Hong Kong Business (December 2017 - January 2018)

Display to 31 January 2018 HK$40

INVESTMENT

IDEAS

2018

for

In the year of the dog, don’t get caught barking on the wrong money tree

DEVELOPERS PIN HOPES ON FARMLANDS CO-LIVING IN HONG KONG WILL ROBOTS REPLACE BANKERS? ACCOUNTING FIRMS BEEF UP PAYROLL PRIVATE EQUITY GETS MEANER AND LEANER

45

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

EY V T R SU RGES G LA NTIN 24CCOURMS A FI

HONG KONG

FROM THE EDITOR

BUSINESS Established 1982 Editorial Enquiries: Charlton Media Group Hong Kong Ltd 19/F, Yat Chau Building, 262 Des Voeux Road Central Hong Kong. +852 3972 7166

Publisher & EDITOR-IN-CHIEF Tim Charlton associate publisher Louis Shek production EDITOR Genelie Sta.Ana-De Leon graphic artist Elizabeth Indoy ADVERTISING CONTACTS Louis Shek +852 6099 9768 louis@hongkongbusiness.hk Rochelle Romero rochelle@charltonmediamail.com Angelica Biso angelica@charltonmediamail.com ADMINISTRATION ACCOUNTS DEPARTMENT accounts@charltonmediamail.com Advertising advertising@charltonmediamail.com Editorial editorial@hongkongbusiness.hk

Welcome to Hong Kong Business. As part of our annual tradition, we bring you fresh investment ideas to welcome the new year. It’s the Year of the Dog, and nobody should be left barking on the wrong money tree. We talked to experts, bankers, and investment firms as we rounded up ten promising investments ideas that could help boost your finances in 2018.

Local developers are getting pushed out of Hong Kong as Mainland Chinese developers snag every piece of Hong Kong land that they can get their hands on. In effect, Hong Kong develpers are now turning to more aggressive farmland conversion, and acquisitions of sites in the UK. Meanwhile, there’s a new kid in the sharing economy block in the guise of co-living spaces. We delved into the world of coliving, as it provides a solution to Hong Kong’s sky-rocketing home prices.

Our regular Financial Insight column delved into the private equity landscape in Hong Kong. Analysts reckoned that funds now seem more willing to get their skin in the game, and this has resulted in heated rivalries, record-high valuations, and a keener interest in tech-powered efficiency. Competition for deals, which has exceeded $6b in Hong Kong and grown 50% over the previous five-year average, is getting tighter. With PE firms also now having more money to spend, this has led to larger valuations. Sovereign wealth funds and Chinese technology giants are also attempting to grab a piece of the deal pie, which further complicates an already highly contested deal environment.

Enjoy the issue!

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HONG KONG BUSINESS | JANUARY 2018

1

CONTENTS

26

COVER STORY 10 investment ideas for 2018

FIRST 06 PRC developers push locals out of Hong Kong

07 Large Fintech deals dominate 08 Developers pin hope

16

FINANCIAL INSIGHT Private equity gets meaner and leaner

26

Accounting survey Top Hong Kong accounting firms beef up payrolls in 2017

OPINION

REGULAR 20 Economy Watch 40 Legal Briefing 42 Marketing Briefing

44 Seeing stars in Hong Kong restaurants

46 Why the Link REIT is a problem that wont go away

on farmland

10 Cosmetics put a glow on pallid retail

12 Co-living: New kid on the sharing block

EVENT COVERAGE

ANALYSIS 30 Fintech goes mainstream by 2018: KPMG

48 How companies can defeat modern-day hackers

34 Why 2018 will be a good year for equities

38 Technology alters real estate

Published Bi-monthly on the Second week of the Month by Charlton Media Group Pte Ltd, 19/F, Yat Chau Building, 2 HONG KONG BUSINESS | JANUARY 2018 262 Des Voeux Road Central, Hong Kong

For the latest business news from Hong Kong visit the website

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

MARKETS & INVESTING

Property

Hong Kong is the most attractive country for IPOs

Two in 5 Hong Kongers consider running e-commerce side businesses

Property prices are expected to increase in 2018

Hong Kong ranked first around the world in terms of attractiveness for mergers and acquisitions (M&A) and initial public offerings (IPO), legal firm Baker McKenzie said.

Hong Kong scored 9.1 followed by Singapore with a score of 8.8.

Two in five or 44% of Hong Kongers consider running a side business through e-commerce platforms, a survey revealed. 60% prefer to start their side hustle online instead of by opening a physical brick and mortar store to save on costs.

Hong Kong’s property prices are expected to increase moderately in 2018 due to rising borrowing costs and interest rates, according to a news release from Colliers International. The office segment is projected to be the most popular.

Markets & Investing

Hong Kong is China’s third property investment destination Hong Kong slips to third place in destination ranking for outbound mainland Chinese real estate investment, attracting $4.37b (US$560m) in investment, according to a report on outbound Chinese investment by Cushman & Wakefield. Development sites remain the most favoured sector.

4

RETAIL

HONG KONG BUSINESS | JANUARY 2018

Property

Real estate market in Hong Kong grew the fastest in Asia Pacific Hong Kong’s property market grew the fastest in terms of investment in income-producing assets and development sites in the Asia Pacific, intelligence firm Real Capital Analytics (RCA) revealed. The sales of standing assets rose 38% to $114.7b, whilst development site transactions tripled to $134.2b.

Hr & Education

Six in 10 employees unlikely to seek advice for career goals Six in ten or 58% of Hong Kong employees are least likely to seek career advice for their goals, Randstad revealed. According to its Workmonitor, amongst Singapore and Malaysia, Hong Kong employees are the least likely to see professional advice but it still above the global average.

FIRST about 10% in China whilst some Hong Kong property developers enjoy core profit margins of 25%-40% or even higher. Dennis Ma, head of research at JLL, noted that PRC developers have moved into the city due to the more challenging business environment on the mainland.

“Developers have a better understanding of what the market wants, as well at its open and transparent government land sale programme,” he said. Ma reckoned PRC developers have been favouring development sites in urban areas with high growth potential, including Kai Tak, Homantin, and Island South.

Notably, these districts have new transport infrastructure planned or recently built.

Cash rebate is king for hong kongers

When DBS Bank Hong Kong credit card holders avail their cash rebates, they spend maybe a few minutes setting up their account and then proceed to lay back as the rebate reward goes on autopilot. The bank will automatically deduct the user’s next monthly statement by the equivalent $1 cash rebate for every DBS dollar earned through the reward scheme. Local banks offering such convenient and straightforward cash rebates have made it the most popular credit card reward in Hong Kong.

Nearly three out of four Hong Kongers prefer cash rebates as a credit card reward programme, according to a recent Visa survey, preferring the option because it is convenient and provides relatively better value compared to alternatives such as air miles and lower interest rates.“Hong Kong consumers have always been attracted to payment products that have a straightforward and clearly understood value proposition, and it’s clear that cash back programmes deliver this,” said Caroline Ada, country manager for Visa Hong Kong and Macau.

More cash rebate programmes Whilst 73% preferred cash rebates, making it the most favourite credit card reward, air miles came in at a distant second with 20% preferring the option. The survey also found that millennials aged 18 to 24 love cash rebates, with 68% citing rebates as the best credit card reward for their purchases.

The findings seem to reinforce Visa’s strategic focus to build cash rebate programmes with banks like Citi Hong Kong. The pair’s new Citi Cash Bank Visa Card provides credit card owners with no auto rebate cap.

Local spending grants 2% rebate for dining and hotel spending, whilst spending in foreign currency grants a 2% rebate. Its welcome offer even raises the cash rebate rate to 10% up to Hong Kong$1,500 in the first two months after card issuance.

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HONG KONG BUSINESS | JANUARY 2018

PRC developers have been favouring development sites in urban areas with high growth potential like Homantin

Chinese developers push locals out of HK

M

ainland Chinese developers are snagging every piece of Hong Kong land that they can get their hands on.

The share of residential sites awarded to developers from the People’s Republic of China (PRC), in terms of consideration, soared from 1% in 2011 to virtually 100% in the first half of the year, JLL research revealed.

In terms of maximum developable gross floor area for the residential sites awarded via government public land sale, the contribution from PRC developers in 2016 has also doubled to 4 million sq ft. In a separate report

by Colliers International, senior analyst Zac Tang noted that Chinese developers have fetched 96% of residential lands sold by Hong Kong Lands Department.

Patrick Chau, senior director, residential development and investment at Savills, said that PRC developers are winning more bids because they are more willing to cut down their profit margins compared to Hong Kong developers. Colliers International data revealed that PRC developers saw its profit margin at

Chinese developers have fetched 96% of residential lands sold by Hong Kong Lands Department.

Locals foray into overseas land In response, Hong Kong developers are focussing instead on overseas property markets like London where they have become the international financial hub’s biggest spenders with US$6.9b in acquisitions this year as of November. Chau added that in the years ahead, small and mediumsized developers will likely focus on this approach of purchasing property overseas to survive and remain competitive.

Meanwhile, Tang said local players can fight back by actively bidding for URA projects. “Chinese developers have not been actively bidding for URA projects, as those developments provide less planning flexibility than sites sold by the Lands Department.

In addition, the developments are subject to a sales revenue split with the URA. We expect URA projects to remain popular among local developers amidst intense competition,” he said.

Hong Kong developers spent US$6.9b in acquisitions this year in foreign markets

FIRST year period to June 2017, one of the highest-raising companies based in Hong Kong fell into this subsector with Futu Securities raising $215.5m across three deals since 2014, according to Fintech Global.

The top three subsectors dominating the Fintech deal landscape are: Payments &x Remittances. Data & Analytics, and Institutional Investments

Large fintech deals dominate

I

f the past three years are any indication, outsize deals are the new overlords of Hong Kong’s fintech investment scene. More funds are gravitating towards large deals valued over $50m, whilst a lesser proportion is being secured by deals worth under $50m, according to Fintech Global data.

As of the first half of the year, $145.5m or 87% of the $167.3m total fintech investments in Hong Kong went to deals valued over $50m, whilst only $21.8m went to the smaller deals bracket. Still, it shows

an accelerating pace for under $50m deals with 69.9% of the funding to this segment in 2016 already committed.

Top subsectors Three subsectors are dominating the deals. Between 2014 to the first half of 2017, more than half of those closed went to Payments & Remittances, Data & Analytics, and Institutional Investments and Trading. Whilst Institutional Investments & Trading companies received only 17% of total deals for the three-and-half-

Most active fintech investors The top 10 most active fintech investors participated in more than half of all deals to fintech companies based in Hong Kong since 2014. Four of the top ten investors—Cyberport Hong Kong, Supercharger, Nova Founders Capital, and Bigcolors—are based in Hong Kong, two are based As of the first in China, and the remaining four are half of the year, based in the US. $145.5m or 87% In addition, around 4% of of the $167.3m investments to fintech companies in total fintech Hong Kong were made by the four investments in accelerators and incubators in the Hong Kong went top ten investor group: Innovation to deals valued Lab, Cyberport Hong Kong, over $50m.

SuperCharger, and 500 Startups.

FinTech investments in Hong Kong, 2014 - H1 2017

Source: FinTech Global

The Chartist: Is Hong Kong valuing real estate stability over affordability?

Housing prices in Hong Kong have risen fourfold since 2001 and the macroprudential measures do not seem to be reversing the trend. Alicia Garcia Herrero, chief economist for Asia Pacific at Natixis, noted that annual supply only makes up for 0.7% of total number of domestic households in Hong Kong, The Hong Kong government, thought to be addressing affordability concerns, have also rolled out measures such as the stamp duty, which not only failed to temper high prices, but inflated them further.“Supply cannot even keep pace with the population need, let alone the demand driven by speculating activities,” said Herrero, adding that she does not expect “any immediate change” in Hong Kong home price trends unless the government is more determined to increase land supply.

But supply has diverged (% change of flats minus population growth)

Source: Natixis, CEIC

Domestic household grew faster than house supply (thousands)

Source: Natixis, CEIC

HONG KONG BUSINESS | JANUARY 2018

7

FIRST Financial Firms Are OnshorING

Hong Kong companies are accelerating plans to bring offshored business operations back to the territory, also known as onshoring, to cut costs and reduce customer service complaints, a recent survey by specialised recruiter Robert Half revealed. CFOs cited rising prices and service quality in offshore locations as top reasons for ramping up their onshoring activities. But they also said the decision to bring back businesses still hinges on securing qualified talent in Hong Kong.

“Operating within a global trading and financial hub, Hong Kong’s financial services companies are increasingly under pressure to remain competitive by maximising performance and decreasing costs,” said Adam Johnston, managing director at Robert Half Hong Kong. By onshoring, 44% of CFOs reported cost efficiencies, increased productivity (43%), greater customer responsiveness (39%) and an increase in service quality (33%). But CFOs are also cognisant of a skills shortage in Hong Kong and consider it a critical hindrance in onshoring.

Challenges Johnston reckoned this can be remedied by expanding their staff training programmes, or acquiring new talent.“Whilst the skills shortage in the offshored regions is a key reason to bring back activities, the lack of skilled talent on a local level is simultaneously hindering other companies from onshoring their business operations back to Hong Kong,” he said. “To combat the local skills shortage and have their workforce operating at an optimal level, financial services companies need to invest in adequate staff development programs to remedy any critical skills gaps. When it is not possible to upskill existing staff with business-critical skillsets, employers need to recruit qualified professionals – on either temporary or permanent basis to meet strategic and operational objectives,” he added.

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HONG KONG BUSINESS | JANUARY 2018

Developers pin hope on farmlands

W

hen Chief Executive Carrie Lam delivered her highly anticipated first policy address in October, real estate developers were keen for her to detail an agricultural land scheme to convert farmland for residential developments.

But she ended up keeping mum on the topic. Analysts said Lam’s omission does not take away from government’s intention to raise housing supply, which means Hong Kong developers might just need to wait a whilst longer for details of the conversion plan to be hashed out.

Zac Tang, senior analyst of research at Colliers International Hong Kong, noted that the top four developers have altogether amassed 9.8 million sqm (106 million sq ft) of agricultural land in Hong Kong. But converting farmland into residential development would involve a complicated planning and land premium negotiation process, which could take a considerable amount of time before final settlement.

Notably, he added that it will probably be very difficult for PRC developers to be involved in the procurement process of agricultural land in Hong Kong, giving local firms an advantage.

Karl Choi, research analyst at Bank of

Agricultural lands in Hong Kong

America Merrill Lynch (Hong Kong), noted that property giant Henderson Land Developments is confident about converting more than 2,000 units by end-2017.

The top four developers have altogether amassed 9.8 million sqm (106 million sq ft) of agricultural land in Hong Kong.

Beneficiaries of farmland conversions Meanwhile, New World Development, or NWD, will be a key beneficiary of potential agricultural land conversion into residential, said Vikrant Pandey, analyst at UOB Kay Hian. He said NWD has 69% of its 1.5 million sqm (17 million sq ft) of agricultural landbank located in the Yuen Long and Tuen Mun districts that is valued at over $19.4b. Also, the property firm is looking at 700,000 to 1 million sqm farm conversion in FY2018, having delivered on 6.8 million sq ft of farmland conversion projects in the past decade. Patrick Chau, director at Savills Hong Kong, said that focussing on agricultural land is one of the ways Hong Kong developers can survive the crush of PRC developers snapping up record-high land bids.

Mobile App Watch

On-demand services app OKSir launches in Hong Kong When one Hong Konger lost her keys and was locked out of her home at 2am, she avoided the hassle of waiting till morning to phone a locksmith through the on-demand services mobile app OKSir. She was then matched with a service provider willing to fix her problem quickly at an agreeable price. “We actually arranged a keymaker in 30 minutes to her doorstep,” said Arun Kapoor, CEO and founder of OKSir. In October, the app went live in Hong Kong, its first regional territory and its new headquarters in East Asia.

The mobile app was born in India where it is available in five major cities and fulfills up to 3,000 service needs daily. In Hong Kong, OKSir users can already choose from more than 6,000 providers alone that offer upwards of 300 services spanning errands, events, finance and legal, healthcare, travel, professionals, beauty and housekeeping.

Arun Kapoor, CEO and founder of OKSir “We are the Uber of services,” said Kapoor.

FIRST

Cosmetics put a glow on pallid retail

L

ast year, big brands such as Ralph Lauren closed down in Hong Kong, a clear casualty of the tough retail times that have gripped the territory as mainland Chinese tourists opted to visit and shop in other countries. But this year, not all retail segments seem to be sinking: cosmetics, in particular, is glowing bright amidst the general gloom of retail, as seen in the rise of cosmetics pop-up stores like Armani Box. In the first three weeks of September, Italian fashion house Armani set up Armani Box in the IFC mall at Central Waterfront and used it as a platform to launch new makeup products in Hong Kong like the My Armani to Go cushion foundation and Ecstasy Shine lipstick. Popular stars and beauty influencers such as Shu Qi, Kary Ng and Janet Ma were tapped to help promote the pop-up store, which was patterned after an initial concept launched in Paris in 2016.

Cosmetics brands are making quite a splash not only in beauty blogs but also in Hong Kong’s attempts to recover from its retail malaise, according to analysts.

Cosmetics and skincare is one of three retail segments in Hong Kong, along with food and beverage and lifestyle apparel and premium accessories, which have been able to do well even amidst the decline in tourists and shopping, said Cynthia Ng, director at Colliers Hong Kong.

“Cosmetics and skincare have been the most sustainable in sales during the retail market slump as it’s almost a necessity to stay youthful and beautiful, affected by the social perspective in Hong Kong,” she said.

The value of sales of the medicines and cosmetics segment grew 12.7% yoy in September, the second-highest increase amongst retail category types, just behind jewellery, watches and clocks, and valuable gifts, data from the Hong Kong Census and Statistics Department showed.

Wide demographic appeal Analysts expect cosmetics to continue to perform well in the near term since makeup and skincare products hold a wide demographic appeal — from increasingly price-sensitive tourists, more of which are starting to come back to Hong Kong, to image-conscious local consumers. “Hong Kong is a city with most of the renowned cosmetic brands easily found everywhere. In this city of shopping centres and department stores, cosmetics still dominate the most prominent locations,” said Joe Lin, executive director, advisory and transactions services at CBRE Hong Kong.

He reckoned mainland Chinese tourists are a key customer base for beauty and skincare retailers, but the local Hong Kong populace have also become a strong

Hong Kong Beauty and Wellness Expo Source: HKTDC

segment for this business, with the latter group preferring to patronise more affordable cosmetics lines. “Given their prices are mostly not expensive, especially the Korean brands, all age of ladies (and men) can find what they want easily and affordably,” said Lin. Alicia Guerrero-Herrera, chief economist for Asia Pacific at Natixis, holds a sanguine outlook on cosmetics given expectations of a further strengthening of Chinese tourist numbers.“The Chinese tourist numbers are doing quite good in recent quarters. With the recent political turbulence and terrorist attacks in Europe and United States, and the missile threat in Korea and Japan, more Chinese tourist come back to Hong Kong, when most of the anti-Mainlander protest disappeared,” she said. “Jewellery retail, coupled with medicines and cosmetics, should be particularly benefited from the comeback of Chinese tourists.”

OFFICE WATCH

BLOOM coworking space is a haven for productivity Upon entering the BLOOM coworking space on Canton Road, Tsim Sha Tsui, one notices a refreshingly open floor plan free from the usual trappings of a traditional office. There is no reception or meeting rooms. “The first thing you‘ll notice when you walk into BLOOM is that you will not be stopped by a reception desk,” said Chapman Leung, co-founder of BLOOM coworking space. “Our staff is floating around the office as if they too are our members.”

He said BLOOM is attached to Jumpstart Business Centre’s existing location, which enables the coworking space to bend the rules of a corporate office setup. The result is a coworking space that is closer to a café or a restaurant, complete with a logo that fits the vibe of a coffee chain than a corporation.

“We think open-plan working style combined with nice décor can help both creativity and productivity. BLOOM features different areas so members can move around during the day,” said Leung.

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HONG KONG BUSINESS | JANUARY 2018

Work stations

Coffee Bike

Meditation Room

Open Area

FIRST NUMBERS

GLOBAL TRANSACTIONS Most countryenvironments environments Most attractive attractive country for M&A and IPO activity for M&A and IPO activity

n

11 Hong Hong Kong Kong

e)

22 Singapore Singapore

Switzerland 44 Switzerland

33 Luxembourg Luxembourg

Netherlands 55 Netherlands

SACTIONS FORECAST 2018 NG

s ING

Deal activity by region region2018 2018

on on

nn

)

North America: America:

EMEA: EMEA:

Synergy Group’s co-living space Bibliotheque offers beds for as low as $3,500

Most Most attractive attractive country country environments environments for M&A and IPO activity Co-living: New kid on the sharing block for M&A and IPO activity

$3.2 trillion GLOBAL TRANSACTIONS FORECAST 2018 $893.5 M&A $893.5billion billion M&A $65 $65billion billionIPO IPO

$1.5 trillion trillionM&A M&A $78 billion $78 billionIPO IPO

GLOBAL TRANSACTIONS FORECAST 2018 DEAL APPETITE RISINGLatin Asia Pacific: Pacific: Asia LatinAmerica: America: $710 billion M&A

W

$108 billion M&A

billion M&A $108 billion M&A GLOBAL$710 TRANSACTIONS FORECAST 2018 $74.2 billion $6 $74.2 billionIPO IPO $6billion billionIPO IPO

hen Synergy Group

in the downtown area left idle and

launched their second Most attractive country environments with low utilisation rates, that they Total (23% YoY increase) Total global global M&A M&A in inMost2018 2018 YoY increase) attractive (23% country environments

DEAL APPETITE RISING

DEAL APPETITE RISING

M&A

$3.2 trillion

M&A

Hong Kong for M&A and IPO11activity co-living project in Hong turn into their next projects.

Hongcan Kong $3.2 trillion Kong, one key improvement they “Co-living is a form of housing for M&A and IPO activity

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Global Chair and newly-listed businesses.

North America: EMEA: Total global M&A in 2018 (23% YoY increase)

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4 Switzerland

3 Luxembourg

5 Netherlands

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$893.5 billion M&A $65 billion IPO

$3.2 trillion Deal activity 2018 for M&A and IPO activity 1 Hong Kong Deal activity by by region region 2018 $3.2 trillion $3.2 trillion billion $531 professionals rent bunk beds and Capital Markets, on why the co-living $616 billion $531tobillion billion &A M&A$616

3.2 trillion M&A

Asia Pacific:

Total global IPOs in 2018 (55% YoY increase)

$710 billion M&A $74.2 billion IPO

Top 3 Sectors by IPO in 2018

Finance

$84 billion

Consumer Goods

in 2018

Consumer Goods

Industrials

$60 billion billion Total global M&A in 2018 (23% $56 YoY increase)

3.2 trillion

$633 billion Top 3 Sectors by M&A in 2018

Latin America:

$108 billion M&A $6 billion IPO

After a few soft patches in 2017 we have a more optimistic outlook for the global economy in 2018 as dealmakers and investors gain greater confidence in the business prospects of acquisition targets and newly-listed businesses.

for M&A and IPO activity

Paul Rawlinson, Global Chair

North America:

1beds Hong Finance Industrials global by M&A insingle 2018 (23% YoY increase) 4 Switzerland 23 Sectors Singapore TopTotal M&A in 2018 forKong around $3,500 to

2 Singapore

EMEA:

4 Switzerland

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5 Netherlands 3 Luxembourg North America: EMEA: for M&A and IPO activity 5 Netherlands 3 Luxembourg 4 Switzerland 2 Singapore Asia Pacific: Latin America: Yoan Kamalaski, CEO and founder $1.5 trillion M&A $78 billion IPO

$290 billion IPO 1 Hong Kong Deal activity by region 2018 $633 billion $616 billion $531 billion Deal activity by region 2018 $531 billion $290billion billion Deal activity byAsia Pacific: Asia $290 regionPacific: 2018 IPO $633 billion $616 billion $531 billion Total global IPOs in 2018 (55% YoY increase) Total global IPOs in 2018 (55% YoY increase) $290 billion $290 billion PO 290 billion Deal activity by region 2018 n $531 billion IPO $84 billion $60 billion $56 billion Top 2018 billion Top 33 Sectors Sectors by

by IPO IPO inin$290 2018 IPO $84 billion $60 billion $56 billion Top 3 Sectors by M&A in 2018

3 Luxembourg

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EMEA: $1.5 trillion M&A

$893.5 billion M&A

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global M&A in 2018Consumer (23% YoY increase) Goods

290 billion

$60 $60 billion billion

12

HONG KONG BUSINESS | JANUARY 2018

TheIPOs millennial appeal Total global in 2018 (55% YoY increase) Finance Industrials

Paul Rawlinson, Global Chair

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startups

MoneyHero raises US$50m

P

ersonal finance management platform MoneyHero.com.hk, has secured US$50m in Series B funding and is looking to push through its next stage of growth by upgrading its technology and hiring top talent.

MoneyHero.com.hk, secured access to the funding led by IFC, a member of the World Bank Group, as part of CompareAsiaGroup Series B. The holding company employs more than 150 financial experts and technologists, and aside from its presence in Hong Kong, it also operates in Malaysia, Indonesia, Philippines, and Thailand.

The latest funding round also included other new investors Alibaba

Entrepreneurs Fund, SBI Group, and H&Q Utrust, as well as existing investors Goldman Sachs Investment Partners VC and Growth Equity, Nova Founders Capital, ACE & Company, and Route 66 Ventures.

Rachel Lam, managing director of MoneyHero.com.hk, said the funding raised through a Series B Round will be used to develop its proprietary technology and further expand its team with “exceptional talent.”

One of the key goals is to improve user experience on the platform, which has stood out in a competitive market by going the hi-tech route. It uses data, machine learning, and artificial intelligence to offer optimal search matches across a breadth of financial products.

For example, the site can compare personal installment loans from more than 20 banks and let a user perform a free eligibility check after entering how much they want to borrow and loan duration. It also offers comparisons for credit cards, mortgages, and travel insurance—with over 400 personal finance products to-date and partners include Standard Chartered, HSBC, Citibank, Bank of China to name a few.

PICK-UP eyes expansion with new funding and products, said a so-called asset light model is at the centre of the startup’s growing number of satisfied ecommerce customers—its other clients include popular online gift shop Gift Something—and increasing daily deliveries that have reached 1,200 in September.

PICK-UP’s model removes the need Hong Kong-based supply chain for warehousing and permanent staff, optimisation platform PICK-UP raised and instead matches companies and an undisclosed amount of new funding crowdsourced freelance agents, the latter and is looking at three key areas for of which executes same-day deliveries. expansion: add features on its mobile app, a new marketing push for large-size Operationally, Pang said a proprietary technology assigns agents to delivery merchants, and branch out its delivery requests to speed up dispatching, coverage to a couple more cities. It currently delivers to the entire Hong Kong analyses the most efficient pickup and drop off routes to shorten delivery Island, the entire Kowloon, Kwai Ching, times, and executes batch and cluster Tsuen Wan, Sha Tin and Tseung Kwan processing to fully utilise capacity and O. It is also preparing for the big order reduce cost. Meanwhile, for investors, spike during Christmas and Chinese New year with an ambitious ecommerce she reckoned this model gives PICK-UP a highly scaleable growth model where integration plan.

Crystal Pang, one of the four founders fixed costs and operational overhead does not rise together with demand. of PICK-UP who leads strategies

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FinTech loan platform WeLab raises US$220 million funding

After amassing 25 million users in Hong Kong and China, mobile lending platform WeLab is looking to extend its services beyond the Greater China region, using the US$220m in fresh funding to help power its overseas foray. In November, WeLab raised US$220m of combined Series B+ equity and debt strategic financing, with big-name backers such as Alibaba Hong Kong Entrepreneurs Fund, International Finance Corporation (IFC) and other global banks.

The new round of financing nearly doubles WeLab’s total funding to US$425m. WeLab was founded in 2013 and has since grown grown to a major loans provider in both Hong Kong and China, processing US$28b in loans so far, according to a company release. Users only spend three minutes waiting whether their loan is approved, and everything is done online or on mobile with no requirement to meet a human agent. The service is also available 24/7 online instead of being restricted by brick-and-mortar office hours. And the icing on the cake: The FinTech business model means it runs a lean operation, allowing for interest rates to be kept to as low as 1.99%.

“For this round of strategic financing, it was important for us to have participants that would help scale our business to the next level,” said Simon Loong, founder and CEO of WeLab, who leads the more than 500 staff across the company’s offices in Shenzhen and Beijing, China and Hong Kong, as well as in India.

Best-in-class technology WeLab has developed a business model that targets the gap in financing amongst the Chinese population with a vision to “Provide affordable credit for 30% of China by 2018.” The World Bank estimates 36% of China’s population aged 15 and above have borrowed money, but only 10% managed to borrow from a financial institution. This is where the mobile lender has broken new ground, providing a tech-powered solution that does not rely on consumers having an established credit history. The result: WeLab’s millions of users and that now avail formal financing and loans in a “more efficient, direct and inclusive way,” the company said.

The mobile lender also intends to invest in the development of its best-in-class credit technology, which has enabled the company to effectively analyse unstructured mobile big data within seconds and make credit decisions for individual borrowers. The quick results and seamless mobile lending process have been instrumental to its rising popularity. Banks and telcos also license the mobile lender’s technology.

FINANCIAL INSIGHT: Private Equity

Deal #1:Hutchison Telecom, the second-largest mobile network operator in Hong Kong, sold its fixed-line network business for US$1.9b

Deal #2: Chow Tai Fook Enterprises agreed to buy all of the Australian energy group Alinta Energy for US$3b

Private equity gets meaner and leaner Analysts reckoned that funds now seem more willing to get their skin in the game, and this has resulted in heated rivalries, record-high valuations, and a keener interest in tech-powered efficiency.

W

hilst 2017 saw private equity (PE) funds in Hong Kong follow the same trend last year of amassing higher amounts of dry powder, or funds raised but not invested, there is a distinct difference in attitude this year: it’s leaner and meaner as funds now seem more willing to get their skin in the game, according to analysts, and this has resulted in heated rivalries, recordhigh valuations, and a keener interest in tech-powered efficiency.

Competition for deals, which has exceeded $6b in Hong Kong and grown 50% over the previous five-year average, is getting tighter. With PE firms also now having more money to spend, this has led to larger valuations.

Sovereign wealth funds and Chinese technology giants are also attempting to grab a piece of the deal pie, which further complicates an already highly contested deal environment.

“There is still a vast amount of dry powder at the disposal of PE funds, which they are actively looking to deploy,” said James Parker, partner at Norton Rose Fulbright, Hong Kong. “However, all this dry powder is fuelling competition between PE firms, thus driving up prices. We are seeing that competition, particularly for the biggest deals, is being further increased by new entrants into the market like sovereign wealth funds, pension funds, and large Chinese corporations such as Alibaba and Tencent,” he said.

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HONG KONG BUSINESS | JANUARY 2018

Competition for deals, which has exceeded $6 billion in Hong Kong and grown 50% over the previous fiveyear average, is getting tighter.

Parker warned that with valuations recently hitting record levels, there is a danger of PE funds overpaying for assets and struggling to achieve the levels of exit multiples desired by investors.

More risk In response to the rising competition for deals, some fund managers have begun to look at deals in the earlier stage, taking on more risk than usual, said Denis Tse of the Hong Kong Venture Capital and & Private Equity Association. But as an alternative strategy to this risk-focused approach, he recommended that funds should focus more on specialising in their value-adding proposition in sourcing deals.

“Some of the investment opportunities are actually created. They’re not necessarily readily available,” he said. “There can be more of such opportunities going forward. With more companies disposing assets and more companies wanting to expand beyond their own industry lines, there will be more corporate actions going forward just like in the West. Asia is no exception,” he added.

Tse said PE managers are becoming increasingly interested in some of the larger corporate disposal activities Hong Kong groups, building on a trend that started last year. He pointed to two headline-grabbing exits of two telecommunications operators: Hutchison Telecom in July and Wharf T&T in 2016.

FINANCIAL INSIGHT: Private Equity Asia-based privated equity & venture capital investors by location

Source: Preqin

Hutchison Telecom, the second-largest mobile network operator in Hong Kong, sold its fixed-line network business for US$1.9b (HK$14.5b) to Asia Cube Global Communications, which is wholly-owned by a fund managed by I Squared Capital. Late last year, on the other hand, a consortium of PE firms MBK Partners and TPG Capital agreed to acquire Hong Kong telecommunications company Wharf T&T for US$1.2b (HK$9.5b).

“There will be continued activities going on from corporate divestitures by Hong Kong-based large family groups,” said Tse. “It’s a very salient observation already that PE is getting into the mainstream.” He reckoned that alongside disposing domestic assets, large family groups in Hong Kong are showing increased interest in outbound investing.

In March, the Cheng family’s Chow Tai Fook Enterprises agreed to buy all of the Australian energy group Alinta Energy for US$3b (AU$4b). Meanwhile, in July, Li Ka-Shing agreed to acquire CVC Capital’s German smartmetre business Insta for around US$5.3b (€4.5 billion).

Real estate PE managers are also interested in some of the activities coming out of Hong Kong, said Tse, and several are aiming to raise bigger funds. Indigenous managers like Primavera, he said, are all aiming to raise US$3 billion in capital. He said that there are more capital competing for assets which has led to more deals, with larger deals remaining open to PE. “That’s the changing landscape—not just valuation but also the scope of involvement of PE has become broader and more significant,” he noted.

Creating efficiency The forecast for intensified fundraising efforts will follow 2017, a year which, so far, has shown a double-digit increase in fundraising for Asia-focused funds, said Norton Rose Fulbright’s Parker. The funds raised amounted to US$35b in the first six months alone, or about 25% higher from the average for the last five years. But Parker reckoned PE firms are facing increased scrutiny that puts an additional layer of pressure on top of the expectation to deliver returns on the billions of funds they have raised.

To get some breathing room, some firms have turned to technology.

“Firms are facing increased scrutiny and dealing with

James Parker

Denis Tse

Tony Tsang

new challenges—they are spending significant time and resources to comply with increased regulation, for instance, in regulatory and investor reporting. They are also experiencing increased focus on returns from their investors and a squeeze on the fees they charge,” said Parker. “Correspondingly, many funds are investing in new technological solutions in order to create efficiencies, although the benefit of these investments have not yet been apparent,” he said.

China effect As PE firms address the competitive and regulatory threats in Hong Kong, they are also seeking opportunities beyond the city—and mainland China is the obvious first place to look for those, according to analysts.

“Although Hong Kong has many global and regional private equity firms, it is still a very small mergers and acquisitions market for them compared to the mainland China market,” said Tony Tsang, private equity leader, transaction advisory services, Greater China at EY. “Most of these firms are using Hong Kong as their management offices and their deals generally originate in mainland China. Accordingly, the private equity market in Hong Kong does depend on the Chinese market significantly,” he noted.

Tsang said he sees more distressed opportunities in China and noted many private equity firms in Hong Kong have set up distressed and credit funds to respond to the market needs. “I think Hong Kong will continue to play a significant role in attracting private equity firms to set up offices here and attracting more new funds to set up due to the tax and legal competitiveness, as well as its proximity to mainland China,” he said. “Also, the PE firms will continue to use Hong Kong for their portfolio exits via the Hong Kong Stock Exchange.”

Vinit Bhatia, partner at Bain, reckoned there is a very strong deal momentum in Greater China, with the total as of the third quarter of 2017 already higher than the whole of 2016. “Mainly, China is the powerhouse of this growth, but we are also seeing sustained levels of activity in Hong Kong,” he said, estimating about $6b for 2017 year-to-date, which is already higher than the last 5-year average of $4b.

Unsurprisingly, large deals in Hong Kong originated Location of Asia-based private equity & venture capital fund managers and institutional investors

Source: Preqin

HONG KONG BUSINESS | JANUARY 2018

17

FINANCIAL INSIGHT: Private Equity Asia-based privated equity & venture capital investors by location

from the financial and property sectors, two sectoral pillars of the city’s economy, according to Tsang. This includes a deal in April which saw Permira announce the completion of Tricor, the leading provider of integrated business, corporate, and investor services in Asia Pacific, acquired from the Bank of East Asia for nearly $838m (HK$6.5b).

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A tale of two private equity markets It was the best of times for Singapore’s private equity landscape with an influx of funds funnelled into the market. But it was also the worst of times for private equity firms who grappled with fewer deals to clinch. Doris Yee, director of the Singapore Venture Capital & Private Equity Association, noted that there has been robust growth in terms of capital deployed in Southeast Asia. PE transactions in the first nine months of 2017 reached US$8.2b, surpassing the whole of 2016, with investment activity rising most strongly in Singapore, Indonesia, and Vietnam in the past 12 to 18 months. Some notable transactions from the city-state such as SEA, Grab, and ARA Asset Management at transaction values “well above what is commonly found in our region,” she noted.

Source: Preqin

Sectors and trends Bryan Koo, consultant at Clifford Chance, Hong Kong, said that with asset prices remaining high and combined with the ample dry powder of PE funds in Asia Pacific, it is “very difficult for PE funds to find the right assets and the right price to deploy money.” Commenting on the China market, he said China outbound investments have slowed and could pose a challenge for international PE sellers who “thought there would always be some Chinese outbound investors who’s willing to outbid everyone else for an asset.”

Bhatia, for his part, said the largest deals were in a range of sectors, from traditional to technology, although interest in Internet and consumer-focused sectors have notably driven deal activities recently. He noted that even though the internet sector has slightly slowed down, it remains a big focus area, which together with TMT and Consumer, now account for more than 70% of deal volume for 2015 to 2017 YTD. “The big question which people are asking is how sustainable the growth is and this will partly depend on how the macro story of Greater China unfolds,” said Bhatia.

Koo said other key trends this year include an increasing number of secondary deals, such as CVC’s sale of the Content Solutions business of SPi to PE fund Partners Group, active deal flow in Southeast Asia, and tendency for deals to be minority investments rather than buyouts. He also noticed a slowdown of privatisations of Hong Kong-listed companies in the past three to four months with the Hang Seng index reaching a 10-year high. For the Hong Kong Venture Capital and Private Equity Association, PE firms need to find better debt financing solutions, given the expensive prices of high quality assets in deals in order to survive and thrive. There is also heightened concerns in adopting a specialisation strategy, focusing on key sectors based on your size and strengths.“If you’re a big manager, you’re a small manager, you play a different angle. But you can still originate deals in a relatively proprietary basis—obviously not for all your investments in your portfolio, but selectively,” said Tse.

Singapore view

Bryan Koo

Vinit Bhatia

Notable deals One of the recent notable deals in the Singapore market is the private bid by way of scheme of arrangement for Global Logistic Properties by a consortium comprising of HOPU, Hillhouse Capital, SMG, which is owned by GLP’s CEO Ming Mei, Bank of China Group Investment, and Vanke, said Bill Jamieson, partner at Colin Ng & Partners LLP. This transaction is poised to be Asia’s largest private equity buyout.“The transaction values GLP at S$16b and shows the buyout market is alive and well in Singapore, although the trend in buyouts in Asia generally may be down on previous years,” he said. Jamieson also cited the acquisition of additional shares in e-commerce firm Lazada

by Alibaba for close to US$1b to raise its stake in Lazada from 51% to 83%, which he said shows Southeast Asia’s ability to attract attention as a growth market in online services. Singapore should continue to flourish as a nexus for the management of PE deals in the region, especially as the Monetary Authority of Singapore announced its move towards a lighter touch regime for venture capital fund managers in Singapore, said Jamieson.

Another factor that is driving up deal interest and activity in the region is the large stock of dry powder amongst PE firms, which they are now itching to deploy, said Chunshek Chan, global head of M&A and Financial Sponsors Research at Dealogic. “PE firms have been sitting on top of billions of dollars of committed but undeployed capital for years, and it seems like this year, everyone has decided that they can’t wait anymore,” he said. “We are seeing a record high amount of capital being deployed into leveraged buyouts (LBOs), even though the number of LBO deals has fallen to a multi-year low.”

Total private equity into SEA

Sources: Preqin, Singapore Venture Capital Association

economy watch were rolled out to attempt to cool the property market, house prices have still climbed to new highs.

The housing market remains an overarching risk to the growth outlook, according to economists

Hong Kong plays to its strengths, but for how long?

Domestic demand is healthy, but economists warned that even with this strong foundation, the territory must start fixing its structural issues.

H

ong Kong posted strongerthan-expected expansion in the second quarter of 2017, which brought first half growth to 4% and triggered upward revisions to forecasts. Prospects for services are rosy, especially if ambitious trade plans push through and the global economic climate continues to recover. Meanwhile, domestic demand is healthy, as shown in the notable pick-up in durable goods spending. But economists warned that even with this strong foundation, the territory must start to fix structural problems, especially those in the property market and tourism sectors, so it can reach its full growth potential in the coming years.

“Hong Kong has benefited from a cyclical upturn, but this also means there are structural issues to be solved,” said Alicia Garcia Herrero, chief economist Asia Pacific at Natixis. “Despite the government’s latest push for innovations, the progress has been rather limited and lacking behind global peers. The lack of openness for technologies, especially from government policies, has limited the potential growth that

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HONG KONG BUSINESS | JANUARY 2018

Hong Kong has benefited from a cyclical upturn, but this also means there are structural issues to be solved.

Hong Kong could have get. This also means clearer and more consistent regulations could contribute positively to economic development,” said Herrero. highlighting the uncertainty in the real estate sector on whether the demand and supply change will make a dent on stillsoaring house prices.

Rising asset prices, along with increasing real wages, have boosted consumer confidence and local demand, said Kelvin Lam, economist at HSBC. These should continue to benefit overall consumption in the near term, if the trend persists. But factoring in how despite numerous rounds of macro-prudential measures

An overarching risk “The housing market remains an overarching risk to the growth outlook, in our view,” said Lam. “Under the linked exchange rate system, the mortgage burden of Hong Kong borrowers will eventually rise as US interest rates normalise, posing risks to the fragile recovery in consumption and economic sentiment,” he said.

“Whether the Hong Kong property market will undergo an adjustment period hinges crucially on several factors: the supply-side dynamics, the direction of capital flows for real estate investment, and the possibility of external shocks or black swan events,” he added.

But Lam noted that with regard to fiscal policy, the government has signalled a change in its public finance philosophy, which will likely pave the way for a more expansionary stance that provides the Hong Kong financial secretary “more flexibility in investing in Hong Kong’s future.”

Michael Spencer, chief economist at Deutsche Bank, said that whilst the Hong Kong Chief Executive Carrie Lam’s recent policy address presented many of the same measures meant to address the territory’s housing issues, there were also signs that Hong Kong’s fiscal and monetary policies may be moving in new directions.

“The Chief Executive’s policy address had many of the same elements as past addresses: efforts to expand the supply of affordable housing to improve the delivery of education and healthcare services, and to make Hong Kong more

Retail sales have shown signs of stabilisation

Source: CEIC, HSBC

economy watch competitive, especially in new technologies. And her answers to most of these challenges were not particularly innovative whilst her much anticipated Starter Home proposal remains a work in progress,” said Spencer. “But that assessment misses what we think was the most important issue: she put the issue of how to spend the government’s fiscal reserves rather than how to protect them squarely on the agenda,” he said.

Sturdier domestic demand As the government looks to pursue a more expansionary fiscal policy, Lam said Hong Kong has been treading a steady recovery path since hitting a trough in the first quarter last year—a trend driven primarily by sturdier domestic demand. Stronger tourism and local spending have been and will still serve as key catalysts to growth.

“We think the gradual recovery in inbound tourism will continue to stabilise spending on luxury items,” said Lam. Total visitor arrivals to Hong Kong from January to August 2017 climbed 1.7% to 38 million compared with the same period last year, according to data from the Hong Kong Tourism Board. Of these, mainland total Chinese visitor arrivals, which are known to be a key market for luxury goods, rose 1.9% to nearly 29 million.

Herrero reckoned private consumption has indeed remained robust likely due to increased asset prices and reduced fall in tourists arrival. But she said that retail sales are still far from the rapid expansion period despite bottoming out, which she attributed to another structural challenge in the Hong Kong economy.

The gloom in retail sales are not only due to the reduced growth in House prices hit a new record high

Source: CEIC, HSBC

mainland tourists, Herrero said, “but also a more fundamental problem of the narrow focus in shopping, which is against the global trend, is switching to higher quality tourism.”

But Lam warned that Hong Kong still faces headwinds, such as the normalisation of US interest rates which may dent local consumption and confidence by way of slower house price growth and higher mortgage repayments. This could mean that annual gross domestic product (GDP) growth might have peaked in the first quarter of 2017, and is likely to moderate in the second half of the year as favourable base effects fade.

Financials sector strength If Hong Kong can rely on one sector to perform well, it will be financials, which should continue to be promising ahead of a government drive to ink new trade deals. “The key highlight for next year is whether Hong Kong will manage to sign free trade pacts with countries along the Belt and Road corridor, which will bring opportunities especially in services,” she said.

Hong Kong has reportedly been courting countries along China’s Belt and Road initiative—which spans Southeast Asia, the Middle East, and Central and Eastern Europe—with a promise that they will be prioritised when negotiating bilateral free trade agreements. As part of its initiative, the government has also been aggressively promoting its Belt and Road Summit, which this year attracted more than 3,000 government officials and business leaders from 51 countries and regions, and featured more than 170 investment projects and 210

The property market has played a key role in growth

Source: Land Registry, HSBC

The key highlight for next year is whether Hong Kong will manage to sign free trade pacts with countries along the Belt and Road corridor, which will bring opportunities especially in services.

one-to-one business matching meetings, according to the event website. Notably, one in five summit participants were from the banking & financial services sector, and nearly one in ten were representing crossborder investment interests.

Financial services not only stands out this year as a key pillar for growth for Hong Kong, said Herrero, but it should continue to prop up the economy.

Favourable external factors Hong Kong can also count on favourable external factors to bolster economic growth, at least in the near term. Merchandise exports have risen by 8.4% y-o-y in the first eight months of 2017, improving from the 0.5% fall in the same period last year, according to the Hong Kong Trade Development Council.

For the entire 2017, merchandise exports are projected to increase by 5%, as mainland China, which accounts for more than half of Hong Kong’s trade, regains its footing.

“Looking forward, the steady international economic environment and China’s economic stabilisation should continue to support the Hong Kong economy,” said Thomas Shik, head of economic research and chief economist of Hang Seng Bank.

“While further interest rate rises by the [US Federal Reserve] should bring more upward pressures on Hong Kong interest rates, the timing and the size of interest rate changes still hinge on a number of factors including fund flows and loan demand,” he added.But Lam said Hong Kong remains a small and open economy, and together with its high trade exposure to China.

HONG KONG BUSINESS | JANUARY 2018

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cover story

Investors should continue to favour equities over fixed income

10 investment ideas for 2018

2018 is the Year of the Dog but it doesn’t mean you have to bury your assets under the ground to save its value for later. Instead, unearth these investment ideas and learn the hacks on how to grow them.

T

he incoming year will not be as vibrant as 2017, said Christian Nolting, global chief investment officer and global head of DPM, Deutsche Bank Wealth Management. “Volatility will probably rise from current very low levels and risky asset prices may not rise as fast as they did in 2017,” he said. “Domestic political risks remain in the US and Europe, as well as geopolitical risks around the world.” But global economic growth, Nolting added, will continue to pick up, and will reach about 3.8% in 2018. “We remain broadly optimistic,” he noted.

Hong Kong Business rounded up the most promising investment opportunities and listed some life hacks to guide investment decisions based on investor outlooks and conversations with industry experts and observers. These range from focusing on the potential of technology to provide solid returns to the importance of understanding diversity and balance in investments. The usual caveat applies, here at Hong Kong Business we don’t have a crystal ball and merely gathered ideas from the experts. If we have a crystal ball, we’d give up publishing and just be professional investors. Nevertheless, here are 10 investment ideas to bark at in 2018.

1. Equities Equities will continue to be a preferred investment option, according to Ricky Tang, product manager, multi-asset, Schroders, as the global market continue to stabilise and 22

HONG KONG BUSINESS | JANUARY 2018

Investors should continue to favour equities over fixed income, with equities expected to continue providing opportunities in 2018, even after this year’s gains.

pile on the upward trajectory seen over the last 12 months, and giving plenty of reasons for stock investors to cheer for next year. “Equities remain our preferred asset class, which should continue to deliver positives returns in 2018,” he said. “As equity valuations are not cheap, returns are likely to come from earnings growth rather than multiple expansions in the future.”

Nolting also shared that at a general level, investors should continue to favour equities over fixed income, with equities expected to continue providing opportunities in 2018, even after this year’s gains. At the time of writing, for instance, the MSCI AC World had hit 68 record highs in 2017, the most on record.

“But earnings growth will be key, as price/earnings and other valuation multiples start to move down from elevated levels. With generally lower returns likely than in 2017, selectivity between sectors and between geographies will be important in 2018,” the Deutsche Bank Wealth Management senior official reckoned.

Currently, earnings of global equities are expected to grow at 7% in 2018, with global financial services firm Credit Suisse also saying that the continuing bullish outlook of financial markets—particularly that of the US—will spill over to next year, for instance, S&P 500 will likely rise 13% by year-end 2018, according to the firm’s latest market strategy report. This positive outlook on global equities growth, according to Tang, is supported

cover story by the strong cyclical environment of steady growth and subdued inflation pressure. “Within equities, we believe better opportunities lie in markets with cheaper valuation and stronger growth potential,” he said.

This is echoed by Arthur Kwong, Asia Pacific head of equities for BNP Paribas Asset Management, particularly noting the well-performing Asian equities since January as a good condition for what’s to come in the next 12 months, although a slight moderation is expected towards the end of the year. The cushioning factor is mainly driven by earnings revisions and currency appreciation, more so than higher valuations.

Dr. Jasslyn Yeo, global market strategist at J.P. Morgan Asset Management, said in a statement that whilst equity valuations are high, they expect these instruments to stay elevated for some time, with preference to cyclical and financial sectors.

2. Focus on technology In this day and age where everything is and technologydriven, it is not a surprise that banking on technology—in stocks, shares, crowdfunding, etc.—continues to be a hot investment opportunity year in and year out.

Brendan Mullhern, global strategist for Newton Investment Management, said that sharing in the growth story of technology startups and groups that pushes the boundary of technology in the market space is an example of a smart investment decision.

“The potential disruption created by this trend creates great opportunities for new businesses and existing ones that adapt to the new openings,” he said, adding that technologies should branch out beyond the consumer sector for it to reach its full (earnings) potential.

This is a particularly important aspect for investors in Hong Kong given its proximity to Shenzhen in mainland China—considered the Silicon Valley for hardware—where technology startups are blossoming out at a rapid pace.

Such proximity offers an array of opportunity for investors to invest in promising technology businesses that are yet to hit the mainstream market, and for these startups to have a global exposure in the fast-paced environment of Hong Kong. “As the potential corporate applications of these innovations become clearer, there is broad scope for companies to reverse this trend [on focusing on the consumer sector],” Mulhern reckoned, citing companies including Microsoft, Cognizant, and SAP—all of Real GDP growth comparison

Source: FactSet, OECD, J.P. Morgan Asset Management.

10Y Bond yields from a Japanese investor’s perspective*

Source: Bloomberg Finance L.P., J.P. Morgan Asset Management.

Christian Nolting

Ricky Tang

Arthur Kwong

which provides enterprise technology and consulting services—could be a starting point for people looking for technology companies to invest in.

Nolting also added that there should be a keen interest and following on the tech industry in Asia that’s ripping through silos and records every single year, given that majority of the hardware—and increasingly software—in today’s tech markets are coming from the continent.

“We remain keen on technology and also on Asian emerging markets, in part due to its tech component— but economic fundamentals are also likely to support equity markets in this region too,” he mentioned. “Asian equity markets seem likely to outperform most developed markets next year. We have an existing High Conviction Idea on Chinese equities.”

3. Materials, industrials, and financials Beyond technology, however, there lies several sectors that are making a comeback. Robert Rountree, global strategist, Eastspring Investments, shared that the long ignored cyclical sectors of materials, industrials, and financials are swinging back into favour, especially in Singapore where the finance industry remain robust and resilient amid movements in the global economy.

“Remove the technology stocks, which rallied strongly, and good to deep value is to be found elsewhere in both developed and emerging Asia including Japan,” he said.

“As valuations in these sectors are still mostly low, there is plenty of potential upside.”

This bullish outlook for all three sectors have been steadily gaining ground over the last few quarters, although their strong performance remains overshadowed by trendier momentum on sectors like information technology. Bloomberg’s Global Market Asia Index, for instance, shows significant year-to-date growth on financials at 18.48%, industrials at 23.61%, and materials at 25.85% for the rest of Asia.

4. Keeping an eye on emerging markets in Asia Perhaps one of the most enduring economic stories over the past decade is the economic rise of developing Asia, and betting on this trend will remain to be a smart investment decision for 2018. Kwong shared that Asian equities have outperformed larger markets globally this year, particularly with the performance of China, South HONG KONG BUSINESS | JANUARY 2018

23

cover story willingness to institute reforms and institutional changes have been showing results. “Key emerging markets including China has shown far more structural reform progress than many investors expected this year.” This is something that Hong Kong, with its proximity—both geographical as well as cultural—to mainland China, can leverage and take advantage of.

EM currencies vs. U.S. dollar

Source: J.P. Morgan Asset Management.

Korea, and India.

Florence Tan, head of advisory – strategy & multichannel communications at Citi, shared that whilst uncertainty over the next US Federal Reserve Chairperson and faster than expected US rate hikes could lift market volatility, corrections in emerging markets can be viewed as opportunities given the robust global growth outlook and attractive valuations.

“Emerging market equities continue to trade near a record 40% valuation discount to the US,” she said. “In Asia, 6.5% yields of local currency Indian bonds are among the most attractive in the region, supported by the country’s longer term economic turnaround.”

Mulhern, however, said that there is little guarantee that flows into emerging market assets over the last 18 months will stick around if global financial and economic conditions start to deteriorate, particularly next year. “It is likely that global growth and global financial conditions have peaked, which we believe warrants a reduction in emerging market assets over the next year,” he said. “On fixed income, we have grown increasingly cautious during 2017 as corporate spreads have rallied to close to our 12-month targets. I don’t think that we are likely becoming markedly more optimistic on this asset class in 2018,” Nolting said, adding that there may obviously continue to be interesting areas in this asset class, particularly within emerging markets debt (which should benefit from a continued pick-up in economic growth combined with generally low levels of inflation), but this may not be the place to focus your investments in.

5. Keeping tabs on China China’s spectacular rise in becoming an economic powerhouse has tapered off, with growth continuing to average 6% to 7% over the last few years compared to 14.2% growth domestic product (GDP) growth rate a decade ago. However, experts are still saying that banking on Chinese industries and activities remains a smart investment decision to take, especially when it plays such a big role in the modern global economy.

“Increased rigour in risk mitigation ahead of topleadership changes in Q4 are crucial for Beijing to preserve economic, social, and political stability,” said Kwong.

“Stability in China should allow for a stable year for Asian equity markets.”

Tan also shared that the Chinese government’s 24

HONG KONG BUSINESS | JANUARY 2018

Brendan Mulhern

Robert Rountree

Dr. Jasslyn Yeo

6. Taking another look at Japan Japan’s lacklustre economic performance over the last couple of years after becoming a developed economy many decades ago may have erased it from the map of investment opportunities of investors. But Rountree shared that Japanese equities is providing a window of opportunity once again.

With investors still seemingly fixated on the success or otherwise of Abenomics, with the equity market falling and rallying on the ebbing and flowing of the confidence tide, Rountree said that investors are missing the tremendous improvements that are taking place at the corporate level—pushing Japanese companies to have some of the world’s best cash earning yields.

“Stronger cashflows are allowing Japanese companies to repay debt, raise dividends, and, more recently, to also embark on share buyback schemes,” he said. “Japan was not immune from the run to safety fears that impacted the rest of the world several years ago. Thus, Japan’s cyclicals look very attractive especially the financials. Unlike elsewhere, Japan’s technology stocks still look attractively valued.”

7. US$ to regain some shine The US dollar was a mixed story in 2017. At the start of the year, there were reasonable expectations that the US dollar would make further gains on the back of a recovering US economy, further rate hikes from the US Federal Reserve, rising inflation, and President Trump’s pro-growth policies.

However, a combination of crowded dollar positioning, falling US inflation, a lack of pro-growth policies from the White House, and better global growth compared to the US economy has underpinned dollar weakness this year.

Coming from this position, Mulhern shared that going into 2018, there is a strong case that the dollar has scope to appreciate. “The decline of the trade-weighted dollar over the first three quarters of 2017 was the largest on record. On this basis alone, further declines are likely to

Global equity market correlations

Source: Factset, MSCI, Standard & Poors, J.P. Morgan Asset Management.

10. Gunning for diversity/balance As with any investment opportunity and decision, there is a saying that we shouldn’t put all our eggs in one basket.

There is a need for diversity and balance on the kind of investment opportunity we’re grabbing and balancing the risk that we’re exposing ourselves into.

According to Rountree, with bond’s long term rally finally petering out, investors have been running towards both higher risk bonds and equities in search of higher returns. “The trick is in balancing these two factors,” he said, adding that in 2018, we should expect to see a further run into both higher risk and duration bonds— despite the possible rise in interest rates—and into equities. In terms of investment behaviour, Yan Pu, head of portfolio review for Asia at Vanguard Investments Hong Kong, shared four investment philosophies that would provide investors a better chance of success: set an investment goal; build a balanced portfolio; stay disciplined; and be mindful of the investment cost.

“Vanguard believes that cost is one of the few controllable factors in today’s dynamic market. Every penny you save in cost will eventually contribute to the return of your investment portfolio,” she said. Pu shared that it is very important for investors to hold a global perspective despite their local bias, for example of investors in Hong Kong, and build a balanced portfolio that diversifies risk exposures appropriately.

Global government bond net supply

Source: Copyright 2017 Morgan Stanley. 2017 and 2018 are estimates.

be limited,” he said, adding that the US dollar is poised for further gains with global economic momentum likely to have peaked and the US Federal Reserve poised for further hikes. Nolting also mentioned that the U.S. dollar has recently recovered against the euro and yen and he thinks that further U.S. dollar strengthening is possible.

8. Diversify to EUR and CAD Despite the bullish outlook of Mulhern regarding the US dollar, Tan shared that the American currency has peaked, with Citi expecting it to move lower given the persistent current account and fiscal deficits and rising net external debt. Historically, multi-year rallies of the US dollar have also been driven by different factors—from a very strong US economy, a technology boom, to underperformance in economies elsewhere in the world—none of which is currently happening.

“Citi’s preferred currencies in 2018 include the euro and the Canadian dollar,” Tan said, explaining that the euro is expected to be supported by attractive valuations, a large current account surplus, and the cyclical recovery in the eurozone, whilst the Bank of Canada is expected to raise interest rates again given strong output and labour market activity.

9. On higher-yielding bonds Although global central banks are talking about pulling back from the quantitative easing programs, the growth in liquidity is unlikely to reverse any time soon, according to Rountree. The US Federal Reserve has started to withdraw money as bonds on its portfolio mature but not only is the pace slow, but it has also signalled it will inject cash into the system again should it make a policy misstep. Where the US Federal Reserve goes, others will follow.

“The case for holding bonds for yield thus remains intact but that yield is to be found in the higher risk and longer duration bonds. On this basis, US high yields and Asian bonds (both local and US dollar) look attractive,” he said. “Asian local bonds look attractive as the US dollar is expensive and should weaken on a longer-term trend basis.

Rising interest rates, however, could generate spurts of US dollar strength which could provide buying opportunities for Asian local bonds.”

Florence Tan

Yan Pu

Bonus: Sectors likely to silently make gains in 2018 As a bonus, we’re adding some more sectors that may likely provide investment gains, according to Nolting.

These are infrastructure, cybersecurity, global ageing, and millennials.“These secular trend themes have done well year-to-date and are intended to complement shorterterm ideas in a portfolio. As recent cyberattacks have shown, cybersecurity is a rapidly growing problem which will demand substantial private and public spending to counter. Opportunities could also be provided by merger and acquisition activity in the cybersecurity sector as it grows and consolidates,” he said. Nolting concluded by saying that infrastructure will also require major spending in the coming decades, particularly in the emerging markets. “Global ageing has impacts well beyond healthcare, for example, on insurance and other financial services. The spending patterns of millennials are already a focus for investors, given millennials’ interest in consumer technology and lifestyle spending,” he said.

US dollar performance

Source: FactSet, J.P. Morgan Asset Management; Bloomberg Finance L.P., U.S. Federal Reserve

HONG KONG BUSINESS | JANUARY 2018

25

ACCOUNTING SURVEY

Raymund Chao, Chairman, PwC Asia Pacific

Top Hong Kong accounting firms beef up payroll in 2017 There is a huge demand for trust-related services due to looming data risks.

O

ur annual accounting survey revealed that PwC, EY, Deloitte, and KPMG cemented their positions last year, with PwC taking the lead with a total number of employees at 4,000, up 100 from last year’s figures. EY comes at second with 3,000 employees, also up 100 from last year’s 2,900. Deloitte Touch Tomatsu grew the most with 235 new recruits to add to its 2,265 employees in 2016. KPMG and BDO retained their fourth and fifth places with steady 2,200 and 1,100 employees, respectively.

Deloitte’s global workforce increased by 70,000 new recruits in 2017 to meet the ever-expanding scope of the company’s work. The increase is 8% higher than that of the previous year, considering that Deloitte China is now 13,000-strong across 21 offices, with 2,500 based in Hong Kong.

As the age of big data continues to transform business and recruitment models across sectors, the accounting industry has already stepped up to the challenge by revolutionising traditional tasks such as bookkeeping, tax, and audit. To attract top talent, top accounting 26

HONG KONG BUSINESS | JANUARY 2018

The accounting sector expects a huge demand for trust-related services as a result of uncertainties in information security, data privacy, corporate culture and governance, risk management, and regulatory compliance.

firms have also added more recruitment benefits such as flexible work schedules, health and wellness programmes, diverse interest classes, and mobile apps for work.

Points of interest Over the next few months, the accounting sector expects a huge demand for trust-related services as a result of uncertainties in information security, data privacy, corporate culture and governance, risk management, and regulatory compliance. Major areas of public concern such as food safety, climate change, and sustainability are also

Wong Poh Weng, Chairman, RSM Hong Kong

expected to be on accounting executives’ recruitment agenda.

Wong Poh Weng, chairman, RSM Hong Kong, believes that the biggest change in the industry during the year were the changes in auditing and accounting standards. According to him, significant provisions relate to the auditing standards requiring an extended format of audit reports and extending the auditor’s responsibilities to cover other information.

Furthermore, the accounting sector may have a breakthrough in terms of audit regulatory reform.

“The Financial Reporting Council (FRC) have already taken over the investigation of listed company audit failures from the Hong Kong Institute of Certified Public Accountants (Hong KongICPA), but the industry body still retains the duties of routine inspection and disciplinary roles. The reform will make FRC a fully independent audit industry regulator. We envisage the draft legislation may finally find its way to the Legco in the latter part of 2018,” said Johnson Kong, managing director of non-assurance, BDO. China’s Belt and Road Initiative will also remain a top consideration as it is expected to rake in huge profits from investments and developments. China’s new cybersecurity law will also have a significant impact on network operators and firms with operations in the mainland. Nevertheless, Hong Kong is set to benefit from China’s economic resilience, particularly from the Belt and Road

ACCOUNTING SURvey

Johnson Kong, Managing Director of Non Assurance, BDO

Initiative and the Guangdong-Hong Kong-Macao Big Bay Area.

PwC has begun focussing on recruiting talent with backgrounds in science, technology, engineering, and mathematics (STEM) as well as new blood skilled in food supply and integrity and cybersecurity.

to encourage the development of innovative and promising local industries.

Innovation is key Amidst all these developments, PwC has begun focussing on Chow said that what matters most for recruiting talent with backgrounds the accounting profession is how they in science, technology, engineering, help clients tackle the challenges and and mathematics (STEM) as well as opportunities that arise from present new blood skilled in food supply and economic initiatives from China and integrity and cybersecurity. Raymund Hong Kong. Deloitte, in particular, Chao, chairman, PwC Asia Pacific, has recently unveiled a strategic said that PwC has also instituted investment program of US$200m, flexible work schedules with emphasis wherein US$40m will be earmarked on work results and not the number to help Chinese companies capture of hours clocked in. Furthermore, its and capitalise on the benefits of the employees can access a suite of online Belt and Road project. applications and services through For PwC, the Belt and Road which they can work from home Initiative has enabled it to serve more efficiently.

36 Belt and Road projects in 20 “With today’s technology countries, with a total investment advancements and disruptive forces, value of US$43b. The company also professional services providers play launched the Belt & Road United in a bigger role in facilitating business September this year. Belt and Road transformation—helping companies United is aimed to be a membershipreconsider business models, either to establish new revenue streams, radically reduce their cost base, or diversify their business by entering new growth markets,” Chao added.

Dennis Chow, southern region managing partner, Deloitte China, said that Deloitte has recently established an innovative Asia Pacific Blockchain Lab in Hong Kong. The Lab aims to support clients across the region in solving various business problems through the application of Distributed Ledger Technology.

He added that Deloitte has also launched Deloitte Technology Fast 20 programme in Hong Kong, a programme which seeks to acknowledge fast-growing companies Dennis Chow, Southern Region Managing Partner, Deloitte China with viable business models and

based platform that promotes the exploration of business opportunities along the Belt and Road.

Inclusive offices Deloitte’s astounding staff growth is also a result of the company’s goal to improve service capabilities in the technology, consulting, and advisory areas. With millennials comprising an increasing share of the workforce, Deloitte also ensures that this generation’s personal values and career expectations are prioritised Chow said that it has been necessary for them to devise new human resource strategies and initiatives to accommodate millennials’ needs by offering flexible work arrangements with good investment on technology— from telecommuting to nursing rooms for working mothers—based on the needs of the individual, the team, and the client.

BDO’s Kong said that its decision to retain staff numbers over the past year is part of its strategy to accommodate staff needs with a more comprehensive package. BDO offers services from learning and development, career advancement, and staff wellness for work-life balance.Moreover, BDO encourages longer staff retention by offering a clear career path for the first five grade levels, with promotions expected every year. According to him, many of BDO’s fast trackers can be promoted to managerial grade within four to five years, with the possibility of being a director at a young age of 33.

HONG KONG BUSINESS | JANUARY 2018

27

Accounting SUrvey 2017

Accounting Firm

2016

2017 Total Staff

2016 Total Staff

2017 Accounting Professionals

Managing Partner

1

PricewaterhouseCoopers

1

4,000

3,900

<4,000

RAYMUND CHAO

2

Ernst & Young (EY)

2

3,000

2,900

<3,000

AGNES CHAN

3

Deloitte Touche Tohmatsu

3

2,500

2,265

-

DENNIS CHOW

4

KPMG

4

2,200

2,200

<2,200

AYESHA LAU

5

BDO

5

1,100

1,100

1,000

CLEMENT CHAN JOHNSON KONG

6

RSM HONG KONG

6

600

491

530

WONG TAK MAN, STEPHEN EUGENE LIU

7

HLB Hodgson Impey Cheng

7

450

450

<430

RAYMOND CHENG

8

Crowe Horwath (Hong Kong) CPA Ltd.

8

350

350

250

CHARLES CHAN

8

SHINEWING

8

350

350

300

ROY LO

10

Mazars CPA Ltd.

11

300

270

242

STEPHEN WEATHERSEED

10

Baker Tilly Hong Kong

10

300

280

275

ANDREW D. ROSS

12

Grant Thornton*

12

200

200

170

DANIEL LIN

12

Cheng & Cheng*

12

200

200

<200

ANDREW CHENG HONG KEI FRANCIS CHENG HONG CHEUNG

14

PKF Hong Kong Ltd.

14

150

126

110

DAVID LEONG

15

Aoba - Hopkins Group

-

114

110

80

EDMOND POON

16

Patrick Wong CPA*

15

100

100

80

PATRICK L T WONG

16

Pan-China (H.K.) CPA LIMITED

15

100

100

<100

PATRICK NG

18

Wong Brothers & Co.*

17

94

94

94

CHARLES CL CHOW

19

Ting Ho Kwan & Chan

19

80

77

18

STEPHEN TING

20

HLM CPA

18

78

84

<80

ELIZA YUEN

21

FTW & Partners CPA Ltd.

20

68

70

45

FREDERICK TSANG

22

KLC CPA's

22

51

47

42

KENNIC L.H. LUI

23

C K Yau & Partners CPA Ltd

22

45

47

30

JOSEPH YAU YIN KWUN

24

Lawrence Cheung CPA*

24

40

40

11

LAWRENCE CHEUNG WAI-KOU

TOTAL

16,470

15,805

DATA PROVIDED BY COMPANIES. SURVEY PERIOD: SEPTEMBER-OCTOBER 2017. *DATA RETAINED FROM 2016 REPORT

28

HONG KONG BUSINESS | JANUARY 2018

Analysis: BANKING SECTOR OUTLOOK

An emerging global trend that is also taking root in Hong Kong is the use of open banking

Fintech goes mainstream by 2018: KPMG 2018 will see more collaboration amongst banks and Fintech firms to digitise and adopt advanced technologies to improve their product and service offerings and increase efficiency.

W

ith the market environment starting to stabilise in 2017, there are a number of positive developments and opportunities in the year ahead for banks in Hong Kong to increase their profitability. We are seeing increasing signs that US interest rates will continue to rise, which is likely to benefit Hong Kong as liquidity in the city’s system is pulled out to invest elsewhere. This may lead to better yields and increases in revenue for Hong Kong banks in 2018.

We also expect to see credit losses remain within their existing levels, with China’s financial deleveraging proceeding at its current controlled pace without any large shocks that could cause potential losses for banks in Hong Kong.Furthermore, we believe that 2018 will be the year where fintech goes mainstream in Hong Kong.

We appear to have reached a tipping point where the adoption of fintech and other technologies across all aspects of banking has become a priority issue on the boardroom and executive committee agenda. This trend is likely to drive the industry towards making a step change in the adoption of fintech in the next 12 months.

However, it is important that banks bear in mind that technology changes are always more successful when they are business-led, rather than technology-led.

Encouragingly, we are seeing that the industry is now recognising this, with banks increasingly ensuring that they first identify the problems they are facing before 30

HONG KONG BUSINESS | JANUARY 2018

seeking out the best available technology to effectively solve the issues.

Certainly, for banks in Hong Kong, there is no shortage of problems – regulatory and compliance costs, conduct and culture risk, anti-money laundering issues – and banks will increasingly apply technology to tackle these issues, manage costs more effectively and maximise revenue generating opportunities.

Hong Kong’s position as a key international financial centre cannot be ignored, and the city will continue to play a pivotal role in propelling China’s growing influence and

The industry enters a new era of Smart Banking

analysis: BANKING SECTOR OUTLOOK power on the world stage. In 2018, we expect mainland China to continue to use external investment as a soft power vehicle, as well as look to build new trading blocs and forge new alliances. One significant way to facilitate this is through the Belt and Road initiative. We therefore expect to see a major step change in Belt and Road financing that is arranged or facilitated through Hong Kong in the year ahead.

We believe that with these positive developments, Hong Kong’s role of bringing together investors and investees, and facilitating inbound and outbound investment will be stronger than ever in the short-term.

Collaboration, not competition Hong Kong’s burgeoning fintech industry is increasingly becoming an area that banks in the city cannot ignore.

In 2018, we expect to see closer collaboration between financial institutions and fintech firms, as banks continue to seek to digitise and adopt advanced technologies to improve their product and service offerings and increase efficiency.

Hong Kong’s government and its regulators continue to foster fintech innovation and growth as the industry enters a new era of Smart Banking. In September, the Hong Kong Monetary Authority (Hong KongMA) announced improvements to its existing fintech sandbox, and plans to link its sandbox with those of the Securities and Futures Commission and the Insurance Authority to create a single point of entry for piloting trials of fintech products.

In addition, an emerging global trend that is also taking root in Hong Kong is the use of open banking, which is designed to foster greater empowerment of customers, transparency and levels of competition. The Hong KongMA recently introduced a new initiative to allow Open Application Programming Interfaces (APIs) in banking. Whilst the policy framework is still being finalised, this will have an impact on the financial services sector, and will further promote innovation and collaboration between banks and fintech firms.

Once the framework is in place, banks will be able to build on their traditional banking services by including add-ons from fintech companies that enhance their functionality – creating consolidated bank statements from multiple banks, for example. Also in the pipeline

Some Hong Kong banks have experimented on the use of prototype robots

Blockchain and Distributed Ledger Technology (DLT) has been a particular area of interest for banks in Hong Kong recently

In the pipeline for banks and Stored Value Facilities operators is the Faster Payment System, which supports the use of mobile phones for payments in Hong Kong Dollars and Renminbi, with real-time settlement.

for banks and Stored Value Facilities operators is the Faster Payment System, which supports the use of mobile phones for payments in Hong Kong Dollars and Renminbi, with real-time settlement. An industry working group has also been set up to facilitate a common QR code standard between mainland China and Hong Kong, which should encourage greater use of mobile payments.

Finally, blockchain and Distributed Ledger Technology (DLT) has been a particular area of interest for banks in Hong Kong recently – especially around trade finance, digital identification and KYC – and we believe this will continue into 2018. The Hong KongMA is expected to continue focusing on facilitating the development of blockchain and DLT platforms, although the regulator has also stressed that these technologies could raise legal and regulatory issues. Whilst banks in Hong Kong will continue to explore blockchain and DLT technologies in the year ahead, they should also ensure that they carefully monitor regulatory developments and take steps to manage any potential associated risks.

Will robots take away banking jobs in 2018?

Over the last 12 months, we have seen many banks in Hong Kong explore the use of robotics to automate processes, streamline their operations and increase efficiency, primarily throughout their back and middle office functions. Whilst 2018 may not be the year where robots take over banking, we do expect rapid progress in this area during the next 12 months. However, whilst these banks have actively experimented with proof of concepts and prototypes, some have done so without carefully thinking about how to most effectively apply advanced robotics technologies to their business. In many cases, robotics is just being used as a stop-gap measure to overcome flaws in the banks’ system architecture.

Furthermore, many banks have not comprehensively considered and implemented strategies to deal with the potential data and security issues around robotics; digital data is a key component that allows robots to perform their functions effectively. As a result, going into 2018, banks need to delve deeper into understanding the overall application of robotics throughout the HONG KONG BUSINESS | JANUARY 2018

31

Analysis: BANKING SECTOR OUTLOOK

Robotics in banking helps take away some of the most undesirable jobs

organisation, and prioritise the specific processes they want to target.

One example would be to examine business processes where structured (e.g. supplier databases) or unstructured data (e.g. emails, contracts) are used to make judgements and business decisions. If these user processes are labour intensive and time consuming, robotics would lend itself well to the task. Another potential area to target is stable, repeatable processes such as Balance Sheet Substantiation or Reconciliations.

Increasingly, machine learning can be applied to bring more automated intelligence into these processes. Hong Kong banks will therefore need to use the next 12 months to assess how the adoption of robotics and the subsequent process changes will affect their organisational and people strategies.

One common misconception about advanced robotics technologies is that they will eliminate most of the jobs currently performed by the human workforce. On the contrary, robotics in banking helps take away some of the most undesirable jobs, which enables the bank to strategically deploy human resources to the areas where they add the most value, and allows the existing workforce to do their jobs more effectively.

As robotics continues to take root among financial institutions in Hong Kong, a key focus for banks in 2018 will be on developing their people and talent programmes to attract and retain the right skills.

Macro trends affecting banking Going into 2018, there are a number of significant external factors that banks need to monitor and prepare for. Banks cannot ignore the geopolitical tensions and the more nationalistic and protectionist tone being taken by some leaders.

Ongoing developments around Brexit continue to impact many international financial institutions, with several banks considering moving key business and staff out of the UK due to a lack of clarity over the path Brexit will take. We are also seeing similar reported issues around Cataloniaâ&#x20AC;&#x2122;s possible secession from Spain.

Banks will also continue to closely monitor the actions of the US in respect of regulation. Whilst there is continued discussion about rolling back aspects of US regulation, 32

HONG KONG BUSINESS | JANUARY 2018

China already leads the world in mobile payments with volumes increasing five times in 2017 from the prior year to RMB59 trillion (USD 8.8 trillion).

the less reported area of concern is that the US appears to be stepping back from implementing Basel 3, which has been hammered out between the leading economic powers. As a result, some leading European nations have said that they will also not implement aspects of the regulation, as they only agreed to do so on the basis that the US would as well. The Basel framework has been an important mechanism for international cooperation in the post-GFC world, and its demise would leave a worrying vacuum.

One consequence of the increased capital requirements for banks has been to dramatically reduce the attractiveness of Fixed Income, Currencies and Commodities (FICC).

This business has long been one of the biggest revenue engines for wholesale investment banks. As this area of business continues to shrink and become less profitable, it has forced many major investment banks to seek alternative growth strategies, which can put more pressure on executives to find new revenue streams.

Banks need to be mindful of the need to drive profitable growth whilst maintaining a focus on promoting a sound banking culture and mitigating operational and conduct risk.

Across the world, non-traditional players are challenging the traditional banks, and banks are experimenting to find the right balance between treating these insurgents as competitors or partners.

In mainland China, powerhouses Tencent and Alibaba are transforming the way business is done and are threatening to replace the traditional means of B2B commerce and trade finance payments conducted by banks. China already leads the world in mobile payments with volumes increasing five times in 2017 from the prior year to RMB59 trillion (USD 8.8 trillion) .

This has led to the central bank mandating that all mobile payments will need to go through a centralised clearing house by next June to give the authorities greater visibility and control. With this trend showing no signs of abating, banks in Hong Kong and mainland China need to seriously consider how to transform, innovate and compete with the fast-growing non-financial players.

From 2018 Hong Kong Banking Outlook, KPMG

A key focus for banks in 2018 will be on developing their people and talent programmes to attract and retain the right skills.

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Analysis: ASIAN EQUITIES

At the end of the year 2017, Asian mutual funds were overweight Indonesia, Taiwan, China and Korea.

Why 2018 will be a good year for equities HSBC remains constructive on Asian equities in 2018 as they foresee a c15% upside.

A

lthough 2017 was a strong year, it is illustrative to examine sector performance as we move from 2017 to 2018. We do this by looking at trends that flow from the current year into next year by examining Asia from a sector perspective.

Some of the best equity performers of 2017 were the Chinese internet names. Their high growth is likely to continue in 2018, albeit maybe at a slightly lower level.

The interesting development in 2018 will be a raft of new Chinese internet companies that aim to list – ranging from fintech names to online video companies and online publishing platforms as well as Alipay, Alibaba’s payment platform. This will lead to a welcome diversification of the Chinese internet sector that will start in 2018.

Tech hardware performed also very well, in particular the DRAM sector. Demand outstripped supply of the memory chips and DRAM prices rallied, as did share prices of DRAM makers. But supply is now reacting to these higher prices and we will see a peak in DRAM prices in 2018.

In the Chinese consumer sector in 2018, the general environment for discretionary consumption remains healthy. This is due to income growth and wealth effects from rising asset prices. Therefore, key themes such a premiumization in the Chinese F&B sector will continue into 2018. In Chinese retail, it’s online delivery that will make a change in 2018. For retail, instant delivery within 1 hour and a 3km radius will become a key driver for offline 34

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stores’ sales, as these orders will be fulfilled from stores.

In Korea, a major theme in 2017 was the decline in tourist arrivals from China. Analyst Karen Choi argues that this appears to have bottomed out – most Chinese travel groups are not coming anymore, but individual travellers are still arriving. And that will continue in 2018.

Indeed, any small recovery from current low visitor levels will be positive news for companies that service these Chinese tourists, such as the local cosmetics companies like Amore Pacific.

Another sector that performed well in 2017 was Valuations are high

Source: MSCI, Thomson Reuters Datastream, HSBC

analysis: ASIAN EQUITIES Chinese and Hong Kong property. Low rates and ample liquidity in Hong Kong helped propel property stocks higher. These Hong Kong stocks were further supported by increased supply and volume growth. The view is that whilst Hong Kong real estate prices are near a peak but, writes analyst Raymond Liu, valuations are low and as long as volumes remain strong, stocks can inch higher in 2018.

In China, the story is different. Chinese contracted sales momentum in 2017 was stronger than expected.

This, together with a clearer policy direction and an absence of draconian national measures, allowed for strong performance of Chinese property stocks. But the current cycle could be close to a peak in terms of annual national sales. Home price have already started to stabilize, particularly in the tier-1 cities. In 2018, asset turn will remain a key theme in China real estate.

On the other hand, Asian utilities underperformed. This is to be expected in a cyclical recovery, but even renewables – a growth sector – underperformed. Within utilities, natural gas stocks have performed the best. China is looking to lower its energy intensity and reduce its reliance on coal. Therefore, natural gas utilities in the downstream sectors will benefit, as heavy industries accelerate the use of gas versus fuel oil/LPG and coal.

Industrials have seen strong top line growth in 2017, but this is set to decelerate in 2018 due to base effects. In that sense, ASEAN industrials are expected to see more growth than Chinese counterparts. But in China the new trend, says analyst Anderson Chow, is the focus on cost control of many industrials. He expects operating profits growth to outstrip sales growth in 2018.

The one sub-sector where growth remains very strong is automation.Understanding these sector trends for 2018 from a bottom up perspective is the first step. The second is to understand macro trends that might be relevant to Asian equities in the coming calendar year.

2018: start of the great unwinding The macro environment has been positive for Asian equities. In 2018, the strength of economies globally – and China’s, in particular – could increase the risk of rate increases in China and elsewhere in the region. This is not our house view, but a risk the market might respond to Strong earnings upgrades

Source: Source: MSCI, Thomson Reuters Datastream, HSBC

Asia equity volatility fallen under the QE programs, could rise as QE unwinds

Source: MSCI, Thomson Reuters Datastream, HSBC

Earnings growth is expected to decelerate to 11.9% in the next calendar year from 22.3% currently forecast for 2017.

nonetheless. Higher rates can hurt equities’ performance.

Still, as long as this is set against a background of strong earnings and earnings upgrades, it should not derail the equities market. One other difference between 2017 and 2018 is the US Federal Reserve’s upcoming balance sheet reduction and QE unwinding programme. Whilst in 2017 it was all talk about unwinding balance sheets, in 2018 we get to learn how that will actually impact markets when the actual unwinding starts.

The Fed has provided clarity and details on the programme’s implementation. This is why HSBC’s global FI team believes the execution of it will not unsettle the US Treasury market. But we can’t say the same is true for other asset classes once the QE unwinding programme gets under way. It has never been done before, so we are clearly entering uncharted territory. We know the Federal Reserve’s QE programme was created to encourage risk-taking and drive real economic activities. Instead, financial market participants have being adding riskier instruments to their portfolios because of the withdrawal of risk-free Treasuries and lower-risk mortgage securities from the marketplace.

One unintended consequence of the QE programme was to drive down the volatility of various financial assets, including Asian equities and credit. The accompanying chart illustrates that Asian equity volatility has declined substantially in the last years.

Dilip Shahani, HSBC’s Asia credit strategist, points out that this decline in volatility encouraged the use of leverage to enhance total returns in Asian credit.

Unwinding the QE programme might inadvertently push up the volatility of non-Treasury financial assets, which could force investors to deleverage and, argues Dilip, move back up the credit rating curve. By extension, this could introduce more volatility to Asian equities.

How much to expect from Asian equities in 2018 Against this background of unwinding balance sheets, we need to assess the ability for Asian equities to move higher in 2018. This is driven by two key factors, changes in EPS growth and changes in PE ratios. Let’s start by looking at earnings growth projections. Overall, earnings growth is expected to decelerate to 11.9% in the next calendar year from 22.3% currently forecast for 2017.

HONG KONG BUSINESS | JANUARY 2018

35

Analysis: ASIAN EQUITIES outperformance. It’s also important to see how mutual funds are currently positioned in the region. At the end of the year 2017, Asian mutual funds were overweight Indonesia, Taiwan, China and Korea. Global funds (i.e. not Asian dedicated funds) have an almost similar pecking order in their portfolios, with the exception of Korea (more underweight) and Thailand (more overweight).

Dissecting market performance

Source: HSBC

The highest 2018 growth is, for now, expected in India, Indonesia and China.

Admittedly, these 2018 forecasts come with some risk given we have just entered the last quarter of 2017. But for now, this is what consensus is forecasting. Japanese earnings are estimated to grow at 8.2% in 2018, a deceleration from 17.8 % expected in 2017. In our view, Japanese earnings, and by extension the equity market, is mostly driven by global factors in the absence of significant domestic reform. For USD-JPY, our FX team has recently revised their forecast to 108 by end-2018e (from 100 previously). This suggests some low risk to Japanese equities in 2018. We remain underweight Japanese equities.

Japanese equities have outperformed in the last months of 2017. This is because of the USD strength witnessed in the last months, which can be explained away as the mirror of a multitude of idiosyncratic local developments elsewhere. The risk, however, is that the price action across markets since the start of September heralds the beginning of a more challenging global backdrop.

Might 2018 be the year when we have to cope with a cocktail of the belated arrival of inflation, an increasingly hawkish Fed, rising Treasury yields, and a subsequent bullish USD trend? For now, the HSBC view is that this not the case, but we are mindful not to be complacent.

A stronger dollar would translate into higher Japanese earnings and positive momentum for Japanese equities.

As mentioned before, the other factor is the prospective change in PE multiples for Asian equities. This, again, is driven by the difference between ROE and COE across the region.On the other hand, the aforementioned rise in volatility associated with the unwinding of QE programs could create some drag to Asian PEs. All in all, PEs are expected to be only moderately higher at the end of 2018 than they are now. The lift in PE and PB multiples is seen in Chart 5 and chart 6, and show its accompanied by rising earnings and increases in ROEs. Putting the EPS numbers and views on PEs together allows us to come to an initial estimate of what happens with Asian equities in 2018.

It suggests low double-digit EPS growth can be accompanied by some moderate PE re-rating, allowing Asian equities to move c15% higher in 2018. Obviously, the further we look into the future, the more uncertainty we should attach to these numbers.

As ever, country selection is key to Asian equity 36

HONG KONG BUSINESS | JANUARY 2018

Japanese earnings are estimated to grow at 8.2% in 2018, a deceleration from 17.8 % expected in 2017.

Possible out-of-the-box stock idea for 2018 When it comes to travel in Asia, most people think about China, or Korean consumer companies. But one of the fastest growing travel markets in Asia is India. According to a report by the World Travel and Tourism Council (WTTC), the travel sector contributed nearly 7% to GDP in 2016. It is expected to grow at a CAGR of 7.9% between 2016 and 2026, twice the rate for the whole of Asia over the same period.

India’s hotel industry will benefit from this. It is recovering after a long downturn dating back to the global financial crisis. Important operating drivers such as revenue per available room (RevPAR), occupancy levels and the average daily rate (ADR) are all improving as stronger demand offsets the impact of surplus room supply. India travel is expected to grow at a CAGR of 7.9% between 2016 and 2026, twice the rate for the whole of Asia.

Meanwhile, our industrial analysts are positive on Chinese rail operators over the medium to long term as China Railway Corporation (unlisted) will speed up railway industry reform. This includes potential positive tariff revisions for passenger and freight as well as mixed asset ownership or asset injections and the emergence of the “rail plus property” business model.Guangshen Railway is also looking at potential opportunities for land development – the company owns 13.1m sqm of land but a detailed plan for development is not available yet. This could further add to earnings surprises in 2018.

Surprises are, by definition, hard to predict. But given the developments mentioned above, this stock has a high probability of positive earnings surprises in 2018. From HSBC’s Asian Equities in 2018

Chart 5: Asia PEs rising

Source: Natixis, CEICReuters Datastream, HSBC Source: MSCI, Thomson

ANALYSIS: Real Estate when construction commences. It is therefore challenging for developers to correctly anticipate the technology that potential tenants will require.

Nevertheless, CBRE Research believes that landlords should proactively implement basic features to attract and retain tenants as well as build-in greater flexibility into their buildings for occupiers to implement their own technology.

Smarter business solutions The rise of technology including artificial intelligence, augmented reality and 3-D printing raises the spectre of massive job losses and the While location will remain important, the changing order of real estate will obsolescence of traditional industries. require buildings and work spaces to be far more flexible and adaptable However, the technology regarded as having the most significant impact on business is the smartphone, which is a catalyst of change rather than an innovation itself. With penetration CBRE Research believes that landlords should proactively implement basic of nearly 60% in Asia Pacific, mobile features to attract and retain tenants. phones are the primary means by which many people collect Landlords are dvances in technology are and development to modify their information, approach customers comparatively breaking the traditional product and service offering. and dispatch services. Survey more reluctant process of companies While disruptors are challenging to invest in deciding on a location where they established players with new business respondents identified a major gap between technology and usability; the technology as would like to do business; buying or models and early adopters have they believe it leasing an office; fitting it out to their identified the need for change, many technology is in place but it is difficult could already specifications; and installing it with followers are struggling with the cost to use.

This is inhibiting the pace and be obsolete technology for their staff to perform of investing in new technology and acceptance of change among business by the time a their jobs. At present, employeesâ&#x20AC;&#x2122; questioning whether it is worth the and customers. The proliferation new building is preferences are rarely included in capital outlay. of mobile apps is a key solution for completed. this decision-making process. The The survey found that landlords usability, with more than six million digital age is reversing this process. are comparatively more reluctant to apps available in online stores.

Individuals are very much in the invest in technology as they believe The adoption of mobile apps driving seat and companiesâ&#x20AC;&#x2122; decisions it could already be obsolete by the in the real estate sector is still at a are being informed by connectivity time a new building is completed, and accessibility as well as talent considering the typical development nascent stage. Only a few respondents reported having apps for use in the attraction and retention. Whilst period of three to five years. workplace such as helping to reserve location will remain important, the Most new office buildings in Asia meeting rooms, order meals and changing order of real estate will are speculative developments and control air conditioning. From CBRE require buildings and work spaces do not have anchor tenants signed to be far more flexible and adaptable than before.

The changing order of real estate

Technology alters real estate

A

Keeping up with technology The survey found that whilst 75% of respondents believe that technology is driving significant change in business, only 60% feel confident in responding to these changes. Even among non-tech companies, senior management believe that success and failure rests upon how well they adopt new technology and digitise their business. To this end, more companies are investing in research 38

HONG KONG BUSINESS | JANUARY 2018

Source: Always On - Real Estate Response for a Rapidly World, CBRE EMEA Research

Legal briefing

Profits tax exemption for open-ended funds The initiative is seen by experts as a good move to promote the asset management industry in Hong Kong.

A

s part of Hong Kong’s push to be an Asian asset management hub, the Financial Services and Treasury Bureau put forward key proposals that would expand the profits tax exemption to also cover onshore privately offered open-ended fund companies, or OFCs. Industry players welcomed the proposals since it would effectively bring greater parity in the tax exemption rules that mostly benefited onshore publicly offered and offshore OFCs, said legal experts.

What are the proposals?

Anthony Lau, tax partner at Deloitte, explained that the current law only provides an exemption from profits tax to publicly offered funds authorised by the Securities & Futures Commission of Hong Kong or an equivalent overseas regulatory body, and offshore funds. The proposals seek to eliminate the existing disparity of tax treatment between privately offered OFCs and publicly offered OFCs, as well as against offshore fund vehicles, said Sophia Man, partner at Baker McKenzie in Hong Kong.

What are the qualification requirements?

To qualify, the onshore privately offered open-ended fund company must be an onshore fund, with its central management and control located in Hong Kong, said Man. It also cannot be closely-held, meaning owned by only a few individuals or corporate investors. Criteria will focus on ownership, fund document, and terms and conditions requirements.“This is intended to prevent abuse of the tax exemption by individual or corporate investors through artificially repackaging their business to take advantage of the exemption,” said Man. Prior to the proposal, there was a legislative regime for OFCs, but it was not a sufficient incentive for funds to locate in Hong Kong, which means that the parity of tax treatment that the proposal introduces has been broadly welcomed, said Lau.

The proposals seek to eliminate the existing disparity of tax treatment between privately offered OFCs and publicly offered OFCs, as well as against offshore fund vehicles.

Man, meanwhile, said the proposals should attract more funds to domicile and originate in Hong Kong. In particular, it should draw in more fund companies and managers looking to establish a regional distribution centre from which to sell products to Asian investors. She added that, as a result of this surge of funds going to Hong Kong, there will likely be a greater demand for local fund management, investment and advisory services, more job opportunities, and other beneficial advantages for Hong Kong’s asset management industry.

40

HONG KONG BUSINESS | JANUARY 2018

Sophia Man

Lewis Lu

What are the qualification requirements?

The conditions to be satisfied to obtain exemption are onerous compared to the offshore funds exemption regime and the required investment amounts of HK$200 million and HK$20 million are high compared, for example, to the professional investor eligibility level of assets of HK$8 million or the Cayman requirement of a minimum investment of US$100,000 (HK$780,000) in a registered mutual fund, according to a spokesperson from Deacons.

“Whilst the introduction of a profits tax exemption is welcomed, there are concerns as to the level of certainty the proposed terms of the Bill will provide and as to how many private funds would in practice qualify as not being closely-held,” the spokesperson said.

Lewis Y. Lu, head of tax at KPMG China, views the policy initiative as “encouraging” with regards to promoting the asset management industry in Hong Kong.

But its effectiveness could be hampered by some areas of uncertainty.

For example, he said there could be concerns as to whether an OFC can satisfy all the not closely-held conditions at all relevant times in order to enjoy the tax exemption. The Bill is also silent on the stamp duty implications with regards to an OFC, and he said a full exemption from stamp duty should be considered.

A bigger concern for Lu is a provision that deems dividends from a non-exempt OFC to be taxable to the extent they are regarded as consideration or remuneration for services rendered in Hong Kong. “This is a simplistic approach to address the issue of carried interest and performance fees in Hong Kong,” he said.

When will it be implemented?

The Financial Services and Treasury Bureau is targeting an amendment bill by the second half of 2017 to coordinate its implementation with the commencement of the OFC regime in 2018, said Man, and another consultation round will likely be held before finalising the legislative amendments.

marketing Briefing

CMOs leverage UX to boost ROI

User experience (UX) will be shaped by AI-led digital solutions in the digital marketing world.

F

our in five customers in the Asia Pacific region would immediately switch brands due to poor user experience (UX). Confirmed by Qualtrics in a survey, this finding is a result of increased online engagement and digitalisation, wherein customers are exposed to a diverse set of choices, brands, and online platforms. This poses a huge challenge to Hong Kong’s already competitive marketing industry and the digital solutions that they propose. Edith Wong, chief marketing officer, Invest Hong Kong, said that UX provides digital marketing guidance which stems from data and research.

According to her, today’s digital landscape dictates that personalisation, prioritisation and convenience are the norms and not simply an option. This creates the need for UX in all aspects of the marketing strategy.

How does user deliver ROI? “UX delivers return on investment (ROI) by driving brand loyalty and maximising retention. It focuses on the needs of users to create a more relevant, engaging and rewarding experience, thus promoting loyalty. Marketers are also able to understand users’ behaviours at the beginning of their online journey and know what is required to best retain their consumers or clients,” Wong added.

According to Xavier Schillinger, chief marketing officer, Clickful, when a media outlet rethinks its digital ecosystem, the impact of UX on ROI can actually be measured through time on site, page views, returning visitors and ultimately, advertising revenue or search engine optimisation (SEO) ranking.

As more companies embrace artificial intelligence (AI) and robotics in their operations, marketers must be able to come up with a UX strategy that can easily adapt to the fast-paced world of digitalisation. From booking a taxi app through SIRI to discovering the best restaurants through a chatbot, users in APAC, are fast seeing the growth and innovation in AI-led digital solutions and digital marketing. Qualtrics also found that almost half of users in Singapore and Hong Kong would be satisfied dealing with an organisation staffed by AI. Marketers have in fact gone

42

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beyond that user expectation by directing UX to be more response-based. Schillinger added that marketers can set trackable goals and provide data to the UX designer who will then analyse and strategise.

“When an extensive UX revamp is starting, you need in the room: marketers, UX designers, graphic designers, IT, product managers, and I would also say top C executives as it can have big impact on the branding,” Schillinger said.

Furthermore, marketers must be able to understand the user experience for new products, websites, mobile apps, and prototypes. According to Foo Mao Gen, head of Southeast Asia, Qualtrics, marketers must make

Trends to look out for in UX design in 2018: humanising digital experience, voice user interfaces, the use of data, Augmented Reality and the focus on content.

Edith Wong

Xavier Schillinger

Foo Mao Gen

informed decisions by testing various aspects of product design; discover, optimise, and evaluate the genuine UX; understand each user interaction prior to conversion; and nail the design and experience early in a product’s life cycle. “Consumers are changing the way they research and buy products. Hence, organisations should be clear about possible obstacles, sources of motivation, or what drives satisfaction. Consistently tying journey performance, instead of one-off interactions, to actions, will help organisations deliver a more personalised customer experience that in turn will encourage loyalty and repeated purchases,” Foo added.

What are the trends in UX design in 2018?

Going forward, Wong said that the trends to look out for in UX design in 2018 are the following: humanising digital experience; voice user interfaces; the use of data to enhance personalisation offering; augmented reality; and the focus on content. “We will see many revamps or indepth integration of e-commerce mobile apps. The other trend is the connected TV experience, brands will look at this channel with more attention,” Schillinger added.

The connection is clear between a company’s UX strategy and its ROI. In fact, UX strategies in digital marketing have become a prerequisite for brands in order to keep up with, if not exceed, user expectations. However, marketers and their firms should not be impulsive in rolling out solutions.

At the end of the day, collaboration and empathy to users should be the core fundamentals for marketers.

Wong said that it is important for marketers not only to place the responsibility on themselves or their partners in creating a user-centric digital marketing solutions.

According to her, a constant discussion and joint-effort should be encouraged instead.

OPINION

tim hamlett

Seeing stars in Hong Kong restaurants

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

I

am an enthusiastic amateur cook. After many years of managing with a variety of recipe books, I discovered a great deal of inspiration on Youtube. Famous chefs here strut their stuff, and this brings us to the matter of the Michelin Guide, or if you pronounce it in French with the adjective after the noun, the Guide Michelin.

This dates back to 1900, when the owners of the Michelin tyre company, in an effort to increase demand for their product, started publishing an annual free guide to petrol stations, garages, and hotels.

In due course, this became a paid-for publication, and developed a speciality in reviewing restaurants, which it still does today. The guide now comes out in the form of a little red book, and grades restaurants in three categories: One star: “A very good restaurant in its category” (Une très bonne table dans sa catégorie)Two stars: “Excellent cooking, worth a detour” (Table excellente, mérite un détour) Three stars: “Exceptional cuisine, worth a special journey.”

The annual appearance of the guide now attracts, at least in France and the United Kingdom, the sort of industry and media attention which attends the Oscars. Chefs take very seriously their star status and, in at least one case, the constant struggle to keep three seems to have led to the suicide of the cook concerned.

Let’s just say (for we have to get to the local angle soon) that the guide has attracted a certain amount of controversy. Some restaurants have asked not to have stars, either because a star produced a surge of demand which overwhelmed the successful chef, or because it led customers to expect a sort of “fine dining” to which the restaurant did not aspire.

Controversial stars Marco Pierre White, who despite his exotic collection of Christian names comes from Yorkshire, tried to give his third star back. The identity of the guide’s anonymous inspectors is a closely guarded secret, but one disillusioned former inspector went public with the complaint that some of the things the company claims—for instance, that candidate restaurants and existing star-holders are reviewed repeatedly—are not true. Well, French people take this stuff seriously.

And not only French people, it seems. A little row has been bubbling along in America about the coming and going of various cities which have had Michelin guides of their own, and then did not have them.

It then emerged that to have a Michelin guide published about your city, you pay the publisher a fee, which they politely call a commission. You do have to offer a reasonable number of restaurants for them to inspect, but they do not take the initiative. You cough up the money. No money, no guide. In the course of this mini-scandal, the Michelin people 44

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Hong Kong’s gastronomic adventure

pointed out that “the guides in Seoul, Macau, Hong Kong, Bangkok, and Singapore were all commissioned.” Were they indeed?

Michelin guide to Hong Kong I don’t know what the people in Seoul, Macau, Bangkok, and Singapore think about this, but it seems rather a curious use of Hong Kong’s public money, even allowing that the government has more of it that it knows what to do with. Also, I seem to remember that when the Michelin guide to Hong Kong first appeared, we were told, by people who should have known better, that this was a tribute to Hong Kong’s status as a culinary capital, an acknowledgement of the extraordinary quality and diversity of our food landscape. No it wasn’t. We just bought it.

According to a local food blogger called e_ting (get it?), he had some suspicions about this and specifically asked the Tourism Board in 2014 if it had any involvement in the genesis of the Hong Kong guide. The Tourism Board’s reply (which would have struck me as suspiciously detailed) said that the Board denied “any lobbying of Michelin to come to Hong Kong, any influence over restaurant selection, inspector, and restaurant nomination, and rankings in any way.” The possibility that the Tourism Board had financed the whole enterprise was not mentioned. Mr. Ting now feels with some reason that this was not as illuminating an answer as it should have been, and wonders if—now that Michelin has let the cat out of the bag— we shall hear from the Tourist Board.

Perhaps we shall. Indeed, I can practically write their answer now. You have to wonder two things, though. One is why, if this was such a good idea, the Tourism Board has been so slow to claim credit for it. The other is whether this is really a practical way of increasing tourist numbers. Hong Kong tourists generally come from a long way away. The more affluent, the further. We have six restaurants which are, apparently, “worth a special journey”.

Hong Kong tourists are in for a food trip

OPINION

Hemlock

Why the Link REIT is a problem that wont go away

T

he Link Reit is a problem that won’t go away. The portfolio of shabby low-rent shopping malls and car parks attached to public housing estates was privatized under Tung Chee-hwa in the early 2000s.

(The crop-haired one thought privatization would make him look Thatcher-cool – thus also the MTR flotation. We might also consider that the subsidized retail complexes competed with Beijing’s co-opted property-giant buddies. For small MPF savers and retirees, it is a dependable utility-like investment.)

The new profit-driven owner started to upgrade the malls. Among the improvements were noticeably more hygienic wet-markets. But the managers also put previously-peppercorn rents up, and this led to some traditional mom-and-pop stores closing, big chains moving in, and – in some cases, according to the anguished complaints – impoverished public-housing residents being forced to travel miles for affordable sustenance. The Link has therefore become demonized as a heartless and cruel exploiter of the downtrodden.

Hong Kong’s dilemma The company recently decided to sell a large chunk of its portfolio to a consortium. They thus cash in whilst real-estate prices are inflated, and divest themselves of the political burden. Activists are warning of the death of communities as the new management hikes rents in order to get a return on their insightful/bold/stupid investment. Politicians are echoing them – and this is where Regina comes in.

Free-markets principles make sense in free markets.

But what do we have in Hong Kong? The government owns all the land, keeps it in artificially short supply, and allows a cartel to dominate much real-estate.

And then – as if the retail property market were not sufficiently distorted – the same government crams in millions of ‘tourists’ who are mainly shoppers of certain goods arbitraging a protected market of 1.3 billion next door. Libertarian waffle about how we must ‘stop glorifying and encouraging business failures’ is meaningless on such a tilted playing field. So is populist demonizing of the Link – a government-created entity partly owned by many of us. The problem is Hong Kong’s cartelized semi-feudal stitched-up crony-riddled travesty of capitalism.

Twenty years ago, Hong Kong was ahead of the curve with its space-age Octopus Cards—visitors were amazed to see commuters glide through MTR turnstiles with a wave of a handbag or even watch over 46

HONG KONG BUSINESS | JANUARY 2018

the “doot” thing. Since then, as we all know, the city has stood still. Meanwhile, mainland China has leapt ahead of this crappy old contactless chip tech and, according to every hackneyed article on the subject, even the beggars up there accept payment via QR codes and phones. My Octopus doesn’t top itself up automatically, so I only use it for transport, which is apparently medieval.

E-payment systems The Hong Kong government does not seem in a hurry to prove that e-payment systems could make life easier for us. When the Transport Department messed up the opening of new highway toll booths in Lantau, it was partly because the majority of drivers pay in cash—they have to pay extra to use the auto-toll system.

Meanwhile, as I understand it, the Hong Kong Monetary Authority has allowed several e-payment systems to offer services here (some convenience stores accept mainland ones). But the systems do not connect with one another and they struggle to take off.

It’s almost as if our officials, for all their talk of tech and innovation, do not want change, because it would disrupt existing vested interests. Ask Uber.

(Octopus—a nice money-spinner, as it enjoys interestfree deposits from the entire population—is owned by the transport operators, several of which are, of course, part of the property-tycoon cartelised empires.

Surprise.) However, Jack Ma and Tencent might be in a position to override the interests of even our allimportant local pro-Beijing shoe-shiner rent-seeking parasites. The mainland giants’ vision of a “fashionable” cashless society fits in ever-so neatly with the Chinese Communist Party’s dream of data-driven surveillance of every individual.

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

Hong Kong’s Octopus card reader at the entrance of Light Rail Tin Shui Wai station, New Territories

interior design architecture 連續十一年榮獲Hong Kong Business頒發

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Event coverage: 2017 NetEvents global Summit

MK Palmore, Dr Ronald Layton, and Michael Levin spoke at the Opening Keynote Session

How companies can defeat modern-day hackers

Find out who the hackers are, what they want, and how your company can prevent the next cyberattack that could cost you billions.

T

he recent data breaches and cyberheists across the world unmasked one of the scariest enemies of private and public entities alike: cyber criminals.

And if the progression of the recent attacks are anything to go by, we can only expect these perpetrators to become even more sophisticated and aggressive over time. This was one of the topics discussed at the 2017 NetEvents Global Press & Analyst Summit in San Jose, California held on September 27 to 29.

In one of the keynote sessions, MK Palmore, information security risk management executive at the Federal Bureau of Investigation San Francisco, said the most prolific computer network intrusion activities throughout the world are those motivated by financial concerns. He said the attackers who do it with almost 100% anonymity are “mostly self-taught males aged 14-32 years old who have access to the dark web and to a limitless amount of information.” What’s more alarming is the fact that these attackers, particularly in the financial sector, all know each other. Ronald Layton, deputy assistant director at

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When you look at the analysis and the pathology of how malware gets on a system, you’re going to find that the major percentage comes from clicking on an email attachment.

the US Secret Service, said, “They all are collaborative, they all use Russian as a communications modality.”

He added that the technological sophistication and capability of threat actors have increased. “The toolsets that you see today that are widely available would have been highly classified 20 years ago. Sophistication has gone up exponentially,” he said.

So with these threats looming, how can companies prevent the attacks?

Michael Levin, former deputy director of the US Department of Homeland Security, said it all boils down to the basics of security. “We’re hiring new people and putting them in important roles, but we’re not telling them what they can and cannot do. Many organisations do not want to take the time to educate their people. It’s about time that every institution starts figuring out a way to educate people to protect themselves,” he added.

Layton concurred and said organisations pay a lot of attention to what the ‘bad guys’ will use to further their own illicit gain without checking if proper internal barriers are in place. “Convenience is the new nicotine, and the new caffeine

is curiosity. When you look at the analysis and the pathology of how malware gets on a system, you’re going to find that the major percentage comes from clicking on an email attachment. Human factors and the psychology of cyber is something we must pay attention to. One way to counter this is through cyberhygiene,” he noted.

This message, whilst simplistic, is not being followed by businesses. “When you go through information security training, there are basics you are taught about protecting systems.

We always find that there’s some gap in coverage in security that boils down to the fundamental issue of security protection. We’re talking about simple things such as patch management, audit and log management, security and vulnerability assessments, or buy-in from leadership and management,” Palmore said.

Strengthening cyberdefence Enterprises can do three things to up their game against cybercriminals, according to Palmore. First, there has to be a commitment from the leadership to invest in cybersecurity.

Second, they have to practice the information security fundamentals, and lastly, they have to engage in information sharing. “As a business, you do not see the entire cyber threat landscape. You have to plug yourself into an intelligence apparatus,” he added.

In the private sector, Levin said the concept of encryption is an important piece of the puzzle. “One of the things we see all the time is people send emails with very sensitive information. This is why we are seeing more organisations encrypting their emails. So as the crooks get more sophisticated, the private sector needs to be more sophisticated,” Levin said.

He added that it is equally important for firms to establish a practice that creates a sense of community for security. “If you can create that sense within the organisation, you’ll see a better result,” he said. By Roxanne Uy