second half of 2019 affected investment across a range of sectors, said Dorothea Koo, head of Baker McKenzie’s Private Equity Practice in Greater China. Things are unlikely to get easier from there, however. “Further regional uncertainty coupled with a consumption slump following the COVID-19 outbreak, has resulted in a general pause in investment as venture capital funds wait to assess the broader implications for certain markets,” she said.

Denis Tse, founder and managing partner at Asia-IO Capital Management, echoed this and added that they are expecting more hiccups in H1. “Right now, there are a lot of logistical constraints. Just because we cannot go [around] and travel, there will be a bit of hold up,” he told Hong Kong Business.

VC sponsors have postponed their investments until the conditions of the COVID-19 epidemic have stabilised,

Ivy Wong

Robert Wright

Investments on biotech firms are gaining traction, as evident

by HKEX’s new pre-profits biotech listing regime in 2019.

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HONG KONG BUSINESS | Q2 2020

said Robert Wright from Baker McKenzie’s Private Equity and M&A practice. “We await the anticipated bounce back, particularly across Greater China. However, most industry players have indicated we are unlikely to see a return to 2018 levels any time soon,” he said Even with challenges ahead, Tse said that the PE and VC sectors should be able to hold up. “If you look beyond, and in terms of the underlying flow, it hasn’t really changed much in terms of at the end of the day. Startups still do have to get back to work and build products and expand on business. So, it’s still normal, but we haven’t gotten to the real critical mass that perhaps you know Singapore would have achieved.”

Carry reform In an effort to pull its economy from the trough, Hong Kong is introducing tax concessions for carried interest to encourage the setting up of PE funds in the city.

As announced in the Budget Speech for 2020, the tax concession will be subject to the fulfillment of certain conditions. Industry consultations are also expected to come in the year.

This reform should provide some relief to PE firms faced with uncertainty over previous policies. Carried interest

Alibaba launched a US$131m Entrepreneurs Fund in Hong Kong, aiming to bolster capital injection in startups.

FINANCIAL INSIGHT: VENTURE CAPITAL Value of VC investments in Hong Kong from 2010 to 2018 (in HKD)

Source: Statista

has been treated by the government as a fee for services, or a type of disguised management fee. But in a note, KPMG held the opinion that carried interest can be considered an investment return, and can be treated as returns received by investors in the fund.

PwC Hong Kong noted that amongst other proposed economic stimuli, this one comes with great significance.

“We are sure that a swift end to the uncertainty that has hung over this issue will be greatly welcomed by the industry.”

Edwin Wong of Baker McKenzie’s Fund Practice, echoed this, saying “The proposed measures will be beneficial to enhancing Hong Kong’s position as a hub for international asset and wealth management. In addition, our PE fund clients will be pleased to see greater certainty in how carried interest is taxed in Hong Kong.”

In order for the reform to significantly affect the sector, KPMG noted that the government must engage with the PE industry before finalising any legislation. “If the provisions fall short of what is necessary to arrest the increasing trend of funds establishing operations elsewhere such as in Singapore, Hong Kong’s position as a leading PE hub could be impacted.”

Biotech exit boom?

Even with a dreary economy in the background, Hong Kong’s VC firms continue to hunt for startups across sectors, with some paying off exceptionally. Notably, investment activity is high for startups in the life sciences and biotech segment, said Alfred Lam, research director at Hong Kong Venture Capital and Private Equity Association (HKVCA).

Previously, the sector has been lowkey due to technicality of product launches, but Lam noted that awareness of the sector has heightened as investment conditions sway to its favour. “A lot of these things are actually below the radar screen, because the entrepreneurs in the life science sector tend to be media-shy. They just focus more on the product, going on stage and talking about their company. All types of products are harder to understand until recently, when people are now paying more attention to help,” he added.

More companies are also taking advantage of the Hong Kong Stock Exchange’s new regulations to allow unprofitable

Denis Tse

Alfred Lam

Brian Chu

Dorothea Koo

Edwin Wong

biotech firms to go public. Thus, more biotech startups are able to lure capital, as seen in 2019 with Insilico Medicine, which bagged $286.9m in a series B funding round led by Qiming Venture Partners to speed up the process of drug development whilst leveraging artificial intelligence (AI).

The government’s push for activity in the biotech space should make way for an exit boom in the years ahead.

Ivy Wong, Asia Pacific chair of Baker McKenzie’s Capital Market Practice, commented, “We do expect to see exit booms in the biotech sector as there are more listing venues in recent years (including the HKSE’s new preprofits biotech listing regime and the Shanghai STAR Market) and we are also seeing more VC investments in the biotech space. There are more VC investments at a very early stage (as compared to previous years) and institutional investors are making proprietary investments in biotech startups, which show that there is a strong interest and belief in the growth prospect in this sector.”

In fact, the $1.02b (US$131m) Alibaba Hong Kong Entrepreneurs Fund said that it would bolster its capital injection in Hong Jong’s biotech startups, emphasising that the next unicorn may emerge from this scene. Its focus is on startups in the series A or B round. One of the startups it has invested in is Prenetics ($310.16m or US$40m), which provides genetics testing solutions for cancer screening and pharmacogenomics.

More investment hotspots Other investment hotspots are on the rise. HKVCA’s Lam noted that education technology is an attractive segment for the retail investor. “You will see that a number of the online tutorial surface platforms operating in China and in Hong Kong have raised a certain amount of money.”

One of the most recent and notable funding rounds raised $271.29m (US$35m) for Hong Kong-based edtech brand Snapask, which develops data analytics and video learning content. The firm started out as a mobile app that matches students with questions to quality tutors for instant one-on-one learning sessions.

Baker McKenzie’s Wright commented, “Whilst consumer demand for online education, grocery and entertainment businesses was already grabbing the attention of VC investors well before the COVID-19 outbreak, interestingly, it seems restrictions on the usual consumer habits, may pave the way for new opportunities and further innovation in these areas. For example, many Chinese consumers have already turned to new tech applications and the internet for shopping, work and other online activities. We may be on the verge of an even wider adoption of digital transformations as businesses are forced to adapt.”

The rise of VC interest in edtech is in line with increasing consumer demand for online education, grocery, and entertainment businesses. However, the rest of the year will still be challenging for start-ups. “During the 2003 SARS outbreak, the strongest players came out as triumphant leaders of their sectors. We expect VC investment to play it safe (following more dominant players in certain markets) whilst the dust settles in the current climate,” Wright added.

HONG KONG BUSINESS | Q2 2020

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INDUSTRY INSIGHT: banks

Bank of China Tower and Cheung Kong Center

Banks’ asset quality battered

by COVID-19 and protests Exodus of corporate clients, mortgage risks, and deteriorating credit card use pose a big threat on banks’ revenues and interest rates.

F

or Hong Kong, the COVID-19 outbreak couldn’t have come at a worse time. Industry performance and consumer sentiment are already at record lows over the past half year, hampered by the social protests that took the city by storm, and earlier waned by the onslaught of trade tensions and mainland China’s slowing economy. A combination of these factors drove the economy to contract 1.5%—its first annual decline since 2009. Now officials and enterprises are bracing for an extended period of decline as airlines suspend flights and overseas markets tighten their borders.

This spells trouble for local banks, who may see their bad debts rise as large corporates and small and medium enterprises (SMEs) struggle to pay back their loans.

“Hong Kong is an international city and thrives on people coming and going to do business in Hong Kong. To prevent itself from importing coronavirus means

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HONG KONG BUSINESS | Q2 2020

How well and how long the economy may endure such drastic measures has yet to be tested.

shutting its borders to visitors from high risk locations. How well and how long the economy may endure such drastic measures has yet to be tested,” Brian Chan, partner, banking & capital markets for Hong Kong at Deloitte, told Hong Kong Business in an exclusive interview.

As of end-September 2019, loans related to travel and tourism, hospitality, and entertainment accounted for about 5% of systemwide loans, wholesale and retail trade comprised about 4%, credit cards and other personal

loans about 8%, and propertyrelated loans including mortgages about 30%.

The lower economic activity will also dent banks’ revenue for the year. “We would expect revenue and profit estimates to be revised downward given the current situation. In particular revenue will be under pressure: we can expect loan growth to be impacted due to lower economic activity and less demand for lending,” noted Paul McSheaffrey, partner, head of banking & capital markets for Hong Kong at KPMG. McSheaffrey added that the potential impact on global growth from COVID-19 will also make any rise in interest rates unlikely.

Disrupted operations Already, banks have closed down stores in an effort to mitigate the spread of the virus. Bank of East Asia temporarily closed 20 physical branches starting 1 February, including those in Causeway Bay and Wanchai Convention Plaza. UOB also shuttered its commercial banking centre in Kwun Tong soon after the outbreak first took hold.

A total of 243 bank branches have suspended their services since Chinese New Year, representing 19% of the 1,200 branches operating in the city, according to Deloitte. Some outlets that remained open also restricted their operating hours.

The full impact of these closures remains to be seen since most bank-related transactions are

How far bank branches in Hong Kong have been affected

Source: Deloitte

INDUSTRY INSIGHT: banks

HSBC Headquarters

done electronically, noted Deloitte’s Chan. “[Although] retail branches serve as one of many touch points that banks service their customers [they] are not the major channel for banking business any more. A typical retail bank handles 80-90% of its transactions through electronic means instead of through a bank teller,” he explained.

Instead, the exodus of corporate clients, mortgage risks, and dropping credit card use poses the biggest threat on banks’ revenues.

With corporates’ profitability and liquidity challenged, banks exposed to retail, restaurants, tourism, education and transportation sectors—the most impacted industries by the outbreak—will see credit deterioration. Of these, SMEs may not weather the economic shock and may go into bankruptcy should the outbreak persist, warned Chan.

Meanwhile, although the average loan-to-value (LTV) ratio provides ample cushion for banks, a drastic fall in property prices increases collateral risk.

Apart from prices, homebuyer demand will likely be dampened further by the outbreak, which was already strained by the protests, S&P Global Ratings’ stated in a report. The firm warned that transaction volumes during the SARS epidemic hit an all-time low, and history could repeat itself.

The length of the outbreak also weighs on workers’ wages and salaries, and any cuts would also

Brian Chan

Paul McSheaffrey

Clement Chan

slash credit card usage and push credit quality to deteriorate, Deloitte’s Chan added.

Similarly, S&P warned of a negative impact on banks’ credit card receivables should the unemployment rate rise.

During the 2003 SARS crisis, Hong Kong’s unemployment rate rose to an all-time high of about 8.5%. The jobless rate was 3.3% at end-2019, according to data from the Labour and Welfare Department.

Meanwhile, KPMG’s McSheaffrey sees a rise in bad debts the longer the outbreak persists. “This would probably be most likely to occur in the unsecured personal lending and SME sector as these are the sectors most impacted. We may also see some increase in bad debts for larger corporates, including potentially those with operations in China, although this will depend on the impact of government measures to support business.”

But McSheaffrey noted that, in general, the level of bad debts in Hong Kong’s banking sector has been low. “The banking sector is well capitalised and so should be able to absorb the increase in bad debts,” he added.

Fitch Ratings also said that Hong Kong banks are still wellpositioned as of now, as less than 1% of mortgage loans were in negative equity compared with the 30% in June 2003 during the SARS crisis. Further, the LTV

ratio for new mortgages was only 53% in December 2019 compared with 65% in June 2003.

A short-term outbreak would likely have little effect on their operations, added Fitch, given banks’ sufficient capital and liquidity buffers.

But the odds of a short-term outbreak are shrinking every day.

By the end of March, close to 800 cases had been recorded in Hong Kong, with the figures continuing to grow, albeit not as fast as those in other markets. Precautionary measures are becoming stricter, and this is likely to have an impact on banks and the wider economy.

Analysts agreed that the endresult will depend on how long the government’s measures will continue to take place.

Despite the branch closures, KPMG’s McSheaffrey has not seen any significant impact—at least, not yet. “We are not seeing any significant disruption to banking operations within Hong Kong.

Banks have implemented their Business Continuity Plans. Teams who operate critical functions, such as remittances and payments, are generally working at alternate BCP sites and/or under split team arrangements to ensure these critical functions can still operate.”

Both Deloitte and Fitch agreed that there is still room to recover if the outbreak is contained fast.

“In general, if the outbreak is contained within months, certain banking business[es] might be delayed but may catch up later in

COVID-19’s impact on institutional banking

Source: Deloitte

HONG KONG BUSINESS | Q2 2020

15

INDUSTRY INSIGHT: banks

Bank of China Headquarters

the year,” said Deloitte’s Chan.

“However, if the outbreak sustains, banks may need to adjust itself to any structural changes in the economy to achieve their growth targets,” he concluded.

Prices of financial assets are also headed towards declines if disruptions from the outbreak persists, according to Moody’s Investors Service. “This will result in declines in the values of mark-to-market securities held by banks and falls in revenue from financial markets,” they concluded.

Protests’ impact lingers The coronavirus upsurge came at the heels of the social protests that crippled Hong Kong’s economy in the second half of 2019 and riveted the rest of the world. This has created a dent in profitability due to increased costs, as banks’ revisited their operating procedures and risk measures.

“The recent social unrest greatly affected banks’ operations in two aspects. Most of the banks will review and revisit their Business Continuation Plan (BCP) just in case if their HQ is being compromised by the social unrest. The other major impact is to review and reinforce security measures to protect the branch operation particularly those with Chinese background and affiliation,” noted accounting firm BDO’s managing director of assurance Clement Chan.

“The overall results of the 16

HONG KONG BUSINESS | Q2 2020

If the outbreak sustains, banks may need to adjust itself to any structural changes in the economy to achieve their growth targets.

social unrest have created a dent on the profitability because of increased costs incurred for the abovementioned reaction and the forced closure due to sudden outbreak of movement and demonstration.”

BDO’s Chan said that they had noted cases where banks have to incur extra cost to purchase PCs and install appropriate alternative structure for BCP. “We have seen access to branches at the regularly affected area are heavily guarded around the sensitive hours to minimise the chance of being sabotaged,” he added.

Any growth that banks’ expected to happen in the second half of the year was stopped and in some cases was turnaround to red, BDO’s Chan further noted.

HSBC, for example, increased its provision for expected credit losses by $3.1b (US$400m) in Q3, with which the protests were cited as the driving force for the higher provisions.

Despite this, HSBC reported a 7% growth in profits for its Hong Kong operations for the full year of 2019, and its local banking operations recorded growth.

In a similar vein, Citibank Hong Kong said in an exclusive correspondence that their business had not been materially impacted in

Q4 2019, but noted that client sentiment remained cautious.

Citi Hong Kong’s franchise grew for the 12th consecutive quarter in Q3 2019. Revenues also rose 8% YoY, driven by solid growth in our balance sheet with average deposits up 10% and loans up 6%. “There is a strong pipeline of business not only for Citi but across the market and this will support and underpin Hong Kong’s role as a major financial centre,” said James Griffiths, spokesperson of Citi Hong Kong. “Key Hong Kong corporates remain active and we continue to see good deal flow. Our treasury clients continue to use Hong Kong as a key treasury hub.”

M&A volumes in Hong Kong also reportedly remained healthy during the year, with inbound volumes up 50% to $34.12b (US$4.4b) as of November YTD and outbound running at $317.9b (US$41b) over the same period, he added.

BDO’s Chan added that banks who are less reliant on retail banking were likely not much affected by the protests. “In general, banks that are less reliant on retail banking business will find the social unrest less disruptive.

However, the extent of negative sentiment created by the social movement will drag down the economy through its effect on the retail and property market which ultimately will affect all banks,” he said.

He left one piece of advice for banks: “Adopt a conservative strategy to sail through this storm.”

COVID-19’s impact on retail banking

Source: Deloitte

Business Services

Tricor Group: Leading the way in Trust Services It provides one-stop-shop services for corporate and individual clients at every stage of their journeys. property, stocks and bonds through to wine, art and antiques.

For companies, a trustee needs to be adaptable and able to develop alongside a business. Tricor provides a full range of services, including setting up a company, handling payroll, taxation, IPO and investor services. When a company grows, Tricor can help owners set up a family trust or employee benefit trust, taking care of both employer and employee.

The future of trusts Tricor launched a new concept referred to as “Sustainable Trusts” to encourage (Left) Karen Cheung, the Group Director of Business Development for Trust & Corporate Services at Tricor and (Right) Michael Shue, Managing Director of Trust Services at Tricor private clients to explore investments that have an environmental protection focus. s Asia’s leading business expansion Trust Services at Tricor, continued, “As Tricor works together with clients specialist, Tricor provides corporate an independent and experienced trustee, and financial advisors to identify the and investor services to over Tricor can provide holistic and tailorsuitable green finance for investment.

50,000 clients worldwide, including over made Trust services—a one-size-fits-all Michael explained, “Global warming 40% of Fortune Global 500 companies. approach is no longer fit for purpose. As is indisputable. As a trustee, we need The burgeoning middle class in ASEAN a client’s personal family circumstances to focus on protecting and growing countries—such as China, Vietnam and change or his/her business develops, we the wealth of the Trust Fund but also India—have created a growing market for can adapt our services to fit the client’s the environment. We will continue to Trust Services. In fact, by 2020 Financial needs.” educate our clients on the importance Times predicted that APAC will be of sustainability, and to encourage home to half of the world’s middle-class Stricter compliance diversification of Trust Funds into population. As such, Tricor has recently Michael also pointed out that the investments that protect the environment expanded its services in this area to meet ever-changing international regulatory and meet minimum ESG standards*.” the significant market demand. environment has brought in greater Whilst there are complexity to “As an independent and obvious challenges Adapting to a changing market Trust services. For with shifting to Client needs are changing rapidly, example, the launch experienced trustee, green finance due commented Karen Cheung, Group of Foreign Account Tricor can provide to a “profit first Director of Business Development for Tax Compliance Act Trust & Corporate Services at Tricor.

(FATCA) and Common holistic and tailormade now” mindset, “Today, clients want a more versatile Reporting Standard trust services—a one- Michael noted how are and adaptable trustee. Take mainland (CRS) demands size-fits-all approach governments encouraging the Chinese clients as an example. We have more work and time is no longer fit for adoption of such a much younger generation of customers in structuring and products via the who have made their fortune at a shorter managing a Trust. purpose.” corporate sector. time frame. Consequently, this younger “Increased group of clients tend to have a higher complexity has led to growing compliance For example, Hong Kong is already one of the major green finance hubs in the risk appetite in managing business and costs. As a result, Hong Kong banks have world, recording a total of US$11 billion wealth, leading to very different demands continued to phase out internal Trust of green bonds issuing and arranging in the service required from a trustee departments. This provides a growing in Hong Kong, according to data from nowadays.” opportunity for Tricor to build out its HKMA. Tricor strongly believes that The traditional trustee mindset that expertise and provide high-quality Trust sustainability of the environment worked 20 years old is no longer relevant services to clients,” said Michael. will become an inevitable trend in the today, especially with Mainland clients. business and financial world and naturally Karen pointed out, “Personal wealth, Choosing a trustee will become one of the main investment businesses and family lives are so Selecting the right jurisdiction is one trends for private clients in the near intertwined and complicated nowadays, of the most important steps when it is not possible to just sit behind the structuring a Trust, as this will dictate the future. *Disclaimer: Tricor does not provide computers and facilitate the trust in a laws and regulations that the Trust will be investment advice. The Content is for set framework. We need to think outside governed by. Tricor provides far broader informational purposes only, you should the box and find a way to balance what is choices for clients when compared not construe any such information or important to them—money, legacy and to other financial organisations, and other material as legal, tax, investment, relationships.” the types of trusts offered can hold a financial, or other advice.

Michael Shue, Managing Director of wide range of assets: from real estate

A

HONG KONG BUSINESS | Q2 2020

17

COVER STORY

Lorem ipsum dolor sit amet consectetuer The COVID-19 pandemic is hitting all sectors of the Hong Kong economy.

Businesses adapt to the time of Corona

The global pandemic has forced most of the world into lockdown. Hong Kong business leaders reveal how they are coping, and adapting, to the new environment.

I

t’s a whole new world out there in 2020, and a whole new Hong Kong business environment. The protests and social unrest of last year are no longer top of mind for most of the city and its economy. That mantle has been taken by the new severe acute respiratory syndrome coronavirus 2, which causes the highly dangerous coronavirus disease, or COVID-19.

In 2020, Hongkongers are focused on facemasks, handwashing, and social distancing as they work to “flatten the curve” of infection across the SAR. Hong Kong is handling the pandemic well, at least comparative to many other countries and markets. As of the end of March, its government had not been forced to enact the strict lockdowns that have been a key pillar of public responses in Italy, the UK, the US, and Australia.

Still, that might be on the cards as this issue of Hong Kong Business goes to print. On April 2, the Hong Kong government ordered all pubs and bars 18

HONG KONG BUSINESS | Q2 2020

to close for two weeks—with many analysts expecting a longer and wider lockdown will be announced soon.

Businesses are obviously being impacted, with the nature of those impacts being wide and varied.

Clearly, airlines, hospitality, and retail businesses have each suffered a huge drop in demand as customers choose, or are forced to stay away—and there have been thousands of jobs lost in these sectors. Hong Kong’s unemployment rate hit a nine-year high in February, at 3.7%, but even the most optimistic forecasts see that growing even further in the months ahead.

Other sectors are facing issues around getting workers to the places they need to be, and ensuring their health and safety in this new regime of avoiding human contact and close interaction. Many technology and office-based businesses have been forced to move to work-from-home arrangements for the majority of their remaining staff.

Hong Kong’s unemployment rate hit a nineyear high in February, at 3.7%.

Meanwhile, essential service providers, including hospitals and healthcare providers, transport and logistics, and even supermarkets are all making do with the resources they have available to them in the best possible way.

View from the top Hong Kong Business spoke to seven prominent leaders, from a broad range of sectors operating in the Hong Kong market. We asked each about how their organisations had fared over the tumultuous first quarter of 2020, and the specific challenges being faced as well as the solutions being developed.

Their responses show a strong level of resilience across the business community here. For some, it has been the chance to test out some business continuity processes developed for this very situation, whilst others have adapted as the pandemic escalated, creating some new case studies in innovation and ingenuity. These are their stories.

COVER STORY Robert Walters Hong Kong

Ricky Mui Managing Director How has the COVID-19 pandemic affected your company’s operations?

Our company has always had a business continuity policy in place supported by our various departments, which we have also started implementing since the pandemic outbreak. This means we can smoothly change our operations from onsite to remote working in a short period of time to ensure minimal impact to our operations We also communicated with our clients and candidates immediately, and on a regular basis, to ensure they are well supported at all times.

Robert Walters is a global business and when the pandemic

Holman Fenwick Willan

Patrick Yeung, Hong Kong Office Head How has the COVID-19 pandemic affected your company’s operations?

We are continually monitoring the developing Covid-19 outbreak and implementing contingency plans to protect our colleagues, clients, and everyone in the HFW community.

We have systems in place to allow remote working across our international network, and we continue to be available for our clients during this difficult time. Our lawyers are working with clients across our sectors and international network to help them minimise the impact of the coronavirus on their business—and to prepare for what’s next.

has made a global impact, some of our overseas offices have also implemented their business continuity plan. However, this does not cause much issue to our collaboration and communication since our group has always been a technology-led business.

What changes have you had to make with regards to staffing?

Thanks to technology, all our consultants are equipped with devices to allow them to work remotely. This has also minimised the impact to our business, by allowing us to interview candidates and contact clients over the phone or other virtual meeting and video conferencing platforms such as Skype, Zoom, and Webex.

Apart from the working from home option, we have also split our staff into two teams, and they can choose to come to work on a roster basis. Our HR team also ensures we don’t over reach a certain number of staff in the office at one time.

What measures have you implemented to help customers?

Recruitment is very human oriented, and social distancing is causing much disturbance on some of our customers’ recruitment process.

We’ve advised them on the latest technology available, and helped them in conducting first-round interviews over video conferencing tools, such as Webex, Skype, and Zoom.

What has been the effect from a revenue and cost standpoint?

We have always been a fiscally responsible organisation and therefore the immediate effect on cost has been manageable, however, it is likely that plans for future initiatives may need to be reassessed.

However, we are also expecting cost savings through working from home rather than operating a full CBD office.

What changes have you had to make with regards to staffing?

We have followed the Hong Kong Government’s direction and implemented work from home arrangements and flexible working hours to limit the number of staff in the office, and avoid staff traveling during peak hour. For those in the office, we provide face masks, hand sanitiser, and distancing measures.

The changes we have made are designed to maintain business-asusual operations at HFW, while whilst at the same time safeguard our clients, staff, and their families.

What measures have you implemented to help customers?

Client care is critical to us and we very quickly created a dedicated COVID-19 website hub with a host of information available, including briefings and articles that provide the latest advice on the issues our clients are facing.

We quickly assembled a COVID-19 Leads group that includes HFW Industry Leaders who draw expert insight on the latest legal and commercial developments surrounding COVID-19.

With the majority of physical events being cancelled we have moved our events online in the form of webinars. This enables us to continue to share our knowledge and stay connected with our clients.

What has been the effect from a revenue and cost standpoint?

Our financial performance has remained relatively stable and many of our service areas are extremely busy, working alongside our clients to mitigate risks and advise on current and future strategy plans. We recognise the extreme challenges our clients are facing and we are committed to working shoulder to shoulder with them.

HONG KONG BUSINESS | Q2 2020

19

COVER STORY Mazars

stressed, and less productive. Nevertheless we have been able to meet our deadlines and continue working with our clients.

What measures have you implemented to help your customers?

The most practical has been in communicating online rather than in person, and this has included accessing documents and other information online too. We are communicating closely with our clients to help them navigate the challenges, to understand and to plan ahead, especially when it comes to cash management at this time.

Stephen Weatherseed Managing Director How has the COVID-19 pandemic affected your company’s operations?

Like most businesses in Hong Kong we have followed the Government instructions to civil servants and encouraged work from home, and of course banned all travel out of Hong Kong. Staff with family members who have arrived from overseas have also been required to be self-quarantined. And all international meetings, seminars and conferences have been cancelled until at least September 2020.

All of this, plus the disruption to our clients’ own operations, has made our working life more hectic, more

Michael Page

Anthony Thompson Regional Managing Director How has the COVID-19 pandemic affected your company’s operations?

Across the APAC region we have seen an impact in almost all markets but at different times. In recent weeks we have seen impacts increase in HK and Singapore along with Japan, India and our other offices in Southeast Asia. As with our China experience there is certainly an impact in the level of hiring activity and in the willingness of clients and candidates to make recruitment decisions.

There is still considerable recruitment activity however, and in certain sectors, we have seen a surge in hiring.

20

HONG KONG BUSINESS | Q2 2020

Could you share with us your future plans amidst this pandemic?

It is difficult to plan ahead when we really do not yet have visibility of when the global lockdown will finish, or even when travel to and from Mainland China will be re-established.

All we can do is plan a few months ahead, and keep abreast of developments locally, in China, in Asia and globally, and be ready to react. We are planning longer term with an assumption that a “new normal” will be established within the next 12-18 months, and our thinking is that we expect Mazars’ strong growth globally to continue.

What changes have you had to make with regards to staffing?

We have not made any material changes to staffing numbers in Asia however we have had to adapt to considerable differences in working arrangements.

During February in China and recently in other parts of the region, we have had a large percentage of our people operating from home some or all of the time. Fortunately our technology allows us to operate remotely in a very effective fashion both in individual markets and across the region.

This has not been without its challenges but overall we have managed to be more productive than we had anticipated.

What measures have you implemented to help your customers?

As much useful communication as possible. This has been through phone calls and social media, one on one and through broader communication. The nature of our business means that we are able to quickly understand how a wide variety of companies and people are dealing with the situation, and we have endeavoured to share this feedback as much as we can.

In China we have conducted several webinars with hundreds of customers dialling in.

What has been the effect from a revenue and cost standpoint?

Such circumstances do have an impact on short-term results but thus far there has still been meaningful levels of activity, and therefore revenue. We have endeavoured to eliminate nonessential costs, and clearly travel throughout the region has been reduced significantly.

COVER STORY Jetstar Asia

cancelling annual bonuses. To reduce costs, we are looking to innovate, challenge the norms and embark on new ways of working across all business segments.

How has the COVID-19 pandemic affected your company’s operations?

As a result of new government border measures across multiple jurisdictions and the subsequent fall in travel demand, Jetstar Asia made the decision to temporarily suspend all services for an initial period of three weeks, from 23 March to at least 15 April. This represents the temporary grounding of all Jetstar Asia’s 18 A320 aircraft.

Bara Pasupathi CEO What has been the effect from a revenue and cost standpoint?

The impact of this pandemic is delivering the single biggest shock the aviation industry has ever faced. At Jetstar Asia we are working hard to contain the impact as much as possible and are focused on protecting jobs, preserving cash and reducing costs.

Cost containment initiatives include salary cuts for the senior leadership team and I, as the CEO, will not be taking salary during this suspension period. We are asking our people to take paid and unpaid leave, in addition to

BDO

What changes have you had to make with regards to staffing?

To support our dedicated and talented crew during the temporary suspension of our flights, we have been working with government agencies to find temporary job opportunities as part of the public response. To date, more than one third of our Singapore-based crew have taken up contract positions for a period of one to six months.

What measures have you implemented to help your customers?

We understand this impacts our customers and we apologise for any inconvenience caused. For any Jetstar Asia customer affected by this suspension we will give a full refund in the form of a travel credit voucher to anyone with an existing Jetstar Asia booking for travel between 15 March and 30 April.

What changes have you had to make with regards to staffing?

We are relying heavily on digitisation and IT. We need to change all our meetings into video conferencing. On the part of the work that we can perform offsite, we have asked our clients to transmit the required information to us electronically so that we can perform the work in our office. As for the part that we need to perform onsite, we are having to rely on staff sent by our network firms on the ground.

What measures have you implemented to help customers?

We have encouraged our clients to shift to virtual meetings and to use our portals in transmitting important information timely for our work. These alternative measures make our delivery of work still possible under these extremely adverse and difficult circumstances caused by lockdowns and other forms of travel restrictions.

Clement Chan, Managing Director of Assurance, and Johnson Kong, Managing Director of Non-Assurance How has the COVID-19 pandemic affected your company’s operations?

COVID-19 has affected our company’s operation in many different and significant ways. In normal times, a big part of our work needs to be performed at our clients’ workplaces, but the travel restrictions have made that almost impossible. In addition most of our work needs to be performed by teams of different levels of staff on a project basis.

As you can imagine, social distancing and quarantine requirements make our normal work arrangement almost impossible in terms of execution.

What has been the effect from a revenue and cost standpoint?

We have tried our best to keep our production line going, so that our normal operation could still function and hopefully will sustain our normal cash flow. The effect on our costs has been a mix, as we have savings on the travelling costs which are somehow offset by additional costs such as IT hardware, sanitary and health-related accessories, and subcontracting costs.

Could you share with us your future plans beyond the pandemic?

The fact that we can still largely cope with the work requirements through no traveling, work from home, flexi-hours, exchange and sharing of information through portals, teleconferencing, etc. will provide us with good experience to fine tune our entire mode of operation when the pandemic is over.

HONG KONG BUSINESS | Q2 2020

21

HOTEL INDUSTRY SURVEY

Regal Airport Hotel

Hotels make further room rate cuts to survive Some have resorted to offering rates cheaper than the city’s subdivided flats with an extremely low price of $71 per night.

L

’hotel Nina et Convention Centre still holds the top spot in Hong Kong Business’ largest hotels survey with 1,608 rooms. Following suit and retaining second place is the Regal Airport Hotel with 1,171 rooms.

Completing the top five are Regal Riverside Hotel, Harbour Plaza Resort City, and the Panda Hotel, each with 1,147 rooms, 1,102 rooms and 911 rooms respectively.

Overall, Hong Kong’s 52 largest hotels have 35,044 rooms in 2019, slightly up compared to 34,647 rooms in 2018.

Despite facing a rough year with the civil unrest and the delayed effects of the US-China trade tension, Hong Kong’s hoteliers were not given a break in the first part of 2020, with the onslaught of the novel coronavirus.

Colliers’ head of valuation and advisory services Hannah Jeong stated that even during this period, hotels were still supported by various F&B, MICS and weekends services.

“However unfortunately, today’s novel coronavirus hinders both domestic and overseas travellers. As per the market news, many hotel restaurants will close down for the next two months or even temporarily,” Jeong commented.

22

HONG KONG BUSINESS | Q2 2020

Hotels were offering longterm stay to capture the domestic market as well as providing different staycation packages for Hong Kong residents.

Budget hotels are currently providing temporary guaranty services for government as a quick solution to run cashflow. The region’s hospitality sector can expect a continuous decline and reduction in hotel occupancy, which is reflected in the significant drop in hotel prices by about 30% from their peak, according to a report published

by Colliers.

They claim that the spread of COVID-19 is a case of history repeating itself, referring to the SARS outbreak in 2003. “Right after SARS (2003), the Hong Kong hotel industry recovered a year later as the government initiated a same-day-return visa for mainland visitors, which stimulated more than double of Mainland Chinese visitors.

Unfortunately in 2020, there are not many immediate remedy options available,” Jeong added.

Colliers further predicts that price and rental growth will likely remain negative in 2020, with office rents and prices falling arduously over H1 2020.

Stark solutions Somewhere between the extensive demonstrations and the COVID-19 pandemic, the hotel industry began

capturing the domestic market.

Since the number of leisure travelers dwindled at the onslaught of the political unrest, the sector decided to shift towards reining in the local population. “Hotels were offering long-term stay to capture the domestic market as well as providing different staycation packages for Hong Kong residents as many weekends were not allowed us to walk around the city.

Long-term stay offers an alternative residential solutions to residents in Hong Kong under the uncertain market situation,” Jeong said.

Long-term occupancy focused on alternative rental solutions to locals facing an uncertain market situation.

In the latter part of 2019, Hong Kong’s hotel operators urged the government to waive rents and permit properties to extend empty rooms on longterm leases or for sale to survive the precipitous nosedive in occupancy and rates due to the civil unrest.

Some hotels have become cheaper than the city’s subdivided flats with an extremely low price of $71 per night.

This rate was being offered by Winland 800 Hotel, which is located in Tsing Yi, an area that faced some of the most intense heat of the political protests.

These numbers are said to signify a staggering decline of 65.7% from the country’s lowest rate of $207 a night in March 2018. Meanwhile, monthly rent at a three-star, 800-room hotel with coastal views amounted to $5,980 for 30 nights. This includes breakfast as well as WiFi connection and was found to be cheaper than plenty of subdivided flats in the country.

Since Hong Kong’s nosedive is expected to continue at least over H1 2020, Colliers recommends a shift on occupier sectors. “For occupiers, we expect a challenging business situation to persist, although opportunities to sign new leases at attractive rents should arise,” a spokesperson from Colliers said. “We think that landlords may need to be flexible in providing leasing incentives and discounts in order to attract tenants.”

Should COVID-19 peak within H1, hoteliers may look forward to the investment sentiment in H2 since it may undergo a sharp recovery, making the moment ripe for investigating distressed investment assets.

HOTEL INDUSTRY SURVEY Number of Rooms

2020

Hotels

2019 ranking

2020

2019

1

L'hotel Nina et Convention Centre

1

1,608

1,608

Keven Chan

2

Regal Airport Hotel

2

1,171

1,171

John Girard

3

Regal Riverside Hotel

3

1,147

1,138

Peter Chiu

4

Harbour Plaza Resort City

4

1,102

1,102

Ken Chow (Hotel Manager)

5

Harbour Grand Kowloon

36

967

555

Victor Chan

6

Panda Hotel

5

911

911

Andrew Chen (Deputy General Manager)

7

Renaissance Harbour View Hotel Hong Kong (Marriott Hotel)

6

860

860

Priscilla Wong

8

Harbour Grand Hong Kong

8

828

828

Benedict Chow

General Manager/Head of Hotel Operations

9

Rambler Oasis Hotel

9.5

820*

822

Andy Tsang

10

Harbour Plaza Metropolis

9.5

819

822

Andy Castillejos

11

The Park Lane Hong Kong, a Pullman Hotel

7

818

832

Luc Bollen

12

Rambler Garden Hotel

11.5

800

800

Andy Tsang*

12

Winland 800 Hotel

11.5

800*

800

Patrick Ng

14

Sheraton Hong Kong Hotel & Towers

13

782

782

Charles Woo

15

Disney Explorers Lodge

14

750

750

Louise Lao

16

The Kowloon Hotel

15

736*

736

Florence Ng

17

Harbour Plaza North Point

16

719*

714

Virginia Tam

18

Harbour Plaza 8 Degrees

17

704

704

Dickson Lee

19

Royal Plaza Hotel

18

699

699

William Chan

20

pentahotel Hong Kong Kowloon

19

695

695

Andy So

21

Royal View Hotel

20.5

688

688

Derek But

21

Kowloon Shangri-La, Hong Kong

20.5

688

688

Jürgen Dörr

23

Royal Pacific Hotel

22

673

673

Kevin Chuc

24

Hyatt Centric Victoria Harbour Hong Kong (formerly Hotel VIC on the Harbour)

23

665

671

Andy Chang

24

Marco Polo Hongkong Hotel

24.5

665

665

Dalip Singh

24

Cordis, Hong Kong

24.5

665

665

Shane Pateman

27

Hong Kong Skycity Marriott Hotel

26

658

658

Michael Müller

28

Holiday Inn Golden Mile Hong Kong

27

621

621

Gerhard Aicher

29

JW Marriott Hotel Hong Kong

29

608

608

Silvio Rosenberger

30

City Garden Hotel Hong Kong

28

605*

609

Annie Jea

31

Regal Kowloon Hotel

30.5

600

600

Christo Diamandopoulos

31

Disney's Hollywood Hotel

30.5

600

600

Louise Lao

33

Hotel COZi Oasis

32

583*

583

Henry Tse

34

InterContinental Grand Stanford Hong Kong

33

572

572

John Drummond

35

Island Shangri-La, Hong Kong

34

565

565

Ulf Bremer

36

Hyatt Regency Hong Kong, Sha Tin

35

562

562

Wilson Lee

37

ibis Hong Kong Central & Sheung Wan Hotel

37

550

550

Jennifer Siu (Front Office Manager)

38

Dorsett Tsuen Wan, Hong Kong

38

546*

547

Florence Ng

38

The Kerry Hotel, Hong Kong

39

546

546

Andrew den Oudsten

38

The Kimberley Hotel

40

546*

546

Samantha Hui

41

Grand Hyatt Hong Kong

41

542*

542

Richard Greaves

42

B P International

42

529

529

Bernard Chan

43

Courtyard by Marriott Hong Kong Sha Tin

43

524

524

Peter Sih

44

Conrad Hong Kong

44

512

512

Thomas Hoeborn

45

Novotel Century Hong Kong

45

509

508

Adam Hipp

46

InterContinental Hong Kong

46

503

503

Claus Pedersen

47

Mandarin Oriental, Hong Kong

47

499

499

Pierre Barthes

48

The Langham, Hong Kong

48

498

498

Marcel N.A. Holman

49

Regal Oriental Hotel

49

494

494

The Mira Hong Kong

50

Stephen Au Alexander Wasserman (Business Unit Head – Hotels & Serviced Apartments,

50

TOTAL NUMBER OF ROOMS

492

492

35,044

34,647

DATA GATHERED AS OF 29 FEBRUARY 2020 * taken from website

HONG KONG BUSINESS | Q2 2020

23

MBA PROGRAMMES SURVEY

The University of Hong Kong campus

MBA providers turn to online schooling following unrests and outbreak Many universities have closed their campuses amidst the double whammy of protests and COVID-19.

I

n this year’s MBA Programme Rankings, the University of Hong Kong (HKU) emerged with the largest MBA programme, with a student population of 315. It is followed by the Chinese University of Hong Kong (CUHK) MBA with 215 students and The Hong Kong Polytechnic University (PolyU) MBA with 188. Rounding out the top five are CUHK MBA in Finance and the Hopkins Training & Education Group’s University of Northern Iowa MBA, with 140 and 116 students, respectively.

In total, the student population of Hong Kong’s top MBA programmes fell 10.13% to 1,651 in the 2020 rankings, compared to 1,837 in 2019.

Hong Kong’s economy tumbled into its first contraction since the 2019 Global Financial Crisis, with the GDP declining 1.2% YoY in 2019, as industries in the city reeled amidst months of social unrest. The massive 24

HONG KONG BUSINESS | Q2 2020

upheaval escalated to the nearly twoweek siege of the PolyU that resulted in extensive damage to its campus.

Yet it did not end there. The year 2020 saw the outbreak of the COVID-19 infection right off the bat, and this has since disrupted business operations across the globe.

With the city facing this double whammy, many schools, including universities offering Master of Business Administration (MBA) programmes, had little choice but to forego face-to-face schooling. The Education Bureau (EDB) has already ordered all schools—including kindergartens, primary schools, secondary schools, special schools and private schools offering non-formal curriculum—to suspend classes until 20 April at the earliest.

Schools like HKU have suspended all classes. PolyU also said in a notice that it is unlikely for face-to-face teaching to resume in the university

Andrew Yuen

any time soon. “All the universities in general have been affected. We were mostly spared although Festival Walk was closed down and we had security guards at our gates. Mainly, it made students wary but in general, life continued,” a spokesperson from the City University of Hong Kong (CityU) told Hong Kong Business.

Confirming the decline in student count amongst the top MBA programmes, The Chinese University of Hong Kong Business School Associate Director (e-learning) of MBA Programmes Andrew Yuen shared that there have been challenges in student recruitment this year, with prospective students postponing their application due to the current uncertainties.

The macroeconomic situation also threatened job opportunities for new graduates. “Given the regional and local job market being under great pressure, it also posed threats to recent

MBA PROGRAMMES SURVEY We’ve very rapidly adopted new technologies to allow for remote teaching, to allow students the flexibility to study from wherever they want.

The University of Chicago’s Hong Kong branch

MBA graduates,” Yuen added.

Going online With their scheduling affected, MBA providers like CityU had to conduct make-up classes for students to catch up with the programme. To minimise the effects of the outbreak on schooling, some have resorted to holding classes through online teaching and instruction.

A spokesperson from the HKU Faculty of Business and Economics found that advancements in online delivery have gone far enough that students could interact with the professor and with each other, in a more participative way than if they held classes in person.

“We’ve had to adapt quickly to the changing situations. We were affected by the closure of our campuses, but we’ve very rapidly adopted new technologies to allow for remote teaching, to allow students the flexibility to study from wherever they want,” they said.

Likewise, some of CityU’s staff have been keeping in touch with individual students who are doing assignments and tasks, taking the opportunity to catch up and checking to make sure that everything is alright. It noted that a lot of the non-local students have been confined in their hometowns, and are unable to come back to classes yet, but are at least coping with a lot of online courses and processes. “With COVID-19, this has put us on edge but with online classes, we are coping with the classes and the interaction with the students,” CityU said.

Beyond classes, HKU has also

been engaging with companies and doing virtual presentations and sessions. On the other hand, CUHK has also been putting in place some additional efforts to keep in touch with their students, including online consultation and admission talks.

Communication challenges With their MBA programme emphasising class interaction and peer-learning environment, Yuen finds keeping a level of student engagement in an online setting to be a challenge. “In particular, group discussion and in-class work may not be as effective as in the classroom.

It is also noted that students may easily be distracted from their own environment,” he said.

To address this issue, he recommends teachers to adopt a so-called Flipped Classroom Approach, where students do their part in preparation, which includes self-learning for basics, as well as activity-based learning like case

discussions. Debate and games will also be carried out in online meetings.

“Different from lectures, students are found more engaged in those activities in the online meeting,” Yuen noted.

Their programme is also giving further technical support for their lecturers, such as shooting and instructional design, with the goal of enhancing the teaching quality for online classes.

Weathering the uncertainties Despite these uncertainties, HKU is confident in the remaining demand, with local companies still out looking for top talent. “Uncertain and volatile times like these also often spur waves of innovation and creativity. We might not be able to predict the future, but we need to support students as they explore alternatives to traditional post-MBA paths, whether they create their own businesses, join growing start-ups or investigate opportunities in emerging markets,” they said.

Yuen recommends further diversifying MBA programmes as well as students. “Instead of focussing on a single market in student recruitment and placement, MBA programmes in Hong Kong are required to have a more internationalised students mix.

More efforts should also be placed to help students to develop their careers in different markets in the region,” he said.

He also suggested for the government to consider extending the immigrationarrangements for nonlocal graduates from 12 months to 24 months, emphasising a need to retain non-local talents in the economy after their graduation in local post-graduate programmes, in order to maintain the city’s competitiveness.

Inside The Chinese University of Hong Kong Business School

HONG KONG BUSINESS | Q2 2020

25

MBA PROGRAMMES SURVEY Total Number of Students

2020 rankings

MBA Programme

1

HKU MBA

2

Provider/Local Partner 2019

Faculty of Business and Economics, HKU

315

319

Hongbin Cai

CUHK MBA

The Chinese University of Hong Kong

215

254

Ms. Grace Liang, Executive Director (MBA Programmes)

3

PolyU MBA

The Hong Kong Polytechnic University

188*

188

Pamsy Hui

4

CUHK MBA in Finance

The Chinese University of Hong Kong

140

280

Ming Liu

5

University of Northern Iowa MBA

Hopkins Training & Education Group

116*

116**

Clara Chan

6

CityU MBA

City University of Hong Kong

110

128

Kevin Chiang

7

CUHK Executive MBA

The Chinese University of Hong Kong

108

98

Andrew C. F. Chan

8

HKUST MBA for Professionals (Weekly Part-time)

Hong Kong UST Business School

106

109*

Prof. Tai-Yuan Chen

9

HKUST Full-time MBA

Hong Kong UST Business School

95

87*

Prof. Tai-Yuan Chen

10

HKUST MBA for Professionals Bi-weekly Part Time

Hong Kong UST Business School

69

69*

Prof. Tai-Yuan Chen

11

Kellogg-HKUST Executive MBA Program

Kellogg School of Management, Hong Kong University of Science and Technology.

63*

63

Judy Au

12

Hong Kong UST EMBA for Chinese Executives

Hong Kong UST Business School

61*

61*

Yan Xu

13

The University of Hull Executive MBA

Kaplan Higher Education

35*

35

Rebecca Lui

14

University of Iowa Hong Kong MBA

University of Iowa Tippie College of Business

30*

30

Victor S K Lee

TOTAL

1,651

1,837

GENERAL FIGURES SHOW TOTAL NUMBER OF STUDENTS AS OF 29 FERUARY 2020. * figures retained from 2019 **figures retained from 2018

26

Head of Hong Kong Office/Dean

2020

HONG KONG BUSINESS | Q2 2020

MBA PROGRAMMES SURVEY Total Number of Students

Minimum Cost (HK$)

Duration

Full Time

Part Time

Full Time

Part Time

Full Time

Part Time

Number of Intakes Per Year

55

260

$588,000

$468,000

1 year

2 - 4 years

1

79

136

$560,000

$435,000

12 or 16 months

24 months

1

N/A

188*

N/A

$288,600

N/A

2 - 4 years

1 intake per academic year

N/A

140

N/A

$490,182*

N/A

24 months

1

N/A

116*

N/A

$151,900

N/A

average 18 months**

2 to 3**

40

40

$368,000

$368,000

1 year

2 years

1

N/A

108

N/A

$610,000*

N/A

2 years

1

N/A

106

N/A

$450,000

N/A

24 months

1

95

N/A

$585,000

NA

12 or 16 months

N/A

1

N/A

69

N/A

$498,000

N/A

24 months

1

N/A

63*

N/A

$1,370,933

N/A

18 months

1

N/A

61*

N/A

$118,450

N/A

16 months

1

N/A

35*

N/A

$174,800

N/A

2 years

1

N/A

30*

N/A

$258,000

N/A

2 years (maximum: 4 years)

12

HONG KONG BUSINESS | Q2 2020

27

event coverage: HIGH FLYERS AWARDS

Hong Kong Business salutes the high flyers of 2019

I

n its 16th year, the High Flyers Awards is gliding above and beyond. For the 2019 edition of the awards, 18 enterprises in their respective sectors were recognised for their innovative business practices, outstanding quality of service, and relentless efforts to contribute towards social progress and business growth.

These businesses represent a wide range of industries, including banking and finance, insurance, legal services, interior design, information technology and telecommunications, boutique hotels, corporate accommodations, and Food and Beverage.

One of the outstanding performances this year was from Standard Chartered Bank. It won the Enterprise Award as Bank of the Year under the visionary leadership of its Executive Director and CEO Mary Huen.

Tim Charlton, publisher of Hong Kong Business, said the bank was one of many worthy businesses celebrated at the Awards.

“Our awardees this year encapsulate what business excellence and resilience means for the people of Hong Kong. In the midst of an economic downturn and social unrest, they have risen to the occasion by delivering innovation and setting their sights on fresh opportunities to expand globally. As the city and economy recovers to a new reality, so will these companies carry the everburning torch of positive influence for others to follow,” he said.

The winners were awarded in a ceremony on January 14 at Chin Chin Bar, Hyatt Regency Hong Kong, Tsim Sha Tsui.

HFA Trophies

Hong Kong Business print magazines

Grand Enterprise Award

• Standard Chartered Bank – Bank of the Year

Other award winners and their respective categories are as follows: • Archikris Design Group – Interior Designer • Concord Medical Limited – Innovative Skin Care Technology • Elite Concepts – Innovative F&B Concepts • FTLife Insurance Company Limited – Life Insurance • Hang Seng Bank Limited – Commercial Banking • Headwin Logistics – Leading Provider of International Logistics Solutions • HKBN Enterprise Solutions Ltd – Best Network, Broadband, Cloud & ICT Services Provider • Hyatt Regency Hong Kong, Tsim Sha Tsui – Best City Hotel • JCDecaux Transport – Innovative & Leading Outdoor Advertising Company • Lifestyle Insurance – Insurance Broker of Business & General Insurance • Lindt & Sprüngli (Asia Pacific) Ltd – Premium Chocolatier • Nintex – Enterprise Software • OZO Wesley Hong Kong – Best Corporate Accommodation • PrimeCredit Limited – Outstanding Finance Company • Standard Chartered Bank – Retail Banking • Thomas, Mayer & Associés – Law Firm • Vastcom Technology Limited – IT Solutions Company 28

HONG KONG BUSINESS | Q2 2020

High Flyers Awards 2019 Winners

Guests enjoying the live music

Archikris Design Group

FTLife Insurance

Concord Medical Limited

Vastcom Technology

PrimeCredit

Hang Seng Bank

TMA

Headwin Logistics

JCDecaux Transport

HKBN Enterpise Solutions

Lifestyle Insurance

Nintex

Hyatt Regency Hong Kong

OZO Wesley

Elite Concepts

Standard Chartered Bank

Guests from Lifestyle Insurance

Guests from Standard Chartered

Guests from Headwin Logistics

Guests from TMA

HONG KONG BUSINESS | Q2 2020

29

analysis: PRIVATE EQUITY

Hong Kong-listed SOHO China made the headlines as they are in talks with private equity firm Blackstone on a potential buyout.

The PE boom was over before COVID-19 A slump in private equity deals across China and Hong Kong is being felt across the region.

A

fter roaring ahead in 2017 and 2018, AsiaPacific private equity (PE) investment declined year-on-year as the region’s largest market, Greater China, slumped. There, the boom that produced record deal value for two years running ended abruptly: Deal activities and exits plunged, pulling down the wider region’s performance. In all other geographies, by contrast, investment grew or was on par with the average of the previous five years.

Domestic factors played a large role in China’s reversal. Real GDP growth in the second half of 2019 slowed to 6%, the lowest rate since the first quarter of 2009, in the midst of the 2008–2009 recession.

The ongoing low level of RMB-based fund-raising undercut investment activities by reducing dry powder. Ongoing trade tensions with the US and social unrest in Hong Kong also undermined the economy and investor confidence. Bain’s 2020 AsiaPacific private equity survey, conducted with 175 senior market practitioners, shows that macro softness was the no. 1 worry for PE funds focused on Greater China.

Beyond the contraction in Greater China—and perhaps more worrying—the sharp drop in exits across the region meant that cash flow for limited partners (LPs) in late 2018 and 2019 was negative for the first time since 2013. General partners (GPs) already had 30

HONG KONG BUSINESS | Q2 2020

An erratic stock market has discouraged PE funds from pursuing exits.

trimmed their portfolios in 2018 when exit values hit a record high, but an uncertain macroeconomic outlook, tepid M&A activity, and an erratic stock market also discouraged funds from pursuing exits.

Despite warning signals, several positive trends stood out. Solid investment growth in other markets helped maintain Asia-Pacific’s heavyweight status in the global private equity market. The asset class also remained a popular source of capital in the region.

It made up 17% of the Asia-Pacific merger-andacquisition (M&A) market, slightly down from the previous year, but up from an average 14% in the previous five years.

Importantly, returns remained strong, with the top quartile of Asia-Pacific-focused funds forecasting a net internal rate of return (IRR) of 16% or higher, and private equity outperformed public-market benchmarks by at least six percentage points across one-, five-, 10- and 20-year periods.

Looking forward, the region’s general partners face a broad set of challenges. Widespread uncertainty in financial markets, exacerbated by the coronavirus pandemic across the world, trade frictions, and macroecononic risk paint a more sober picture for the coming year. Any one of those factors could trigger serious economic and social imbalances in the coming decade, changing the investment outlook for countries

analysis: PRIVATE EQUITY or regions. As investors weigh those risks, many are becoming more cautious.

But uncertain times also create opportunities for those who are well-prepared. Leading funds are anticipating disruption and targeting sectors likely to thrive in a downturn. Bain research shows that in hard times, the performance gap between winners and losers widens. Top performers adjust their strategies before the market shifts, increase their control over deals, and manage their portfolios more actively.

Reducing risk whilst redoubling their focus on opportunities helps GPs outperform even in an unpredictable market.

As PE funds seek out new pockets of growth, many are eyeing Internet and tech-related assets.

Though investors worry about the risk of a market correction, the sector offers faster-thanaverage growth and was widely recession-resistant during the last global financial crisis. But given the record high prices for these assets, ferreting out smart investments requires a special set of skills and capabilities. Winning GPs are investing in talent, building partnerships, honing their approach to deal assessment, and ensuring companies with new technologies have a path to commercialisation.

What happened in 2019?

Asia-Pacific’s private equity markets went their own way in 2019, with diverging tales of growth and contraction.

Greater China was hit hard by macroeconomic uncertainty and a reduction in megadeals, whilst investment activity flourished in most of the other markets.

With Asia-Pacific’s powerhouse market down, investment decelerated to $1.16t (US$150b).

Exits took a hit across the region and sank 43% from a record high in 2018. Overall, fund-raising in 2019 tumbled 45% from the historical five-year average.

Restrictions on RMB-denominated funds continued to hamper activity

Asia-Pacific now represents a quarter of the global PE market

Source: Bain & Company

In hard times, the performance gap between winners and losers widens.

in China. And with a record $3t (US$388b) in dry powder available, GPs didn’t feel pressure to raise new funds.

After historic highs in 2017 and 2018, Asia-Pacific deal value slumped 16% in 2019 to $1.16t (US$150b), but was still 9% higher than the average annual $1.06t ($137b) in the five previous years.

The average deal size was $945.91m ($122m), on par with the five-year average.

Greater China suffered the biggest drop in the region’s deal activity. The decline in RMB-based fund-raising was a key factor undercutting investment. Total deal value fell below the levels of the previous two years and was 16% lower than the annual average for the previous five years.

By contrast, investment value in India, the second-largest market in Asia-Pacific, was 29% higher than in 2018 and 88% higher than the previous five-year average. Despite a softening economy, strong interest from global and local investors in India’s burgeoning Internet and technology sector buoyed deal value.

The four remaining Asia-Pacific markets performed solidly in 2019. Deal value in South Korea outperformed the 2014-to-2018 average by 36%; it rebounded 18% in Australia–New Zealand, and rose 19% in Southeast Asia (although it declined slightly from the year before). By contrast, deal value in Japan was slightly below the past five-year average and 144%

above 2018, when investment activity fell sharply, the result of fewer large deals and investors’ inclination to hold high-quality assets instead of selling in a difficult market.

Investors again preferred teaming up on deals, a trend called deal clubbing. The average number of investors per deal was 3.2, on a par with 2018 and higher than 2.6, the average for 2014 to 2018. Joining forces gives investors greater access to a larger pool of deals and mitigates the risk.

For the eighth year running, the Internet and technology sector attracted the largest share of capital. However, for the first time since 2017, investment slowed in the sector and made up 42% of all investment value, compared with 53% the previous year. In a dramatic reversal, the number of Asia-Pacific megadeals in the Internet and tech sector valued at $1 billion fell to 10, down 50% from 2018. The decline in RMB fund-raising was partly responsible for this drop. By contrast, investors had a strong appetite for consumption-driven sectors, including consumer products and healthcare, which rose from the prior five-year averages by 170% and 66%, respectively, buoyed by a rising middle class in China, India and Southeast Asia.

Whilst investors prefer deals that give them control over the way the company operates, locking in a majority stake isn’t easy in Asia-Pacific. As in 2018, buyouts HONG KONG BUSINESS | Q2 2020

31

analysis: PRIVATE EQUITY accounted for only a quarter of the market. Growth deals again were the largest segment, making up 62% of deal value. GPs are still looking for a path to control in situations where they have a minority stake, securing board seats or decision rights for the most important decisions. Bain’s 2020 Asia-Pacific survey shows 38% of minority deals included a path to control in 2019, and investors expect that proportion to increase to about 50% in the next two to three years.

Global and domestic GPs were more active than institutional and corporate investors in the region, although domestic GPs’ share of deals fell to a five-year low. The 2019 drop in domestic GPs reflects a decline in domestic funds’ activity across all geographies, particularly China, where local funds are traditionally strong. Corporate investors retrenched, taking part in only 13% of deals, well below 2017’s high of 20%.

What’s clear is that a tougher investment landscape has done nothing to diminish competition in AsiaPacific. Eighty-five percent of PE funds say that rivalry for the best deals has increased in their primary market, with other GPs considered the biggest competitive threat, followed by corporate investors and LPs investing directly. The number of active investors in 2017 to 2019 reached a record 3,300, compared with 2,700 for 2015 to 2017, though the growth has plateaued. The top 20 players were involved in 31% of deals by value, roughly on par with prior years.

The wave of investors chasing deals of all sizes has surged, pushing valuations to exorbitant levels over the last few years. According to our survey, GPs’ No. 1 concern is high prices.

Despite intense competition, slowing GDP growth and the increasing likelihood of a global recession have given many investors pause. For the first time since 2013, multiples contracted slightly in a few regions, with median enterprise value-to-EBITDA entry multiples for PE-backed transactions declining to 12.9 from 13.3 in 2018.

About 60% of the GPs expect valuations to decline further in the coming two years. Many of the funds we’re working with don’t include any multiple expansion in their valuation model, a change from five years ago, when 38% said multiple expansion was the biggest factor contributing to returns. Maintaining a high IRR in that environment will require GPs to find new sources of value and work harder to expand revenues and margins.

A breathtaking fall in exits Exits dropped even more precipitously than deal value.

After setting a record in 2018, pushed by the $124.96b (US$16b) sale of Flipkart, Asia-Pacific’s exit market plunged, breaking the recycling of capital that typically fuels the next investment phase. Exit values totalled $659.06b ($85b), down 43% from 2018 and 31% from the previous five-year average. With a bumpy stock market and timid corporate M&A activity, exits to other PE funds gained in importance: The share of secondary sales jumped to 17% from a 10% average 32

HONG KONG BUSINESS | Q2 2020

The tougher investment landscape has done nothing to diminish competition among PE funds in Asia Pacific.

over the previous five years.

Exit value declined primarily because GPs sold fewer assets, as opposed to selling smaller companies.

Exit count plummeted to 330 sales, a 10-year low, with double-digit drops throughout Asia-Pacific, including in Hong Kong. It was a striking contrast to the region’s peak year in 2017, when the total number of exits reached a record 760. GPs felt this seismic shift on the ground: roughly half of the PE funds we surveyed said the exit environment was more challenging in 2019 than in 2018.

Several factors contributed to the broad downturn in exits, particularly a poorly performing initial public offering (IPO) market and soft macroeconomic conditions. During the booming sale markets of 2017 and 2018, GPs trimmed their portfolios. That allowed them to hold off in 2019 whilst working to boost value.

With exits on hold, the value of companies held in PE portfolios, or unrealised value, reached a new high of $6.33t (US$806b) in June 2019, up 32% from a year earlier. The good news is that strong exit activity in recent years has led to younger portfolios overall.

Fund-raising: Another dip As funds returned less capital to LPs, fund-raising activity from purely Asia-focused funds fell further (after also plummeting in 2018), and was 45% below the previous five-year average. The region’s share of global fund-raising dipped to 13% from 16% a year earlier. With peak sums raised in 2016 and 2017, GPs were under less pressure to raise new capital.

Conditions remained extremely soft for RMB-based funds. The stringent asset-management rules China introduced in 2018 that prevented insurers, banks and other financial companies from investing in private equity have been partially lifted. But they still limit the ability of Chinese GPs to raise RMB funds.

Fund-raising data underscored the ongoing flight to quality, with the average size of Asia-Pacific funds expanding to a record $2.19b (US$282m) from $1.75b

The Asia-Pacific PE market slowed in 2019

Source: Bain & Company

analysis: PRIVATE EQUITY

An uncertain landscape is pushing PE investors to high-quality assets.

(US$226m) in 2018. Total capital raised was spread among far fewer funds, which closed 8% ahead of their target.

Returns: Steady for now Despite slower market momentum, private equity continued to outperform the public market.

Over one-, five-, 10- and 20-year horizons, the IRR for Asia-Pacific buyout and growth funds have been at least six ppt higher than comparable market benchmarks.

Overall, industry returns were stable at 12% median net IRR. Whilst it’s too early to know how younger vintages will perform, top performers continued to deliver well above expectations of 16% returns for Asian emerging markets. But IRR was trending down for most recent funds. With exits down, LPs’ cash flow in the fourth quarter of 2018 dipped into the red for the first time since 2013, and was negative again in the first half of 2019, with only 86 cents returned for each $1 invested.

Negative returns will push PE firms to focus more intensely on value creation. Whilst most expect top-line growth to continue fuelling returns over the next five years, they’re increasingly counting on margin expansion and M&A as sources of returns.

Opportunities despite uncertainty The region’s private equity landscape is in flux. Elevated prices, increased competition and limited exit opportunities could make it tougher for GPs to replicate the returns of the past

few years. An uncertain landscape has accelerated investors’ flight to high-quality assets, and that trend is likely to widen the gulf between winners and losers.

However, several positive developments and innovations on the horizon may help reignite investment activity and optimism, including the pending Regional Comprehensive Economic Partnership (RCEP). This AsiaPacific trade bloc deal, if signed by the 15 intended countries, would create the world’s largest free trade pact, comprising nearly a third of the world’s population and about one-third of GDP. Members of the pact are counting on it to counterbalance the economic slowdown in China and stimulate economic growth, trade and investment. However, India’s opt out in late 2019 was a serious blow to the negotiations, and time will tell how valuable this deal will be to the region.

Many funds are incorporating environmental, social and governance (ESG) considerations in their investment decisions at an accelerating clip. Sixty-eight percent of investors say they’re seeking investments that have positive social or environmental impact alongside financial returns.

And 87% say they plan to increase their focus on sustainability investing in the coming three to five years. As the debate about environmental and social concerns grows more acute, all private equity firms will need to

consider how ESG issues affect their portfolios.

A decade has passed since the end of the global financial crisis.

With the risk of a global recession looming, it’s a good time to ponder the lessons learned from the last one. During economic downturns, the gap between winners and losers widens, and turbulent times pave the way for smart funds to leapfrog the competition. Successful investors are preparing for a more difficult road ahead, putting in place strategies to mitigate volatility.

They are taking a more active role and pursuing new approaches to deal sourcing, deal assessment and portfolio management.

It’s also a good time for GPs to rethink their investment strategy for Internet and technology companies. This fast-evolving sector offers attractive new investments in second-generation technologies.

But the risks associated with high prices and a stampede of investors chasing deals are as high as ever. Leading funds are building specialist teams and new capabilities to make the most of new opportunities.

Looking forward: key trends in 2020 and beyond After a long and robust period of growth, many indicators now point to downturn and disruption. Smart investors are bracing for what could be a perfect storm. Fundamental changes to the macro landscape, changing demographics and rising inequality are likely to trigger

Percentage of Asia-Pacific deals involving specific investor groups

Many funds are incorporating environmental, social and governance (ESG) considerations in their investment decisions.

Source: Bain & Company

HONG KONG BUSINESS | Q2 2020

33

analysis: PRIVATE EQUITY serious economic and social imbalances in the coming decade. For governments, companies and investors, it will be a time of unprecedented challenges.

The most immediate concern is a global downturn that brings an end to the long-running expansion.

Economists forecast the coronavirus outbreak will slow the region’s growth, heightening the risk of a global economic downturn. But other factors cloud the horizon too. The US-China trade dispute and Brexit create critical challenges for supply chains and increase investor uncertainty. The International Monetary Fund (IMF) warns that conditions are ripe for the next global financial crisis, and banks are poorly prepared for it.

Some economists forecast oil supplies may run short in the coming decade as demand for energy continues to grow in the wake of a slowdown in capital investment. The geopolitical crisis in Iran or conflict elsewhere in the Middle East also could precipitate a squeeze on oil supplies.

Add to that troubling outlook the unpredictable effects of climate change. And as the world’s population swells toward an estimated 10 billion by 2050, its consumption of natural resources is accelerating.

Extreme inequality, which has triggered violent social unrest around the world, is on the rise. Ongoing civil protests, including those in Hong Kong, add to an increasingly unstable political climate.

Perfect storm or not, the effects of these trends are sobering. The IMF estimates that in 2019, global

The IMF says growth in 90% of the world slowed to its lowest rate since 2010 last year.

growth in 90% of the world slowed to its lowest rate since 2010. It also forecasts that the trade war between China and the US could cost an increasingly fractured global economy $5.43t (US$700b) in 2020.

It’s impossible to evaluate the potential cost of damage from events related to climate change in the coming years, but new data triples previous assessments of infrastructure, businesses and individuals vulnerable to rising sea levels by mid-century. Even if governments agree to battle climate change by scaling back carbon emissions, that effort risks creating stranded assets in fossil fuels, energy infrastructure, transport and other industries.

Those somber forecasts have investors on edge.

Fifty-nine percent of Asia-Pacific GPs ranked macroeconomic conditions—mainly associated with the financial crisis and trade war—among the top three issues keeping them awake at night. Almost half said they believe private equity has now passed its peak or entered a recession phase, and a striking 96% expect a downturn in the next two years, with 54% anticipating a severe or moderate impact on their portfolio.

In addition to the macroeconomic challenges, record-high multiples risk making it harder to sustain returns. Since 2016, more than 40% of Asia-Pacific PE-backed deals had an entry multiple higher than 15, compared with 25% to 30% from 2010 to 2015.

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analysis: real estate

Office decentralisation and building renewal to buoy real estate growth

These are Hong Kong’s key attractions as mainland companies flee and Shenzhen’s growth looms.

H

ong Kong’s economy shrank by 1.2% in 2019, the first contraction in 10 years, weighed down by trade tensions and the social government protests that intensified towards the second half of the year, weighing on tourism and consumption.

As residents struggled to come to terms with daily life being disrupted by frequent protests, the COVID-19 outbreak occurred. Overnight, face masks that once symbolised the protests now represent health and safety for the city. But the negative effects of the pandemic, if uncontained, may deliver a fatal blow to the already fragile economy.

Moreover, there is no guarantee that the domestic unrest has been resolved, as political groundswell may stir to life again.

Heightened political risks from rising social tensions are increasingly a key point of concern for real

estate investors, notes UBS Asset Management in its 2020 Asia Pacific Real Estate Outlook. From sentiments to capital flows, right up to underlying property demand, the midterm consideration for real estate market participants is stability. And that stability, or the certainty of Hong Kong’s position in the regional and global hegemony, is what will make or break the real estate markets in the next half decade.

That said, Hong Kong’s economic fundamentals remain sound on account of a well-regulated financial and banking sector, strong fiscal position and a tight labor market that will support wage gains. And these are unlikely to change drastically in the next five years.

Signposts to watch for The first signpost is the Greater Bay Area (GBA), who’s next milestone should be in 2022, by which time there

Hong Kong saw the biggest absolute and year-on-year decline in investment volumes in 2019.

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Hong Kong’s economic fundamentals remain sound on account of a well-regulated financial and banking sector.

should be a vibrant cluster facilitated by infrastructure and the seamless exchange of people and services. The GBA blueprint highlighted Hong Kong’s importance as the region’s financial center, international financing hub and offshore RMB center.

Real estate investors should monitoring this development closely, as any diminishment of Hong Kong’s role in the GBA master plan within the next five years could adversely influence it’s global positioning in the long run, affecting the commercial real estate market.

The second signpost is the Lantau Tomorrow Vision, a long-term plan which will see the reclamation of more than 1,700 hectares of land along East Lantau. Preliminary projections have factored in the provision of approximately 43 million sqft of commercial floor space.

The reclaimed land will also be able to accommodate close to a million

analysis: real estate people in about 400,000 residential units. Although slated to be underway in 2025, with fiscal affordability being a real concern for now, the project should be a key interest for investors as that could alleviate housing and social woes as well as improve the affordability problems faced by many commercial tenants.

Capital might to flight China remains the biggest what-if to the real-estate sector. The local commercial real estate’s dependence on the mainland is double-edged.

The relevance of Hong Kong as an international office market has been increasingly thrust into the limelight, as the occupier profile of the office sector shifted from a clear dominance by multinational firms towards a market driven by growing demand from mainland occupiers. This growth in demand from mainland firms, particularly from the finance sector–which accounts for over a third of all reported CBD demand in the past three years–has played a key role in pushing up prime office rents in Central.

But in the past year, anecdotal feedback suggests that many corporates have ceased their expansion plans and lease renewals have generally taken a backseat. Enquiries from Chinese companies have largely evaporated, and that is significant for office absorption in Central given the reliance on this tenant group in the last few years.

The ailing retail sector adds to this problem. The “Golden Week” holiday in October 2019 failed to translate into a tourism bonanza for Hong Kong.

Compared to the same month in 2018, visitor arrivals during this month plunged by more than 40%. Periodic episodes of social unrest have also dampened the festive mood, keeping many local shoppers off the streets in 2019.

Changes in investor attitudes could trigger a sustained dull in the real estate sector and liquidity. Hong Kong saw the biggest absolute and year-on-year decline in investment volumes in 2019.

From a high of more than $193.84b (US$25b) in 2018, commercial investment volumes fell 45% YoY to around ($107b (US$13.8b) in 2019.

The last quarter of 2019 also marked the lowest quarterly investment volumes since 2009.

With vacancy rates and extremely tight supply in Central, decentralisation should continue to gather pace in the next few years.

GDP forecast

Source: UBM Asset Management Real Estate Outlook 2020

Shenzhen also poses a threat. The government may choose to speed up the development of the city in the next five years should the political crisis remain unresolved. Already, the GBA plan puts forward Shenzhen as the key hub for innovation and technology.

Shenzhen’s GDP also overtook Hong Kong in 2018, partly due to its hightech industry. With a bustling stock exchange and growing ecosystem of growing companies, and if Beijing diverts more resources towards the targeted development of Shenzhen, it could well dilute Hong Kong’s appeal to multinationals and mainland companies.

Opportunities Amongst the market’s biggest opportunities are office decentralisation and the growth of the second CBD in Kowloon East.

With vacancy rates and extremely tight supply in Central, decentralization should continue to gather pace in the next few years, despite the expected weakening of occupier demand. Prime office market values and rents outside Central will continue to hold up in the near term after the impact of the COVID-19 outbreak is accounted for.

For now, affordability concerns will continue to drive occupiers towards Kowloon East.

The sequel to the 2009 industrial revitalisation plan was announced by the government in late 2018. The renewed scheme allows for extra floor area in the conversion of entire industrial buildings built before 1987 into commercial purposes. The government ropes in the private sector in the renewal of old districts and aging industrial buildings, whilst allowing

investors to take advantage of lower costs compared to acquiring new land.

Whilst renewal of buildings may be additional costs, this is a window of opportunity for asset owners and investors to identify areas where the greatest upside in conversion value may manifest. Approximately six million sqft of logistics space could be removed from the market over the next five years which is expected to exacerbate an already tight warehouse market. Healthy demand from 3PL companies supported leasing activity, driving overall warehouse vacancy rates to a four-year low.

Low vacancy is underpinning the defensive qualities of dominant shopping centers. Whilst concerns over Hong Kong’s dependence on China and tourism in the prime retail segment remain, [UBS] is optimistic on the long-term performance of suburban retail. The dense urban layout of Hong Kong means that retail offerings are mostly a stone’s throw away from most residential areas.

In a country where living space is limited, retail takes on the role of the “third place”, after the home and the workplace. What this meant is that the need for disruption on physical retail by e-commerce is less flagrant in Hong Kong. Investors can focus on non-discretionary retail, such as suburban malls which are supported by wide residential catchments and non-discretionary domestic spending. Execution-focused investors will be able to tap on pockets of opportunities in Hong Kong in the value enhancement of poorly managed suburban malls, of which the intrinsic value was never truly unlocked. From UBS-AM REPM: Real Estate Outlook.

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analysis: OFFICE space

Servcorp’s CEO Alf Moufarrige says their Hong Kong offices had taken a hard hit.

Grade A office rents drop to worst performance yet Both Wanchai/Causeway Bay and Central recorded the largest rental falls as it crashed 6.2% on the latest quarterly data.

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rade A office rents recorded their worst quarterly performance since Q2/2009, with overall rents falling by 5.2% QoQ in the Q1 2020, according to a report by Savills Hong Kong. This figure is said to be worse than the previous two quarters combined.

Both Wanchai/Causeway Bay and Central recorded the largest rental falls as it dropped 6.2% QoQ. It is followed

by Kowloon West with a 5.1% dive and Tsim Sha Tsui, which dipped 4.7% over the same period. Rents in Kowloon side performed better compared to those on Hong Kong Island, with rents in Kowloon and on Hong Kong Island declining by 4.7% and 6.8%, respectively over Q1.

Despite a generally lifeless market, the decentralisation remains popular because of the substantial 80% rental difference which persists between Central and all other business districts.

The report cited two global law firms based in Central that were reported to commit to space in United Centre in Admiralty and One Island East in Quarry Bay. “We can also see companies based in core areas of Kowloon moving to non-core districts to cut costs given a company specialized in photographic 38

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Despite a generally lifeless market, decentralisation remains popular because of the substantial 80% rental difference which persists between Central and all other business districts.

products recently committed to a lease in Kwai Chung, relocating from their current office in Mong Kok,” Savills said in a report.

Despite the relocation cases, the capital expenditure incurred in a move can be substantial ($600 to $1,000 psf net), and has become an overriding concern in the current uncertain economic environment.

As a result, Savills stated that the vacancy rate of offices rose sharply during the Q1, from 4.65% at 2.74 million sqft net in December 2019 to 5.22% at 3.08 million sqft net in March. Island East continued to be the district with the lowest vacancy rate at 1.6%, whilst vacancy rates in Central and Wanchai/Causeway Bay rose from 3.8% and 4.6% in Q4 2019, to 4.6% and 5.3% in Q1, respectively.

The widened vacancy rates come on the back of the relocation of international luxury brands and an international professional firm out of these areas. On Kowloon side, Tsim Sha Tsui and Kowloon East recorded vacancy rates of 3.3% and 10.2%, up from 2.7% and 9.7% in Q4 2019, caused partly by COVID-19’s overwhelming impact on retailers, many of whom have their back offices in these two areas.

Apart from grade A offices, coworking operators are taking a severe hit from the COVID-19 outbreak as people avoid crowds and public areas.

For instance, Servcorp’s founder and CEO Alf Moufarrige recently mentioned that the company’s China and Hong Kong offices had taken a particularly hard hit. He also mentioned that Servcorp’s co-working sales across the UK, Europe, US and Australia had fallen by around 30% to 40% from mid-February to earlyMarch. The report commented that this dilemma could result in another stage of consolidation for the coworking industry.

Amongst sub-sectors, Savills noted that only offices leased by online businesses will likely be stable. “Online businesses could be set for expansion, however, as the social unrest from the middle of last year and the COVID-19 outbreak have encouraged consumers to rely more on a wider variety of online services,” the report added.

As a case in point, it cited data from Euromonitor where Hong Kong’s e-commerce sales value in 2019 rose by 13.3% compared to the figure posted in 2018. The institution forecasts e-commerce sales by value will grow at a compound annual growth rate of 12.5% from 2020 to 2024.

No silver lining Looking forward, Savills doesn’t seem to see a glimmer of hope that grade A office rents will recover throughout 2020 as they are projecting the rents to drop by around 20% in 2020.

As the COVID-19 pandemic persists, retail and hospitality sectors have been hard hit and companies in these industries, which will negatively affect rental levels and vacancy in noncore areas where the offices of such firms are concentrated.

The report added that some companies have postponed their Hong Kong IPOs due to the recent stock market sell off, which could affect the rental affordability of the financial and professional services sectors housed predominantly in Central.

“COVID-19 has also caused extensive disruption to global production and trading activity and the solvency of some corporates is expected to be tested under these uncertain conditions with implications for the local office market,” Savills stated in its industry report.

Numbers HONG KONG THIRD IN EASE OF DOING BUSINESS RANKINGS The Doing Business 2020 report, by Russell Bedford International, measures regulations across 190 economies to assess the business environment in each. Ten different indicators, including rules over starting a business and registering property, were used to estimate an ease of doing business score out of 100.

Hong Kong, with a score of 85.3, was ranked third in the world, after New Zealand and Singapore.

Doing Business 2020

Starting a Business in Hong Kong

Registering Property - Hong Kong

Getting Credit- Hong Kong

Protecting Minority Investors in Hong Kong and comparator economies

Registering Property - Hong Kong

Source: Russell Bedford International

HONG KONG BUSINESS | Q2 2020

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MARKETING briefing

What makes a great mobile ad campaign?

A 30-second ad gets 12% less in revenue, compared to a 15-second commercial.

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lashy neon colors, repetitive memes, a fun encouraging tone, and the catchphrase LAM—literally “LAM to the end,” a wordplay that reflects the local slang amongst the youth whilst poking fun at local politics—headlined the online video ad for Hutchinson Communication’s Mobile Online (MO) brand. It was a massive hit: throughout its run, clickthrough rate (CTR) increased 63.6% whilst app downloads ballooned 138.75%, according to ad agency New iMedia, who produced the campaign.

Further, it reduced the cost-per-action of the app’s downloads by 33%, enhancing cost efficiency.

The MO Sim Card ad is just one successful example of why brands are increasingly turning to mobile ads to get more customers. A study by data firm Magna found that mobile ad spending in APAC rose 25% in 2019. It also accounted for 73% of total digital advertising. In 2020, digital ad spending is forecasted to expand by another 13% and hit $793.13m (US$102m).

In contrast, linear advertising revenues (TV, radio, print, OOH) decreased by 1.2% in 2019. TV advertising sales shrank 1.3% to $443.22b (US$57b); whilst newspapers ad and magazine ad sales contracted 8% and 10%, respectively.

In Hong Kong, where 5.94 million people or 72.26% of the city’s population are expected to be active mobile phone users, PwC forecasts that expenses on mobile ad will make up a third (32%) of total ad revenues by the year’s end.

These numbers underpin where the money goes—and it’s not on paper nor on the flatscreen. But just taking your ad online won’t make it an instant hit.

“It depends on the campaign objective or budget available.

The best way would be leveraging both video and banner ads to achieve the complementary effect and synergy,” said Sandy Ho, CEO of New iMedia.

Sandy Ho

Five-second rule Apart from catchy taglines and creative effects, length also plays a role in the success of a video ad. A study by online ad manager Mediavine found that the completion rate for a five-second ad stands at 92.88%, compared to the 80-82% range for 10, 15, and 20-second ads. In contrast, a standard

“LAM to the end”— an online video ad for Hutchinson Communication’s Mobile Online brand

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30-second ad gets watched through only 69.53% of the time.

This makes the first five seconds the optimal length for a non-skippable video ad, or at least to get to the content, according to Mediavine.

New iMedia’s Ho also said that the core message must be displayed in the first five seconds of the video. “As consumers are getting more and more impatient and so much information is browsed by them every minute, simple and direct ad messages for most of the ad campaigns are preferred,” she noted.

The MO campaign, which ran primarily on YouTube, carried a simple catchphrase with minimal text and graphics set on a vibrant palette. At 15 seconds and with a shorter sixsecond version, the MO ad falls below the average 30-second length.

30-second ads tend to be the most popular pre-roll length as it is the popular television commercial length, according to MO. But uploading the same TV ad to an online platform may be doing the brand more harm than good. The Mediavine study found that a 30-second ad gets 12.9% less in revenue compared to its 15-second counterpart. It also gets 12.1% revenue less than a 20-second ad.

Getting the ad across As websites or platforms all have different themes and target audiences, it is also important to diversify the ad’s dimensions to adapt to different platforms and different specifications of banner ads for recalling the brand, product, service and/or message easier, added Ho. This includes minimising the wordings, using creative formats such as gifs and HTML5, and having call-to-action wordings that direct clients on what to do. The last one includes phrases such as, “click to get the promotion code”, for example.

For video ads, Ho noted that it is important for companies to display their company logo throughout the video, to avoid too much content, and to be aware of the different platforms setting practices. For example, some digital platforms may not carry sound or may give the option to turn off ad audio, so subtitles have become essential.

Ho also suggested that for a more far-reaching campaign ad, companies should implement both video ads and banner ads. “Use video ads to deliver more detailed promotion messages whilst leveraging banner ads to reinforce the key message and further enhance brand awareness,” she explained.

Further, despite the fact that they believe that most advertisers would focus on mobile advertising, companies who sell their services to other businesses should still make use of desktop banner ads.

“As an agency, we believe that most of the advertisers will focus more on mobile advertising. However, for B2B advertisers, desktop ad placement is still important as their target audience usually search them during office hours using [a] desktop,” said Ho. By Frances Gagua

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Legal briefing

FIL opens PRC doors to HK investors

Foreign investments are now treated equally with domestic investments in the People’s Republic of China.

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new Foreign Investment law (FIL) in the People’s Republic of China (PRC) was brought into force in March 2019, replacing the country’s three foreign capital laws: the PRC Wholly Foreign-Owned Enterprise Law, the PRC Sino-Foreign Equity Joint Venture law, and the PRC Sino-Foreign Contractual Joint Venture law. Whilst the new FIL promised an improved regulatory framework for foreign investments in China, that status of China’s breakaway provinces including Hong Kong in relation to the law are still marred by vagueness.

The state council of the PRC adopted the regulation on the FIL in December 2019, where new regulations of the FIL, further elaborated, were brought into force on 1 January 2020. The new terms see a much more refined regulation on the equal treatment between domestic enterprises and foreign invested enterprises, which reiterates the protections offered to foreign investments as well as the five-year transitional arrangement for foreign investment enterprises (FIEs) that are still regulated under the three former foreign capital laws.

How will the new regulations of the Foreign Investments Law (FIL) impact foreign investments in Hong Kong?

“Whilst the FIL is a great leap in transforming mainland China into a more liberalised and attractive place for foreign investments, we do not anticipate the FIL to have immediate material impact on foreign investments in Hong Kong in the short term,” said Colette Pan of Zhao Sheng law firm, a joint partner of Linklaters.

However, the new FIL, in general, enhanced the environment for foreign investments to a more stable, and transparent one, by providing a single unified body of laws governing foreign investments, according to Helena Huang, Co-Chief Executive (Hong Kong) at King & Wood Mallesons.

“Previously, foreign investors investing in Mainland China had to navigate and comply with different sets of law in the PRC,” noted Huang.

Can you elaborate further on what makes the new FIL different from the three previous laws that it repealed?

Pan says that the FIL fundamentally revamps the foreign investment regime in mainland China. It lays down the “national treatment - negative list - ongoing supervision” framework for foreign investment management, completely replacing the approval-based regime established under the previous laws which were in place for many years.

Foreign investments to The Mainland need to comply under the “negative list” regime. This means that for investments that do not fall within the list (which is updated on an annual basis), approval from the relevant authority will no longer be required before the investment is made and national treatment is granted.

“More concretely, it unifies the corporate governance structure for foreign invested companies and domestic companies, providing more flexibility for foreign investors to structure their investments in China,” noted Pan. 42

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Colette Pan

The new FIL will provide more flexibility for foreign investors

Helena Huang

In the new FIL, the highest authority on foreign investments is switched from the board of directors to the shareholders’ committee. Certain matters will also require two-thirds of shareholders’ approval and no board veto matters at law, compared to the former where certain matters only need an unanimous board resolution. FIL do not require a fixed term and transfers of shares/equity interests will need a simple major shareholder’s consent.

How will the new regulations differentiate domestic firms from foreign-owned firms? Why is it removing barriers between the two?

“One of the main goals of the FIL is to eliminate the differences between domestic companies and FIEs under the principle of Pre-National Treatment with respect to investments in industries by FIEs that do not fall under those listed in the Negative List,” said Huang.

This means that the establishment and operation of such FIEs are basically the same as and are now aligned with the domestic companies. The relaxation of the Negative List and the implementation of more streamlined management systems, which reduces complexity and burden on the foreign investors, provides for easier access by foreign investors into the Mainland China market.

The main reason for removing the barriers between domestic firms and FIEs is to optimise its business environment and to embrace the international market environment for foreign investments.

“One point to mention is that whether foreign invested firms will, in practice, be differentiated from domestic firms (e.g. scope of business) will largely depend on the implementation of the FIL law by industry regulators, and the discretion they may have when regulating these two firms,” Pan added.

For example she cited was when Chinese financial regulators have been busy in recent years with the overhaul of rules relaxing the business restrictions of foreign invested financial institutions to the effect that the permitted business scope of many foreign invested financial institutions be harmonised with that of local financial institutions.

“We believe that with the FIL in place and more implementing rules to come, foreign invested firms and domestic firms will compete fairly in the Chinese market.”

HONG KONG BUSINESS | Q2 2020

43

OPINION

BENSON CHAO

Understanding the human side of working from the home office

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by benson chao Director of Corporate Communications SAP Hong Kong

he very fabric of how the world usually works is being put to the test. The business world and our social life are spinning as the World Health Organization raised its risk assessment of the coronavirus to “very high”, alerting all of wide-spread risk and global impacts. And at press time, things are not exactly looking up. The number of COVID-19 confirmed cases globally has exceeded 90,000, death toll has risen over 3,000, and 60 countries have reported confirmed infection cases. Closer to home, Hong Kong has 100 confirmed infections and, sadly, lost two lives, as of March 2.

As the outbreak continues, people movement inevitably slows down. Even as the HKSAR government restarted parts of its civil service, a portion of Hong Kong’s workforce continues to work from home whilst many companies scramble to make it really work. A lot of ink has been spilt on how to structure remote work-life and the best work-fromhome rules of thumb. But this is not what this article is about.

I am advocating companies, leaders and line managers to be more “human”.

Foster understanding In times of any sort of worldwide crisis, your employees are emotionally shaken if not distraught. They look up to their leaders for guidance and it calls for authentic understanding.

When you assign tasks, monitor progress and find quick fixes when things fall through, take note of what your employees are grappling with. They worry about their own health, parents and children whilst they adapt to these new circumstances.

Help them cope. Be understanding.

Communicate both ways This is the worst time to be top-down in communicating with staff. Listen to your staff ’s concerns. Be candid when you appreciate them, be specific of what you expect them to deliver, set a reasonable timeline, share with them your goals, but be prepared to readjust if realities do not agree.

Appreciate adaptability No one has been schooled or trained to function as effectively as they are working from home. There is a difference in setting, which calls for a change in mindset, work habits and tools.

Adapting is not that easy for all. Thus, employers should appreciate that their teams are handling this the best they can.

Trust them and give them room to perform at their best.

Leverage technologies Whilst we are all quite adept at maintaining constant communication through emails, messaging, conference calls and shared materials, there are enterprise technologies that enable companies to better manage work processes, ensure

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Firms are allowing their staff to work from home as the pandemic spreads.

employee experience and safety and foster remote collaboration.

Leverage these to innovate and make remote work-life work.

Exercise patience Digital communication enables teams to put their heads together digitally. It removes physical contact, and most of the time, it works. But technologies intrinsically hamper immediacy and sometimes, latency might cause frustration. This calls for patience when things do not work as fast or immediate as in an office environment.

Set realistic goals Companies exist to make profits. Granted. But under these sluggish circumstances, KPIs might need to be recalibrated to reflect business realities. Sometimes, high margins, bonuses and profits might have to take a back seat when life throws us all a curveball.

Humans are funny animals. Our moods and sentiments fundamentally influence how we function as a workforce.

If companies and leaders demonstrate how they genuinely care about their employees, they might boost morale, lessen resistance to adapt and pave the way for promising results. Be positive in mind and in practice with your teams, they might have some pleasant surprises in store for you.

HONG KONG BUSINESS | Q2 2020

45

OPINION

BRIAN LO

Charting the explosive growth of Hong Kong’s gig economy

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hat do workers want? This question is now vital for employers to answer, as Asia Pacific continues to face record talent shortages. The region is expected to see a talent deficit topping 47 million by 2030 and Hong Kong has been cited as the third most difficult place to find skilled employees anywhere in the world.

Companies who understand what workers want and deliver it will be a step ahead in finding great people and keeping them on board—which is why it’s so important to talk about the gig economy, or “on demand” economy.

Participating in the on-demand economy means working freelance with more freedom, rather than the traditional Monday to Friday, 9-to-5 role. It might mean chauffeuring passengers around town via a ride-hailing app, building websites as an on-the-go digital nomad, or helping a food delivery service get delicious meals to people’s dinner tables.

Whatever the role, many people choose to enter the gig economy because it offers control and flexibility; so workers can fit their work around their lives, rather than the other way around. On-demand workers are able to set their own hours, work as little or as much as they like at any given point, and take on multiple roles simultaneously.

The gig economy offers huge advantages for workers with other commitments—whether they’re a student who needs to adjust their weekly schedule based on coursework, a parent balancing work and childcare duties, or an employee who already has a full-time job but wants to make a little topup income every now and then. On-demand work is also appealing to budding entrepreneurs who need to pay their bills, but still want to devote the majority of their time and energy to working on independent projects or building their own business.

All these benefits and more for gig workers, like those who choose to ride with Deliveroo, are made possible thanks to new technology platforms that put workers in control as never before. In many cases, a self-employed worker has the power to choose whether to work, where to work and when to work.

They can reject a job at any time, start or finish work at any point, and even work for multiple companies simultaneously.

This represents a fundamentally different relationship than that we are used to between employer and employee in in traditional forms of work.

Gig work is on the rise around the world, particularly within APAC where 84% of talent managers say they engage gig workers—a full 19% above the global average.

In Hong Kong, we are also seeing a gig economy boom as people increasingly demand more choice, flexibility and control in how they work. Research undertaken for us at the end of 2018 found that nearly nine in 10 people in Hong Kong (87%) think it’s important to have the choice to set their own

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by brian lo General Manager Deliveroo

Hong Kong Victoria Harbour

working hours and nearly half (45%) said their choice of work would be influenced by other commitments such as caring for family, pursuing a hobby or studying. This is the new reality companies have to respond to.

Of course, with the freedom and control offered by the gig economy, it is still essential that appropriate measures are put in place to protect workers, businesses and the public at large.

Companies must support their self-employed workers, to ensure appropriate training and safety provisions. Deliveroo, for example, has offered free Red Cross first aid courses to riders and launched a free accident and third-party liability insurance package last year, giving riders in Hong Kong and worldwide accident and injury cover and allowing them to claim for lost income if they are unable to ride because of an on-the-job injury. We have called for a change to the regulation governing self-employment to enable platforms and companies to go even further to offer on-demand workers even more protections.

With the right approach, balancing flexibility and security, the gig economy has the power to transform the world of work as we know it. We are now seeing gig work attract a huge range of people across different industries, ages and experience levels. Collectively, these freelancers are ready to re-shape the interactions between workers, businesses and customers; fueling new business models that provide on-demand services to customers and new ways of working.

The future for the gig economy is wide open and there is no doubt that Hong Kong can be a frontrunner.

HONG KONG BUSINESS | Q2 2020

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OPINION

TIM HAMLETT

Is it time for universities to learn a valuable new lesson?

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he temporary closure of Hong Kong’s universities has accidentally highlighted the very old-fashioned way in which they operate in normal times. In the Middle Ages, when books were scarce and expensive, it was necessary for students to gather round the feet of an established scholar and gather the pearls which supposedly fell from his lips.

Nowadays this is hardly necessary. Unfortunately, the one topic which attracts little attention and less research in universities is their own internal doings. Education departments—where some relevant expertise lurks— are regarded as very much the bottom of the prestige pyramid; comments from them on the way more eminent people operate are neither welcomed nor heeded.

So the tools used to insert knowledge into young heads remain for the most part what they were hundreds of years ago: tutorials, seminars and lectures.

The difference between these is the number of people present. The classical tutorial is one and one: student and tutor. In practice, the number of students, at least in the early years of the degree course, may creep up to two or three.

What happens is that the student or students read out their essay on the set topic, and there is then a discussion. The tutor, if she is a good tutor, will try to make this a conversation of equals, whilest guiding the students in fruitful directions. The friendly atmosphere does not detract from the fact that this is a very demanding exercise for the student.

The seminar is bigger, and used to go up to about 12. This is the number up to which, according to the anthropologists, it is still possible to have a conversation, with some guidance from a leader. People speak spontaneously, interrupt (politely, we hope) and interact with each other. As in the tutorial, one person reads out his thoughts on the set subject, and these are then discussed.

This is an ordeal for the individual doing the reading.

The other people may be tempted to sit back and say little. A good instructor will try to draw everyone into the conversation.

After this, we get to the lecture. Up to about 40 this can operate rather like a well-run school class: the teacher will set the topic, advise on readings and other resources, will set out his own views and invite questions and comments, to which she or he can respond.

Above 40 (another landmark for the anthropologists, for reasons we need not go into here) we are in the territory of the mass lecture. In this the instructor really has no choice but to perform. Meaningful two-way interaction with the audience is desperately difficult.

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by TIM HAMLETT Former Editor of Sunday Standard and Associate Professor of Journalism

Hong Kong universities are shutting down amidst recent economic turmoil.

Many of them will be unwilling to speak before such a large gathering, even if invited.

This has been a popular method since the 1700s and the only concession to modernity usually offered is a PowerPoint presentation.

Two points to note here. In various subjects there are other requirements: scientists do lab work, law students argue in moots, journalism people produce newspapers, medics have a clinical practice and so on.

But the basic diet is still as above.

Secondly, there has been some inflation in the language used to describe these events. Many so-called “tutorials” are really seminars, “seminars” are so big they should properly be called lectures, and lectures have in some courses become so large—300 and up students – that they are more like a very sleepy pop concert.

Clearly there are economic forces at work here, as there were at my secondary school, which switched from football to rugby on the very simple grounds that a teacher running a football game only occupied 22 boys, whilst a rugby match would engage 30.

Universities are propelled by competitive forces to do more research. The league tables measure little else.

And this is congenial to their staff, for whom teaching is a chore, whilst research is what allows them to cherish the hope of being headhunted by Harvard.

So there is a temptation to reduce teaching hours, and spread them further by packing more students into the room. Against this is the dilution of the effect on students. As the number of people in the room goes up the temptation and opportunity to doze increases.

“Universities are propelled by competitive forces to do more research. The league tables measure little else.”

L INE R EFINE F a c e t h e d ay f o r wr ink l e fre e disco v e r m o r e a t c on cor d-m e di c al. c o m

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HONG KONG BUSINESS | Q2 2020