Hong Kong Business

Display to 31 March 2012

HONG KONG’S

RETAIL rents-

GOING UP OF RUNNING DOGS

AND SHOPPING

LOCUSTS

hong kong banks

ratchet up MORTGAGE RATES

CONSUMPTION SWAYS TO THE BEAT OF

HOTTEST START-UPS OF 2012 Life&Style

ASSET PRICES Business Bankers

confident of Asian growth

RICHARD BRANSON

BE A LEADER,

NOT A BOSS BE CAREFUL WHEN YOU SUE THE BOSS FOR BEING SACKED

Take a slice with

Grilled steak? these steak knives

HONG KONG BUSINESS | FEBRUARY 2012 1

2 HONG KONG BUSINESS | FEBRUARY 2012

HONG KONG BUSINESS | FEBRUARY 2012 3

CONTENTS

11

FIRST Retail rents - Going up

18 ANALYSIS Business Bankers confident of 30

COVER STORY

44 Consumption sways to the beat

REGULAR

Just how much changes in Asian consumption are linked to changes in house and stock prices? Find out as Roxanne Uy and Krisana Gallezo report.

20 CEO Interview

30 10 Startups in Hong Kong to

watch in 2012

Hong Kong Business worked with Hong Kong Investment Network, the largest angel investment community in the world, to bring you some interesting startups across industries.

ANALYSIS 18 Business Bankers confident of

Asian growth even as Europe threatens

COVER STORY Hong Kong’s hottest start-ups of 2012

Asian growth even as Europe threatens

As European banks start to deleverage and restrict lending to Asia amid the sovereign debt crisis, fears of a credit crunch abound. But are these worries overdone?

Find out as Roxanne Uy reports.

Published Bi-monthly on the Second week of the Month by Charlton Media Group Pte Ltd, 19/F, Yat Chau Building, 262 Des Voeux Road Central, Hong Kong 4 HONG KONG BUSINESS | FEBRUARY 2012

of asset prices

36 Legal Briefing 48 Life & Style

OPINION 14 Cautious budget on global

weakness

17 Be a leader, not a boss

FIRST 11 Retail rents - going up 11 Of running dogs and shopping

locusts

34 A game of skill or a game of

chance?

50 A modest proposal to ward off the

Monstrous Mainland Mother Menace

For the latest business news from Hong Kong visit the website

www.hongkongbusiness.hk HONG KONG BUSINESS | FEBRUARY 2012 5

FROM THE EDITOR

HONG KONG

BUSINESS Established 1982 Editorial Enquiries: Charlton Media Group 19/F, Yat Chau Building, 262 Des Voeux Road Central Hong Kong. +852 3972 7166 Publisher & EDITOR-IN-CHIEF Associate Publisher Assistant Editor Art Director Editorial Assistant Media Assistant Editorial Assistant contributing Editor ADVERTISING CONTACTS

Tim Charlton Louis Shek

In this issue of Hong Kong Business Magazine we

Jason Oliver Jane Kristine Cruz

thought we would investigate Hong Kong’s ten

Queenie Chan

hottest start-ups to watch, or work for, in 2012.

Daniela Gujilde Alex Wong Ajay Shamdasani

Our methodology was to ask some of the leading venture capitalists in

Louis Shek +852 60999768

Hong Kong to name the hottest and most talked about start-ups and from

louis@hongkongbusiness.hk

that we got a list of over 28 companies, which we have whittled down to just

Laarni Salazar-Navida

ten hot start-ups to watch. Many of these start-ups were also mentioned by

lanie@charltonmediamail.com Rochelle Romero

several of the venture capitalists we talk to.

rochelle@charltonmediamail.com

What makes this list particularly interesting is that it is very different ADMINISTRATION Advertising Editorial

Melania Ticman

from similar lists which are come out of the United States and tend to focus

melania@charltonmediamail.com

overwhelmingly on tech start ups. To be sure there are some web companies

advertising@hongkongbusiness.hk

on our list, such as Ecopoint Asia, which is a web platform for professionals

editorial@hongkongbusiness.hk

involved in the environment and climate change. But there are also other areas of new endeavor from turbines to watches.

SINGAPORE Charlton Media Group #06-09 E, Maxwell House 20 Maxwell Road Singapore 069113 +65 3152 0147 +65 6223 7660 www.charltonmedia.com PriNting Gear Printing Limited 1/F Express Ind Building 43 Heung Yip Road Aberdeen, Hong Kong

Can we help?

What the lists shows is that Hong Kong is still an inventive, entrepreneurial city and that the future still belongs to those who dare to try something new.

To all our readers in the year of the Dragon, we wish you luck and prosperity.

Tim Charlton

Hong Kong Business is available at the airport lounges or onboard the following airlines:

Editorial Enquiries If you have a story idea or just a press release please Email: editorial@hongkongbusiness.hk and our news editor will read it.

Media Partnerships Please Email: editorial@hongkongbusiness.hk and put “partnership” on the subject line and it will forward to the right person.

Subscriptions Email: subscriptions@charltonmedia.com Hong Kong Business is published by Charlton Media Group.

All editorial is copyright and may not be reproduced without consent. Contributions are invited but copies of all work should be kept as Hong Kong Business can accept no responsibility for loss.

We will however take the gains.

Sold on newstands in Hong Kong, Macau, Singapore, London and New York *If you’re reading the small print you may be missing the big picture 

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News from hongkongbusiness.hk Daily news from Hong Kong Year of the dragon: a good or a bad start? most read ECONOMY

HK Monetary Authority warns against growth risks Growth did occur in Hong Kong last year but what about in 2012?

The Monetary Authority’s end-2011 review of the economy presented a rosy picture of a buoyant Hong Kong: the banking sector’s total loans rose 20% and residential mortgage loans increased 8%, said Deputy Chief Executive Arthur Yuen.

Profits also rose in interest and noninterest income, with total deposits up 11%.

ECONOMY

A bad start to a bad year for Hong Kong business

24% of senior management in Hong Kong companies expect the business situation to worsen in the first quarter of the year.

The supposedly luck Year of the Dragon is set to inflict great pain on businesses in Hong Kong.

Hong Kong exports heading for a downturn?

second-biggest insurer, or Ace Ltd, an insurer, reinsurer based in Zurich. economy

Hong Kong posts record gold exports to China China’s insatiable appetite for gold is driving Hong Kong’s gold traders to seventh heaven as exports surged 19%.

Hong Kong’s gold exports to China surged 19% to 102,799 kilograms in November from 86,299 kg in October as Chinese continued to cling to gold as a hedge against turmoil in the financial markets. The November sales is a record, said the Census

FINANCIAL SERVICES

Who will buy HSBC Holdings’ non-life insurance operations?

It’s either Europe’s Axa or Zurich’s Ace - we’ll probably know by late February.

Industry sources said the winner will be either Axa SA, Europe’s

Gold exports on the rise

8 HONG KONG BUSINESS | FEBRUARY 2012

and Statistics Department. economy

Hong Kong’s air pollution drives businesses to Singapore Air pollution is a pox on Hong Kong’s business.

Just how bad can be gleaned from a report by the city’s Environmental Protection Department which said pollution readings at three roadside monitoring stations in Hong Kong’s Central, Causeway Bay and Mong Kok commercial districts showed that pollution levels were above the 100 mark more than 20% of the time.

A gloomy outlook for Hong Kong? economy

Ailing Hong Kong needs more than band aid therapy

Petty solutions aren’t going to do it for Hong Kong, which stands to take a tremendous hit from the explosive Eurozone debt crisis.

Chief Executive Donald Tsang rang the alarm bells for Hong Kong at the Fifth Asian Financial Forum, saying the city urgently needs wholesale strategies that promote sustainable growth in light of another impending global economic downturn. economy

Hong Kong domestic exports plunge 20.6% yoy

Exports continue to wilt before the worldwide economic slowdown.

The Census & Statistics Department reported that domestic exports dropped sharply by 20.6% from January to November 2011 compared to the same period in 2010.

Exports for November alone were also

down significantly: they plummeted 37.6% year-on-year. economy

U.S. dollar grows stronger in Hong Kong amid banking crisis Hong Kong’s savers are apparently abandoning the renminbi for the still mighty but battered U.S. dollar.

They’re buying more U.S. dollars and Hong Kong dollars that’s boosting liquidity and less of the renminbi because of lingering doubts about the latter’s appreciation. This means that Hong Kong banks now have more money to lend. economy

Hong Kong has second best bureaucracy in Asia The city’s bureaucracy is the second best or most efficient in Asia, according to a report by the Political & Economic Risk Consultancy Ltd (PERC).

Hong Kong was rated 3.53 on a scale of 10, with 10 being the worst.

HONG KONG BUSINESS | FEBRUARY 2012 9

FIRST

FIRST mortgages – a key driver of profits.

Credit Suisse analyst Franco Lam noted that with the rise in new time deposit rates, we have also seen the trend of the return of the pricing power for banks, particularly in mortgages where pricing is more transparent in the market. “Though current gross levels of mortgage lending rates are still low versus historically, we estimate mortgage spreads earned for the large banks are only 0.7& off their 2005 peak and the current spread earned from new mortgage is over 2%.”

Offshore RMB market diving Almost without warning, the much vaunted offshore Chinese RMB market seems to be slowing down almost too quickly, and it has some bankers concerned. Ever since it became possible to settle trade with China in Hong Kong in RMB, the market took off like a bull out of a gate – rising from 0.7% of all trades in early 2010 to finish 2011 at 9% of all trades. The flood of RMB available in Hong Kong gave rise to the so called “Dim Sum” Bond, which is a bond raised in RMB by organisations outside of China.

Many Hong Kong corporates were quick to tap into this new source of funding, especially at a time when US and European lenders were beginning to be tighter with lending.

Credit Suisse noted that the new issuance of RMB bonds exceeded the Rmb100 bn level in 2011, compared to just RMB 36 bn in 2010, and the number of issuing institutions also rose from 23 to 86. Ten percent of all deposits in Hong Kong are in RMB – that is RMB622 bn. But there are now signs that RMB deposits are slowing sharply and even reversing, with HKMA December 2011 data showing a - 6.2% MoM decline in RMB deposits.

This matches Fitch data which show net withdrawals of Chinese corporates from banks in the mainland over the end of last year. No doubt a liquidity crunch among Chinese corporates will hamper the offshore RMB market, and also the Dim Sum bond market.

Offshore RMB ‘dim sum’ bonds (Rmb bn)

10 HONG KONG BUSINESS | FEBRUARY 2012

Hong Kong Banks ratchet up mortgage rates

O

ne could think that near zero interest rates would encourage would-be borrowers to pile in for cheap loans to buy real estate and stocks. But that is not what has been happening in Hong Kong’s banking sector over the last three months. Instead, banks are seeing loan demand actually drop whilst consumers continue to put more cash in the bank waiting, perhaps, more certain times.

Macquarie Securities banking analyst Ismael Pili noted that on a YoY basis, total loan growth moderated to 20.2% in December vs. 23.5% in November and total loan to deposit ratios improved to 66.9% in December vs 68.0% in November. Still, analysts have noted that the keen competition for deposits seems to be slowing down with reduced loan growth and this means that banks are able to increase their margins on

Mortgage lending rates have crept up as much as 1.30%

Rocketing mortgage interest rates And if you reckon your mortgage interest rate has crept up over the past few months, you are not wrong. Mr Lam estimates that mortgage lending rates have crept up as much as 1.30%, a magnitude of increase that was one of steepest in recent years. “Mortgage rates also rose significantly during 2003–05, but that was the period when interest rates were generally rising as the US Fed Funds rates moved up interest rates as much as 4.25 %,” noted Mr Lam. And Macquarie doesn’t see much other good news for banks on the horizon, expecting liquidity conditions in the HK bank sector to improve with slowing loan demand, though we believe margins will continue to be pressured. “Looking into 2012, margins may be troughing, although we don’t expect NIMs to materially improve in the absence of a rise in benchmark rates and lighter competition. We note that the Fed intends to maintain policy rates at historically low levels through 2014, which doesn’t bode well for HK banks’ margins.”

Property transactions (HK$ mn) versus growth

Retail rentsgoing up

H

ong Kong has never been a cheap place for retail space but the surge in tourist spending and growth over the last few years has at least provided a buffer to tenants as sales growth has outstripped rental income. Unfortunately for retailers, that trend started unwinding in September last year and shows no signs of resuming as rents start catching up with retail sales growth.

“Hong Kong retail sales growth momentum started weakening in September 2011, with growth decelerating from 29% in July and August to 24% in September, and further decelerating to 23.1% in October,” noted Credit Suisse analyst Gabriel Chan. In Hong Kong, where 3-year leases are the norm compared to 5-year leases in Europe, the retail cycle typically runs up to a year ahead of the rental market as landlords use current sales as a benchmark for setting new rental rates. Which stores will be affected?

that landlords underestimated the growth potential. “Rental pressure may force some retailers to scale down store expansion plans, triggering even more downward earnings estimate revisions,” he added. So which store may be hit the hardest by these rental hikes?

Readers concerned that their favourite Louis Vuitton or Prada store may have to downsize can relax.

Typically rent accounts for just 5% of sales for ‘hard retail’ companies, and around 10% for restaurants and cosmetics. Most vulnerable are apparel and accessories shops, who currently average about 20% of their sales as rent. Any rapid increase could force them to downsize or shift location - perhaps even freeing up more space for the large hard luxury retailers. Credit Suisse notes that retailers such as Bauhaus, I.T, Moiselle and Veeko all had rental expenses that exceeded 20% of their

Rental pressure may force some retailers to scale down store expansion plans, triggering even more downward earnings estimate revisions

Apparel & accessories retailers have the highest rental expense-to-turnover ratio

turnover in 2010. “High rental cost may eventually force some retailers to scale down their store expansion plans, which could trigger even more downward earnings estimate revisions and result in some valuation de-rating,” noted Mr Chan. Chinese visitors to Hong Kong have been the most important driver of retail sales growth and over the past ten years, retail spending by mainland visitors increased at a 22.3% CAGR between 2000 and 2010.

But Credit Suisse has stripped out tourist spending from the retail figures which shows that Hong Kongers have actually cut their retail spending over the last three years, and this means that rental rises could most affect shops that mainly cater to locals. In fact there are already clear signs that big international brands are taking up prime retail space that previously served a more local market.

China consumer confidence index

Which stores will be affected?

And the rental rises coming in to tenants could be severe, he warned. Retail sales growth has been outpacing rental rate growth since 1Q09 and this rarely happened over the previous ten years, suggesting

Of running dogs and shopping locusts If Hong Kong feels more crowded than its 7 million population would suggest, that may be because last year there were 6 tourists for every resident visiting the territory, though thankfully not all at once.

A sudden surge of tourists A record breaking, draw dropping 42 million tourists officially made it through immigration into Hong Kong last year, boosting tourist numbers by double digits. Alas, 2012 may prove harder for the industry as hard times and a return of travelers to flood hit Thailand and Radioactive baked

Tokyo may see Hong Kong tourism growth stall.

Capacity constraints And even if the mainlanders still come in droves, some analysts are concerned that there is simply not enough hotel rooms or shopping space available to pack them all in to.

Retail rentals have surged, especially in prime mainlander shopping districts, and hotel rates are high.

And this was even before the much publicised ‘locust’ advertisement pitting tourists against locals.

retail sales.

As UBS economist Silvia Liu notes, “the increasing noise from the general public, are but some of the signs that we may be approaching the capacity limits.”

HK—arrival growth

Tourism and Hong Kong’s economy In 2004 tourism accounted for just 7% of Hong Kong’s economy, but by last year it had risen to 14% and accounted for over half of all local HONG KONG BUSINESS | FEBRUARY 2012 11

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CM

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12 HONG KONG BUSINESS | FEBRUARY 2012

HONG KONG BUSINESS | FEBRUARY 2012 13

co-published Corporate profile

ECONOMICS

Cautious budget on global weakness

T

he Hong Kong SAR should have another solid year of growth in 2012 despite ongoing concerns about the prospects for the global economy and more especially the European debt crisis.

These continuing global economic uncertainties ensure that Hong Kong’s Financial Secretary, John C Tsang, will deliver a cautious budget to the Legislative Council in the early days of the Year of the Water Dragon.

Mr Tsang will no doubt highlight the SAR’s positive outlook while noting that the global situation will make things more difficult than they might otherwise have been.

Although Hong Kong’s GDP growth slowed through 2011, average growth for the year will be above 5%. The actual outcome will be confirmed with the Budget documents on February 1.

Growth in the final three months of the year would need to come in at less than 3% for the annual average to slip below the predicted 5% level. Mr Tsang is also expected to forecast growth of around 5% for calendar 2012.

The Financial Secretary has several things going for him in framing the 2012-2013 Budget.

First, despite the global concerns, there have been recent signs of better conditions in the US. Politics will dominate the year ahead in what is a Presidential election year (with all the political wrangling that will bring), but the US at least seems to have avoided double-dip recession. Events in Europe will need to be watched closely.

Second, although Mainland growth will be slower than last year (in the range 8-to-9% annual) it will remain strong enough to underpin Hong Kong’s own growth. This is despite the recent slowdown in China’s exports and continued domestic pressures.

Third, Hong Kong’s domestic demand, especially consumption, held up well despite the global

“Domestic investment is also likely to be weaker in 2012 than in 2011.” uncertainties that emerged during 2011. Domestic investment continued to be lacklustre, but the property market remained sound.

Fourth, the Hong Kong fiscal situation is in good shape (see table). In the eight months of the financial year to November 30, the budget was in surplus to the tune of $21.2 billion with end-of-year tax inflows still to come. This leaves the Financial Secretary plenty of room to manoeuvre in the Budget especially on livelihood issues.

Mr Tsang will need to be wary of any (largely) unforeseeable, but serious, setback globally – the collapse of the Eurozone (or some parts of it), perhaps, or trouble in the Middle East (conflict over oil supplies 14 HONG KONG BUSINESS | FEBRUARY 2012

The Euro effect – what does the future hold?

IAN PERKIN Independent Economic Consultant perkin888@hotmail.com

Hong Kong’s Budget Surplus 2011-12 Component

November HK$million

Eight months to November HK$million

Revenue

47,186.6

254,835.3

Expenditure

(48,651.8)

(233,635.7)

(Deficit)/Surplus

(1,465.2)

21,199.6

Fiscal Reserves

616,602.2

616,602.2

from the Gulf, the Iran situation), or even a sudden setback to the Mainland’s growth.

Recent events, such as the Standard and Poor’s downgrading of nine European countries’ debt and Iranian threats to close the straits of Hormuz (through which one-fifth of the world’s oil passes), show how ever-present the bigger global uncertainties are.

As for the Mainland, it is not immune to slower global growth, the troubles in European debt markets and any new threats to global growth that may emerge.

Mainland exports grew 13.4% in December (over a year earlier) and imports by 11.8%, the slowest pace of growth in two years.

While this is hardly a calamitous outcome, it does reflect the impact of slower global demand on Mainland trade and will also affect the Hong Kong SAR’s own trade growth which is so reliant on Chinarelated re-exports.

China also has internal issues to tackle. While few are tempted to suggest any imminent “hard-landing” for the Mainland, economy growth in 2012 will be slower.

Growth in export trade, which has continued to be a major contributor to Mainland expansion, for the year, is likely to slow to around 13%. Domestic investment is also likely to be weaker in 2012 than in 2011.

The Mainland also has its own leadership transition to contend with in 2012 and the transfer of power may have some impact on vital economic decision making.

Of global interest, this transfer of leadership will also be watched closely in Hong Kong.

The Hong Kong SAR Financial Secretary’s Budget outlook for the 2011-2012 year is therefore expected to be positive for the Hong Kong SAR although tempered by the acknowledged risks in the global economy.

Growth is likely to be slower in the opening six months of the 2012 calendar year, but – barring any dramatic setbacks on the global political and economic fronts – should improve as the year progresses. This is the reverse of the trend seen in 2011 when growth started well and then slowed.

Domestic consumption will continue to underpin the SAR’s growth in the year ahead.

Though Hong Kong’s banking sector had limited exposure to the EU debt crisis, what risks should we be prepared for?

W

hile the general consensus is that the current Euro debt crisis poses no direct threat to our banking sector in Hong Kong, due to the relatively low exposure it has to countries with severe sovereign debt issues, there are still other risks that present potential causes for concern.

There’s no denying that Hong Kong’s economy is extremely robust, supported by our close links to China and strong domestic consumption, but like other Asia Pacific countries, we still have a dependence on the health of the global economy, which in part is influenced by Western businesses.

Consequently, while Hong Kong’s banks do not have a significant level of exposure to the debts present in individual European countries, there is a clear possibility that fiscal tightening and other debt reduction measure taken in Europe could lead to an increased aversion to risk. This fact has already been recognised by Secretary for Financial Services & the Treasury, Professor KC Chan, who indicated that this risk aversion might trigger capital outflows and a squeeze on interbank liquidity.

Even though most Asian economies emerged from the global credit crisis earlier than other markets, the financial, commercial and political effects of that event are still causing ‘aftershocks’ across Europe, which are now sharply focussed on the Eurozone sovereign debt crisis.

So what does the future hold for Europe and how will it affect us?

The end result of the current turmoil in Europe is still some way from being fully resolved, so any definitive predictions on the impact on Hong Kong and other Asian markets is likely to incorporate a potentially large degree of inaccuracy. In addition, there are already two different scenarios being considered as to which path the crisis might follow as we move further into 2012.

While one option is for the Eurozone to ‘stick together’ and manage the crisis through minimising further escalation, the other alternative of a ‘Eurozone breakup’ might seem a simple solution, yet the impact of any country leaving the

European monetary union is burdened with further financial problems as well as legal issues.

Given the rapid escalation and stress in the Eurozone, breakup scenarios have been explored and analysed in depth. Yet detailed research undertaken by Atradius economists in a new report on ‘Sticking together : the future of the Eurozone’, suggests that the consequences of a breakup would be highly damaging not only for any country that leaves the Euro but also those that remain within the currency union.

Initially it might appear simple for a country to leave the monetary union as it is a matter of passing a law through parliament to introduce a new currency and subsequently, contracts would be redenominated in the new currency, including demand deposits and accounts held with banks. In theory, this approach is a mechanical operation, but in practice, there are at least two difficulties.

Firstly, the operation would require meticulous preparation. Dismantling the Eurozone would be a completely new experience for policy makers, increasing the likelihood of policy mistakes.

Secondly, a new currency could only be introduced into the highly integrated Eurozone if the operation was made without prior publicity – essentially as a ‘big bang’ - otherwise the disintegration process would be disorderly. Even if a country could overcome these issues, there is actually no way that a country can leave the Eurozone legally and there is intentionally no ‘opt out’ clause in the Maastricht Treaty.

So, by default, there is really only one viable option, however challenging, left for policy makers, decision makers and the European Central Bank (ECB), which is to stay united and address the crisis by minimizing its escalation and begin to exert control over the debt levels in the

“The ECB’s balance sheet has already expanded by more than EUR 300 billion, or 14%”

Matthew Cockerill Atradius Country Manager - Hong Kong peripheral member states of Portugal, Greece, Spain, Italy and Ireland.

Since September, the ECB’s balance sheet has already expanded by more than EUR 300 billion, or 14% and it is expected the ECB will continue to support the banking system via this channel. However ECB intervention, can only offer a longlasting solution if bonds are bought from countries that are temporarily illiquid but fundamentally solvent, yet it can also offer relief to distressed countries for a limited amount of time until investor sentiment improves.

Whichever scenario prevails, there will inevitably be unrest and volatility within European markets for some time, although any stabilisation and improvement has to be welcomed. We know that Hong Kong is not immune from the effects of global misfortune, which is why it would be wise to maintain a cautionary interest in development in Europe.

A full copy of the comprehensive Atradius report on ‘Sticking together : the future of the Eurozone’ is available for free download from our website, www. atradius.com.hk and if you are interested in finding out more about credit insurance and how it can help protect your business, please contact me on +852-3657 0700.

ATRADIUS CREDIT INSURANCE N.V Tel: +852 3657 0700 E-mail: hongkong.enquiries@atradius.com www.atradius.com.hk HONG KONG BUSINESS | FEBRUARY 2012 15

opinion

richard branson Be a leader, not a boss

I

“Many CEOs are bosses, not leaders, directing their employees from well behind the front lines.”

t used to be said that children should be seen and not heard. The only justification for a decision that a parent ever had to offer was, “Because I said so!” This authoritarianism carried into schoolrooms and workplaces, where teachers and managers simply replaced parents as the people whose word was law. But attitudes have changed, and these days, if there is anything that sets me off, it’s when someone says, “OK, fine.

You’re the boss.”

Because in most instances what that person really means is, “OK, then. I don’t agree with you, but I’ll do it because you’re telling me to. If it doesn’t work out, I’ll be the first to remind everyone that it wasn’t my idea.”

In today’s business world, kowtowing to one’s boss is anachronistic. And, conversely, being bossy is not a desirable attribute in a manager or anyone else.

Fortunately, attitudes have changed in both the home and the workplace. Healthy debate was a way of life in our household. School was a different story, however. My dyslexia and rebelliousness meant that I was destined to be my own boss. As it turned out, from that day on I have always been lucky enough to be my own boss and ended up behind bars just once, but very briefly!

To lead forth Latin was never my favorite subject at school – in fact, I don’t think I had a favorite subject, aside from sports – but one word in Latin class that registered with me was the verb “educere.” I remember being greatly surprised to learn that the root of the word “educa-

16 HONG KONG BUSINESS | FEBRUARY 2012

tion” actually means “to lead forth.” Until that moment, I had thought of education as mere “cramming in.” And while a bad school teacher, like a bad boss, will indeed teach or manage by cramming his opinions into his charges, a good teacher or corporate leader will do the opposite and draw opinions and ideas out of his students or associates.

Observe the office floor plan If you are noticing that you and your managers are finding yourselves, despite your best efforts, in the position of giving orders rather than listening for your employees’ decisions, first take a close look at how your office space is laid out. Much of that traditional management structure starts with the actual bricks-and-mortar plan of most office buildings, which reinforces it from the corner office on the top floor all the way down to the darker spaces afforded “lower level” employees on the ground floor or in a windowless basement.

Such hierarchical floor plans are often absent at forwardthinking workplaces. We did not build a glass-and-concrete world headquarters for the Virgin Group. I have spent my career working from just three places: houseboat, home and hammock. Our companies are all located in buildings that are individually tailored to their needs, while the address of the closest thing we have to a head office says it all: “The Old Schoolhouse” is anything but a corporate cathedral.

From our company’s earliest days, when we set out beanbag chairs at our record store, inviting customers to listen to

music and chat with our staff rather than trying to sell them something quickly and move them out the door, I have long been a fan of open-plan offices.

Most should have lots of communal brainstorming spaces, lounges and kitchen areas where co-workers can naturally come together to talk things over. Office walls, doors, desks and counters are barriers to communication.

CEOs but not leaders And now take a look at yourself: a leader is very different from a boss. Many CEOs are bosses, not leaders, directing their employees from well behind the front lines. But sitting in the boardroom listening to even the most comprehensive reports from the front can never compare with your being there and seeing, hearing and understanding those interactions with your customers for yourself. If you aren’t frequently out there leading the charge with your employees, you simply cannot stay in touch with the realities of your business.

So the next time someone says to you, “OK, you’re the boss” as they head for the door, stop them in their tracks. Say: “Not really – we’re all in this together. So come back here and tell me what you’d be doing with this if you were in my place?”

Better still, next time go visit that person in his workspace, put in a shift or some hours beside him, and seek out his opinion on how things are going.

Good examples are contagious, and so is real leadership. © 2012 Richard Branson/Distributed

by The New York Times Syndicate.

HONG KONG BUSINESS | FEBRUARY 2012 17

SECTOR REPORT: BUSINESS BANKING

SECTOR REPORT: BUSINESS BANKING

Business bankers confident of asian growth even as europe threatens As European banks start to deleverage and restrict lending to Asia amid the sovereign debt crisis, fears of a credit crunch abound - but are these worries overdone? Find out as Roxanne Uy reports.

T

he sovereign debt crisis in Europe has started to trickle down in Asia and now business bankers are concerned about liquidity shocks and direct exposure to EU debt. But Noel Quinn, group general manager and regional head of commercial banking at HSBC, noted that though there has been weak demand from Europe over the last few months that has led to an export slowdown in Asia, he does not see any evidence at this stage of a liquidity crunch such as we saw in 2008/2009 impacting trade finance.

“What we are seeing in terms of trade activity is an adjustment in orders from some buyers in Europe and the US, not a halt in activity,” he added.

Credit issues, however, still pose certain threats to Asian businesses as Asia’s recent growth has become credit intensive. There is the possibility of a disruption in the flow of credit, which in turn could affect local consumption and investment.

“European banks lend about three times as much as US banks, a ratio that has held steady over time. Also, 18 HONG KONG BUSINESS | FEBRUARY 2012

“The share of European bank lending to total credit in Asia is around 20%”

total lending by European banks have reached US$1.5 trillion, about 20% higher than in mid-2008. According to the Bank for International Settlements, the share of European bank lending to total credit in Asia is around 20%,” noted Quinn.

Threats of a credit crunch So with Europe undergoing a debt crisis and the looming possibility of credit flow disruption, will Asia be threatened by a credit crunch soon? Ismael Pili, head of financials research at Macquarie Securities believes it is unlikely to happen in Asia.

Indeed, European banks are deleveraging and some are likely withdrawing lending. “However we think that the vacuum will be filled. The US banks, such as Citigroup, as well as other local banks are stepping in, while HSBC sees it as a market share opportunity,” he added.

Quinn sees some early evidence of European institutions tempering their appetite for certain types of lending, such as syndicated deals that may be rolling over and to a certain

extent, trade finance. “We believe that Asia’s financial systems are fundamentally strong and local financial institutions have adequate liquidity and capital to offset the withdrawal

by European banks and mitigate the risk of lending costs spiraling out of control,” he added.

Pili also reckons that typical concerns are direct exposure to EU debt, especially for developed markets of Singapore and Hong Kong but he believes the amount is extremely small. “The maximum, and I underscore maximum, exposure is with Singapore banks equivalent to 6.5% of total assets and HK banks at 6.2% of total assets, and I wouldn’t say this is a worry,” he added.

What to expect in 2012 So amid these uncertainties in the global market conditions, what does 2012 hold for Asia? Pili warns that Asian growth will be affected by the degree that Europe and the US slows but Asia will do its part to foster growth. “China is looking to be more accommodative, Indonesia has ag-

gressively cut its benchmark rates to a historical low of 6.25%, and Singapore has postured towards loosening with their currency stance. We see scope for other countries to follow suit. We think central bankers’ focus is growth; inflation was last year’s story,” he added.

According to Eric Tham, managing director and head of group commercial banking at UOB, global market volatility and uncertainty is expected to persist in 2012 but the global trend of economy gravity shifting to Asia presents growth opportunities in and across the region. “In 2010, Asia accounted for 29% of the more than US$1.2 trillion Foreign Direct Investment (FDI) invested globally. Based on the momentum of growth over the past four years alone, FDI in Asia is expected to reach US$760 billion by 2013, which accounts for 40% of the world’s total FDI,” he added.

But while Asia has proven to be resilient and is expected to continue to deliver respectable levels of GDP growth, the region is not immune to the impact of prolonged uncertainty in the developed world, Quinn noted.

“However we believe that intraregional trade and robust domestic demand will provide a buffer against the global slowdown and unlike the West, Asia has the capability to implement stimulus policies in case of a sharper than expected slowdown,” he added.

A tenfold surge in regional trade flows If there is anything positive that the demand slowdown from Europe and the US brings, it may be that it will cause capital flows within and across Asia to increase tenfold. Quinn noted that one of the most important developments in Asia is the growth of intra-regional trade, which now accounts for almost half of all trade in Asia. “With the slowdown in trade between Asia and traditional partners in Europe and the US, trade activity within and across Asia has strengthened. For example, we’ve seen significant growth in trade China and Bangladesh, Sri Lanka, Vietnam and India as well. This has helped cushion the impact of weak demand from the West, providing new markets and opportunities for Asian businesses,” he added.

Trade prospects in Asia may just get some additional boost as trade between emerging markets, alongside capital flows, is expected to increase tenfold by 2050. “For example, trade between Asia and Brazil is expected to grow from US$96bn in 2010 to US$206bn by 2025 (163% increase), with much of this trade being in soya.

Demand for electronics components and food commodities from Asia into Latin America is also expected to increase as is Asian demand for soya, meats and maize, which are currently imported chiefly from USA and Brazil,” Quinn added.

He also noted that the latest HSBC Trade Confidence Index points to a steady level of confidence among exporters and importers in Asia.

Despite expected headwinds as a result of global economic uncertainty, half of all traders across Asia expect to maintain the same level of trade finance while 40% expect to increase their financing requirement levels. “According to the survey, Greater China continues to be the most promising region of growth for importers and exporters in Asia and intra-regional trade remains the main driver of trade,” he added.

Pili regards banks that have greater regional ties or presence to be better positioned for the regionalization of trade flows and interconnectivity will be a key consideration for bank customers. “We’ve also seen how tight liquidity in a system can spill over to the rest of the region. For example, mainland corporates or mainland related businesses that have difficulties in funding are turning to banks in HK, Singapore, Taiwan, and possibly even Indonesia. There’s been a

Noel Quinn

Group General Manager & Regional Head of Commercial Banking, HSBC

“FDI in Asia is expected to reach US$760 billion by 2013, which accounts for 40% of the world’s total FDI”

Eric Tham

Managing Editor & Head Group Commercial Banking, UOB

pickup in trade finance, while foreign currency liquidity has fallen. For example, Singapore has seen its banking sector’s foreign currency LDR rise to 124% in 3Q11, up from 100% a year ago, while in HK, banks are citing tight HK$ liquidity conditions,” Pili added.

The bankers’ outlook Since trade finance boomed amid some tight foreign currency liquidity, Quinn forecasts that Asian businesses will continue to be a key engine of growth for the region – generating income, jobs and growth opportunities for Asia’s fast-growing economies.

Asian businesses are evolving to become increasingly international – they are doing more cross-border trade, investing overseas or expanding outside their home markets. “As trade and capital flows shift to emerging markets such as Asia, businesses have the opportunity to grow within and across the region – as reflected by the continued growth in intra-regional trade and investments. Riding on these trends, Asian businesses will continue to require international trade finance, financing options, investment advice and efficient transaction banking platforms,” he added.

Likewise, Pili reckons that the developing markets have attractive structural stories that should allow decent growth for the sector over the next several years. “Strong domestic demand will help prop up growth, as private consumption and an investment cycle kick in. Indonesia, for example, has an extremely low loan penetration rate, as reflected by a loan to GDP of 28%, while we still see retail lending as largely untapped,” he added.

Ismael Pili

Head of Financials Research (Asia), Macquarie Securities HONG KONG BUSINESS | FEBRUARY 2012 19

CEO interview

China Everbright reveals its plans for 2012 Everbright International is committed to environmental protection to create a better environment Mr. Chen Xiaoping, Chief Executive Officer of Everbright International, said in the interview that the national policy and the development of the world energy is in favour, and now it is the best period for the development of Everbright International.

HKB: What is the latest environmental development for CEI? Mr. Chen: Recently, there was the inauguration for the Jinan wasteto-energy project. It was the largest waste-to-energy project completed within one phase in China to date. It has a daily waste processing capacity of 2,000 tons. There are a total of eight waste-to-energy projects being put into action and have a daily waste processing capacity of 12,000 tons altogether.

The waste-to-energy projects will be the core business of the company in the future. To further develop the environmental protection sector, it is estimated that manufacturing the equipment on their own can save up to 40% than purchasing the equipment from the others.

HKB: What is the key development focus for CEI? Mr. Chen: Three projects will start by the end of this year to early next year, including Phase III of Suzhou Waste-to-Energy Project, Phase II of Yixing Waste-to-energy Project and Huidong Waste-to-energy Project with a total investment of approximately $1.3 billion. In addition, one more project will be commencing at the end of the year.

When the above projects operate, the company expects a daily waste processing capacity of 14,000 - 15,000 tons altogether.

At the moment, the Shandong Waste-to-energy Project is under

“As of the end of June 2011, our company’s total investment on completed projects is approximately 2.619 billion RMB.” discussion. Our company has been negotiating with various projects in different regions, and will disclose the details once there is substantial progress.

HKB: What is your funding source and how are you planning to fund your upcoming projects?

Mr. Chen: As of the end of June 2011, our company’s total investment on completed projects is approximately RMB 2.619 billion, and the estimated investment on the projects in progress is about RMB 3.634 billion. Our company has adequate cash flow right now to fund the completed and on-going projects.

The Asian Development Bank borrowed a ten-year long-term loan of 200 million USD to fund the new waste-to-energy project. Only 100 million USD is used now, leaving 100 million USD still unused.

Our company’s debt ratio is 50% and this is a reasonable level and it is in a stage of high-input, high-return. Our company gave out dividend twice as much as the last one in the first half of this year and will not let the shareholders down in the second half of the year.

Mr. Chen Xiaoping CEO, China Everbright International Limited 20 HONG KONG BUSINESS | FEBRUARY 2012

HKB: Do you think the European debt crisis has any effect on your business?

Mr. Chen: Everbright International has also successfully invested in the German photovoltaic power station project, furthering its expansion to overseas alternative energy market. Although the American and other European debt crises have not been resolved yet, I believe

the crises will not cause significant impact to the company. According to a study by the European Photovoltaic Industry Association, it showed that the demand for photovoltaic electricity will increase from the current 2% to 12% of the total demand of energy in Europe.

The demand for alternative and environmental energy will increase drastically but since the current photovoltaic conversion rate is not high, the company will involve in the PV business selectively such as Golden Solar project and the photovoltaic industry of the high- rate electricity regions. However, the investment rate of return will not be less than 10% to enter the PV industry.

HKB: What do you think is the key to a successful business?

Mr Chen: Since Everbright International’s transition in 2003, the company expanded from the original three staff to 2,000 personnel currently, after eight years of constant struggle to move forward. The company provides training twice a year for the new employees. The new recruits will undergo intensive training with older employees so that they will share the sense of community and belonging and enhance mutual understanding. The effect of the training is very positive. The new staff felt a little uneasy when they first came, but in the end, they are reluctant to leave.

In order to attract the talented, our company’s policy needs to be extensive and systematic. In addition to monthly business training, employees from the management level also participated in the CEO class held in Tsinghua University. Furthermore, our company will hire experts to hold seminars on a regular basis. Topics include national defense, literature, ritual, medical, etc.

HKB: Everbright International spends significant time and energy to train their personnel, what if the employee decided to leave the company?

Mr. Chen: It is understandable that people move forward. It is normal that people leave the company if there are better chances out there.

In fact, we are training people for the good of the community. That’s why it doesn’t matter, because you need to have long-term goal when training people. The company has a fairly stable group of staff in recent years. Basically, nobody left. Instead, they chose to stay in the company because of the free and relaxed environment.

I hope our staff will be full of confidence and wisdom so that they will become wealthy, spiritually enriched and free individuals. The company will also form a highly efficient and pragmatic culture and will create a better environment as a payback to the community.

One-on-one interview with Mr. Chen Xiaoping

HONG KONG BUSINESS | FEBRUARY 2012 21

Regional EConOmy Briefing: KOREA Inflation projected to decline in 2012

Korean exports on the rise

Korean exports brace for headwinds in 2012 The upward trend in demand for Korean goods in the US won’t last long as the country is under threat of a recession.

W

ill Korea’s exports last?

Korean exports will face headwinds in 2012 but HSBC doesn’t expect them to collapse. Rather, export growth will be mainly supported by demand from China and a weak Korean won, says Ronald Man, an Economist at HSBC. The key risk lies on American shores. According to Man, recent US data signalled sustained confidence despite the jitters in Europe, which has also been reflected in the upward trend in its demand for Korean goods. “However, given our chief US economist Kevin Logan is maintaining the US on recession watch, we do not expect the strong upward momentum to be sustained.

That said, new free trade agreements signed in 2011 with the EU and US should help cushion the fall in shipments. Even if not all barriers are phased out immediately, Korean exporters are still expected to reap significant benefits in 2012,” he added.

For instance, Korea’s automobile industry remained robust.

Man noted that within the first four months since the enactment of the EU FTA, shipments of Korean automobiles into the EU surged by 88% compared to the same period in the previous year. “Eyes will be on talks over the trilateral FTA between China, Japan and Korea. Together, China and Japan constitute roughly 30% of Korea’s total shipments last year. Negotiations are expected to take place in 2012. However, a reduction in Korea’s tariffs against countries such as China is likely to hurt its SMEs. With elections at hand this year, we expect progress on this front to be slow,” he added.

Where is inflation heading?

HSBC expects headline CPI to average 2.6% in 2012 and pressure is set to ease on the back of lower commodity prices amidst 22 HONG KONG BUSINESS | FEBRUARY 2012

weak global demand, as well as the high base effect from last year’s strong inflation print. Man cites the following three factors as the top three contributors to inflation in 2011 (4.0%): “First are food and non-alcoholic beverages (7.5% y-o-y in 2011, contribution of 1.1ppt to CPI). Last year’s food prices were driven much by surging pork prices, given the foot-and-mouth outbreak in Korea. With domestic pork supply stabilising, we expect less upward pressure on this front in 2012. Second are housing, water and fuels (5.9% y-o-y, contribution of 0.8ppt to CPI). There are two things to look out for in 2012. First is Jeonse, a local form of rental payment, which may continue to rise if overall investment returns on assets do not pick up soon.

Second, fuel prices are expected to ease alongside commodity prices. Last is transportation (6.3% y-o-y, contribution of 0.8ppt to CPI). This component has been driven by “fuels and lubricants.” With commodity prices expected to moderate, costs here should slow down in 2012. We emphasise an upward bias to our forecasts for 2012, reflecting a potentially stronger-than- expected recovery in emerging markets, which would fuel demand for commodities, pushing up their prices.”

What will drag growth?

Private consumption should slow down in 2012, with its growth being the weakest in the first quarter, according to HSBC. Man emphasizes that a particular area to keep an eye out for is the employment market. “In December 2011, the HSBC Korea PMI employment sub-index recorded its first monthly contraction in almost three years. With stagnant wage growth, flat property prices in Seoul and rising household debt, the purchasing power of consumers will continue to be eroded. Furthermore, as banks continue to tighten lending to households despite sustained demand for credit access, maintaining consumption growth is going to prove increasingly difficult. Whilst we expect a slight rebound in consumption during the second half of 2012 as economic activity picks up, the magnitude of the upward swing should be moderate.”

According to HSBC’s estimates, 1.8% consumption growth is expected in 1H 2012 over the same period in 2011 and 2.0% in 2H 2012. “The Bank of Korea has penciled in a stronger rebound of 2.6% and 3.2% in each respective half. With household debt climbing to almost 160% of disposable income in 2011, tighter liquidity conditions and a low saving rate of around 4%, we believe the exact source of such a strong rebound will no doubt raise a few eyebrows,” it added.

HONG KONG BUSINESS | FEBRUARY 2012 23

vox pop : Commercial property market

Tenants are fleeing Central As companies become highly cost sensitive, demand for office space in Hong Kong is likely to soften in 2012 and Grade A office rents will see some correction - but by how much?

Thomas Lam Head of Research and Director Knight Frank Although a number of companies put their expansion plans on hold at the latter half of 2011amid the economic uncertainties, leasing activity sustained as relocation demand increased, with tenants opting to reduce operating costs by moving from core to non-core business districts.

Amid shrinking demand for offices in core areas and strong competition from noncore areas, vacancies in core areas started to rise towards the end of 2011. However, asking rents in non-core districts remained firm amid increased demand and low vacancy rates. As a result, Grade A office rents in core and non-core districts showed divergent performances last year. While Central and Admiralty saw rents slip, rents in Causeway Bay, Wan Chai and Kowloon East remained firm.

Looking forward, with shrinking demand from the business sector, landlords in core areas will exhibit greater flexibility in rents in the coming months. Those in non-core areas, meanwhile, are likely to remain firm on rents amid rising relocation demand and vaporising vacancies. Grade A office rents in Central are likely to see a 10–15% correction in the first half of the year, while rents in non-core districts, such as Causeway Bay, Quarry Bay and Wan Chai, will remain firm or see a small growth of 5% over the period.

Ong Kah Seng Director R’ST Research After 7 consecutive quarters 24 HONG KONG BUSINESS | FEBRUARY 2012

HEAD OF RESEARCH

director

DEPUTY managing DIRECTOR

Thomas Lam

Ong Kah Seng

Gavin Morgan

of rental increase, Grade A offices in Central saw about 5% of rental corrections in 2H 2011, as numerous MNCs in the financial sector were increasingly cost sensitive due to tighter budgets allocated by their HQs in the economically embattled Western economies. Landlords became responsive and understanding, in case tenants secure lower cost options nearer to the expiry term. This mitigates possible significant fall in office rentals in Central in the nearer term, as the better offers can still encourage companies to renew at slightly more attractive rentals, stay and minimize relocation costs.

Going into 2012, the economic challenges is set to stay due to Hong Kong’s highly open economy, translating to even more cautious office occupiers’ decision.

Many financial institutions will put expansion plans on hold and some may consolidate business functions.

Some shadow office space, essentially un-utilized prime office space pre-committed by major companies, may be sublet at competitive rates,

as the anticipated headcount growth may not pan out in 2012.

The worst scenario is that overall Grade A office rents are expected to further correct in 2012, by about 15%.

However, rents are more likeley to soften by up to 12% in 2012, with the bulk of the fall in the first 3 quarters of 2012, as the economy may stabilize from end 2012. The fall will be more significant in Central due to high occupancy costs, while secondary business locations may see limited rental decrease in the year, of up to 7%.

Gavin Morgan Deputy Managing Director and Head of Leasing Jones Lang LaSalle The proposed transformation of Kowloon East into Hong Kong’s next-generation Central Business District (CBD) will be key to the continuing success of the city as a global financial centre.

We estimate a potential stock growth of 14 million sq ft net (about 18 million sq ft gross) within the areas of Kwun Tong, Kowloon Bay and

Kai Tak over the next decade.

This would lift the district’s total Grade A office supply level to about 26 million sq ft net, bringing Kowloon East roughly on par with the size of Central as a commercial district.

The evolution of Wanchai North, Causeway Bay and Hong Kong East into core business locations outside Central can be supported through Government initiatives to help speed up the refurbishment and redevelopment of existing office space, accelerate the incorporation of stratified buildings and the expansion of core commercial clusters, including the connectivity of these locations and the addition of improved amenities within.

We believe that Kowloon East has every potential to fulfil the Government’s aspirations of turning it into Hong Kong’s next generation business hub. But to achieve this, we need to see appropriate commercial real estate clustering across Kowloon East and extensive gentrification works to complete its metamorphosis from an industrial district to a commercial centre.

HONG KONG BUSINESS | FEBRUARY 2012 25

Company Snapshot: Sands China

Cotai Central to drive higher yields for Sands China

Sands China is set to have the largest revenue generating land mass in Macau when Cotai Central opens - but will Sands China enjoy good fortunes throughout the year?

W

hen Sands opens its Cotai Central to punters later this year it will be the biggest building on the planet and the largest construction project since the Pyramids of Giza. So now that they have built it, will they come?

Sands China may have lost to Melco-Crown as Macquarie’s top pick, but the Year of the Dragon may just bring good fortune to the developer as it is set to have the largest revenue generating land mass in the market. According to Gary Pinge, an analyst at Macquarie Equities Research, as one of the earliest casino operators to invest in capacity expansion, Sands China is set to start harvesting significant free cashflow over the remainder of its concession term. Its new property, Cotai Central, is due to open in 1H12. “By then Sands China will have the largest revenue generating land mass both in Cotai and the market as a whole. With the opening of Cotai Central, Sands China will own 1/3 of Macau’s hotel room capacity. We note that limited hotel room supply has been a constraint to the growth of the multiple-day visitors’ market. We expect the increase in hotel rooms to accelerate mass market growth, particularly in Cotai, where Sands China should be a key beneficiary of the trend,” he added. Steven Sun, head of China equity strategy at HSBC, noted that Sands Cotai Central will be one of the single largest buildings in the world with 13m sqf of GFA. “The venue will have 340 tables, 1,100 gaming machines and 1,800 hotel rooms (Hilton and Holiday Inn). The project will open progressively – phase 3 in late 2013. The industry’s gross gaming revenue in

26 HONG KONG BUSINESS | FEBRUARY 2012

Macau may grow 16% to USD38.7bn in 2012,” he added. Pinge further reckons that if Sands China was to decide to expand its footprint further on Cotai, it has the option to invest in site 3 – which is expected to be another catalyst for the stock. He estimates its existing property portfolio will generate sufficient cash to fund the capex for site 3.

“The estimated capex for Site 3 is likely to be c.US$2.5bn – which would represent about one year’s EBITDA for Sands China,” he added. According to CIMB analyst Tan Teng Yee, the positioning of Sands Cotai Central will be similar to Venetian but different from Galaxy Macau. The operator will capitalise on its proficiency in retail and MICE offerings to capture the mid-end mass market patrons. “We, therefore, do not expect the gains in gaming revenue market share to be as striking as that achieved by Galaxy. However, EBITDA margin should be on the rise as Sands China penetrates deeper into the higher-margin mass market business,” he said.

But despite its expanding capacity and the analysts’ positive outlook for its market share growth, Sands China still has some challenges ahead as Pinge notes his cautiousness about VIP growth which is weighed down by the general slowdown in discretionary spending in mainland China. “Sands China

has the highest exposure to mass market among its Macau peers. Macquarie estimates it to have 53% EBITDAR from mass market compared to its peers’ <30%, which helps to cushion the slower earnings momentum from VIP. Our sensitivity analysis shows that Sands China will see the least operating deleverage should the VIP gaming market decline,” he said.

Still, Sands China’s wheel of fortune seems to be spinning well and good as Macquarie expects it to start harvesting significant free cash flow from 2013 onwards, given that it has been one of the earliest deployers of capital into Macau. Sands China is seen to generate a 10% FCF yield (on current trading price) from 2013 onwards, and this will grow. “We are optimistic on the outlook for Sands China’s Cotai Central project. We believe that Macau’s capacity constraint is in terms of hotel rooms rather than table games. As a result, while Sands China is not getting many tables into Cotai Central, the addition of c.6k hotel rooms would allow it to better monetise its existing table game capacity – potentially driving higher yields,” said Pinge.

Tan, however, is not overly concerned if fewer tables are approved by the authorities as Sands China has the capacity to shift under-utilised tables from its other properties to make up for the shortfall.

VIP growth is starting to decelerate...

HONG KONG BUSINESS | FEBRUARY 2012 27

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HONG KONG BUSINESS | FEBRUARY 2012 29

TEN HONG KONG STARTUPS

TEN HONG KONG STARTUPS Funding: 50,000 EUR completed in May 2011, with major investor Andrea De Dominicis.

According to co-founder Andrea De Dominicis, De Dominicis is a response to the huge request of highquality arts. “It is a new and highprofile arts agency in Hong Kong showcasing a selection of the best of European talent in visual arts. With a strong focus on fine arts and illustration, it represents established artists and promotes emerging talents from Italy and other parts of Europe,” she said. The agency started operation in November 15, 2011. Its mission is to provide an interdisciplinary platform for outstanding European artists and foster cultural exchange between Asia and Europe by organizing exhibitions, workshops, seminars and cultural exchange programs by working closely with galleries, curators, art critics and arts organizations in Hong Kong, Asia and Europe. Website: www.dedominicisagency.com

10 startups in Hong Kong to watch in 2012 What are the hot companies to keep an eye in the Year of the Dragon?

Find out as krisana Gallezo reports

I

t could be a rough economy this 2012 as most economists would say but the market has plenty of interesting newcomers and probably new leaders. Some had been there for a year or two raising more funds and building a niche that it was only in the latter parts of 2011 that they slowly gained momentum. Some of them are even increasingly becoming popular abroad. Hong Kong Business worked with Hong Kong Investment Network, the largest angel investment community in the world to bring you some interesting startups across industries. They are arranged in no particular order.

1. REALGOLDX FOUNDER: J. Bradley Hall FUNDING: The founder, management and certain seed investors have invested USD 2 million. Initial fund30 HONG KONG BUSINESS | FEBRUARY 2012

“De Dominicis represents established artists and promotes emerging talents from Italy and other parts of Europe”

ing completed in December 2011. The Company intends to raise up to USD 60m in equity and issue USD 500m in gold backed bonds in Q2 2012.

REALGOLDX is a Hong Kongbased operator focusing on ultra high net worth investors and family offices who desire to enhance and preserve inter-generational wealth utilizing physical gold bullion. According to founder J. Bradley Hall, the company generates a market arbitrage and fee-based income stream that ensures pricing efficiency, peerless execution and world-class security. Members are offered insured vaulting in secure non-bank, free-port facilities in Singapore and Switzerland. The company will start its operation on the first quarter of 2012. Website: www.realgoldx.com

2. Kidztown Founder: Alex R. Key Funding: HKD 8 million which was completed in December 2011 through investment from local and overseas.

Kidztown bills itself as the first Japanese style indoor role play centre in Hong Kong, providing exciting school trips and days out for kids aged 2-14. According to founder Alex R. Key, at Kidztown, kids get a chance to dress and take on the role of different jobs from doctors to football stars. It promises to deliver an educational yet entertaining experience for both children and parents alike. “A 25,000 sq ft built area will provide a huge indoor forum for kids to let their imagination run away with them,” said Mr Key. Mr Key said that Kidztown is opening summer this year with unconfirmed sponsors like a premiership football team. Website: under construction but will be www.kidztown.hk 3. De Dominicis Founders: Andrea De Dominicis, Isabella Mazzanti, Anne Kristin Knabe, Ottavio Lugin

4. Ecopoint Asia Founders: Jeff Smith and Jochen Kleef Funding: HKD 250,000 which was self-funded by co-founders.

Ecopoint bills itself as Asia’s first web-based collaboration platform and resource hub exclusively for professionals working in the fields of climate change, environment, clean technology and sustainable business. “Whether it is an entrepreneur breaking new ground, an employee trying to change big business from the inside, an individual mobilizing a community through volunteer work or a policy maker in government – Ecopoint enables us all to pull together and change our world for the better,” said co-founder Jeff Smith.

It held its soft launch on February 26, 2011 but fully operated only in January 2012. According to Mr. Smith, it is now focusing on building business directory and jobs board. It is also launching this year EcoDeal, a platform to provide a network and visibility to match both Investment companies and Entrepreneurs/Startups within the Environmental space in Asia. Website: www.ecopoint.asia.

5. Vibrant Communications Founder: Dave Arnold

Funding: HKD 1.6 million from accredited investors from 11 countries.

Vibrant is a Hong Kong-registered company publishing multiplayer online games in South Asia, South America, and the Middle East. Its game content includes massively multiplayer online games, social games, and mobile multiplayer games.

According to founder Dave Arnold, Vibrant licenses AAA titles from top tier game developers in China, Korea, and Japan and localizes and markets them in the fastest growing social media markets in the world. “There are 20 companies in China, Korea, and Japan that are publicly traded using the same ‘free to play’ games making excellent profits selling virtual items in microtransactions. Vibrant expects big success in 2012 with proven titles targeting over 200 million people in its fast growing underserved markets where it can give its development partners additional market reach,” said Mr Arnold. The founder noted that the company just completed a financing round that will provide marketing

“The Chinese Timekeeper is the first exclusive Chinese watch brand”

muscle to back its best products and low cost global operations in Beijing, Bangalore, Lima, and Alexandria. Website: http://vibrant3g.com 6. The Chinese TimeKeeper Founder: Adrien Choux Funding: the brand was launched with just HKD 500,000 but the founder was able to raise funds and now has 5 independent business angels who have invested HKD 1.2 million in exchange of 18% of the company. Funds were completed in November 2011.

The Chinese Timekeeper is a trademark already protected in HK and France and under final approval in China, EU, US and other major countries. It claims to be the first exclusive Chinese watch brand. According to founder Adrien Choux, all its time pieces are ‘crafted in China’ where designs embrace the unique an rich Chinese history and culture to offer watch amateurs around the world a new take in a Swiss dominated market.

CTK was officially launched in HK in December 2010 with a distribution network comprised of 4 points HONG KONG BUSINESS | FEBRUARY 2012 31

TEN HONG KONG STARTUPS of sales in 3 countries: HK, China and Holland. Mr. Choux boasts that the most striking achievement the company has so far is that the brand was successfully launched with only HKD 500,000 when any other new Swiss watch brand would have at least spent 10 to 20 times this amount to end up having a lesser attractive product and brand altogether. According to him, 2012 will be a ‘fascinating’ year for CTK as it will unveil during Baselworld, the world’s biggest luxury watch fair on March 2012, its second collection. Also, Mr. Choux shared that CTK will open its very first boutique in Hong Kong at the end of February. The website is www. thechinesetimekeeper.com and will have its Mandarin & French version added within one month.

7. Alternative Turbine Technologies Limited Founders: Louis Lam, Ronald Lam Funding: Self-funded. The company is raising USD 3 million of capital.

Alternative Turbine Technologies or Alturtech was established in 2009 but marketing operation for selling of products will only start in the second quarter of 2012. The company specializes in novel turbine technology to harness fluid flow energy. According to co-founder Louis Lam, the company is currently developing Alturtech Transverse Axis Turbine (ATAT) which is a revolutionary turbine design to overcome limitations and issues of existing turbines. “A-TAT is ideally suited for urban environments and can harness energy in turbulent wind and flowing water,” he said noting that the project has the full support of the Mechanical Department of the Hong Kong University of Science and Technology (HKUST),” Mr Lam said. Alturtech is assisting HKUST to build a full scale prototype which will be erected in their Ecology Park in Hong Kong. The Company will also collaborate with the Technical University of Munich this year. According to Mr Lam, the Chair of non-destructing testing laboratory of the TUM has shown great interest in the development and utilization of Alturtech’s turbine in the German market. The company, he said, has now completed the wind tunnel tests on the half-scale model of the prototype. “Alturtech is 32 HONG KONG BUSINESS | FEBRUARY 2012

“ We give you the freedom to build your business while we take care of the tedious, administrative tasks - Startupr Hong Kong”

ready and poised for production and delivery of the revolutionary turbine in 2012,” said Mr Lam. Website: www. alturtech.com 8. Golden Fern Holdings (HK) Ltd Founders: Chris Berryman and Yanyan Zhang Total funds: Approximately HKD 20 million as of March 2011. The main investors are BVI companies which are held by local Hong Kong and Macau investors.

GFH through its wholly owned subsidiary in New Zealand, Golden Fern Group, is an exporter and brand management company for NZ- made dairy and health products.

The focus is on value added products that are packed for retail. Business commenced in August 2010 but co-founder Chris Berryman boasts that its dairy formulas, especially infant formulas, are experiencing unprecedented demand in China. Mr Berryman expects its growth revenues to exceed 300% in 2012. “Golden Fern brand of formulas is fast gaining recognition in China through TV advertising and retail presence. The Company will also enter new markets in 2012 including Vietnam and Japan.

Growth in 2012,” he said. Website: www.goldenfern.co.nz 9. Track the Buzz Founders: Gideon Vos, Bruce Altmann and Joyce Paulo Funding: Self-funded. USD5,000 Track the Buzz is a social media monitoring and analytics tool which tracks social networking conversations as they move around the globe, allowing companies to determine customer satisfaction and sentiment, plus the latest trends. It supports 34 languages and offers online transla-

tion of social conversations - Twitter, Facebook, Sina Weibo, LinkedIn, and more - as they happen. According to co-founder Gideon Vos, the company is in BETA mode for the last seven months and is looking to start proper operations in the second quarter of 2012. Mr Vos said that with very little cash, the company managed to build a highly competitive online platform from scratch to 280 subscribers in 7 months. Its operational costs per month are less than USD 300, yet it nearly doubled its subscriber base every month. The company, which has global operations intends to focus on Asia and the social networks available in the region. Website: www.trackthebuzz.com 10. Startupr Hong Kong Founders: Tomas Milar, John Vanhara Funding: Self-funded. USD50,000.

Startupr is a Hong Kong-based company with global operations since July 2011. According to founder Tomas Milar, the firm’s main focus are startups with global ambitions. “We give you the freedom to build your business while we take care of the tedious, administrative tasks, leaving you to concentrate on your dream for your company. As part of our brilliant service, our back end software will automatically send you reminders of important annual filings, and upload your important document to your online account,” he said. For 2012, Mr Milar said that Startupr will implement the company auction platform - ready made companies for over 20 jurisdictions plus whole of USA. “The auction system will provide the list of ready made companies for particular jurisdiction. The auction should support the fast match between vendors and customers,” he told Hong Kong Business. Website: startupr.com HONG KONG BUSINESS | FEBRUARY 2012 33

opinion

Tim hamlett

A game of skill or a game of chance?

A

n interesting dispute has arisen over the status of Poker.

Poker is a card game on which large sums of money can be wagered. In the old days it was played clandestinely in smoke-filled back rooms. Many American states outlawed it. There are also legal problems attached to it in Hong Kong.

Still, recently a substantial industry has appeared running poker tournaments in places where this is allowed. Players compete against each other and winners get big cash prizes. This gives rise to a question of great interest and importance to tax gatherers: Is Poker a game of skill or a game of chance?

To answer a question of this kind is a fairly simple matter. You take the results scored by particular individuals over several years, and see to what extent the same individuals crop up on the leader board. It is not necessary for them to win all the time. But if particular individuals consistently do reasonably well, then there is something going for them more interesting than luck with the cards.

It would not be fair to pass on at this point without telling you the result: some players do in fact do consistently well and the statisticians concluded that Poker was to a substantial extent a game of skill. Of course many games which we think of in terms of skill involve luck as well. Sometimes the players are honest enough to admit this. Wayne Rooney commented on a famous bicycle kick goal that it had pleasantly surprised him because such efforts usually ended up “in the back of the stands”.

Tiger Woods is regarded with such awe because at his best he triumphed over the infinite variations in luck which afflict golfers and dominated tournament after tournament.

The reason for exploring this is that The Economist, reporting the revised status of Poker, commented that the evidence of skill being deployed seemed to be stronger than in the case of stock picking or investment advice. This is the sort of passing comment that makes The Economist such a beguiling read, but it did not offer any detail on the evidence about stock picking.

There have been some famous anecdotal studies in which professional stock pickers were outdone by variations on the pin, including selection by six-year-old child and by trained monkey.

But these are after all single cases. There is also Nicholas Taleb’s celebrated observation that if you set up an experiment in your computer in which the results of stock picking are distributed entirely randomly you still get a small population of apparent experts, and a large population of moderate performers, which is more or less what we see in the real world. This shows us what is possible, but not what is.

What does the Noble Prize winner say?

However I have now come across the original test, which was conducted by Daniel Kahneman. Mr Kahneman is a psychologist whose work on decisionmaking won him the thing usually called the Nobel Prize in Economics, though the 34 HONG KONG BUSINESS | FEBRUARY 2012

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

people who award the other Nobels object to this.

Kahneman was invited to speak to a financial firm, and asked them for some data to play with. He was given the rankings of the firm’s 25 stock advisers over eight years. It was then a simple matter to compare the ranking of each adviser for each year and see if there was any significant correlation, which would indicate that some advisers were more skillful than others.

Kahneman says he “knew the theory and was prepared to find weak evidence of skill.” In fact he found none at all. The results were what you would have expected if the advisers had been throwing dice or darts. This is not a matter of it being impossible to beat the market because all the value is already in the price. Some people do manage to beat the market. The problem is that they do so by being lucky, not by being skillful. It seems that the purpose of the business press is like that of the racing press - to make a process for producing random outcomes look so complex and so logical as to engender the illusion that people can make money by betting on it.

We scribblers foster the illusion of skill.

Kahneman says that people often prefer personal impressions to statistical evidence, and adds rather kindly that analysing company performance is obviously a skilled job; it just doesn’t lead to any useful information about the future of stock prices.

He did not expect his observations to make any difference to the company concerned, and nor did they. The point has been repeatedly confirmed and is now widely known. It has made no difference to the rest of the industry either. I suppose this should come as no surprise. It has after all been manifest for a long time that astrology is bunk. Newspapers continue to print it and readers continue to believe it. Compared with the people who read the business tealeaves, though, astrologers are not quite so spectacularly overpaid.

Then of course there is what we should I suppose call the fung shui industry. It would have been easy to conclude from a recent case that this was primarily engaged in extracting fabulous sums of money from rich and gullible old ladies. But that is not fair. Fung shui merchants extract money apparently effortlessly from rich and gullible people of all ages and both sexes.

Those of us who believe that banking is a sober, realistic and cautious activity (if the events of the last few years have left any such people) have to account for the odd positioning of the escalators in the HSBC’s handsome if somewhat post-industrial headquarters.

The perverse angles at which they ascend from the ground floor were apparently adopted on the advice of a guru whom the bank consulted in order to ensure its corporate harmony with the wind and the water. I am not sure that the subsequent history of the bank is a good advertisement for this sort of precaution.

But there it is. We all heaped scorn on Nancy Reagan, who consulted a stargazer about auspicious dates for Ronald’s public activities. Superstition is perhaps a sin. But which of us is without sin?

C

M

Y

CM

MY

CY

CMY

K

Just my luck!

HONG KONG BUSINESS | FEBRUARY 2012 35

legal briefing

legal briefing

Be careful when you sue the boss for being sacked You may just lose and be ordered to pay your employer’s legal costs as well as your own.

A recent court decision against an ex-civil servant which has ordered him to pay the government’s costs for an unsuccessful lawsuit over his dismissal on the grounds of discrimination has employers cheering and employees worried.

What are the facts of the case?

The case involved an assistant clerical officer working in the Civil Service Bureau who was ordered to retire in 2008. The clerical officer suffered from asthma and had, between 2004 and 2008, taken 61 days of sick leave. P claimed that he had been treated unfairly due to his disability, namely, his asthma, in particular that the Clerical Officer of the CSB prohibited him from applying for sick leave using sickness certificates issued by private clinics; the CSB unreasonably rated his performance as “bad” or “of poor quality” in his performance evaluation. The civil servant claimed damages for unlawful disability discrimination against the CSB and sought reinstatement to his former post.

What was the court decision?

The Court held that given the civil servant had complained to various institutions after receiving the CSB’s warning letters, he had adequate opportunity to complain about the alleged unlawful discrimination or prohibition on the use of sick leave certificates from private clinics. Yet he did not do so and therefore failed in his claim relating to sick leave. The really unique point about this case was that the District Court exercised its discretion to order costs against a plaintiff for bringing a frivolous claim. “In making the award, the Judge said he would like to discourage abuse of the discrimination ordinances for determination of employment matters,” noted law firm Mayer Brown.

Why would the court order the civil servant to pay the government’s legal fees?

According to Pattie Walsh, DLA Piper head of employment, pensions and benefits for Asia Pacific, the intent of the unique costs is to achieve an appropriate balance between the need to encourage individuals to bring forward good faith discrimination claims on the one hand, and the need to deter complainants from bringing frivolous claims that can have serious consequences for the person or organisation accused.

Tanner de Witt employment law partner Russell Bennett points out that this case is a demonstration of an important trend in the approach of the courts to costs in discrimination cases. “Herein, a claimant brought a claim which the court viewed as having very little or no merit. The claim centered upon a policy relating to medical certificates which was not discriminatory as it applied to all employees and 36 HONG KONG BUSINESS | FEBRUARY 2012

Adam Hugill

Pattie Walsh

about the employer’s view of the claimant’s work performance. As the court pointed out, the role of the Court is not to handle interpersonal disputes about the appraisal of work performance but to decide whether there has been discrimination. As the claim was frivolous, the claimant was ordered to pay costs,” said Mr Bennett.

Simmons & Simmons partner Fiona Loughrey adds that the judge also awarded costs because it was thought the plaintiff may not have actually believed he had been discriminated against, and the proceedings were a last ditch, and after the fact, an attempt by the plaintiff to redress perceived injustice surrounding the decision to make him retire.“The decision contains

“If there is no prospect of adverse costs orders, then the system becomes open to abuse.” strong statements by the judge that the discrimination ordinances should not be used as a de factomeans of attempting to bring unfair termination claims, and that costs orders will be made where plaintiffs are found in this way to be abusing laws designed to eliminate or reduce discrimination, a laudable public policy measure,” she said.

DLA Piper’s Ms.Walsh also shares the same view, adding that the case serves as a useful reminder that notwithstanding the unique costs mechanism in discrimination claims, a complainant will not be afforded blanket immunity from costs. “A complainant who brings a frivolous claim (which he or she knows to be unmeritorious or which is objectively bound to fail) should be aware of the potential cost implications.

Employers across Hong Kong might seek comfort from this decision in that it illustrates that the Court will scrutinise the basis of discrimination claims and is willing to deviate from the usual costs mechanism in appropriate circumstances,” she said. According to Ms. Walsh, the approach taken by the Court is aligned with the implementation of the Civil Justice Reforms in 2009 and its objective to ensure that the Court’s time and resources are not wasted.

Kennedys Partner Toby Brown also notes that if there is no prospect of adverse costs orders, then the system becomes open to abuse. “In fact, there is particularly high risk of frivolous discrimination claims, as employees are aware that bringing a claim against their employer may create leverage for the employee, even if the employee’s claim is wholly unfounded,” he said.

According to Tanner de Witt’s Mr. Bennett, the above case was preceded by the First Instance decision on costs in Sit Ka Yin Priscilla v Equal Opportunities Commission and Others in 27 October 2010 and was followed by the Court of Appeal’s decision, in that same case on 4 November 2011. In both of those decisions, the court also considered the claim to be frivolous which includes where “objectively considered it is plainly without foundation and is bound to fail… or is on the face of it so manifestly misconceived that it can have no prospect of success”. This contrasts, Mr. Bennett says, with the approach taken by Deputy High Court Muttrie in the previous case of L v Equal Opportunities Commission (23 June 2003).

Simmons & Simmons’ Ms. Loughrey also cites a case handed down just before Christmas (A v Chan [2011] HKCU 2522). In that case, the court said that the defendant employee, who was found to have sexually harassed a colleague, advanced defenses at the hearing that were entirely implausible, and were always going to be found as such. As a consequence, the court made costs orders against him.

What about the Equal Opportunities Commission?

Kennedy’s Mr.Brown said that persons who believe they may have been discriminated against have the ability to seek the assistance of the Equal Opportunities Commission (EOC). The EOC is obliged to conduct investigation into discrimination complaints lodged by members of the public free of charge. If the EOC

Fiona Loughrey

Toby Brown

Russell Bennett

decides that a complainant’s claim is valid and the matter cannot be otherwise resolved, the EOC may bring legal proceedings on the claimant’s behalf. The claimant would then have no risk of an adverse costs order against him personally as any such cost order would be payable by the EOC. Mr. Brown notes that there is no obligation for a claimant to engage the EOC’s services or agree with their opinion if the EOC decides the claim is not strong. However, if a claimant elects to bring a claim the EOC was unwilling to support and the claim is subsequently determined to be frivolous, then there is good public policy grounds for requiring that claimant to pay the defendant’s costs.

Oldham, Li & Nie (OLN) also notes the importance of EOC in avoiding abuse by a vexatious litigant. “In our experience, the EOC is robust in investigating complaints and where we are asked to comment on the findings of an EOC investigation, in many, but not all cases, we are able to agree with the EOC’s findings. We have, however, sometimes reached a contrary conclusion to the EOC and advised District Court action as the next step,” said OLN partner Adam Hugill. Mr. Hugill cautions though that from an employer’s perspective, replying to an EOC investigation is often considered to be highly disruptive and, if lawyers are instructed, as they often are, expensive. “It is possible that an employer will have to do a great deal of work and incur substantial costs, which they cannot recover, before proceedings are even issued in the District Court,” he said.

Are there other similar cases wherein claims were proved frivolous?

HONG KONG BUSINESS | FEBRUARY 2012 37

EVENT I HONG KONG BUSINESS 2011 HIGH-FLYERS AWARD

HONG KONG BUSINESS

2011 HIGH-FLYERS

Raymond Chui of Bao Gallery by Crystallize•Me and his team

Bonnie Tse and AIA Pension & Trustee team with Tim Charlton

Hong Kong’s Outstanding Enterprises Hong Kong’s top business leaders and celebrities gather to celebrate excellence on January 25, 2011 at the Hong Kong Business High-Flyers Awards, now in its sixth year. Publisher Tim Charlton was on hand to congratulate the winners at a soiree full of great food and wine followed by cigars and cognac on the terrace at the magnificent Duetto restaurant. Congratulations to all the winners.

Kison Chan & Jason Lee of Zchron Design

Alex Wu of The Cityview with his team

Arjan De Boer of ABN AMRO Bank with Tim Charlton

LIST OF HONOREES MOST OUTSTANDING ENTERPRISE AIA Pension and Trustee Co. Ltd.

ENAMEL JEWELRY FREY WILLE GMBH & CO KG

PRIVATE BANKING ABN AMRO PRIVATE BANKING

ENVIRONMENTAL PERFORMANCE FUJI XEROX (HONG KONG) LIMITED

LIFE INSURANCE AGEAS INSURANCE COMPANY (ASIA) LIMITED

PREMIUM CHOCOLATIER GODIVA CHOCOLATIER

FIJI’S INTERNATIONAL AIRLINE AIR PACIFIC FINANCIAL PLANNING ALTRUIST FINANCIAL GROUP LIMITED LUXURY CRYSTAL LIVING BAO GALLERY BY CRYSTALLIZE-ME OUTSTANDING AV BAND BOSE LEADING INTERNATIONAL SCHOOL CANADIAN INTERNATIONAL SCHOOL OF HONG KONG CARGO & LOGISTICS DHL GLOBAL FORWARDING (HK) LTD. LXURIOUS BEDDING DORMIREST

PROPERTY DEVELOPER HENDERSON REAL ESTATE AGENCY LTD. MEDICAL INSURANCE HSBC INSURANCE (ASIA-PACIFIC) HOLDINGS LIMITED KITCHEN DESIGNER JIA INTERNATIONAL LTD INNOVATIVE FINANCE COMPANY PRIMECREDIT LEADING HOTEL MANAGEMENT RHOMBUS INTERNATIONAL HOTELS GROUP EXECUTIVE TRAVELLER LUGGAGE RIMOWA

RETAIL CHAIN SA SA INTERNATIONAL HOLDINGS LIMITED PROFESSIONAL AV CONSULTANCY SOUND CONCEPTS LTD RETAIL BANKING STANDARD CHARTERED BANK (HONG KONG) LIMITED LEADING HOTEL AND CASINO STARWORLD HOTEL & CASINO BUSINESS HOTEL THE CITYVIEW

Bonnie Tse of AIA Pension & Trustees with her team

Joan Lam of BOSE with Tim Charlton

Kitty Tam of Frey Wille with Tim Charlton

BOUTIQUE HOTEL THE MERCER LAW FIRM THOMAS, MAYER & ASSOCIES AV SHOP UNIVERSAL AUDIO & VIDEO CENTRE INTERIOR DESIGNER ZCHRON DESIGN

Eric Mayer of TMA with Tim Charlton 38 HONG KONG BUSINESS | FEBRUARY 2012

Angela Yam of Ageas Insurance

Helen Lee of Universal Audio & Video Centre with Tim Charlton

Rebecca Kwan of The Mercer with Tim Charlton HONG KONG BUSINESS | FEBRUARY 2012 39

EVENT I HONG KONG BUSINESS 2011 HIGH-FLYERS AWARD

EVENT I HONG KONG BUSINESS 2011 HIGH-FLYERS AWARD

Brett Gebers of Air Pacific with Tim Charlton

David Kennedy of DHL with his team

Sherry Chung of Sound Concepts Ltd.

Brett Gebes of Air Pacific with his team

Dean Croy of Canadian International School of hong Kong with Tim Charlton

Calvin Mak of Rhombus International with his team

Katherine Lau of Fuji Xerox 40 HONG KONG BUSINESS | FEBRUARY 2012

Susanna Liew of PrimeCredit with Tim Charlton

Sussanna Liew of PrimeCredit with her team

Tim Costello and Alison Law of HSBC Insurance

Charles Yong of Rimowa with Tim Charlton

Kenneth Tjon of Dormirest

Rebecca Kwan of The Mercer with her team

Vicky Wu and Elaine Kwee of Starworld Hotel & Casino

Charles Yong and Carrie Lam of Rimowa

Glen turner of Altruist Financial Group with his team

Brandy Tsang of Altruist Financeial Group with Tim Charlton

Katherine Lau of Fuji Xerox

Eric Mayer of Thomas Mayer & Associes with his team

Raymond Chui of Bao Gallery by Crystallize•Me

Kitty Tam of Frey Wille with her team

Rebecca Kwan of The Mercer and her team

Pauline Lai of Standard Chartered Bank with her team

Angela Yam of AGEAS Insurance with Tim Charlton

Dean Croy of Canadian International School of Hong Kong

Raymond Chui, Bao Gallery Crustallize•Me with Tim Charlton

Tiffany Cheung and Queennie Mak of Sa Sa International

Vicky Wu of Starworld Hotel and Casino with Tim Charlton HONG KONG BUSINESS | FEBRUARY 2012 41

EVENT I HONG KONG BUSINESS 2011 HIGH-FLYERS AWARD

The

FacTor

UndersTaTed InnovaTIon sInce 1999

Tim Charlton, editor-in-chief of Hong Kong Business magazine

Tony Kelley of Marketing Magazine, Tim Charlton, and Mark Denton of Broadreach Media

Fijian Meke Dancers courtesy by Air Pacific

Hong Kong Business High Flyers Award Presentation Ceremony Hong Kong Business High Flyers Awards trophies at Azure Restaurant/Bar

Kinky Yung, Julie Nunez, Daniela Gujilde, Rochelle Romero, Louis Shek, Tim Charlton, Laarni Navida, and Ann Aquino of Hong Kong Business magazine

Guests enjoying the champagne 42 HONG KONG BUSINESS | FEBRUARY 2012

Socializing at the cocktail party

Hong Kong Business Annual 2012 High Flyers Special Edition

Guests enjoying during the High Flyers event

Guests checking out the HKB magazine

Reading through the HKB High Flyers edition

jia international limited 20/f, 18 hysan avenue, causeway bay, hk 香港銅鑼灣希慎道18號20樓 tel: 852 2832 5000 fax: 852 2572 6500 info@jia.com.hk www.jia.com.hk HONG KONG BUSINESS | FEBRUARY 2012 43

ANALYSIS: ASIAN CONSUMPTION

ANALYSIS: ASIAN CONSUMPTION prefer to have their big chunk of savings in bank deposits, says Neumann.

While the arguments may be true, Moody’s vice-president and senior analyst Sonny Hsu notes of other factors affecting consumer spending.

Hsu says that in Hong Kong the volatile equity market conditions actually have had limited impact on consumer spending as part of the strong retail growth can be attributed to the significant influx of mainland tourists. “Consumer spending has been strong in Hong Kong, but the strong spending is likely due to very strong labor market conditions although the sizable appreciation of property values over the past 2 years may also have contributed to strong consumer spending,” he added.

Perhaps a more interesting finding is that virtually everywhere, consumer spending declines by more when shares fall, than it rises when equity values climb. According to Neumann, presumably, this has to do with a fundamental human bias towards risk aversion, though it may also reflect other factors, such as the fear – whether realized or not - of job losses when shares tumble. In Hong Kong, private consumption spending rises by about 0.5% following a 10% rise in the stock market and declines by almost 0.5% as well when stock market declines by 10%.

Consumption sways to the beat of asset prices Just how much changes in Asian consumption are linked to changes in house and stock prices?

Find out as Roxanne Uy and Krisana Gallezo report.

W

hen talking about swings in asset prices largely influenced by troubles in the West, Asian economies seem to overlook that there’s more to worry about than falling exports. Effects of the rise and fall of the asset values to consumer spending are oftentimes missing in the picture though local spending could be hit as well if equity markets begin to sell off. HSBC economist Frederic Neumann noted that analysis of sensitivities of consumer spending to swings in stock market in Asia is generally lacking but that does not mean that the effect on the region is negligible. “Swings in asset prices, in Asia as elsewhere, have a powerful psychological effect. Not only do they 44 HONG KONG BUSINESS | FEBRUARY 2012

“Results showed that households react sensitively to changes in asset values in Hong Kong...”

keep traders on the edge of their seats and fund mangers reaching nervously for their handhelds, but consumers also take a keen interest. Their savings, after all, not to mention their pensions, depend on the rise and fall of asset values. As a result, households swiftly adjust their spending, with powerful consequences for growth,” he added.

How do asset prices affect consumer spending?

HSBC’s first quantitative study on Asia illustrated the estimated impact of swings in equity and, where available, in house prices. Unsurprisingly, results showed that households react sensitively to changes in asset values,

especially, and above the norm of other emerging markets, in Hong Kong, Taiwan, Singapore, Korea, and also in Thailand. Household expenditure in Taiwan, which showed the highest sensitivity, rises by 0.7% for every 10% change in the stock index. When comparing Indonesians to Malaysians meanwhile, the former appears to be more sensitive to changes in equity price which, according to Neumann, reflects the greater prominence of household debt among Malaysians that allows consumers to “smooth” their spending through swings in asset prices. Data in China is negligible at 0.08% but this is primarily because there are just a few Chinese participating in the stock market as they

Wage effect or wealth effect?

CIMB analyst Ching Quan Jian also reckons that consumer spending tends to increase/decrease by around 0.3-0.5% assuming a 10% gain/loss in the equity market - with the impact larger in countries with more developed financial markets. “While not negligible, we believe that the impact from rising wages which have twice to three times the impact on consumption compared to stock market wealth effects, and stronger regional currencies will continue to propel consumption growth in the region,” he added.

On the other hand, Andy Sim, vice president of equity research at DBS Vickers, notes that upward swings in asset prices, by virtue of the “wealth effect,” will usually lead to higher consumer spending as well as stronger economic growth. To some extent, this effect has perpetuated Asia’s economic growth since the rebound from the global financial crisis (GFC).

“That said, Asia’s consumption has

risen by more than 25% since the GFC and asset value is certainly not the only factor underpinning this strong growth. The robust economic fundamentals, the buoyant employment and growth prospects, an emerging middle income class and rising consumerism, as well as the well-calibrated and sustainable macroeconomic policies are some of the other important contributing factors,” he added.

HSBC’s study has proven the correlation between swings in asset prices and local consumer spending in Asia. According to Neumann, this highlights that the trouble in the West is not only transmitted through exports from the East, but that a wider sell-off in asset prices can harm growth in Asia as well. “The effects of the potential impact of a 10% decline in equity and in real estate prices, though varying, are generally quite sizeable, and would provide an especially big challenge if they occurred simultaneously,” he added.

“In Hong Kong, private consumption spending rises by about 0.5% following a 10% rise in the stock market”

Self-fulfilling expectations?

DBS’ Sim argues that a sell-off in

stock markets do not in itself cause changes in consumer spending, but expectations of wider economic conditions will evidently have an impact. And though things may blow up in Europe and the US may fall back into a recession which may trigger risk aversion and a flight back to safety as witnessed in 2H11, CIMB’s Quan Jian noted that this is not their base case. “We remain bullish on the other regional markets. Growth in Malaysia will be sustained by its economic transformation program and supported by spending in an election year while re-construction effort in Thailand will help cushion the economy. In Indonesia, our economist and strategist both remain highly optimistic on the back of strong consumption growth, improving fiscal position and, potentially, lower risk premiums,” he added. Likewise, Sim does not envisage a major selloff in Asian stock markets though 1H2012 will see slower growth and higher volatility. “We are positive on ASEAN for its lower beta and see that growth risks are lower in Malaysia and Thailand due to fiscal priming,

Percent impact on private consumption spending from a 10% change in the stock market index

Changes in stock market capitalization over time (% of GDP)

HONG KONG BUSINESS | FEBRUARY 2012 45

ANALYSIS: ASIAN CONSUMPTION and Indonesia due to monetary priming. While we see slower growth in China, valuation support should limit downside,” he added.

According to Quan Jian, considering the sluggish response of consumption to shocks and the strong persistence of consumption growth, unless we have prolonged bear markets, the impact should be well contained. Our main worry this year is still the development in the advanced economies, which have a corresponding impact on employment, especially in the externally-oriented industries.

“However, assuming Europe continues to muddle through and the growth trajectory in the US remains positive, admirable economic growth in the region of between 3.0-8.0% is still achievable in 2012,” he added.

Real estate woes But there’s another factor hurting local consumer spending that does not even require an international trigger to make an impact. Real estate prices rising in dizzying heights are also a cause of concern. According to Hsu, property values have appreciated greatly in Hong Kong, China, Singapore and Taiwan since early 2009. “Concerns of a real estate bubble had led to a slew of cooling measures, targeting at both supply and demand, undertaken by the respective governments in the region such as China and HK SAR as well

as Singapore,” said Sim. Neumann noted that the usual suspects stand out, with estimated effects being quite large in Hong Kong, Korea, Taiwan, and Singapore. Remarkably, however, the estimated effect is rather large in China as well. “This is important since it implies that a potential deflation of China’s property prices would have an impact on local consumption spending as well. In fact, based on our results, the effect may be larger than it is generally in Hong Kong and even in the United States,” he added. In terms of real estate prices, Quan Jian is not overly concerned at this moment with the exception of maybe Hong Kong, Taipei and Vietnam. “Our property analysts have pointed out that overall fundamentals - affordability, population and income growth - remain healthy and supportive of property prices over the long-term, barring a major correction,” he added.

So how could real estate prices actually affect local consumer spending? According to DBS’ Sim, a rise in real estate prices typically generates a positive “wealth effect,” the so called “feel-good-factor,” which could in turn have a positive effect on consumer spending. We do need to realise, however, that in periods of demand-led rise in real estate prices, these are generally, if not always, in times of robust economic growth, high employment, which contrib-

“A rise in real estate prices typically generates a positive “wealth effect,” the so called “feelgood-factor,” which could in turn have a positive effect on consumer spending”

utes to consumer spending as well.

“Hence, it would be difficult to attribute changes to consumer spending solely to rising real estate prices. On the other hand, intuitively, we should also be aware that if property prices rise too fast such that affordability, in turn, falls rapidly, there is a possibility it could turn into a situation where peripheral consumption could be crimped,” he added.

Likewise, Quan Jian added that consumer spending could be affected through imagined wealth effects or expectations of potential capital gains as individuals find themselves wealthier with surplus assets and increase their consumption back to their equilibrium ratio against income. However, much will depend on the institutional arrangement of the property markets as well. “Rising real estate prices are shown to have much larger impact in the advanced economies, due to various means in which owners could extract gains, either through home equity loans or as a collateral for further credit extension. In Asia, where arrangements to liquidate housing gains are less common or even restricted, the impact will, I believe, be much smaller. Further, debt levels in the region remain manageable and banks’ balance sheet resilient. As such, the US experience of multi-year de-leveraging is unlikely to happen here in Asia,” he added.

Both matter: percentage in consumer spending in response to a 10% fall in equity or residential real estate prices

46 HONG KONG BUSINESS | FEBRUARY 2012

HONG KONG BUSINESS | FEBRUARY 2012 47

LIFE & STYLE

Grilled steak? Take a slice with these steak knives

What’s the best accompaniment for that perfectly grilled dry-aged steak? Is it a tangy wholegrain mustard, punchy horseradish, or perhaps blue cheese butter à la Blumenthal? Quintessentially thinks it’s the perfect steak knife…

Pro-Balance I Love Kitchen, No.1 Leighton Road, Causeway Bay, Hong Kong - 2572 0009 Winner of a prestigious Red Dot design award, these meticulous blades are created by Hong Kong designer Jimi Kwok. The internal weights are adjustable for a fully customizable balance. The 12cm steak knife is available at HKD 1,288 for a set of 4.

Laguiole SOGO, 555 Hennessy Road, Causeway Bay, Hong Kong - 2833 8338 Possibly the prettiest steak knives in the world, these distinctive knives are created in the eponymous town in southern France. Traditionally a pocket knife, these have expanded to include attractive corkscrews and stunning tableware. Languiole’s sinewy blades and exquisite hand crafted handles with its iconic bee symbol (or horsefly according to some). Prices range according to the material of the handle, from wood (HKD 2,289 for a set of two), a dark cow horn (HKD 2,506 for a set of two) and a lighter cow horn (HKD 2,888 for a set of two).

GLOBAL Pan Handler, Shop 318 Prince’s Building Central, Hong Kong - 2523 1672.

Chef’s favourite GLOBAL is extolled by professionals for their reliable quality, lightness and superlative construction. The blades utilize GLOBAL’s own formulation of stainless steel, CROMOVA 18, which is ice tempered and hardened to a C56°-58° rating on the Rockwell scale, a degree of hardness able to hold a ferocious edge for an extended period. The steel also repels corrosion and the final knife is carefully weighted for balance. GLOBAL steak knives retail at HKD 490.

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Wüsthof Peak Honour Int. Ltd., Room 2303, 23/F., Olympia Plaza, 255 King´s Road, North Point, Hong Kong - 2861 3058 Forged in Solingen, Wüsthof knives are forged with characteristic Teutonic precision, with over 40 different manufacturing steps required in the process. The brand prides itself on exceptional sharpness and long lasting cutting edge, with blades measured by laser prior to sharpening. While their Classic Ikon series steak knife (HKD 828) is harder wearing and easier to maintain with its high-performance synthetic handle, a connoisseur may prefer the sheer beauty of the Ikon series steak knife (HKD 1,206). The handle of the Ikon is carved from African Blackwood, one of the hardest wood species in the world and sourced from carefully monitored farms. The wood is painstakingly selected and matched for each blade.

Zwilling J.A. Henckels Wing On Centre, 211 Des Voeux Road Central, Sheung Wan, Hong Kong - 2852 1888 Founded in 1731 in Solingen, this German brand continues to make a superb range of knives for the kitchen, as well as stylish flatware and scissors. Their top blades are precision forged from a high-performance steel developed for aviation and space technology, which certainly guarantees efficient dissection of your medium rare Wagyu. The unmistakable “Twin” trademark has been part of the brand since its 18th Century origins (though its precise design has evolved), and is a reference to the zodiac sign, “Gemini”, commemorating brand’s 13th June birthday. Steak knives range from HKD 599, to HKD 779, to HKD 799.

Recommended by QUINTESSENTIALLY, the world’s leading luxury lifestyle group with a 24-hour global concierge service.

Contact hongkongbusiness@quintessentially.com.

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opinion

Hemlock A modest proposal to ward off the Monstrous Mainland Mother Menace

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

roblem: Mainland mothers are making ever more determined efforts to give birth in Hong Kong to qualify their kids for an eventual ID card and residence rights.

Hospitals now have quotas to limit Mainlanders’ deliveries, and pregnant women from over the border without a booking may be intercepted by immigration officials and turned back. To get round this, some mothers-to-be enter Hong Kong before the bump gets too obvious, hang out in an illegal apartmenthostel for a while, then turn up at the public hospital emergency room after contractions begin. This endangers them and their kids, and – more to the point for angry Hongkongers – increases pressure on medical services and taxpayers’ costs, especially when the rascals run off without paying the bill.

Non-solutions: Hong Kong’s Basic Law guarantees residency to all born in the city. Changing this would be difficult politically and practically. (Amending the BL – a Chinese law – would legitimize Western-style rule of law and lose the Communist Party face.

Chinese-style ‘interpreting’, under which we would be invited to believe drafters really meant to exclude Mainland babies all along, invites ridicule. Besides, the accumulation of Mainland residents in Hong Kong

“Mainland mothers are making ever more determined efforts to give birth in Hong Kong to qualify their kids for an eventual ID card and residence rights.

Hospitals now have quotas to limit Mainlanders’ deliveries, and pregnant women from over the border without a booking may be intercepted by immigration officials and turned back.” seems to be a policy of Beijing’s. There would also be problems with discriminating against fellow Chinese vis-à-vis overseas nationals living here.)

Refusal to hand over the birth certificate without payment of fees – and perhaps of some sort of deterrent fine – is, I am reliably informed by a lawmaker who suggested it, not possible for some constitutional or legal reason that escapes me. Lame politicians like Chief Executive hopeful Henry 50 HONG KONG BUSINESS | FEBRUARY 2012

The Nature of Sleep “The thermostatic properties of camel wool in Dormirest beds keep the body cool and comfortable” Tang offer silly ideas like barring the mothers from Hong Kong for two years, as if that would make any difference.

A real solution: I hereby solve the problem neatly and vividly in three simple steps.

1. All un-booked, potentially bill-skipping Mainland babies shall henceforth be impounded (what’s the phrase – taken into care?) by the child welfare and social services people straight after the nurse severs the umbilical cord. The grounds for this are that any woman willing to risk her and her child’s well-being by staggering in after her waters break is unfit to be a parent.

2. The newborn children will be offered up for adoption (maybe we could charge the new parents a fee to cover the costs of the delivery and the repatriation of the unfit mother). Local families would get priority, but most of the kids would no doubt go to those slightly creepy but no-doubt well-intentioned Americans who hanker after a Chinese baby to dress in cheongsams and teach Mandarin.

3. As word of the new policy spreads extremely quickly, watch the illicit mothers vanish overnight, and the pressure on our hospitals noticeably lessen.

Tomorrow I will solve the problem of illegal parking in Central through selective – and in practice relatively rare – public garroting.

“Mommy, I want HK’s ID card!”

1016 Horizon Plaza, 2 Lee Wing Street, Ap Lei Chau, Aberdeen, Hong Kong Tel + 852 3741 1828 Fax +852 3741 1829 www.dormirest.com HONG KONG BUSINESS | FEBRUARY 2012 51

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