Hong Kong Business by Charlton Media Group

Issue No. 20

Display to 30 November 2013

Singaporeâ&#x20AC;&#x2122;s Best Selling Business Magazine

Property ISSUE warning signs of a slowing property market

The RISE OF

QIANHAI

retailers scramble for store space GROWOLD OR DIETRYING

THINK GLOBAL, HIRE LOCAL

DEBT CAPITAL WOES GETTING WORSE

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

HONG KONG

FROM THE EDITOR

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

In this issue, we talk about Hong Kong’s increasing wealth and how consumers’ fatter wallets are driving the retail sector. We also explore the looming supply risks threatening retailers and developers.

Tim Charlton Louis Shek Jason Oliver

Meanwhile, our channel checks with analysts

Jonn Martin Herman

Editorial Assistant

Queenie Chan

Editorial Assistant

Alex Wong

reveal booming trends in Macau’s gaming sector and operators scrambling for new growth strategies. We give you forecasts on the next gameplans of Hong Kong’s gaming big wigs. Hong Kong’s

ADVERTISING CONTACTS

Louis Shek +852 60999768

property investors are in for a treasure-load of information as we delve into

louis@hongkongbusiness.hk

how the property market manages to remain attractive. This is despite tell-

Laarni Salazar-Navida

tale signs of a sluggish outlook based on the data from the last few months.

lanie@charltonmediamail.com

We also found out that widening credit spreads and uncertainty are pushing investors farther away from funding high-risk corporate bonds towards safer picks. Can Asian corporate firms sustain their debt capital spree? ADMINISTRATION

Lovelyn Labrador accounts@charltonmediamail.com

Advertising Editorial

advertising@hongkongbusiness.hk editorial@hongkongbusiness.hk

This issue of HKB also discussed the alarming issue of an ageing Asian labor pool. You’ll be surprised at how fast emerging Asian countries are graying and how the economies are preparing for a ‘power shift.’ Enjoy reading!

PriNting Gear Printing Limited Flat B, 3/F, Derrick Ind. Bldg., 49-51 Wong Chuk Hang Rd., Hong Kong.

Can we help?

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

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

Interest rate strategy

CNH: Will Qianhai jeopardize Hong Kong’s position? DBS Group Research

6 Sep 2013

In mid-2012, the China’s State Council approved the development of the Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone. Four industries were focussed upon: finance, logistics, information services and science & technology services. Particular emphasis was placed on finance, for which the government designated Qianhai to be built into an experimental zone for financial innovation and further opening-up to the outside world. Back then, market watchers found it difficult to associate the mudflat with such bold plans. We, however, have been optimistic about the project. Specifically, we stated in earlier report that the zone’s development would be kicked off by the launch of a cross-border RMB lending scheme (see “CNH: RMB lending set to cross border in pilot plan”, 16 April 2012). In Jan13, only nine months after the approval has been granted, fifteen Hong Kong banks were authorized to offer a combined RMB2 bn of loans for Qianhai companies. More impressively, the first Qianhai land auction was held in July and construction is planned to start by October. It signals that the zone has already entered into an expansion period.

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

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

Three decades ago, Hong Kong’s manufacturing industry was hit by soaring costs. Factory rents and manufacturing labor wages ballooned 140% and 170% respectively during 1980-90. The city’s international competiveness was being challenged by several lower-cost developing countries in the region. For instance, the manufacturing labor costs in IndoneChart 1: Transformation of HK economic activities sia at the time was only during 1980-2000 one-fourth that of Hong Kong. 30% 90% Shenzhen became an expansion outlet for Hong Kong manufacturers and the timing could not have been better. The availability of abundant inexpensive land and labor in Shenzhen made it possible for Hong Kong manufacturers to move labor-intensive processes across the river. Meanwhile, more skill-inten-

Manufacturing 25%

Service (rhs)

85%

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

5% 0%

65% 1980

1984

1988

1992

1996

2000

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

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



HONG KONG BUSINESS | NOVEMBER 2013 3

CONTENTS

COVER STORY Pockets of HK property market remain attractive

FIRST 08 Why coffers are alarmingly running low

09 Macau gaming revenue trends up

10 Spencer Ogden, not your typical office space

20 Branson: This is how you should pitch a business idea

33 Tourism lobbying becoming pathological

37 How the sluggish growth of Mainland will badly maim Hong Kong

48 The crucial implications of FATCA

expansion appetite

Published Bi-monthly on the Second week of the Month by Charlton Media Group Pte Ltd, 19/F, Yat Chau Building, 4 HONG KONG BUSINESS | NOVEMBER 2013 262 Des Voeux Road Central, Hong Kong

Why fears of Qianhai jeopardizing Hong Kongâ&#x20AC;&#x2122;s position are overblown

ANALYSIS

OPINION

12 Shine bright like a diamond 14 China Gas Holdings fires up its

All aboard: Hong Kong veers toward Asia cruise market

for U.S. Citizens in Hong Kong

36 Mid-range brands storm

Hong Kongâ&#x20AC;&#x2122;s fashion scene Mid-range fashion retailers are expanding at a faster rate than luxury retailers.

REGULAR 36 Legal briefing: Hong Kong welcomes more employer-un friendly labor changes

50 Numbers

For the latest business news from Hong Kong visit the website

www.hongkongbusiness.hk

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

RESIDENTIAL PROPERTY

Hong Kong reveals 10-year housing strategy According to a report, the housing strategy for the next 10 years will be a supply-led approach with the Government taking a proactive role in the provision of public and subsidised housing. This was the message from Secretary for Transport & Housing Prof Anthony Cheung after chairing the Long Term Housing Strategy Steering Committee’s 10th meeting.

HR & EDUCATION

6 in 10 Hong Kong employers to go on a hiring spree until October Fifty-nine percent of Hong Kong employers intend to hire staff in the coming three months and 31% plan to hire fresh graduates, according to the jobsDB Q2 2013 Hiring Index. The average monthly salary they plan to offer to university graduates is $12,778. Among employers who hired fresh graduates in the last three years, about half of them (48%) said the turnover rate of fresh graduates is 50% or above.

MARKETS & INVESTING

Hong Kong’s fund management business hits record HK$12.6 Hong Kong’s fund management business grew 39% in 2012 to HK$12.6 trillion while overseas investors accounted for about HK$8 trillion of assets under management, excluding real estate investment trusts. The Securities and Futures Commission said this significant growth reflected more active engagement in Hong Kong’s fund management business.

FROM THE BLOG 4 ways on how to make your event eco-friendly BY LAWRENCE CHIA Traditionally, the events and exhibitions industry in Hong Kong has been more focused on being business-friendly than being eco-friendly. in the last few years, this status quo has begun to change rapidly, as the idea that business and green values can coexist and indeed, create new and profitable synergies.

6 HONG KONG BUSINESS | NOVEMBER 2013

Internal communications crucial for SMEs BY JOHNNY MCGINLEY In an economic downturn, one of the first reactions of businesses is to make efficiency savings. They are forced to do more with less finances. When that happens it becomes a catalyst for new ways of thinking, new approaches and innovation in order to do more with less resource. It can fuel a culture change.

How the ‘local plus’ approach can cut costs of expat staff in Hong Kong BY EUAN JONES Despite today’s economic uncertainties, global mobility remains integral to the way businesses operate. Multinational companies must grapple with the challenge of increasing the number of international assignments while managing costs.

Recover and Reduce Costs, Minimise Waste Nuance’s Print Management & Document Capture Solutions

Organisations today spend 1 to 3 percent of their revenue on print-related costs. Yet by actively managing overall printing efforts, you can reduce recurring spending on document output by 10 to 30 percent. If you’re ready to gain control and management of your business’s printing to reduce costs, increase document security and enable sustainability programs, a Nuance Print Management Solution can help. If you’re ready to escape the “trapped in paper” challenge, a Nuance MFP-based document capture solution will enable you to integrate paper into your electronic document workÅow. Nuance document workÅow and automation tools deliver measurable productivity gains and cost reductions by streamlining how people create, share, store and use ofÄce documents. Print Management: Eliminate wasteful printing. Print only what you need, when you need it, and where you need it. Capture and WorkÅow: Speed access to information trapped in paper, in the system you want it, in the format you need it. Conversion and WorkÅow: Transform key documents into digital assets, all in the most popular formats.

For information about Nuance Print & Document solutions, please email imagingAPAC@nuance.com or phone Richard Chan on +(852) 9170 3856 www.nuance.com

FIRST BANKERS COMPLAIN OF NIGHT CALLS

While most people believe that “money makes the world go round,” workaholic Hong Kongers are living proof that money makes the world sleepless. Nearly 4 in 10 financial services employees in Hong Kong confess to have been woken up during the night by a phone call from a colleague or client, over two thirds have their holiday interrupted, of which over a third had to cancel it. A recent survey by global career site eFinancialCareers reveals that even when they are not in the office, 42% of professionals in financial services are contactable at all times of the day and night, and during their weekends and holidays. Talk about working 24/7! Sleepless nights Almost half are working outside their contracted hours twice or more times a week to coordinate with overseas stakeholders. This appears to be due to requirements such as communication purposes, mainly joining conference calls involving people in other countries. George McFerran, Managing Director APAC at eFinancialCareers, believes that the working culture in Financial Services is closely linked to the market-to-market nature of the industry. He said: “Financial Services is a truly global industry and many organisations are now operating around the clock. In a hub like Hong Kong, from where business is being done all over the world, it’s important to coordinate with colleagues overseas. When transactions are taking place in different time zones that can mean working longer hours or always being on call, but we’re also seeing many employers operating global shift systems to ensure 24/7 cover. ” In fact, according to the survey results, more than 1 in 4 (28%) of the workforce in financial services operates on a shift basis. At the start of their day they have work handed over to them by a colleague in a different country, and at the end of the day over a quarter (26%) pass it on to someone else. A similar proportion (27%) are contracted to work unconventional hours to service clients and stakeholders in different time zones. 8 HONG KONG BUSINESS | NOVEMBER 2013

Hong Kongers seem to have fatter wallets

Here’s proof that HK isn’t getting any poorer

ong Kongers seem to be enjoying higher income and increasing wealth, if the rapid growth in retail sales is anything to go by. Local residents, not tourists, remain the main source of demand for retail stores. Ryan Lam, an economist with Hang Seng Bank, notes that spending by local residents came in at HKD287.4 billion last year, 77.4% higher than what it was in 2001. Contrary to what some might have expected, sales to local residents still make up two-thirds of total retail sales even as the territory has experienced an exceptional growth in tourism receipts in the past decade.

Locals driving retail boom Lam’s findings indicate that labour market conditions were the most important factors supporting spending by local residents. Employment gains (+13.9%) and wage growth (+24.5%) in total contributed 38.4 percentage points to the 77.4% increase in resident spending growth for 2001-2012. He adds that changes in other factors, such as housing and financial wealth, explain the remaining 50% of domestic retail sales gains. Matthew Circosta, an economist with Moody’s Analytics, adds that a surge in visitors from the

Spending by local residents came in at HKD287.4 billion last year, 77.4% higher than what it was in 2001.

mainland and falling gold prices helped lift tourism and retail trade in April, and rising local wages and low unemployment continued that momentum through May and June. According to the latest study by Hong Kong Monetary Authority, net housing and financial wealth’s elasticity of consumption is estimated to be around 0.18 and 0.12. On that premises, one may calculate that the advances in net housing and financial wealth contributed about 11.2 percentage points and 6.0 percentage points to resident spending growth during 2001-2012. “All told, beyond the wealth effect, structural factors such as aging population, negative real interest rates, credit expansion and reduced unemployment volatility were also at play in supporting resident spending, albeit to a lesser degree,” says Hang Seng Bank’s Lam. Tourist spending still key However, he warns that contribution to retail sales growth from local residents may diminish as income effects, the second key factor supporting growth, will however become less visible on the structural slowdown that Hong Kong is going through. As in other Asian countries, the importance of inbound tourism as a retail growth driver then becomes more evident. Number of inbound travellers is expected to rise 13% per annum for 2013-2017. “Future growth potential in Hong Kong’s tourism sector is apparent, considering rising income levels in other Asian economies combined with increasing confidence about the future and falling saving rates,” says Lam.

Net financial and housing wealth (HKD billion)

Source: R&VD, HKMA, Hang Seng Bank estimates

FIRST Analysts warn that competition is bound to increase by the depth but the breadth of the RMB market should continue to grow.

RMB cross-border use becoming more widespread

The yin and yang of Qianhai

ith the China’s State Council approving the Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone in mid-2012, both opportunities and threats loom for Hong Kong and Qianhai. Analysts warn that competition is bound to increase by the depth but the breadth of the RMB market should continue to grow. According to Nathan Chow, an analyst with DBS Group Research, the scheme provides Hong Kong banks a new attractive avenue for RMB fund investments; the growth of which has far been lagging behind that of other offshore RMB products. He notes that the total outstanding

RMB loans in Hong Kong merely amounted to RMB88 bn, compared with the dim sum bond market’s RMB500 bn. Potential opportunities With Qianhai to become the pilot district for RMB cross-border use, Barclays analyst Sharnie Wong reveals that Hong Kong banks have opportunities to develop business in four areas including bilateral crossborder RMB loans, underwriting bond issuance of Qianhai companies in Hong Kong, custody business, and wealth management for wealthy people from mainland. Qianhai is said to be in the second stage of the ‘three-stage’ development

plan designed for it. This means that from 2013 to 2015, development projects are determined and investments are attracted. Wong notes that currently more than 600 companies with RMB100bn+ capital are registered in Qianhai, of which 80% are financial institutions and 10% are from Hong Kong. Looming challenges On the other hand, Mr Ma Weihua, Chairman of Wing Lung Bank, sees slowing economic growth, challenges from stakeholders and changing customer needs as the top three challenges for the banking industry. Tse Yung Hoi, Chairman, BOCIPrudential Asset Management, noted the progress of development of the Qianhai special economic zone as a pilot testing ground for internationalisation of China’s financial industry and opportunities it presents for the Hong Kong Banks.

Hong Kong RMB

Source: DBS Group Research

The Chartist: The flip side to hong kong’s impressive loan growth If there’s one thing Hong Kong should be very happy about, it should be their loan growth. According to CCB International, it continues to be resilient (+1.3% MoM, +16.9% YoY) while system deposits continue to lag behind (+0.5% MoM, +10.3% YoY). Total system loan-to-deposit ratio increased 60bp to 72.4% while HKD LDR inched up 10bp to 83.7%. They also said that RMB deposits continue to record strong growth (+2.1% MoM). But here is the scary catch. According to UBS Investment Research, the government has repeatedly warned about the risks of higher interest rates. “With the Fed looking set to be holding rates unchanged for quite some time, how is that possible? Well, we have seen banks re-price mortgage rates before. That happened during 2H11-1H12 when HKD liquidity tightened on the back of the European debt crisis,” UBS Investment Research said.

Loan-to-deposit ratios

Sources: CEIC, CCBIS estimates

Household mortgage debt service

Sources: CEIC and UBS calculations. Note: mortgage repayments are estimated by amortising the outstanding stocks of mortgage loan extended by banks, based on an estimated average mortgage rate. We assume a constant maturity of 15 years

HONG KONG BUSINESS | NOVEMBER 2013 9

FIRST

Retailers scramble for store space

STARTUP WATCH

Last minute bookings

etailers may have breathed a sigh of relief with rents down 2% over the second quarter of the year, but that may be short lived with a supply crunch next year looming. Hang Seng Bank economist Ryan Lam notes that new supply for the next two years is way below the 20-year average, meaning retailers will have to fight more for space. Retail floor space completions of 58,000 sq.m. in 2013 and 60,000 sq.m in 2014 respectively aree way below the 20-year average of approximately 137,200 sq.m. per year. “The supply-demand imbalance would put upward pressure on retail rents,” he said. More retail space coming up That’s not to say Hong Kong hasn’t had a big jump in retail space – almost 1.8 sq km of malls and shops over the last ten years. Floor area occupied by retailers has gone up over 5.8 sq km from just 4 sq. km in 2004. Lam projects an additional demand of 950,000 sq.m. of store space over the next five years. Macquarie Equities Research forecast ‘overall prime’ rents to increase +7.5% YoY in CY13E and +4.5% YoY in CY14E following strong retail sales growth. Hong Kong retail sales growth excluding jewellery, watches, clocks & other valuable gifts has moderated to +9.3% CYTD. “Retail sales should continue to be supported by the positive wealth effect from

Please do touch the merchandise!

HSI growth and residential property price appreciation of 3.5% CYTD, combined with a low unemployment rate, low interest rates and continued solid growth in Mainland Chinese tourist arrivals,” said Macquarie analyst Kai Tan. Costs still comfortable Furthermore, he believes occupancy costs in key retail assets remain comfortable at 14-17%. “The supply outlook is tight with “overall prime vacancy just 2.5% with 1.5% of existing stock coming in new supply over the next 3 years.”

HotelQuickly offers a same-day booking service that allows its clients to book last-minute lodgings on-the-go through HotelQuickly’s mobile app. The app presents users with its list of hotels offering the best deals within the user’s location. The startup which just raised HK$9 million for its series A round has investors coming from various locations that span three continents and include prominent individuals like Boon Hwee Koh who was the former chairman of SingTel and Singapore Airlines. Founded by Tomas Laboutka with Christian Mischler, Michal Juhas, Mario Peng, and Raphael Cohen, the startup’s goal is to expand its services and improve its product. HotelQuickly is now serving key South East Asian countries like Hong Kong, Singapore, Thailand, Taiwan, Indonesia and Malaysia. It has partnered with around 400 hotels across the region, allowing them to offer hotel rates with deep discounts that are cheaper than its online counterparts.

Effortless selfie shots

SURVEY

More mothers go part-time in Hong Kong Hong Kong’s female employees who just returned from their maternity leave prefer flexible working conditions while dealing with tiny yawns, sleepy sighs, nursery rhymes and lullabies. A research by recruitment firm Robert Half reveals this trend was particularly pronounced at large firms, where 86% of HR directors said that employees would return into roles with more parent-friendly conditions. The trend for flexible working conditions seems to be taking off in Hong Kong as it is globally because of the shift to try and encourage women into more senior positions and on executive boards whilst being able to maintain a healthy work/life balance. Ms. Pallavi Anand, Director of Robert Half in Hong Kong, said: “It is encouraging to see employers’ willingness to adopt flexible working schedules for their staff allowing more women to be a professional and a parent simultaneously. The percentage of women who are returning to work in Hong Kong following maternity leave has traditionally been higher than other jurisdictions because of the availability of affordable healthcare in the region.” 10 HONG KONG BUSINESS | NOVEMBER 2013

Ever tried taking self-portrait with your smartphone but found that the view was always limited by your arm-length? Muku Shuttr, a bluetooth remote shutter release for smartphones, offers a solution. Manufactured by Muku Labs, it claims to be the “world’s thinnest” shutter and does not require any app to operate. Its design is compact and light, featuring only a button and a key-hole and connects to smartphones via bluetooth. It operates on its own, without the need of any application and is handy at 6mm in thickness. Muku Shuttr stretches out its function as it is crosscompatible with other tools that enhances smartphone cameras. Muku Shuttr has raised its initial funding through Kickstarter within just one week, exceeding its US$10,000 goal and closing the campaign at US$94,947 total funding. CEO Kevin Leung was inspired by the idea of capturing moments easily with the ease of a remote shutter.

FIRST

What PayPal’s new country manager is gunning for Hong Kong Business recently caught up with James Mirfin and he talked about the plans he is brewing for PayPal in Hong Kong and Taiwan. He divulged three major goals he and his team are zeroing in on right now. HKB: What makes you excited about your new position? JM: I am excited about the way in which PayPal as a company is growing. In my new role, I am glad to have the opportunity to apply all our knowledge and best practice gleaned globally in our local markets. I am particularly excited about working with the team to launch more innovative services to better support our merchants and help them grow. HKB: What three goals are you focused on? JM: Following our many conversations with hundreds of thousands of merchants worldwide, we recognize that checkout conversion rates are a point of contention for many online retailers. We provide solutions to merchants that they can simplify their checkout process to as few as two-clicks, significantly enhancing the conversion rate of their online business. Helping merchants to improve their conversion rate will always be a key part of our business. As a trusted third party payment solution, we empower merchants of all sizes to capitalize on the growing cross-border

trade opportunity, helping them to succeed in new markets. HKB: What will you do differently in this position? JM: I’m lucky to be joining a fantastic team at a very exciting time in the company’s history. I don’t believe this is about changing the game, but further building on and developing our existing, strong merchant and partner ecosystem. My goal is really to further highlight to both buyers and sellers the benefits of working together with PayPal to bolster the local e-commerce market, and accelerate cross-border trade throughout the region. I look forward to partnering with everyone in our ecosystem in Hong Kong, Korea and Taiwan to help our customers bolster international trade in a simpler, safer way. HKB: What changes are you planning for? JM: As a growing e-commerce company, PayPal is changing and evolving all the time. It’s another reason why I’m so passionate about this new role. The world of commerce continues to grow as more and more people go online to shop and pay for goods and services. New technologies such as tablets, phablets and increasingly intelligent smartphones means that more people are walking around with millions of shops at their fingertips, just inches away from a purchase. PayPal’s own continued technological innovations such as PayPal Here and our recently redesigned consumer mobile app make it easier for merchants to sell, and consumers to shop.

James Mirfin Country Manager PayPal Hong Kong and Taiwan

HKB: What are your key business philosophies? JM: My key business philosophy centres around being passionate about what we’re doing, and building a strong, creative, driven team, focused on doing something they love. Personally, using PayPal is one of the first things I do every day, when I buy my Americano from Pacific Coffee using my Perfect Cup Card mobile app, and swiping my iPhone to pay for my caffeine boost with PayPal. I believe that the energy and enthusiasm of our staff underpins much of our business success.

retail WATCH

Tagore Gallery paints the town red

Linking the East and West, Hong Kong plays an important role in the global art scene. Joining the throng of galleries in the region, Sundaram Tagore unveiled its newly renovated gallery located on the ground and first floor of the Lee Roy Building. The interior was designed by architect and University of Hong Kong professor Jason Carlow. The redesign features a modern look with a dramatic, curvilinear ceiling treatment, state-of-the-art lighting and more wall space to accommodate oversized works of art. The gallery represents painters, sculptors and photographers from around the globe who each work in different mediums and use diverse techniques, but share a passion for crosscultural dialogue. Its interest in cross-cultural exchange extends beyond the visual arts into many other disciplines, including literature, and performance art, Sundaram Tagore is the first international gallery to open in Hong Kong and the reopening coincides with the gallery’s fifth anniversary.

12 HONG KONG BUSINESS | NOVEMBER 2013

Bigger walls accommodate oversized art pieces

Reception area

Exhibition hall

Gallery facade

FIRST deal WATCH

FUJI ends 3-year debt saga

Pushing the betting limits higher

Macau’s minimum bets to continue rising

nflation has finally caught up with Macau’s gamblers who are about to see big increases in the minimum bets for games. According to CLSA analyst Aaron Fischer, over 60% of the mass gaming tables have a minimum bet of over HK$1,000 while some of the Cotai casinos like City of Dreams and Galaxy Macau even have over 80% of their tables with a minimum bet of over HK1,000. He adds that minimum bets in Macau are also significantly higher than in other major gaming markets – US125 in Macau compared to the US$7-50 in Philippines, South Korea, Malaysia, Australia, Las Vegas and Australia.

Tight table supply Fischer says high minimum bets in Macau are blamed on tight table supply which showed modest growth in 2010-2012 with only Wynn Encore, Galaxy Macau and Sands Cotai Central opening in the past three years adding 715 tables to the market or 15% increase. The supply, he adds, is not expected to improve over the next two years with less than 400 expected to be added from Sands Cotai Central and Macau Legend. “Table supply growth will start picking up until 2015, as the next 14 HONG KONG BUSINESS | NOVEMBER 2013

phase of new Cotai projects gradually opens up. We expect 2,700 additional gaming tables to be added in 20152017, which represents an aggregate growth of 46% and 13% per annum,” says Fischer.

Operators’ strategy Despite new table suppy with Cotai projects opening, Barclays Research reports that some operators still see continued room for raising of minimum bets, but would strategically implement raises selectively. Barclays analyst Vineet Sharma notes that MGM China management has announced that it sees potentially 20-30% room for raising minimum bets if they have to, but they prefer not to price out lowerend customers and therefore tables with HK$500 minimum bets, or even at times HK$300, still exist. “MGM only plans to selectively raise minimum bets in some of the crowded smoking areas. For VIP, as well as adding VIP capacity last 4Q, MGM continues to shuffle tables among performing and nonperforming junkets.” By keeping a product offering for lower end customers, Sharma said that MGM believes that if premium mass growth turns softer, there will be an option to lower minimum bets for the more general mass market.

The long debt restructuring saga of Hong Kong-listed firm FUJI Food and Catering Services Holdings finally came to a close when it resumed trading on HKEx in July this year. On top of this three-year deal was WingOn Chui of King & Wood Mallesons who has tried his hands on equally complicated projects including credit risk management, corporate recovery, debt trading/distressed debt transactions, and bankruptcy. In 2009, FUJI filed a petition for its winding-up and resumption of trading of its shares on HKEx. Headed by Chui, the team’s multidisciplinary skills enable it to deliver more commercial outcomes for FUJI particularly in respect of complex restructurings in Greater China and beyond.

Qihoo 360 turns to bonds

Over 60% of the mass gaming tables have a minimum bet of over HK$1,000 while some of the Cotai casinos like City of Dreams and Galaxy Macau even have over 80% of their tables with a minimum bet of over HK1,000.

Embarking on a landmark transaction, Eugene Lee co-led Latham & Watkins in representing Citi, China Renaissance, and UBS on the US$600 million convertible bond issuance by Qihoo 360, a Chinese Internet and mobile security products and services provider, whose ADSs are listed on the New York Stock Exchange. The bonds are convertible into the listed ADSs of Qihoo 360, based on an initial conversion rate of 9.0119 ADS per US$1,000 principal amount of bonds. Prior to this deal, Lee has advised on IPOs and high-yield debt offerings for local and international clients. Commenting on his recent client, Lee said “We’re excited to be involved in this landmark transaction, the largest-ever convertible bond issue by a China-based, U.S.-listed company. equity-linked products. The deal showcases Latham’s strong capital markets capabilities.”

FIRST NUMBERS

THE ASIAN MOBILE CONSUMER DECODED

How do Hong Kongers compare with their neighbours when it comes to mobile phone and tablet ownership? Multiple handset ownership in Asia Pacific

Hong Kong’s skyscrapers

Here are the 10 tallest commercial buildings in Hong Kong

ong Kong’s skyline seem to be composed of equally appealing skyscrapers but a few stand out to be the tallest. Data from Emporis, a leading database for building information worldwide, show that the International Commerce Centre holds the title of tallest building in Hong Kong since it was completed in 2010. It is a 118-storey, 484m tall skyscraper and a part of the Union Square project built on top of Kowloon station. Emporis notes that this tower will form a “gateway” for Victoria Harbour with Two International Finance Centre at the opposite side of the harbour. The runners-up The 88-storey, 415m tall Two International Finance Centre (IFC) came in next. Completed in 2003, the Two IFC was completed in 2003 as part of a complex that includes the IFC mall and the Four Seasons Hotel, as well as MTR Hong Kong Station. The 78-storey Central Plaza, soaring 374m is ranked third. Completed in 1992, Central Plaza held the title ‘world’s tallest reinforced concrete building’ until it was surpassed by CITIC Plaza in Guangzhou in 1997. Fourth in the list is the70-storey, 367m tall the Bank of China (BOC) Tower which houses the headquarters for the BOC-HK. It was recognized as the first building outside the United States the 1,000 ft mark in 1990.

16 HONG KONG BUSINESS | NOVEMBER 2013

The 73-storey, 346m tall The Center came in fifth. The Center, notable for its arrangement of neon lights is one of the few skyscrapers in Hong Kong that is entirely steel-structured with no reinforced concrete core. Teddy Tower, comprising of 80 floors and with a height of 319m is ranked sixth. The Nina Tower of this tower was designed as the tallest building in the world, but its proximity to Chep Lap Kok Airport resulted in a restriction on its height. The top 40 floors will house a 800room 5-star hotel, while the 10th to 39th floor will contain office space. Construction stopped at an early stage, and resumed in September of 2002. It was completed in 2007. One Island East Centre [Taikoo Place] followed. The 69 meter tall building completed in 2008, comprises 69 floors. According to Emporis, the original plan called for a 36-storey building with 817,034 square feet of gross area. The bottom three Top eight is the 283m tall Cheung Kong Centre. The building which has 62 floors was completed in 1999The top floor is a private residence of Li Ka-Shing, the richest man in Hong Kong and chairman of developer Cheung Kong Holdings and is the only residential part of the building Rounding up the top 10 list are The Cullinan I and II which both has 68 floors and 270m in height.

Tablet ownership, 2013 compared to 2012

Source: Nielsen Holdings N.V.

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FIRST The Analysts’ call

What can Wing Hang’s potential suitors make out of the acquisition? CCB International - Adam Chan

Analysts no longer skeptical of small HK banks being acquired

Wing Hang Bank’s M&A play

11.5% over the past 4 years while its ROA has been just 1.02% over this time. This compares to ROEs in the mid-to-high teens for BOC(HK) and Hang Seng and ROAs of 1.3-1.8%, says Sun-Mattison. Assuming Wing Hang is purchased at a 2.5-3.0x P/B valuation, she reckons it would be a VERY generous price for a bank with this profitability profile and almost certainly dilutive, even adopting the most liberal assumption for synergies. SunMattison recalls that the last local HK bank to be acquired was Wing Lung Bank, but Wing Hang’s ROE has the deal turned out rather averaged just 11.5% over the past poorly for the acquirer, China Merchants Bank. “Similar to 4 years. Wing Hang Bank, Wing Lung Bank was a subscale banking franchise with an average ROE of senior analyst at Bernstein Research, 12-13% in the years leading up to its this news is certainly a positive for acquisition.” the other smaller listed banks like Although the potential buyers are Dah Sing and BEA as these reports unknown, Moody’s senior analyst will likely result in an M&A premium Sonny Hsu suspects that mainland being placed on these smaller names. China institutions are most likely “For the past 4 years, we have behind the offer. This would be been skeptical of these smaller HK credit negative for Wing Hang banks being acquired as we saw little Bank because it would likely lead strategic value in acquiring these to significant loan and asset growth subscale entities operating in one and weaken its standalone liquidity of the most competitive banking profile. “We base our view on other markets in the world. However, it appears that someone is now willing transactions involving midsize Hong to purchase a stake in these banks,” Kong banks over the past decade. However, our expectation of strong she adds. parental support from a mainland Wing Hang Bank’s profitability is bank should partially mitigate the sub-par relative to the other banks acquisition’s negative effect on Wing like BOC(HK) and Hang Seng. Hang’s standalone credit profile.” Wing Hang’s ROE has averaged just here is an M&A play brewing in Hong Kong involving Wing Hang Bank that is expected to attract a rich scarcity premium for other smaller banks. Despite having only 2% market share of loans in Hong Kong, Wing Hang’s controlling shareholders, the Fung family and The Bank of New York Mellon, were approached by unknown, independent third parties to buy their 45% stake in the bank. According to Linda Sun-Mattison,

18 HONG KONG BUSINESS | NOVEMBER 2013

Potential purchasers cited most often are the Chinese banks and insurers. Besides the usual suspects, the Wall Street Journal noted on 27 September 2013 that other interested suitors include UOB, Singapore’s third-largest bank and the Australian bank ANZ. UOB’s interest in Wing Hang would allow it to broaden its footprint in Greater China where it is currently lagging rival DBS. ANZ, on the other hand, is motivated to make a transformational deal in the Asian region to help lower the group’s funding cost while diversifying the group’s geographical earnings mix. Given the number of potential suitors for WHB, we think it is more a matter of when and not if a deal gets done.

Moody’s - Sonny Hsu

Although the potential buyers are unknown, we suspect that mainland China institutions are most likely behind the offer. By purchasing a Hong Kong-based bank such as Wing Hang, a mainland bank can gain a retail presence in the city, reduce its reliance on wholesale banking business and diversify its funding sources. In addition to serving Chinese corporates, they can also serve the increasing offshore banking needs of mainland individuals and small enterprises.

CLSA - Derek Ovington

Like its Hong Kong banking peers, Wing Hang has experienced considerable compression of returns over the past two decades, with ROA going from above 1.5% at the start of the 2000s to below 1% in recent years, resulting in a compression of ROE from mid-teens down to 10%. This is likely to have a material bearing on the multiple a potential corporate acquirer pays. There is no certainty of a deal but, given the dearth of remaining independent banks in Hong Kong, we expect it would attract a rich scarcity premium. Our HK$132 probability-weighted target assumes a 1.8x 14CL PB, capturing both a takeover premium and the risk of no deal. That implies 13% upside, enough for an Outperform rating, but we would not chase the stock at current levels.

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FINANCIAL INSIGHT

Securing debt capital becomes harder

Can Asian corporates sustain their debt capital spree?

Widening credit spreads and uncertainty are pushing investors away from funding high-risk corporate bonds towards safer picks.

ven as debt capital market, or DCM, volume in the region remained at par in 2013, Asia Pacific firms may soon find it harder to secure debt capital due to shifts in international macroeconomic policy. The foremost of these is the looming winding down by the US Federal Reserve of its quantitative easing programme. The investor recoil has already begun in recent weeks with emerging markets being hit the hardest, according to analysts. “India and Indonesia bore the brunt of the pressure as investors retreated from countries with big current account deficits; the Philippines and Malaysia were also affected,” said Richard Turner, managing director, head of investors, Thomson Reuters, Asia. “As credit spreads widened, local currencies and stocks fell, investors are starting to become more cautious 20 HONG KONG BUSINESS | NOVEMBER 2013

“Investors are now developing a lower risk appetite, and will soon shift their preference from highyield corporate bonds to lowerrisk investmentgrade sector issues.”

toward companies in the region that have come to depend on regular access to the capital markets after a funding spree in recent years. Asian corporates, thanks to easy access to cheap money in the recent past, have accumulated a steady rise in debt and as a result now hold among the most heavily leveraged balance sheets globally.” Risky corporate debt has been accumulating briskly since 2009, when Asia Pacific high yield corporate bond proceeds stood at just $1.3 bn before ballooning to a record $19.9bn in 2011. Volume crashed in 2012 to $8.8bn but rebounded strongly to $16.6bn in 2013. Lower risk appetite Turner said investors are now developing a lower risk appetite, and will soon shift their preference from high-yield corporate bonds to lowerrisk investment-grade sector issues

in developed markets such as South Korea, Hong Kong and Singapore. Sovereign bonds will also become more appealing as an alternative for investors seeking safer havens. “Meanwhile, high yield bonds (bonds not rated as investment grade) in Asia will likely come under pressure as Asia heads to slower growth and tighter credit availability, which will negatively impact already highly leveraged balance sheets. Meanwhile, as banks in the region continue to tighten their lending standards, higher default rates and forced supply pressures in corporate bond markets may come into play,” said Turner. Among Asian developed markets, South Korea seems to appeal the most to investors. “The shift to more developed markets is seeing South Korea once again dominate the flow of new US dollar bonds from Asia, with policy banks and power companies especially keen to refinance their maturing debt,” said Turner. Investment-grade issuers, wary of impending rate increases, have been recently rushing to secure deals. Turner cited Thailand’s PTT Exploration and Production raising

FINANCIAL INSIGHT US$500m on 9 September, and the rumoured capital raising efforts of Chinese lender ICBC’s Hong Kong unit. Meanwhile, high-yield corporate issuers are resorting to bank guarantees to lower their risk and attract cautious investors. “Car dealer China ZhengTong Auto Services used a guarantee from Bank of China to lure investors to its first US dollar bond, a US$335m fiveyear rated BBB+, five notches higher than ZhengTong’s own BB – rating,” said Turner. Signs of this waning bond investor appetite could also be seen in the region’s relatively slower DCM volume growth. Asia Pacific (ex Japan) DCM during the first half of 2013 (1H 2013) stood at $509.7bn or just on par with the first half of 2012 (1H 2012), according to latest Dealogic data. This is despite 1H 2013 seeing 200 more deals than the previous period. China leads, Southeast declines In the Asia Pacific (ex Japan) region, China continued to lead in volume in 1H 2013, with India and Thailand growing fast. Australia and the rest of Southeast Asia, however, suffered contractions. China DCM volume led the region with a 1H record volume of $232.4bn, up 19% from $196.2bn raised in 1H 2012, and its highest 1H volume and activity ever. China DCM volume now constitutes 45% of the total volume in the region, as companies in the Mainland look to fund their business expansion nationally and globally. China Development Bank Corp handled the largest share of DCM volume at 7% amounting to $16.2bn, followed by CITIC Securities (5.7%, $13.2bn) and ICBC (5.4%, $12.6bn). Notably, China high-yield DCM volume also reached $12.2bn in 1H 2013 via 35 deals, the highest semiannual volume and activity on record. This is more than double the $5.9bn volume seen in 2H 2012 via 17 deals. While China leads the region in volume, India has one of the fastestgrowing markets. India DCM volume spiked to $33.1bn via 291 deals in 1H 2013, up 56% on the $21.2bn (232 deals) raised during 1H 2012 and the highest 1H volume on record,

Dealogic data revealed. International DCM volume reached $11.3bn via 25 deals in 1H 2013 – the highest 1H volume and deal activity on record and more than quadruple the $2.6bn in the same 2012 period. AXIS Bank took on the largest share of DCM volume at 11.8% amounting to $3.9bn, trailed by Standard Chartered Bank (8.3%, $2.76bn) and ICICI Bank (8.3%, $2.76bn). Along with India, Thailand also saw a volume increase in 1H 2013 of 44% to $12.2bn from $8.5bn in the same 2012 period. But overall, the South East Asia region seems to be losing funding momentum fast. South East Asia DCM volume dropped to $53.8bn in 1H 2013, which represents a 23% dip from the same half-year period in 2012 when it issued $70.1bn. HSBC led the South East Asia bookrunners, snagging a 7.9% share amounting to $4.2bn, followed closely by Standard Chartered Bank (7.7%, $4.2bn) and Goldman Sachs (6.8%, $3.7bn). Australia, Japan also down Australia, too, saw its DCM activity decline, which while not as steep as the dip in South East Asia, has brought it to near-term record lows. Australia DCM volume dropped 13% to $88.8bn in 1H 2013 from the $102.6bn issued in 1H 2012, the lowest 1H level since 2010 ($67.1bn). Westpac handled the largest share of Australia DCM volume at 13.5%, equivalent to roughly $12bn, with CBA (10.8%, $9.6bn) and Citi (9.7%, $8.6bn) taking up the second and third positions, respectively. Mike Bass, Head of Financial Markets, Asia - based in Singapore, says that Westpac is bullish that DCM in Asia will remain buoyant in the near term. This sense for the opportunity is based on the growth of savings invested into the funds sector. “Funds are the natural providers of long term capital to the corporate sector, with banks playing an essential role in the relationship as an intermediary through debt capital markets. The opportunity has evolved further with challenges in the form of capital and regulatory requirements

Mike Bass

Richard Turner

on banks, as well as investors not having a multi-faceted relationship with the borrower,” he said. Bass notes that around 45% of borrowers currently obtain their funding from debt capital markets and – this is expected to increase further. “In Asia, we are seeing more opportunities to bring investors in to participate in deals. A major inhibitor in the past was that structured products have been too complex, which has meant Asian investors only had sporadic involvement in deals. We are overcoming this by establishing intimate knowledge and multi-faceted relationships with the borrowers as well as leveraging our institutional research insights, to better match funding needs with debt market appetite,” Bass added. Meanwhile, Japan DCM volume also deteriorated, dipping to $76.9bn via 238 deals in 2Q 2013, its third consecutive quarterly volume drop. But Dealogic noted that this was actually up 8% on 2Q 2012 and surpassed 2Q 2009 ($73.2bn via 195 deals) as the highest 2Q volume on record. Mizuho dominated the bookrunner rankings list with 23.1% or $35.9bn in the 1H 2013. Nomura is at a relatively distant second with 17.1% amounting to a $26.5bn value, followed by Morgan Stanley with 12.6% equivalent to $19.6bn. While DCM volume slipped somewhat, Japanese corporate bond activities in were on the rise during this period, partially offsetting the weaker overall Japanese debt market environment, said Thomson Reuters. Proceeds increased by 23.8% to ¥4.9 trillion from 209 deals compared to the same period last year.

Asia Pacific (ex Japan) DCM Issuance

Sources: Urban redevelopment authority, Knight HONG KONG BUSINESS | NOVEMBER 2013 21

OPINION

Tim hamlett

Here’s the real problem with the Hong Kong poverty line

he establishment of a Hong Kong poverty line, whatever you think about where exactly it should be drawn, seems to many people an ominous development. Oddly enough they see it as ominous for the same reason as other people find it promising. Faced with a poverty line and a number of people officially described as “poor” there will be an expectation that the government will do something. And since poverty, at least in the common sense view, consists of a shortage of money, the something to be done will presumably, sooner or later, involve the distribution of cash. Business people will note that the cash will have to come from somewhere, and suspect that they will be called upon to make a contribution, if not to stump up the entire cost, one way or another. It is no good denouncing this prospect as “welfarism”. We must try not to look dumb. We already have welfare. That horse is out of the stable and over the horizon. We have a public health system offering universal care more or less free at the point of delivery. We have a public education system which is compulsory and also more or less free. We have public housing in large quantities whose rents are supposed to reflect the modest means of their potential tenants. Also, most people accept the idea that poverty is a problem to be confronted collectively. It is no longer possible, as it was during the Irish Potato Famine, to argue that mass starvation is a result of market forces in which any interference will be counter-productive. Faced with families living in illegal squalor in an overcrowded converted factory building, we expect nowadays to hear a more constructive comment from our leaders than a confession of helplessness. So welfare there will be. The only question is how it will be done and who pays for it. Now it is of course true, though if you are going to make the point in public you should try to so so tactfully, that there will always be poverty. Some people will make bad decisions, some will simply not be able to handle the complexities involved in achieving prosperity in a modern society. And some will be unlucky. Reducing the role of luck This last is an important point, because the legitimate objective of welfare is not to make everyone the same. Even aiming for a universal minimum standard may be asking too much. What we can do is to reduce the role of luck in deciding who gets what standard of living. This is not a matter of fault; it is a matter of rectifying an unfairness built into human life, that some people are lucky and some not. For example, in the old days if your parents were poor or had six other children ¬– or as often happened both – you were probably not going to get much education at all. This was not your fault. We do not choose our parents. Providing education for all reduces the importance of the choice which is made for us by fate. Similarly catastrophic illness is not something for which a person can be blamed. But if nature is left to take its course then it will bring bankruptcy and penury to the family

22 HONG KONG BUSINESS | NOVEMBER 2013

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

From rags to riches - is it possible for all?

of the victim. Providing free treatment can head off this kind of hardship and most governments now arrange it one way or another. I suppose in the early days of national pension schemes they were looked on in rather the same way. Many people died before they reached an age at which they could no longer work. Those who survived into their 60s were in a sense unlucky; something unforseen had happened to them which left them in danger of suffering. Preparing for retirement, as we are all supposed to do nowadays, involves making a guess about how many years we have to cater for. Only the richest people will be able to contemplate living indefinitely on the interest from their winnings. Those who outlive their savings are selected by fortune, not by demerit. Money distribution Still, it is difficult to imagine a successful pension system for a society in which virtually everyone has a long and healthy old age. The numbers are simply too great. An obvious solution would be to raise the retiring age to reflect the fact that increasing numbers of people are willing and able to work well into their 60s and even 70s. But it would be optimistic to expect action along these lines from a government whose own staff are allowed to retire at 55. So I expect we will see some kind of money distribution. I think business people should make one point about this quite strongly. There is a temptation for the bureaucratic designers of such schemes to wish to involve the potential pensioner’s employer. In other countries this temptation has been accepted on a large scale. Employers find themselves saddles with a great deal of work which, in a sane world, would be done by the civil servants who ordered it. Quite small organizations find they need a person – even a department – to cope with the form-filling, stamp-buying, record-keeping and money-handling involved in the administration of schemes mandated by the government. This is the sort of thing which discourages employment, and produces a “black economy.”

Does mass starvation loom in Hong Kong?

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HONG KONG BUSINESS | NOVEMBER 2013 23

OPINION

JOHN HENDERSON

Workations: Lessons from working on a holiday in Hong Kong

Workations vs vacations

ore than a third of workers in Hong Kong would like more paid leave – it’s the second most wished-for worklife initiative, behind flexible working. Women in particular wish for extra paid leave (34.4%, against 31.4% of men). But actually paid leave may not be the boost to energy or work-life balance that people think. A survey by Regus shows that a large number of professionals spend significant amounts of their so-called holiday time completing work tasks. They may be sightseeing rather than at the office, but they’re not switching off. The Regus survey polled more than 26,000 people from 96 countries and regions, including Hong Kong. Over half (51%) of Hong Kong respondents said they would work 1-3 hours a day during their summer holidays, and nearly a quarter (24%) would spend over 3 hours a day on work activities. Both figures were higher than the global average. On the one hand, I commend their dedication to their jobs; on the other hand, I wonder if this is good for them, or their businesses. The tendency to take ‘workations’ rather than vacations is especially acute among Hong Kong men, with 62% planning to work 1-3 hours daily. Female workers in Hong Kong seem to escape the desk more successfully, with 33% planning to do this. I hope this is because they’re actually

24 HONG KONG BUSINESS | NOVEMBER 2013

BY JOHN HENDERSON Chief Financial Officer Regus, Asia-Pacific

having a good time vacationing, rather than too busy doing the holiday childcare, shopping and domestic chores to check their work emails. One reason for the demise of the switch-off holiday is technology, with tablets, phones, 3G and 4G making us reachable all the time. Almost one in three people in Hong Kong agree with the statement “I can never really switch off, even when I am sleeping or on holiday”. But even if we managed to take ourselves off to some idyllic Pacific island where there is no phone signal, we’d still be worrying about what we’re missing. All this 24/7 availability thwarts work-life balance, with horrible consequences. Among the problems Hong Kong workers attribute to poor work-life balance are prolonged fatigue (57%); no time to spend with partner and family (37%); insomnia and poor diet due to work pressure (35%). Is this really the best workforce to help a company compete and innovate? For anyone who does end up packing their working responsibilities alongside their guidebooks and camera, there are ways to minimise the damage to their holiday: Arrange cover. Holidays and businesses run better if people plan ahead, with everyone briefed about what needs to be done in people’s absence. No organisation should be reliant on one person being there, and holidays are an opportunity to improve the way teams organise themselves, to ensure continuity. One productive hour is better than three semiproductive hours. Rather than juggling work and childcare simultaneously – with the result that neither receives proper attention – set aside a short period each day for work. Find places where you can concentrate, access office facilities and reliable internet, even use videoconferencing for a vital ‘meeting’. Mobile devices have off switches! Make clear to colleagues that you will only be available at certain times of the day. Change email settings on your smartphone, so you have to check for mail manually, rather than have the constant ping-ping-ping of arriving mail. You might even consider leaving your smartphone in your hotel room safe. If it’s not in your pocket, there’s less temptation to check it.

PEOPLE PROFILE

Here’s the ambitious 2015 Asia strategy of SWIFT’s new deputy chief executive for Asia Pacific Hong Kong-based Patrick de Courcy is dead set on breaking new ground for SWIFT in terms of their product portfolio. of domestic payment systems in India, more integrated payment and securities infrastructures in ASEAN: these are examples of projects we’re working on in the region. It’s broad, and ultimately relevant to the development of the region’s economy.

Patrick de Courcy Deputy Chief Executive Asia Pacific

WIFT revealed that it will be maintaining its strategic programmes in greater China, India and ASEAN, while investing more staff in its core competency of supporting the backbone of the financial industry – market infrastructures – not just in mature and growing economies but also in frontier markets. As a result of these changes, Patrick de Courcy was named Deputy Chief Executive, Asia Pacific, in addition to maintaining his role as Head of Markets & Initiatives, Asia Pacific. He is also Acting Head of Sales, Asia Pacific until that position is filled. Hong Kong Business interviewed Patrick to learn more about his plans following his appointment. HKB: What makes you excited about your new position? It’s all about delivering what our customers need and to support them in the changes and growth that we’re experiencing in the region. We provide infrastructure that allows them to process transactions more efficiently, with less risk and more scalability, and connect them to the rest of the world. The internationalisation of the RMB, real-time payment solutions in Australia, a new generation

HKB: What three goals are you focused on? To successfully execute our strategy: We have an ambitious 2015 Asia strategy that calls for achieving greater relevance domestically in the fast growing markets of China, India and in the overall ASEAN region.That in turn, means breaking new ground for SWIFT in terms of how we compete, the product portfolio we deliver and adapting to the realities on the ground. Achieving our strategic goals in the region is important for our customers and shareholders globally. Bringing more customers to SWIFT: Our business is a network business, and the value of a network is in the number of endpoints. We need to expand our footprint to include, beyond banks, more buy-side firms, regional and domestic brokers, and corporates. So it is critical for us to bring to market new low-investment, cloud based solutions to connect to SWIFT, to broaden our local presence in emerging markets, and to develop new partnerships and sales channels. Increase our revenue streams: SWIFT is a cooperative company, we return any surplus in a given year to our customers in the form of rebates, and we reduce prices by 50% every five years. So why increase revenue? It is the measure of the value we deliver to customers in the region, and I want that value to grow, significantly. HKB: What will you do differently in this position? Spend less time in the office! We have evolved our organisation in the region and globally to be less

monolithic, more agile and better able to respond to customer needs, especially to needs from specific segments or domestic and regional markets. I’m looking forward for us to develop more intimacy with our customers so that we respond with the right solutions, at the right time. HKB: What changes are you planning? We recently announced organisational changes in Asia, which are in line with the needs of our customers and industry. While maintaining our strategic programmes in Greater China, India and the ASEAN region, we are investing more staff in our core competency of supporting the backbone of the financial industry – market infrastructures – not just in mature and growing economies but also in frontier markets. We are also revamping the relationship management organisation to focus on geographic areas, with greater emphasis on ASEAN markets, and reinforcing our on-theground presence in eight offices across the region. All of these changes reflect our continued commitment to supporting the growth of the region’s real economy and the development in the global financial industry. HKB: What are your key business philosophies? I am a firm believer in collaboration, collaboration that comes from clarity of purpose and the will to achieve shared goals. It is the key driver to the industry’s sucWe have an cess as well as our own. ambitious 2015 As a member-owned cooperaAsia strategy tive, we are founded by and for the that calls for financial industry. For 40 years, we achieving have been bringing the community greater relevance together to work collaboratively to share market practice, define domestically in the fast growing standards and consider solutions to issues of mutual concern and markets of interest. China, India and I am confident that through colin the overall laboration, we can achieve much more. ASEAN region.

HONG KONG BUSINESS | NOVEMBER 2013 27

CO-PUBLISHED CORPORATE PROFILE

The story behind SMEC’s quiet success in Hong Kong Find out how SMEC has grown to be one of the most sought-after professional services firms as it celebrates its 20th year in Hong Kong.

elebrating 20 years of operation in Hong Kong this year, SMEC is a professional services firm with Australian origins and a global footprint that provides high-quality consultancy services on major infrastructure projects. SMEC couples expertise with responsiveness and reliability to deliver practical outcomes for major infrastructure projects. With over 5,000 employees and an established network of more than 70 offices in Australia, Asia, the Middle East, Africa and North and South America, SMEC has built its success on a clientcentered approach. In Hong Kong, SMEC has grown over the past 20 years from just a few employees operating from a small office in Sheung Wan, to more than 60 employees based in a brand-new office in Kowloon, with a diverse portfolio of projects and offering a wide array of high-quality consultancy services to a diverse range of clients. SMEC provides engineering design, consultancy and advisory services to

Construction of Australia Eucumbene Tumut Tunnel 1954 28 HONG KONG BUSINESS | NOVEMBER 2013

both public and private sector clients in the transportation, water, environment, geotechnics and tunnels, urban development and energy sectors. Australian origins SMEC’s origins date back to Australia’s iconic Snowy Mountains Scheme in the 1940s. Described as a ‘wonder of the modern world’, this project was a remarkable feat and succeeded in its aim to divert the rivers from south-east Australia to the west, providing water for irrigation and generating peak load electricity for Victoria and New South Wales. Engineers and scientists from around

“SMEC provided permanent works and major temporary works design for Admiralty Station’s cavern and tunnel. ”

Graham Read Regional Director – Mekong and North Asia SMEC International Pty Ltd the world worked together on this massive multi-purpose project, undertaken between 1949 and 1974, which involved hydropower (dams, deep shafts, tunnels caverns), roads and bridges. At the time it was the world’s largest civil engineering project and in 1997, the American Society of Civil Engineers recognized it as ‘International Historical Civil Engineering Landmark’, joining the Panama Canal and the Eiffel Tower. After the Scheme was completed, and SMEC was established by the Australian Government, some of these engineers and scientists returned to their home countries, taking with them the “SMEC Spirit” of co-operation and professionalism that was born and nurtured in Australia. SMEC in Hong Kong SMEC has a significant design role in the development of all of Hong Kong’s new railway projects, including Admiralty Station, part of Mass Transit Rail’s (MTR) South Island Line (East) extension. The South Island Line has five stations and 7 km of underground and elevated structures. SMEC provided permanent works and major temporary works design for Admiralty Station’s cavern and tunnel. Situated directly below busy roads, an underpass and a car park with shallow rock cover, the station cavern spans 24.5 m, is 16 m high and 105 m long. Upon

CO-PUBLISHED CORPORATE PROFILE

Ricky Yim, Derek Lai, Graham Read completion, Admiralty Station will be one of the largest and busiest underground stations in Hong Kong. SMEC is also heavily involved in the design checking of 15 km of tunnels for the 26 km express rail link project connecting West Kowloon in Hong Kong with Shenzhen - Guangzhou in Mainland China. The objective of this project is to connect Hong Kong to the 16,000 km high-speed rail network in Mainland China. SMEC is also involved in the design checking of the 11 ha West Kowloon terminus development for this express rail link project. There will be nine long haul platforms and six shuttle platforms at the terminus. SMEC also secured a portion of the design checking from leading contractors for phase one of the Shatin to Central Link project. The Shatin Central Link is a strategic rail corridor connecting Tai Wai and Admiralty. It will serve areas of East Kowloon and connect the New Territories, East Kowloon and Hong Kong Island. The scope of works includes: construction of 1 km of tunnels; reconstruction of Chatham Road Bridge; slope works at Oi Sen Path; underpinning of Hung Hom Bypass Bridge; and a 19 m wide passenger interchange subway. Also in the rail sector, SMEC has recently

been engaged by Australian company Aspire Mining as their Railway Engineering Partner to develop a major 595 km coal haul railway between Aspire’s flagship Ovoot Mine in north-central Mongolia and Erdenet, in the east. With support from SMEC’s Ulaanbaatar office, risk and constraint analysis and engineering design have been undertaken in Hong Kong by local employees. Competitive advantage Ricky Yim, SMEC’s Asia Managing Director, says the Hong Kong Management Team has extensive local knowledge and a wealth of global experience. Their creative thinking and direct approach has brought much of the success that SMEC enjoys in Hong Kong today. “We offer local people with global experience at a competitive price, thereby

“We have expanded our portfolio of services to encompass almost all engineering and environmental disciplines, thereby offering a true ‘one-stop shop’ for our clients. ”

giving our clients the best value for money. This approach works well, as demonstrated by the high proportion of work that is repeat business from valued clients,” says Yim. “Increasingly, as we develop our Hong Kong office as a centre of expertise, our local and international Hong Kong staff travel overseas to provide their expert knowledge to other SMEC offices and other SMEC clients, thereby keeping alive the original “SMEC Spirit” of co-operation and professionalism,” adds Yim. Biggest achievement Graham Read, SMEC’s Regional Director North Asia, reveals that SMEC’s biggest achievement in Hong Kong is that not only does the Company continue to operate in a very competitive market, but that it is expanding and growing at a greater rate than ever before. By providing the highest quality services and by building long-term client relationships, SMEC has achieved a 23% annual growth in revenue in Hong Kong since 2008. “We have expanded our portfolio of services to encompass almost all engineering and environmental disciplines, thereby offering a true ‘one-stop shop’ for our clients. From our initial pilot scheme for a road maintenance project, HONG KONG BUSINESS | NOVEMBER 2013 29

Ricky Yim Managing Director – SMEC Asia Limited

SIL903 Aberdeen Channel Bridge Project

SIL903 Ocean Park Station & Viaduct Project we have moved into detailed design and construction supervision services for tunnels, geotechnical and civil infrastructure sector,” says Read. Apart from the detailed design services, SMEC is proud to be one of Hong Kong’s premier Independent Checking Engineers (ICE) for major infrastructure projects. SMEC has provided ICE services for projects with a capital value of HK$45 billion over the last five years and is honoured to work with the largest construction contractors in Hong Kong. It’s Water and Environmental Group, established in 2010, provides the highest quality environmental services to discerning clients, who understand the value that only a holistic approach can provide. SMEC understands that discerning clients expect the highest level of personal involvement of senior and experienced employees. This is what SMEC delivers. According to Read, “SMEC develops young local engineers and scientists, providing valuable experience in both the local and international markets and exposure to a diverse range of projects at a 30 HONG KONG BUSINESS | NOVEMBER 2013

much earlier stage in their careers than the larger companies.” “Our focus on employee well-being is paramount and we offer one of the best work-life balances in the consulting industry in Hong Kong. This enables the “SMEC Spirit” to shine and allows our employees to deliver better work for our clients,” he adds. Future plans Yim reveals that their most immediate

“Our focus on employee well-being is paramount and we offer one of the best work-life balances in the consulting industry in Hong Kong. This enables the “SMEC Spirit” to shine and allows our employees to deliver better work for our clients.”

plan is to celebrate SMEC’s 20th year in Hong Kong this year, which is a significant milestone for the Company. “Looking further ahead, we intend to expand our centre of expertise in Hong Kong, employing more local talent and partnering with local consultants and planners. We intend to move into the ports and marine sector including reclamations, soft ground engineering and geo-environmental engineering. ” adds Yim. With land supply and environmental quality at the top of the local agenda, SMEC is well placed to assist the public and private sectors in finding solutions to these issues. Its expertise in tunnelling, caverns and land reclamation, for example, will assist in land supply, and their skills in the environment field are well recognised, particularly in terms of solid waste management, land contamination and noise and air quality modelling. Although SMEC has traditionally worked with major works contractors in the private sector, Read says they will continue to expand their services to various departments and bureaus of the Hong Kong government. “We will expand our work with architects and planners in the early stages of project development, where our engineering and environmental services are brought together in a holistic manner to produce a sustainable outcome,” he adds. “The enhanced services will continue to serve our clients both in Hong Kong and overseas, particularly where SMEC has an established presence that can facilitate our client’s own expansion into new territories,” says Read.

HONG KONG BUSINESS | NOVEMBER 2013 31

COVER STORY

Hong Kong’s vibrant skyline seem to show no sign of flickering

HK flashes warning signs of a slowing property market A slowing residential market with no new completions might pose larger dangers to Hong Kong than just high prices.

ver the last few months, analysts have observed that Hong Kong has shown warning signs of a slowing property market. Several factors and trends are driving the slowdown, according to Vincent Kiu-cho, National Director, Greater China, Valuation & Advisory, Cushman & Wakefield. First, land sale prices are dropping, especially luxury residential land plots and large-sized land plots, reflecting developers’ cautious attitude to risk. Second, private residential completion dropped to “0” in July, posing risks to meeting the housing supply target by the end of the fiscal year. Third, sale transactions have hit bottom due to cooling measures such as heavy stamp duty and low leverage. Fourth, there has been a marked decline in first-hand property launches due to the tightened first-hand sale regulations and poor market senti-

The heavy

stamp duty policy in particular has offset most of the positive catalysts in the real estate market, such as the low interest rate and currency depreciation effect.

ment. Fifth, landlords have slashed home prices in West Kowloon whilst the home prices of the Hong Kong island is becoming more stable. Sixth, landlords have also slashed office rents in Core Central whereas office occupancy rates and rents remain high in secondary business areas, especially in the Kowloon East. According to Kiu-cho, the heavy stamp duty policy in particular has offset most of the positive catalysts in the real estate market, such as the low interest rate and currency depreciation effect. Demand curb measures Cooling measures have increasingly become more restrictive over the last couple of years, and has had a huge impact on the Hong Kong property market, notes Jones Lang LaSalle (JLL), regional director and research head for Greater China Michael

Klibaner. “We’ve seen from the last several years that the market has been very reactive. If prices continue to go up then we certainly could expect the government to issue another round of policy measures. In terms of what it means for investors, I think it means that your upside potential is really rated by the livelihood of traditional measures.” Klibaners said investor caution is definitely warranted nowadays forcing a lot of small investors to look at purchasing apartments overseas. “London is very popular right now as is Japan and Australia. An increasing people are looking at North America, Canada and the U.S.” Klibaner expects the tepid market situation to persist at least in the next two to three years. “‘When is property investment likely to improve?’ is a multi-billion dollar question. I think right now, the upside is really limited and downside risk is quite real. A rapid correction is unlikely. It’s going to be gradual.” According to Colliers International, the government’s demand curb measures had a notable impact on sales transaction volumes but had little effect on cooling home prices during 2Q 2013. The effect is most evident

COVER STORY on the luxury sector where overall sales volume dropped by another 19% QoQ during the three-month period ending in May. Meanwhile, Colliers International reports that the number of sales transactions valued at over HK$20 million in the three traditional luxury residential districts of The Peak, Midlevels and South Side saw a sharper decline, down by 68% QoQ in the same period. Luxury residential prices decreased by an average of 2.4% QoQ, as of May 2013, while mass residential prices went down by about 2-3% during the same period. With U.S. inflation well below the Federal Reserve’s 2% target amid weaker inflation expectations, Colliers International said that it is unlikely the Federal Reserve will taper bond purchases this year. “Even if interest rates increase in Hong Kong, they are unlikely to return to the pre-global financial crisis levels in the near future. With interest rates remaining below inflation, there is no compelling reason for vendors to sell at a discount,” Colliers said in a report. Secondary sales market The implementation of restrictive measures, initially aimed at suppressing investor demand and speculative activities in the property sector, have also resulted in significant contraction in the secondary sales market. The implementation of the Special Stamp Duty (SSD), Buyer’s Stamp Duty (BSD) and Doubling Stamp Duty (DSD) in February 2013, along with the lowered loan-to-value ratio, have effectively suppressed demand by increasing transaction costs. According to Colliers, the key driver behind the minimal price correction is a prevailing demandsupply imbalance. The property research firm argues that demand curb measures have not addressed the shortage of residential supply in the market. “New supply in the private housing market is expected to average at 16,750 units per year between 2013 and 2016. Although this figure is an improvement on the annual average new supply of 9,893 units over the previous six years (2007-2012), it is still much lower than the previous average of 27,767 units per year between 1985 and 2006,” said Colliers. “Disregarding investment demand,

pent-up demand from end-users is still enormous. Not to mention the prevailing strong holding power of existing homeowners, due to an ultralow interest rate environment. The tightening measures have discouraged owners from selling their properties as they are considering the higher cost to purchase an alternative property on the back of an increased stamp duty.” Hong Kong’s edge Despite the difficulties, some analysts believe that the Hong Kong market remains attractive. For one, JLL’s Klibaner said that the economy is doing relatively well with little unemployment and moderate wage increases. To examine the investment environment of a city, that there are three areas to consider: The law system, the financial system, and availability of talents. Cushman & Wakefield’s Kiucho said that these three areas impact the competitiveness of a city as well as the demand and supply of real estate, especially on commercial real estate. A comprehensive law system, he said, can help protect property interests and rights owned by investors. It also gives confidence to the investors when acquiring and disposing properties in the market. A healthy financial system, meanwhile, should have a stable currency and sufficient channels for capital raising. Such a wellstructured financial system can help investors acquire, leverage and dispose the assets in the market efficiently. Finally, the availability of talented persons is also an important consid-

A building in Kowloon East goes green

Even if interest rates increase in Hong Kong, they are unlikely to return to the pre-global financial crisis levels in the near future.

eration for real estate investments, since all the commercial properties are income-producing properties but the profitability of the assets totally relies on talents who run the properties and the businesses inside the premises. According to Kiu-cho, Hong Kong is one of the best cities in the world in terms of legal and financial systems, as well as talents, and therefore Hong Kong should continue be one of the best places to invest. Research published by The Economist Intelligence Unit, Hot Spots 2025 Benchmarking the Future Competitiveness of Cities, placed Hong Kong at rank No. 4 suggesting that Hong Kong will continue be one of the most competitive cities in the world, at least for the next 12 years. Kiu-cho also cited Hong Kong’s political and economic environment,which are relatively stable compared to other Asian countries, and are major attractions.

HK office supply, take up and vacancy rate

Sources: CEIC and UBS celculations

COVER STORY “Hong Kong is still a major gateway to China even though the China market is much more mature than 10 or 20 years ago. It is anticipated that the growth rate of Hong Kong property market will be slow in the future but the market will be far less volatile than the other Asian countries, such as Vietnam, Cambodia, The Philippines or the current hot growth market, Indonesia,” said Kiu-cho. Investment opportunities and risks According to Kiu-cho, investors should focus on the fundamentals of an investment, such as the foreseeable benefits of the future infrastructure development to a property, the potential price uplift of a property after renovation or the hidden redevelopment potential of a property. Kiu-cho advises investors to place their bets on the office sector especially premises in Kowloon East. Kiu-cho said that there is still a big gap between the Central office rents and Kowloon East office rents, but possibility of rental increases will bring up the capital value of the properties in the long run. Opportunities still abound, he added, on aged estate residential properties in terms of high efficiency i.e. high saleable area ratio and with the potential to increase in value after renovation. Kiu-cho meanwhile advised some caution in investing on industrial properties. “As the current price of most industrial properties in Hong Kong has already reflected the hope value for the conversion of the industrial properties for commercial or other uses and the price has been increased by 36.9% for the period from Jul 2012 to Jul 2013 whereas the Inflated property prices

Sources: CEIC and UBS celculations

Hong Kong residents, not to mention other limitations, are not really intimidating to begin with.

You’re better off getting exposure to the property sector through REITs

rent has increased by only 12.5% and the yield has been compressed from 3.4% to 2.7%,” he said. Colliers shares the same view, adding that the outlook for Hong Kong’s industrial sector might not be as promising as it was previously. “The strong 20% year-on-year (YoY) growth in warehouse rents over the past two years has started to taper off due to the slower rate of growth in retail sales and total exports, which is a major demand driver for Hong Kong’s warehouse market.” According to Colliers, retail sales and total exports decelerated from an average rate of about 25% YoY and 11% YoY accordingly in 2011 to the average rate of about 15% YoY and 4% YoY during the first 5 months in 2013. As a result, the rate of warehouse rental growth slowed to about 1% QoQ in 2Q 2013 compared with the 5% QoQ growth in the preceding quarter. Strong residential sector Colliers is optimistic on the residential sector thanks to a strong market demand for land. It notes that sale conditions forbidding developers and buyers from selling flats to anyone but permanent Hong Kong residents, not to mention other limitations, are not really intimidating to begin with. The estimated price of apartments, it adds, are lower than the market price and that will surely attract many buyers when the homes are put up for sale.

“The average selling price of flats in nearby development The Latitude, by Sun Hung Kai Properties, is more than HK$10,000 per sq ft currently in terms of gross floor area. With such market potential and the ability to cast the developer in a good light, it is no surprise firms are eager to grab a piece of the cake.” JLL’s Klibaner also believes that it is difficult to invest other than in the residential property market because the purchase price on personal asset is typically very high, which means one has to be a high net worth individual in order to participate in the commercial market. “The reality is probably if you want to get exposure to the property sector you probably better off doing through securities, stocks or REITs.” According to Klibaner, the fundamentals of the retail sector are still good considering the increasing number of mainland tourist arrivals, and robust retail sales growth. On the residential sector however, he notes that the value ratios are very low right now. Klibaner warns that one cannot get a mortgage for a purchase price that he used to before. “There’s a real lack of supply in the market. New launches are quite small right now relative to historical levels and the number of units available in the secondary market is in its historic low. I think that’s another challenge even if you wanted to buy something there isn’t very much in the market that’s available.”

OPINION

Hemlock

Too bad our schools have never taught problem-solving

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

he story so far… For the past several days, thousands of parents – or paid proxies – have been lining up outside kindergartens in the New Territories in order to get application forms for their little ones to enroll. These institutions are privately run local places that handle applications individually and limit the number of forms they distribute to keep processing manageable. But now Mainlanders are turning up, and the apparent competition for the paperwork has raised fears that there will be too few pre-school places, prompting mothers and fathers from both sides of the border to line up days and days ahead of time and to clamour for forms from a larger number of kindergartens. The result is yet another example of the weird semi-mayhem for which history will one day recall Hong Kong in the 2010s, in this case with people sleeping out overnight for no earthly reason, cops getting called, and accusations flying. It has become a frenzy of McDonalds Snoopy Doll or car-parking-space-bubble proportions, significantly spiced up by the intrusion of Yakultgrabbing, non-taxpaying Mainlanders into the equation – all of course greatly magnified in seriousness by the fact that it is about your precious child’s one and only chance of a head start in the Hunger Games that is schooling and exams and homework and piano lessons and ballet classes and language tutoring and all the other types of child abuse essential to Hong Kong’s definition of success in life. Officials’ initial response was hand-wringing. This soon gave way to visibly nervous armflapping. And now the government is urging the kindergartens to sort of get their act together. There is talk of a possible centralized clearing system, and even of giving priority to local kids. But for this year’s cohort of tots and their parents, it is already too late. The situation has gone past the point of you-couldn’t-make-thisup and started to lurch towards the downright surreal. Parents from Henan Province whose kid was born in Hong Kong are among the application form-crazed mob. They are bitter about waiting 50 hours and angry that the child’s interview will be in Cantonese. The infant breaks China’s one-child policy, so schooling on the Mainland is harder to arrange. See how the bizarreness piles up: days far away down south sitting on a

sidewalk; a kindergarten so serious it requires an admission interview; the interview in a language the kid can’t understand; the kid – illegal. If the South China Morning Post’s Hunanese is the same guy, eight kindergarten applications and a similar number of properties back home add to the wackiness. A Hong Kong man says he has given up his university registry job – let’s repeat that: given up his job – to join in the Gold Rush-type scramble for application forms. Seven and counting. “It’s totally a waste of time,” the Standard quotes him as saying. A grandfather from Shenzhen is sleeping at nights in a park (and I’m sure my fellow taxpayers will join me in wishing him a comfortable stay). Some poor wretch bought a toddler an electronic device that miraculously teaches English to kindergarten-admissioninterview standard. The hallucinations continue with a vision of some cretin of a former Chief Executive who was so mesmerized with thoughts of sky-high profits for private hospitals and dreams of Hong Kong becoming a ‘health care hub’ that he didn’t bother to plan ahead to handle the influx of Mainland kids a few years later, let alone pause to consider the impact on local people forced yet again to battle for resources with outsiders. Compared with him, the sidewalk campers in the New Territories are pretty sensible. It’s just that when circumstances multiply actions based on what seems to be rational self-interest a thousand times, you end up with collective lunacy.

You don’t learn everything in school...

HONG KONG BUSINESS | NOVEMBER 2013 35

legal briefing

Hong Kong intensifies rules to probe IPO sponsors’ work quality The Stock Exchange of Hong Kong implements new measures to complement the new regime.

he new regulatory regime for IPO sponsors aimed at improving sponsors’ work quality and market confidence will now come into effect. It set new requirements that shall apply to all listing applications submitted on or after 1 October 2013 According to Mayer Brown partner James M. Fong, the new regime has two major limbs. First is the consolidation and centralization of the key obligations of IPO sponsors in a new paragraph 17 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (SFC). Secondly, the The Stock Exchange of Hong Kong (HKEx) will implement various measures to complement the new sponsors regime. What new measures will SEHK implement? DLA Piper partner Mabel Lui cited six key measures scheduled to become effective on 1 October 2013. First, SEHK required listing applicants to publish the application proof of a prospectus both in Chinese and English on the HKExnews website. Second, It requires sponsors to notify the SEHK in writing as soon as practicable after their appointment, regardless of whether a listing application has been submitted. Third, SEHK requires a sponsor that ceases to act for a listing applicant after its appointment to inform the SEHK as soon as practicable and in writing of its reasons for ceasing to act. Fourth, It imposes an eight-week moratorium on listing applications which have been returned on the grounds that application proofs are not considered by the SEHK to be substantially complete. Fifth, SEHK requires publishing the status mark and related information on the SEHK’s website to indicate the status of each listing application. Finally, it streamlines the regulatory commenting process to focus on major issues such as eligibility, suitability, sustainability, disclosure deficiencies and compliance with the applicable laws and regulations. How will SEHK conduct an initial three-day check for listing applications? According to Lui, SEHK will first conduct a threeday check of the application proof prospectus based on a prescribed checklist and that it will only go on to conduct a more detailed vetting and qualitative assessment of the application proof if it satisfies the requirements in that checklist. She noted that at this stage the initial three-day check will continue until 30 September 2014. 36 HONG KONG BUSINESS | NOVEMBER 2013

James Fong

Mabel lui

Stephen Birkett

What will happen to the current requirement to post a Web Proof Information Pack (WPIP)? Lui said that it will be replaced by the requirement to publish a Post Hearing Information Pack (PHIP), a near-final draft listing document and will need to be published on the HKExnews website. She noted that the content requirements of a PHIP are broadly similar to those for a WPIP. For example, there must be adequate warning and disclaimer statements to advise viewers of the legal status of the document. She advised that listing applicants must post the PHIP at the earliest practicable time after receiving a post hearing letter together with a request to post a PHIP from the SEHK. Will there be exceptions in filing application proof? Stephen Scott Birkett, partner at Morrison & Foerster explained that exemptions from the requirement to publish the Application Proof are available in two conditions. First, if the applicant has been listed on a recognized stock exchange for not less than five years and has a market capitalization of US$200 million or more; and by waiver - if granted, on a case-by-case

“SEHK will first conduct a three-day check of the application proof prospectus based on a prescribed checklist.” basis - in the case of a spin-off listing. What happens if the application proof is not substantially complete? Birkett said that there will be an eight-week moratorium on re-filing a listing application. “When applications are returned, the names of sponsors and listing applicants together with the return date will be published on the Exchange’s website, but this will only take effect on April 1, 2014,” he said. Is there an accelerated process for reviewing Exchange decision? Birkett also mentioned that there will be an accelerated process for reviewing any Exchange decision to return a listing application on the grounds that the Application Proof is not substantially complete. “A new Guidance Letter, GL61-13, sets out a sample timetable for each stage of the accelerated review process and the documentation required for the review.”

ECONOMICs

Ian Perkin

Why Hong Kongers must be careful of their tourism wishes

ow-level grumbling in Hong Kong about the flood of visitors from north of the border has long been the stuff of legend. But in recent months there has been some low level grumbling north of the border. This has mainly questioned how much of their hard-earned cash mainland citizens ought to spend in the uppity island city to the south. Some suggest that money might be better spent at home. Given the importance of the mainland market, Hong Kong’s grumbling citizens should be careful what they wish for. Inbound travel and tourism, one of the key pillars of the local economy and now worth some HK$300 billion (US$38 billion) annually, has undoubtedly undergone profound change in the past two decades. A decade and a half ago, just a year after the return of Hong Kong sovereignty to China, the number of visitor arrivals from the ROW (rest of world) outnumbered arrivals from mainland China by threeto-one. Nowadays the reverse is true. In the opening six months of this year the ratio was 3.6-to-one in favour of mainland arrivals over the ROW. Given the historic events that occurred in this period – the return of Hong Kong sovereignty, the economic rise and rise of China, the opening of its borders and the relaxation of travel restrictions on its citizens – the expansion of travel and tourism is hardly a surprise. To take the sovereignty issue first, the return to China made the former British colony more like a normal big city in a big country with a hinterland to support it. In travel and tourism terms, most big cities worldwide rely on the citizens of the countries in which they are located for the bulk of their visitors. International visitors are a (often lucrative) bonus. Hong Kong was one of the exceptions to this rule. Cut off from its mainland it relied on international visitors from across the globe for its travel and tourism dollars. In the opening six months of this year, visitor arrivals in Hong Kong totaled 25.4 million with just over 18.8 million of them coming from the mainland and 19.8 million or 78 per cent from “Greater China” (Mainland, Taiwan and Macau). Only 5.55 million visitors came from the ROW (see accompanying table). A decade ago (2002), when there had already been substantial change, the opening six months of the year saw just over 7.5 million visitors with 2.9 million from the mainland, 4.3 million from “Greater China” and 3.2 million

IAN PERKIN Independent Economic Consultant perkin888@hotmail.com

Visitor Arrivals: Hong Kong (millions)

from the ROW. Just a few years earlier in 1998 - one year after handover – total visitors were 9.6 million for the whole year with just 2.6 million from the mainland and 7.97 million from the ROW. The total number of visitors to Hong Kong surged from around 10 million a year in the mid-to-late 1990s to 48.6 million last year (2012) – almost a five-fold increase – and 25.4 million in the first half of this year. As a result total receipts from visitors soared to HK$296.6 last year from just HK$53.08 billion in 1998. This overall growth has, however, disguised the relatively modest growth of visitor arrivals in Hong Kong from other source countries, both short haul (around the region) and long haul (elsewhere). From around 8 million arrivals a year 15 years ago they have only increased to about 10 or 11 million currently This probably reflects the intense competitiveness of the global tourism market and the fact that more travelers from third countries now fly direct to cities in China rather than through Hong Kong. Mainland visitors are therefore going to be the main driver of Hong Kong tourism for the foreseeable future - a strong incentive to keep mainland visitors happy and interested in what Hong Kong offers. While return of sovereignty helped attract mainland visitors, the two biggest drivers were their increasing wealth (the result of China’s rapid growth) and the willingness of authorities to relax travel restrictions. These two factors have rapidly made China not just the biggest source of visitor arrivals for Hong Kong (and amongst the biggest spenders), but also now the world. Figures just issued by the World Travel Organisation (WTO), a UN body that tracks travel and tourism reveals that China is now the “new number one tourism source market in the world” as it puts it.

Can’t get enough of tourists

HONG KONG BUSINESS | NOVEMBER 2013 37

CMO Briefing are looking at our emails - via mobile gadgets or their desktops - and tailor our strategies accordingly. Based on our customers’ interaction with our emails – their open and click behaviour, we can decide which mobile app push notifications to send them.”

How Zalora makes e-marketing work

Find out how custom-tailored email marketing could work for Hong Kong brands.

ompanies are using every method possible for brand marketing and the massive penetration of smartphones in Asia has just given them one more channel to get their message across. One of the most common direct marketing strategies is done via email. Direct marketing via email proves to be a good individualized channel and a positive method of engaging a customer, at least according to e-commerce companies ZALORA and Wego. How not to be spammed Candice Ong, regional marketing director at ZALORA South-East Asia, notes that email marketing is an individualized channel allowing companies to speak directly to the consumer to deliver a message that is highly relevant, targeted and tailored for the reader by organizing data such as their surf, click, and purchase habits. “By collating information about a consumer’s experience with ZALORA, our communication with the customer is more personalized, relevant, and therefore more likely to interest them and encourage action,” she says. Joachim Holte, chief marketing officer at Wego, adds that it’s important to ensure that the marketing material is not deemed as spam so being conscious of frequency and content is vital. Tailoring to specific markets provides an opportunity to tailor content to suit local tastes and trends that are more relevant to the customer. “It also allows us a more personal interaction outside of some other marketing channels and overall should sit within the greater objectives of a company’s marketing strategy,” says Holte. ZALORA maximizes the opportunities offered by smartphones by ensuring that email messages are mobile-optimized. “We also monitor how customers 38 HONG KONG BUSINESS | NOVEMBER 2013

The point is to ensure that the communication is as personalised as possible, and by doing so ensure that our user experience is positive and informative.

Exploiting email marketing ZALORA uses automated EDMs to remind customers of their intention to shop. When a customer adds an item to her wishlist but doesn’t take action on it after some time, ZALORA’s system will send her a reminder to purchase the item before it’s sold out. When a customer abandons her cart or leaves items in her online shopping cart without coming back to purchase them, an automated email will also be sent to her as a reminder that she has items waiting for her in her cart. “As this email marketing tactic is a lot more relevant and targets customers who are further down the e-commerce conversion funnel, the conversion rates for these automated EDM’s are twice of the normal edms,” says Ong. On the other hand, Wego’s Holte reckons email marketing should not only be about branding, but it should also provide a tangible benefit to the recipient. Wego uses the weekly Travel Deals newsletter to share the best and latest travel deals and offers provided by their travel partners.“By tailoring our newsletter to local market travel preferences using Wego’s unique popularity by location technology, we are able to deliver travel options that suit that particular market. We additionally include hand-picked experiences from our Travel Editor to further personalise and inspire our customers,” adds Holte. “The point is to ensure that the communication is as personalised as possible, and by doing so ensure that our user experience is positive and informative. Our marketing messaging through our newsletter is an additional value for our users, while also importantly providing additional travel inspiration.” Investing on infrastructure Ong revealed that email marketing is not considered as part of marketing budgets unlike other channels such as offine/paid marketing as the cost per thousand dispatched email is low. Instead, they invest more in the infrastructure of the channel. “We invest in strengthening the sophistication of our email distribution platform. This platform would enable us to easily use data we have collected on the customer for targeted communications (for the right messages to reach the right customer), while enabling us to further collect and analyze information on our customers based on their interactions with our newsletters,” says Ong. Just like any other marketing strategy, email marketing may only work for a certain group of consumers and companies. But email marketing proves to be an effective medium especially for companies like Wego and ZALORA that do not get to physically interact with customers.

HONG KONG BUSINESS | NOVEMBER 2013 39

ANALYSIS: the rise of qianhai

Qianhai - a 15km2 financial center on the rise in Shenzhen

Why fears of Qianhai jeopardizing Hong Kong’s position are overblown The zone has already entered into an expansion period. By Nathan Chow Hung Lai

n mid-2012, the China’s State Council approved the development of the Qianhai ShenzhenHong Kong Modern Service Industry Cooperation Zone. Four industries were focussed upon: finance, logistics, information services and science & technology services. Particular emphasis was placed on finance, for which the government designated Qianhai to be built into an experimental zone for financial innovation and further opening-up to the outside world. Back then, market watchers found it difficult to associate the mudflat with such bold plans. We, however, have been optimistic about the project. Specifically, we stated in earlier report that the zone’s development would be kicked off by the launch of a cross-border RMB lending scheme. In Jan13, only nine months after the approval has been granted, fifteen Hong Kong banks were authorized to offer a combined RMB2 bn of loans 40 HONG KONG BUSINESS | NOVEMBER 2013

Shenzhen became an expansion outlet for Hong Kong manufacturers and the timing could not have been better.

for Qianhai companies. More impressively, the first Qianhai land auction was held in July and construction is planned to start by October. It signals that the zone has already entered into an expansion period. Analogy of Shenzhen SEZ in 1980s While many were previously skeptical about Qianhai’s future, they have now turned to the other extreme of worrying that its rise might jeopardize Hong Kong. Such fears are overblown. In our view, the Qianhai project is similar to the establishment of the Shenzhen Special Economic Zone (SEZ) in the 1980s, which has, in fact, bolstered Hong Kong’s competiveness. Three decades ago, Hong Kong’s manufacturing industry was hit by soaring costs. Factory rents and manufacturing labor wages ballooned 140% and 170% respectively during 1980-90. The city’s international competiveness was being challenged

by several lower-cost developing countries in the region. For instance, the manufacturing labor costs in Indonesia at the time was only onefourth that of Hong Kong. Shenzhen became an expansion outlet for Hong Kong manufacturers and the timing could not have been better. The availability of abundant inexpensive land and labor in Shenzhen made it possible for Hong Kong manufacturers to move labor-intensive processes across the river. Meanwhile, more skill-intensive business activities such as R&D, marketing, and management continued to be performed in Hong Kong. Such division of labor had resulted in Hong Kong’s continuous prosperity and a significant transformation of economic activities. The manufacturing sector’s share in GDP decreased from 23% in 1980 to 6% in 2000, while that of the service sector’s increased from 69% to 86%. Another trend is the increasing use

ANALYSIS: the rise of qianhai

g’s position? 6 Sep 2013

to strengthen Hong Kong’s role as an Qianhai, a 15 of Hong Kong’s financial services by and there is an abundance of high offshore RMB centre. The aforesq km district China. In addition to providing finan- quality, grade-A space available. But mentioned cross-border RMB loan located on the cial advices and consultation services, a significant movement from Hong scheme is a milestone in this regard. Hong Kong has become a center Kong to Singapore has yet to be seen; western side The scheme provides Hong Kong of Shenzhen of fundraising for Chinese firms. in part due to the enviable location banks a new attractive avenue for Mainland-backed companies began Hong Kong enjoys as a gateway to the with just an RMB fund investments; the growth hour’s drive raising capital in Hong Kong’s stock mainland. of which has far been lagging behind market through share placements in Qianhai, a 15 sq km district located from Hong that of other offshore RMB products. 1987. Also, the first Chinese enteron the western side of Shenzhen with Kong’s central 6 sSep For instance, the total outstanding prise listed its H shares in 1993. With just an hour’ drive 2013 from Hong Kong’s business district RMB loans in Hong Kong merely the development of local-serving central business district (CBD), could (CBD), could be amounted to RMB88 bn, compared considered as a and internationally oriented banking be considered as a solution. The with the dim sum bond market’s services, Hong Kong has emerged to recent land auction of 14 million sq ft solution. the China’s State Council approved the development of the QianRMB500 bn. a global financial center just as New GFA (gross floor area) of commercial en-Hong York, KongLondon, Modern Zone.toFour The limited size of RMB-settled andService Tokyo. Industry Cooperation space, comparative the existing ere focussed upon: finance, logistics, information services business for Hong Kong companies grade-A office marketand in Hong Kong’s chnologyPersistent services.cost Particular finance,step forin a scheme is a major factor that attributes to the problememphasis was placed CBD, is aon significant CNH: Will Qianhai jeopardize Hong Kong’s position? 6 Sep 2013 overnment Qianhai to be builtthat into an alleviate experimental weak RMB loan growth, according The designated cost problem has never subsided, could the severe shortancial innovation toage theofoutside world. to a survey constituted to the DBS however. Inand the further past threeopening-up years, Hong Kong’ s office space. RMB Index for VVinning Enterprises Hong Kong has ranked the world’ s In addition to land, Qianhai also market watchers found it difficult to associate the mudflat with such (DRIVE). lendingwith is just most expensive office market. The offers relatively cheap human reQianhai, a 15 sq km district located on the Cross-border western side of Shenzhen We, however, have been optimistic about the project. Specifically, an hour’s drive from Hong Kong’s business (CBD), could be conthuscentral essential in district improving the desituation will probably become more sources. In spite of the 30% growth in earlier report that the zone’s development would be kicked off by sidered as a solution. The recent land auction of 14 million sq ft GFA (gross floor mand and yield on the offshore acute in the years ahead given the low average wage over the past three years area) of commercial space, comparative to the existing grade-A office RMB market of a cross-border RMB lending scheme (see “CNH: RMB lending set stepand in a subsequently scheme that couldthe alleviate deposit; RMBthe rate of new office completions. The (compared with 20% in Hong Kong), in Hong Kong’s CBD, is a significant der in pilot plan”, 16 April 2012). In Jan13, only nine months after severe shortage of Hong Kong’s office space. circulation in Hong Kong. stratospheric rental cost erodes the labor cost in Shenzhen currently is l has been granted, fifteen Hong Kong banks were authorized to In addition to land, Qianhai also offers relatively cheap human resources. In competiveness of today’s Hong Kong’s still about half that of Hong Kong. spite of the 30% growth in average wage over the past three years (compared bined RMB2 bn of loans for Qianhai companies. More impressively, cost in Shenzhen currently Cheaper offshore RMBis still about half financial and other service industries, And thanks to the huge investment with 20% in Hong Kong), labor that of Hong Kong. And thanks to the huge investment made on education by nhai land auction was held in July and construction is planned to On the other hand, the significantly scheme in the which takes up over 90% of GDP made on education by the governthe government, the quality of Chinese labor has improved ober. It signals that the zone has already entered into an expansion past decade. In particular, theprovides number ofacollege Guangdong directgraduates channelinfor Qianhaiin altogether. ment, the quality of Chinese labor 2012 has quadrupled the level seen in 2002. Therefore, relocation to the zone firms to access cheaper offshore To trim operating costs, some has improved significantly in the past allows firms in lowering operating costs as well as tapping the mainland growing pool of qualified labors. RMB funding; thereby enhancing companies decade. of Shenzhen SEZare in seeking 1980s to reconfigure their operating margin. Small- and their office footprints in Hong Kong. In particular, the number of college Strengthens Hong Kong’s role were previously about Qianhai’s future, have nowin 2012 has Apart from easing the physicalmedium-size enterprises problems faced by Hong Kong,(SMEs), another imporThis often skeptical takes the form of movgraduatesthey in Guangdong tant task for Qianhai is to strengthen Hong Kong’s rolestruggled as an offshore he other ing extreme of worrying that itstorise might jeopardize those who have long to RMB mid-to-back office functions quadrupled the levelHong seen in 2002. centre. The aforementioned cross-border RMB loan scheme is a milestone in raise funds from the large state banks, fears aredecentralized overblown.areas In our view,tothe projectrelocation is similar this regard. in order free Qianhai up Therefore, to to the zone seebanks particular benefit.avenue The smaller hment ofmore the Shenzhen Special Economic (SEZ) 1980s, Another important task for The scheme provides Hong Kong a new attractive for RMB fund expensive space for front office Zone allows firmsininthe lowering operating is to strengthen investments; the growth of which has faraccessible been lagging behind that of other amounts from Hong Kong n fact, bolstered Hong Kong’s services. However, suitablecompetiveness. premises costs as well asQianhai tapping the mainland Hong Kong’s role as an offshore RMB products. For instance, the total outstanding RMB loans in Hong banks with more established SME offshore RMB centre Kong merely amounted to RMB88 bn, compared with the dim sum bond marare difficult to source locally. Relocagrowing pool of qualified labors. es ago, Hong Kong’s manufacturing industry was hit by soaring ket’s RMB500 bn (Chart 4). The limited size of RMB-settled business for Hong lending policies will be of greater tion thus becomes another option. Kong companies is a major factor that attributes to the weak RMB loan growth, y rents and manufacturing labor wages ballooned 140% and 170% value according to a survey constituted to to thethem. DBS RMB Index for VVinning EnterSingapore is often touted as an Strengthens Hong Kong’s role during 1980-90. The city’s international competiveness was being prises (DRIVE). Cross-border lending is thus essential in improving the demand Besides loans, the scope of RMB alternative to Hong Kong’s high rental Apart from easing the physical and yield on the offshore RMB deposit; and subsequently the RMB circulation by several lower-cost developing countries in the region. For inbusiness between two jurisdictions in Hong Kong. prices and lack of supply. Rents are problems faced by Hong Kong, manufacturis provides set to bea direct further expanded. Infirms to channel for Qianhai only close to half of Hong Kong’s another important task for Qianhai is On the other hand, the scheme

ai jeopardize Hong

sts in IndoneChart 1: Transformation of HK economic activities me was only Transformation of HK economic activities during 1980-2000 during 1980-2000 that of Hong 90%

30%

ecame an exlet for Hong manufacturers ng could not better. The of abundant land and lazhen made it Hong Kong ers to move ive processes river. Meane skill-inten-

Manufacturing 25%

Service (rhs)

Hong Kong RMB Chart 4: Hong Kong RMB financing RMB bn

600

20% 80% 15%

500

Outstanding dim sum bonds Outstanding RMB loans

400

75% 10%

300 200

70%

100 0 2009

2010

2011

2012

2013 YTD

65%

0% 1980

1984

Source: DBS Group Research

ow@dbs.com

85%

access cheaper offshore RMB funding; thereby enhancing their operating margin. Small- and medium-size enterprises (SMEs), those who have long struggled to raise funds from the large state banks, see particular benefit. The smaller amounts accessible from Hong Kong banks with more established SME lending policies will be of greater value to them.

1988

1992

1996

2000 Source: DBS Group Research 3

HONG KONG BUSINESS | NOVEMBER 2013 41

ANALYSIS: the rise of qianhai

particular, the Qianhai Equity Trading Center will provide lending facilities to enterprises registered in the zone by launching RMB-denominated wealth management products in the Hong Kong capital market.The authorities are also planning to allow Qianhai companies to directly issue dim sum bonds in Hong Kong. Furthermore, individual investors in the zone might be allowed to participate in the RMB-denominated sition? version 6 Sepof2013 Qualified Domestic Institutional Investor program (RQDII2). Chinese regulators have also reportedly given the green light for offshore companies to set up private equity e scope funds of RMB business between in Qianhai. The capital market two jurisdictions is set to and financial institutions in Hong ded. In particular, the Qianhai Equity Trading Center will proKong should continue to benefit ities to enterprises registered in from the zone by launching RMBsuch liberalization initiatives.

alth management products in the Hong Kong capital market ai to offer CNH trust products”, 16 May 2013). The authorities Dissimilarity to allow Qianhai to directly issue dim sum bonds Despite the factcompanies that the Qianhai rthermore, individual in the zone might be allowed program is a mimicinvestors of the Shenzhen SEZ model, the two areversion different inof Qualified Domestic Instithe RMB-denominated one(RQDII2). aspect. In 1980-90s, Hong Kong program Chinese regulators have also reportedly manufacturers were able to lower structures Qianhai light for offshore companies to set upProposed private equityin funds their operating costs successfully by apital market and financial institutions in Hong Kong should moving northward. FDI (USD5.35 bn) than the targeted fit from such liberalization initiatives. And their selling prices were kept amount set for 2000 (USD1.5 bn).

high since the vast majority of prodToday, however, exportation was ucts were exported to high-income no longer focused in the west. Much countries (i.e., the US and Western effort was put to selling within China. that theEurope). Qianhai program is a mimicInof the Shenzhen SEZ That was best demonstrated 2012, 54% of Hong Kong’s exports re different onerise aspect. by thein steady of the city’s export were destined for the mainland, a treunit value during the period. The increaseoperating from 6% in 1980; g Konghuge manufacturers were able to mendous lower their amount of inward investment in whilst exports to advanced econoby moving northward. sellingmies prices high71%. Shenzhen can also beAnd seen their as a result havewere fallen tokept 32% from jority ofof the soaring profit margins. By 1994, Arguably, China is now one of the xportedShenzhen had already utilized more most hypercompetitive markets in Chart 5: HK export unit value index (US)

ountries 107 Western HK export unit value index (US) was best 105 by the he city’s 103 e during 5). The 101 inward henzhen 99 as a reg profit 97 4, Shen95 dy utiUSD5.35 93 argeted 1992 1993 1994 1995 r 2000

1996

1997

1998

Source: DBS Group Research

exportation was no longer focused in the west. Much effort HONG KONG BUSINESS | NOVEMBER 2013 g within42 China. In 2012, 54% of Hong Kong’s exports were mainland, a tremendous increase from 6% in 1980; whilst ex-

the world. Market penetration has been a major challenge for non-Chinese enterprises. Conclusion The experience in 80s has proven that the high level of complementarity in factor endowment led to dynamic economies of scale that are mutually beneficial. Hence, the rise of Qianhai today should not be considered a zero-sum game. Given its geographical proximity, Qianhai provides a unique platform for Hong Kong’s enterprises to overcome regional and systemic barriers; thereby increasing their presence in Shenzhen. Meanwhile, as an experimental area of modern service industry, Qianhai will provide valuable references for the nation, in which the service sector is playing an increasingly important role. On financial development, Hong Kong will benefit from the rise of In 2012, 54% RMB business with the establishment of Hong Kong’s of Qianhai as a test bed for RMB inexports were ternationalization. The Qianhai’s sucdestined for cess, on the other hand, will produce the mainland, a demonstration effect in exploring a tremendous increase from 6% the path for capital account liberalization in China. in 1980.

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LOCAL INDUSTRY: HONG KONG cruise lished world cruise liners like Crystal Cruises. Both of our award-winning ships will be servicing Hong Kong in our 2014 to 2015 itineraries, as we continue to expand our operations throughout Asia,” said Stoll. With high demand for travel to Hong Kong and hotels reporting increasing occupancy and rising average room rates, cruises offer a luxury alternative for travelers looking to experience the vibrant city. Cruises also make travelling to Hong Kong a viable option for new audiences, such as those who dislike long-haul travel, or those who wish to visit multiple locations in one trip or travel in a large group, as it removes the burden of multiple hotel bookings and hauling luggage from destination to destination.

Kai Tak Cruise Terminal - a new gateway to the city

All aboard: Hong Kong veers toward the Asia cruise market

The re-opening of Kai Tak Airport following a nearly $1 bn renovation could push competition ahead of Shanghai, Tianjin and Singapore.

fter closing 15 years ago, Kai Tak is re-launching as a stateof-the-art cruise facility that will certainly enhance Hong Kong as a destination, says John Stoll, Vice President, Land & Port Operations for Crystal Cruises. “It is an incredible project that is sure to assist with the continued development and popularity of Hong Kong. In terms of inbound tourism, this expansion of cruise facilities was timely given the mainland market’s huge potential and the rapid development of cruising in Asia.” China is now the third largest source of travel spending globally, and Hong Kong continues to feature in their list of top destinations so now is certainly the time to propel Hong Kong’s cruising market share, Stoll said. In conjunction with the implementation of a new policy unveiled by the central government last year to relax rules on mainland cruise travelers if they board a cruise ship in Hong Kong and travel in a group, 44 HONG KONG BUSINESS | NOVEMBER 2013

Hong Kong is now a real contender to become the most preferred homeport for cruise lines, he added. Ocean Terminal has long served Hong Kong and the community and has a strong tradition. But because of its location, Stoll notes that it continues to be a challenge to confirm berthing during peak times. As with many other cruise liners, Crystal Cruises has raised concerns over continued high port costs encountered when docking in Hong Kong and it is hoped by all in the industry that with With the opening more capacity, Hong Kong will look of Kai Tak Cruise into cost reductions to increase cruise Terminal, Asia ships calling more often. According now has more to Stoll, Kai Tak Cruise Terminal cruise terminals shows Hong Kong’s commitment to which can the flourishing cruise tourism in Asia accommodate Pacific. The general ease of travel in these larger and out of and around Hong Kong, its ships such as our unique tour opportunities and the rich Mariner of the history are tremendous strengths for Seas. cruise calls, he added. “We believe that there are countless opportunities created for well-estab-

Growing Asia cruise market Adding a new terminal that can handle larger cruise ships will benefit cruise customers as well as many sectors of the cruise industry in Hong Kong, says Zhaoping Liu, professor at School of Hotel and Tourism Management, The Hong Kong Polytechnic University (PolyU). The opening of Kai Tak and a few other cruise terminals in Asia (e.g. those in Shanghai and Singapore) together with a growing cruise customer base will raise Asia’s cruise market share. He also noted that more cruise lines are repositioning more and/or larger cruise ships to this region. The new Kai Tak Cruise Terminal can accommodate the world’s largest cruise ships, which is a game changer for the competitive Asian cruise industry, says Kelvin Tan, Regional Director, Asia Pacific, Royal Caribbean Cruises. With Kai Tak’s opening, Tan said Royal Caribbean Cruises will be able to deploy its larger ships there such as the 138,000GRT Mariner of the Seas. “With the opening of Kai Tak Cruise Terminal, Asia now has more cruise terminals which can accommodate these larger ships such as our Mariner of the Seas, and their size and wider variety of features will in turn create more consumer awareness and interest for cruising. We believe that this will also further push the ongoing momentum for cruise infrastructure development across Asia.” Crytal Cruises’ Stoll agreed, adding

LOCAL INDUSTRY: HONG KONG cruise that with increased ship visits, awareness and visibility of cruise ships entering the Hong Kong harbor, in addition to the enthusiasm for the new terminal, industry players will all benefit from the increased buzz around cruising. The more peopler get excited from seeing and discussing the concept of cruising, the more they will be curious to try their firstever cruise or book another voyage, he said. Crystal Cruises is optimistic about Asia Pacific’s cruise market development as demand from travelers seeking cruise travel is on the rise. Industry forecasts suggest that cruise liners will see a total of seven million passengers a year by 2020 in Asia, up from just over one million at this time, and Crystal Cruises is certainly seeing evidence of this in its evolving demographic distribution. “Of the 25% of our guests that originate from outside of the United States, 41% of these guests are from Asia, a figure that has doubled since the previous year. Since 2012, we have seen an increase of 71% in the number of our guests from Singapore; 70% from Thailand; 48% from Hong Kong; and 41% from Taiwan,” said Stoll. In terms of the overall cruise market, Crystal forecasts there will be continued double-digit growth from Mainland China in the coming 5 years as the definitions of “luxury” become clearer and demand increases for exceptional six-star holiday experiences.In light of the rapid development of cruising in Asia, Stoll shares that Crystal Cruises is vastly expanding its presence in the posh ports of China, Japan, Thailand, Singapore, Vietnam, Cambodia, Indonesia, Malaysia and Brunei next year. “With a choice of 34 voyages – an increase from four in 2012 – the five- to 29-day luxury Asia cruises will offer a host of itinerary firsts and varied options. Also for the first time, both the award-winning Crystal Symphony and Crystal Serenity will be sailing the region in winter, spring and fall 2014 and we will be introducing a series of brand new itineraries and destinations across Asia, including the Shorter Crystal Getaways which now offer new Asia cruises for as little as five days.” Stoll said that their cruise liners

will also be returning to Asian destinations that have not been visited in recent years, including Bandar Seri Begawan, Brunei; Jakarta and Komodo Island, Indonesia; Yangon, Myanmar; Koh Samui, Thailand; Kuala Lumpur, Malaysia; and Okinawa and Tokyo, Japan. Also, two Crystal Cruises liners will explore more of Japan, as well as China, with Crystal Symphony’s BeijingTokyo voyage with Osaka, Nagasaki, and Shimizu, Japan; Shanghai and Dalian, China; and a complimentary Beijing land package. Royal Caribbean sees great potential in Asia especially with the region’s growing affluence and rising middle class in markets such as China and India. Over the next few years, Tan said that the region’s cruise market will likely be stimulated by the entry of more cruise lines and cruise products, and more infrastructure development. This growth, he said, also depends on the effort to promote cruising to consumers and trade, developing better travel agent distribution network and travel agent training.

region, however, Stoll said that it’s important to have strong air lift and worldwide attractions. Industry forecasts “They all support each other as, suggest that particularly for Crystal, most of our cruise liners will itineraries are not roundtrip so our see a total of ships call at all of these destinations. seven million Hong Kong, Shanghai and Singapore passengers a have an advantage in that the ports year by 2020 in are relatively close to major attracAsia, up from just tions of the cities, which also make over one million them attractive for longer stays in at this time. port.”

Competition intensifies PolYu’s Liu says that the Asian cruise market can sustain multiple cruise hubs. He notes that while Hong Kong owns almost all features of an ideal cruise port, Shanghai and Singapore have many of those features, too. Crystal Cruises’ Stoll, which has cruises beginning and/ or ending in Hong Kong, Shanghai, Tianjin , and Singapore, recognizes the particular strength of each port. To be a leading cruise port in the

Ships docking According to Kai Tak Cruise Terminal’s website, ships are scheduled to dock at the new terminal between June 2013 and May 2014 but PolyU’s Liu believes that it will have an even larger number if the docked ships are counted between October 2013 and September 2014 instead. Crystal has called in Hong Kong for two voyages in 2013 and will increase this number to five in 2014, revealed Stoll, while noting that the company will also call at Hong Kong for five voyages on its partly released 2015 itineraries. Stoll noted that it’s not the number of ships that is significant, it is also the size of the ships. The new port, he said, has enabled larger ships to call in Hong Kong and that will grow the mass market sector. Royal Caribbean’s Tan, meanwhile, shared that they are looking at Hong Kong as its homeport in 2013 and beyond. “We are working closely with Kai Tak Cruise Terminal and Hong Kong Tourism Commission on increasing the number of ship calls here for our brands Royal Caribbean International and Celebrity Cruises.”

An entertainment destination for tourists HONG KONG BUSINESS | NOVEMBER 2013 45

THEMATIC REPORT: ASIAN AGEING

Asia’s graying not happening evenly

Grow old or die trying

Asia’s heavyweights are in danger of growing old before they grow rich.

ountries like Malaysia, India, Indonesia and the Philippines – all of which are just about to hit their working-age population peaks – stand to receive a strong growth push, according to analysts. Data suggest that gross domestic product (GDP) growth is tightly correlated to working-age population changes. This means relatively faster graying economies like Japan, South Korea and China will suffer from growth hiccups, while emerging economies will expand quickly. Developed Asia could also decline in relative affluence as emerging economies begin to go through their golden growth periods. But analysts warned that emerging economies have longstanding bottlenecks to investments, education and regulation that could stymie this demographics-led momentum. Asia rapidly graying Asia as a region is rapidly graying, with the elderly Asian population forecasted to double or even triple by 2050, or about a billion Asians aged 65

46 HONG KONG BUSINESS | NOVEMBER 2013

“Asia as a region is rapidly graying, with the elderly Asian population forecasted to double or even triple by 2050.”

years old and up, according to United Nations Population Division data. CLSA Head of Asian Research Amar Gill attributes this demographics trend to declining fertility rates in Asia. “As income levels rise, women’s education improves and contraceptives become more common, fertility rates decline. A very significant change in the last 20 years is that fertility rates in developing East Asia have fallen below the replacement level. From 2.5 in 1993, women in Asia ex-Japan region are now having on average just 1.9 children each.” North and South divide But Asia’s graying is not happening evenly; there is a stark North and South demographic divide when it comes to ageing progression. “Japan was largely the only country that was ageing and shrinking in terms of its labor force and population in the previous decade. But in the coming decade, several Asian countries – including China, Korea, Hong Kong and Thailand – will see their labor force shrink,” said Hak Bin Chua, analyst at Bank

of America Merrill Lynch (BofAML). World Bank data show that South Korea’s working-age population has been on a steady decline. It hit a peak of 39.72% in 2004 but that statistic has slid to 37.88% as of 2011. China is expected to hit its workingage population peak by 2015, based on United Nations revised data. Thailand, which is geographically located in Southeast Asia, is an outlier in that it joins the ranks of its Northeast Asian counterparts which will likely see its working-age population shrink over the next decade, predicted Chua. In contrast, most South and Southeast Asian countries will only start to hit their peaks in several decades, based on United Nations revised data: Malaysia (peaking in 2047), India (2050), Indonesia (2058) and the Philippines (2085). Singapore has managed to delay its working-age population decline due to its still-open immigration policy that assimilates young foreign workers. GDP growth implications BofAML’s Chua argues that changes in

THEMATIC REPORT: ASIAN AGEING working-age population over the past decade were highly correlated with real GDP growth. “Relationship becomes even tighter if China (an outlier) is excluded from the regression. China’s GDP growth has been driven by a surge in labor productivity, in part because of its huge labor surplus shifting to more productive areas (consistent with high rural-tourban migration). Singapore, Malaysia and the Philippines should have seen higher average GDP growth because of favorable demographics over the past decade,” said Chua. But investors should be wary about basing their stock picks on demographics alone due to its less correlated relationship with stock market performance. “Singapore and Malaysia should have seen asset prices perform better given their demographics (from 2002-12), while Indonesia, India and Thailand stock markets did far better than what their demographics would have implied,” said Chua. China’s shrinking labor force China’s working age population and labor force are shrinking, which according to CLSA’s Gill, is a “lagged but inevitable result” of the one-child policy introduced in the seventies. He notes that in the last 20 years China’s labor pool increased by 223 million or 28% to just over 1 billion. But in the next 20 years, it will decline in absolute terms by about 45m, or 4%. China’s graying demographics will allow India to pass over the former as the country with the biggest share of workforce in Asia ex-Japan by 2033. “Over the next 20 years India’s labor

pool is set to rise to 43% of the region, and overtake China which will slip to 40%.” China’s shrinking labor force will also cause significant shockwaves across the region in the areas of relative production, consumption and investment patterns. This includes the increasing price of Chinese labor, which other Asian nations can capitalize on. “This is the opportune time for the Philippines, Indonesia and India if the governments can capitalize on their abundant labor resource and lower labor costs to attract greater foreign direct investment,” said Chua. But to take full advantage of their demographics, these same countries need to address the prevailing barriers to foreign investments, from stifling legal requirements to regulatory roadblocks. Chua said there is a danger that the Philippines, Indonesia and India will not be able to use their young, robust demographics to attract foreign investments. In fact, currently, “the outcome has been more an outflow of workers and talent to a growing diaspora outside their borders, rather than investments flowing in,” said Chua. Shifting affluence Emerging economies are also seeing fast-declining dependency ratios, meaning a smaller proportion of their population are not in the labor force, putting less pressure on the productive population. This may ultimately lead to a rise in affluence among emerging economies, if historical data is to be believed.

“Spending on food and household will fall while allocations discretionaries such as personal products, healthcare, transport equipment and education will rise.”

“Demographics, expressed in terms of the dependency ratio (DR), have been the key driver of affluence in Asia, through factor accumulation,” said according to Manishi Raychaudhuri, analyst at BNP Paribas Securities Asia. “The developed North Asian economies gained from such factor accumulation until the 1980s, but dependency ratios are likely to increase in these economies secularly.” Raychaudhuri points out that when Japan’s DR bottomed out in the 1990s as its population started ageing, its percapita income also flatlined. China’s explosive growth in the past two decades can also be taken as another example of this correlation at work. China’s dependency ratio has been plummeting from mid-70% in 1980 to mid-30% in 2010, which has translated to a massive spike in percapita income from around $150 in 1980 to around $4,500 in 2010. But declining DR is not the sole determinant of increasing affluence, as shown in the case of India which has struggled to raise its per-capita income even as its DR has also plummeted like China’s. “India is a laggard because of several bottlenecks to investments, archaic education system, etc,” said Raychaudhuri. Changing consumption, savings As emerging Asia becomes more affluent, Raychaudhuri foresees a drastic shift in consumption patterns. Spending on food and household will fall while allocations discretionaries such as personal products, healthcare, transport equipment and education will rise.

Per capita income - developed Asia

Fertility rates (2010-2015) in Asian countries

Source: UNPD, US Census, World bank

Source: UNPD

HONG KONG BUSINESS | NOVEMBER 2013 47

THEMATIC REPORT: ASIAN AGEING “The Asian medical tourism industry has been growing at a doubledigit growth rate for the past few years, based on the Asian Medical Tourism Analysis (2008-2012) report.”

Asia’s demographic divide

Source: Bank of America Merril Lynch Global research estimates, UN Population statistics

Graying Asians

According to McKinsey estimates, the average Indian allocated 56% of his total spending to food and beverages, but this has dropped to 42% in 2005 and is estimated to slide to 34% by 2015 and 25% by 2025. Meanwhile, healthcare and transport and education spending will have doubled by 2015. Transport and communications expenses are also set to take up a quarter of the average Indian consumption spending by 2025, from only just 12% in 1995. This same evolving consumption pattern has progressed further in the fast graying markets of Thailand and 48 HONG KONG BUSINESS | NOVEMBER 2013

China, but with distinct nuances. For example, recreation is emerging as a high spending priority for the Chinese, with allocations for recreation equipment and recreation and cultural services rising to a combined 13% by 2020, from just 5% in 2000. The average Chinese will also spend an estimated 20% of his budget on food by 2020 from 43% in 2000, down by more than half in just two decades. Meanwhile, Thailand’s current consumption pattern shows a relatively high priority for transport and communications and leisure, taking up 38% of their total spending, or

even larger than their combined 37% allocation for food & non-alcoholic drinks (32%) and alcoholic drinks & tobacco (5%). But despite the growth of discretionary spending across Emerging Asia, Raychaudhuri notes that consumer goods penetration levels in the region are still very low compared to other emerging markets worldwide, such as Brazil and Mexico. Meanwhile on the savings front, CLSA’s Gill foresees a bulge led by a burgeoning middle class: “When an adult enters the working force, he or she initially saves for big-ticket items like a car or a house. Then come children and expenses related to bringing them up. Only when adults are into their 40s and beyond are they able to start saving more meaningfully for their retirement.” “Especially in developing countries where there are hardly pension schemes to speak of, the need to save for retirement is apparent to those who are in their middle age aiming not to be a burden on their children.” Increasing healthcare costs Asia is following the European trend of rising healthcare costs as its population starts to age. The increasingly older Asian population can and will start to spend more on treatments and medicines. World Bank data show that as a proportion of GDP, healthcare costs have risen virtually across the board in Asia – although specifically in the ASEAN region, the increase in per capital healthcare cost seems to be more driven by rising affluence than ageing. Medical and health industries, particularly hospital chains and pharmaceutical companies, stand to gain the most from this spike in healthcare expenses, according to Raychaudhuri. Hospital chains could benefit from increased healthcare tourism, a term coined for patients traveling from Western developed countries to Asian countries in order to avail of less expensive surgery and other treatments. These healthcare tourists are attracted by the lower total cost of performing the surgery or treatment in Asian countries compared to their home countries. Meanwhile, pharmaceutical companies, particularly those in lifestyle drugs, “could benefit doubly because of increasing affluence of the population,” said Raychaudhuri.

MOTORING REPORT

MercedeS Benz S-Class

After the launch of Mercedes Benz S-Class earlier this year at Hamburg airport, a new hybrid will now be added to its line-up. By Jeff Heselwood

adly, earlier this year, Daimler AG made the decision to end production of the beautiful luxury sedan, the Maybach. It was never the outstanding success it should have been and Mercedes-Benz now offers the top-of-the-rang S-Class with many of the attributes found on the Maybach. The new Mercedes-Benz S-Class was launched earlier this year at Hamburg airport. Long awaited, the new model incorporates many advanced features in terms of both comfort and safety. In addition, Mercedes-Benz added a hybrid to its line-up. The S400 Hybrid is powered by both a 3.5 liter V6 gasoline engine and an electric motor. The gasoline motor delivers 370 Nm of torque between 3,500 and 5,250 rpm, while the electric motor puts out 250 Nm. Priced at HK1,656,000, this is undoubtedly one of the most luxurious hybrids on the market. The S500 features a V8 engine of 4663 cc, delivering a healthy 455 bhp at 5,250 rpm with a huge amount of torque, 700 Nm, produced between 1,800 and 3,500 rpm. Ten years ago Mercedes-Benz pioneered a groundbreaking safety concept called PRE-SAFE, an anticipatory occupant protection system. This has been undergoing continuous refinement ever since. The new PRE-SAFE functions can help prevent collisions

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with pedestrians and vehicles in front in city traffic, defuse dangerous situations caused by following traffic and enhance the protection offered by the seat belts. With the standard PRE-SAFE impulse, the driver and front-seat passenger are pulled away from the direction of impact by their seat belts at an early phase of the crash before the resulting occupant deceleration sets in. This can substantially reduce the risk and severity of injuries in a frontal collision. In addition, the new S-Class has greatly enhanced safety features for rear seat passengers. There are seat belt buckle extenders, belt bags and a cushionbag. With the illuminated seat belt buckle extender, an electric motor extends and retracts the belt buckle automatically. In this way, any

â&#x20AC;&#x153;The S500 features a V8 engine of 4663 cc, delivering a healthy 455 bhp at 5,250 rpm with a huge amount of torque, 700 Nm, produced between 1,800 and 3,500 rpm.â&#x20AC;?

MOTORING REPORT belt slack in the area of the pelvis and thorax can be reduced so that passengers are secured more firmly in both sideways and lengthways directions. The beltbag is an inflatable seat-belt strap that is able to reduce the risk of injury to passengers in the rear in the event of a head-on collision by lessening the strain on the ribcage. When the seat is reclined, it prevents the passenger from sliding beneath the seat belt, or ‘submarining’. Other safety features include adaptive highbeam which allows the headlamps to be kept on permanently without dazzling oncoming traffic, by masking out other vehicles in the beams’ cone of light. There is also Attention Assist which can warn of drowsiness and inattentiveness in an extended speed range and can notify the driver of their current state of fatigue and the driving time since their last break. LED Technology One hundred years after the introduction of electric lighting on motor vehicles, Mercedes-Benz is now making a complete switch to LED technology. The new S-Class is the first vehicle in the world in which the interior and exterior do without a single light bulb. Once again, Mercedes-Benz pioneering a new concept. In addition, the lighting’s multi-level functionality is another world first: the intensity of the brake lights is reduced at night or while waiting at traffic lights. Almost 500 LEDs illuminate the road, the vehicle, the interior and the trunk. The new S500 sells for HK$1,899,000.

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