Hong Kong Business

Display to 31 January 2014

14 INVESTMENT IDEAS FOR 2014 winning picks for the year of the horse

+

as goes singapore, so goes hong kong? central hk a ghost town inthe making?

BIG DATA, BIG PROBLEMS

bigger bonuses for bankers

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

HONG KONG

FROM THE EDITOR

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Last year, we brought you investment ideas with the goal of leading you to more informed investment decisions for the Year of the Dragon. Now for the year 2014, we explore 14 promising investment ideas that could help you pick the right horse.

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In this issue, we also present the largest 25 accounting firms in Hong Kong. PwC and Deloitte, with each having 2400 staff, tied for the top spot in this year’s rankings.

Singapore and Hong Kong residential property may well be a tale of two cities, but in this case home prices are telling the same story. If the 93% correlation between the two cities holds then what happens to Singapore residential property prices should also happen to Hong Kong. And the outlook for both markets is as ugly as a Dickensian character. The office market isn’t any good either with Central Hong Kong hit by rising vacancy rates.

Our channel checks with analysts also revealed that smaller Hong Kong banks are currently the acquirers’ line of sight, attracting interest from cash-flush Chinese banks as well as other larger Singaporean and Malaysian banks, Start flipping the pages for more in-depth features. Enjoy!

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

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

Interest rate strategy

CNH: Will Qianhai jeopardize Hong Kong’s position?

DBS Group Research

6 Sep 2013

In mid-2012, the China’s State Council approved the development of the Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone. Four industries were focussed upon: finance, logistics, information services and science & technology services. Particular emphasis was placed on finance, for which the government designated Qianhai to be built into an experimental zone for financial innovation and further opening-up to the outside world.

Back then, market watchers found it difficult to associate the mudflat with such bold plans. We, however, have been optimistic about the project. Specifically, we stated in earlier report that the zone’s development would be kicked off by the launch of a cross-border RMB lending scheme (see “CNH: RMB lending set to cross border in pilot plan”, 16 April 2012). In Jan13, only nine months after the approval has been granted, fifteen Hong Kong banks were authorized to offer a combined RMB2 bn of loans for Qianhai companies. More impressively, the first Qianhai land auction was held in July and construction is planned to start by October. It signals that the zone has already entered into an expansion period.

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

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

Three decades ago, Hong Kong’s manufacturing industry was hit by soaring costs. Factory rents and manufacturing labor wages ballooned 140% and 170% respectively during 1980-90. The city’s international competiveness was being challenged by several lower-cost developing countries in the region. For instance, the manufacturing labor costs in IndoneChart 1: Transformation of HK economic activities sia at the time was only during 1980-2000 one-fourth that of Hong Kong.

30% 90% Shenzhen became an expansion outlet for Hong Kong manufacturers and the timing could not have been better. The availability of abundant inexpensive land and labor in Shenzhen made it possible for Hong Kong manufacturers to move labor-intensive processes across the river. Meanwhile, more skill-inten-

Manufacturing 25%

Service (rhs)

85%

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

5% 0%

65% 1980

1984

1988

1992

1996

2000

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

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

CONTENTS

Hong Kong banks top

16 takeover wishlists

26

COVER STORY 14 promising investment picks for 2014

24

FIRST 10 NEVER SAY SORRY 10 As goes Singapore,

so goes Hong Kong?

11 Is Central Hong Kong a ghost town

in the making?

11 The Chartist: COMMERCIAL

12 Bigger bonuses for bankers in

46 Manpower shortage?

Hong Kong

What manpower shortage?

48 Mainland’s Third Plenum reforms

to boost Hong Kong?

50 Decline of the Hong Kong

PROPERTY WON’T ESCAPE THE DOWNTURN UNSCATHED

12 Cash-flush tourists in HK

ANALYSIS

OPINION

Hong Kong’s local artists get more exposure online

property ad

24 Hong Kong’s local artists get

more exposure online A shift towards online promotion of artworks is becoming more apparent. Is the Hong Kong Art Space trending well on a social media platform?

38 The longest, boring, slow

REGULAR

down ever What drives economic growth?

36 Legal briefing: New tax treaty

stimulates business traffic

38 CMO Briefing 38 CIO Briefing

Published Bi-monthly on the Second week of the Month by Charlton Media Group Pte Ltd, 19/F, Yat Chau Building, 6 262 HONG KONG BUSINESS | JANUARY 2014 Des Voeux Road Central, Hong Kong

For the latest business news from Hong Kong visit the website

www.hongkongbusiness.hk

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

RESIDENTIAL PROPERTY

Why analysts are convinced home prices will fall 30% According to Barclays, they believe property prices are always set by the marginal buyer. “Our analysis of the home price-to-income multiple, the buy-vs-rent cash flow equation and the opportunity costs of holding a property suggest that home prices should correct by at least 30%.”

“With home prices up 111% since end-2008, it believes there is significant scope for owners to take profit on their property holdings.”

ECONOMY

Hong Kong’s total exports surged 8.8% to to $323.1b Hong Kong’s total exports’ value rose by 8.8% to $323.1 billion in October over a year earlier, compared to a year-on-year increase of 1.5% in September, the Census & Statistics Department announced today. Within this total, re-exports’ value rose 9.1% to $318.7 billion, while that of domestic exports fell 7.7% to $4.5 billion. Concurrently, imports’ value increased 6.3% to $361.2 billion.

RETAIL

Retail rents in Hong Kong seen to spike next year Retail rents in the world’s most expensive markets are expected to rise further in 2014 due to a shortage of prime available locations and a lack of new development according to global property advisor CBRE Group, Inc. With a healthy tourist market and a lack of available space, finding an adequate unit in prime retail locations is a major challenge for new and existing retailers.

FROM THE BLOG Creating an efficient SEO-friendly content development in HK

BY JULIEN RIO As a direct consequence, most websites, blogs, Social Media pages and articles published for Hong Kong readers are usually translated in several languages. The usual procedure is to develop a set of content in a given language then go to official translators.

The truth behind your retirement plans revealed

BY DAVID KNIGHTS Hong Kong life expectancy, for both sexes, has steadily increased over the last 41 years.

Male life expectancy increased from 67.8 to 80.7 years between 1971 and 2012. Over the same period, female life expectancy has also increased from 75.3 to 86.4 years.

Is Bitcoin our future currency?

BY J. BRADLEY HALL In Hong Kong, any discussion regarding currencies tends to focus on offshore trading of the RMB, and how much longer the US$ can maintain a diminishing global reserve status. Monetary scholar Edwin Vieira has observed that every 30 to 40 years the reigning monetary system fails and has to be rebooted.

FIRST NEVER SAY SORRY

Sorry seems to be the hardest word especially for Asian business leaders who fear of looking incompetent in front of their subordinates. The Forum Corporation’s Leadership Pulse Survey recently revealed that trust in Asian leaders is slowly diminishing in the workplace. One in five employees and two in five leaders believe that trust in leadership is lower today as compared to the past. Cynthia Stuckey, Managing Director of Forum in Asia-Pacific, says that a decline in this critical element of the employeemanager relationship can be extremely detrimental as this directly reduces employee engagement and impacts morale and workforce productivity. “Employee trust in leadership is more important now than ever before as organisations grapple with mounting competitive, internal and external pressures,” she adds.

Asian bosses fear losing face While leaders in Asia say they admit to (97.2%) and apologize (99%) for their mistakes, employees do not agree. In fact, five out of ten employees (50%) say that their leaders rarely or never apologize. The overwhelming fear of looking incompetent or weak is cited as the main reason why leaders in Asia do not shoulder up for their mistakes.

Sixty-seven percent of leaders believe saying sorry will make them look incompetent, while another 25% believe they would look weak to their employees.

According to Stuckey, the concept of “face” is highly important in Asia and very influential in leadership. ‘Losing face’ by demonstrating weakness and incompetence is considered to diminish the stature of the leaders in the eyes of his or her subordinates.

By not owning up to their mistakes, leaders risk losing their employees’ trust. On the other hand, there is a strong agreement between leaders and employees around the importance of trust in leadership (96.5%). “Trust is a critical component of a successful employee engagement strategy that increases productivity. Building and strengthening trust in leadership is a multifaceted process that requires leaders to truly understand what their employees expect of them,” says Stuckey.

10 HONG KONG BUSINESS | JANUARY 2014

A tale of two cities

As goes Singapore, so goes Hong Kong?

S

ingapore and Hong Kong residential property may well be a tale of two cities, but in this case home prices are telling the same story. Both Singapore’s URA Property Price Index (PPI) and Hong Kong’s Centa-City Leading (CCL) Index have demonstrated a 93% correlation since 1998 according to Barclays property analyst Paul Louie.

If the connection holds then what happens to Singapore residential property prices should also happen to Singapore. And the outlook for both markets is as ugly as a Dickensian character.

HK-SG correlation Louie expects that Hong Kong residential prices will fall by 30% by 2015 and Singapore by 20% over the same time frame. Just why these markets should be so correlated is not entirely clear. Both markets are different in terms of supply and population growth and home ownership, where HK is at 70% and Singapore at 90%.

“Hong Kong’s private home prices have risen 111% since the 4Q98 bottom, while Singapore’s have risen at a slower pace of 62%. In terms of affordability, Hong Kong’s c57% mortgage-to-income ratio is also higher than Singapore’s c33% level.

The volume of home sales remained suppressed by the government’s cooling measures to curb speculation.

In Hong Kong, the volume of home sales remained suppressed by the government’s cooling measures to curb speculation. Thomas Lam, Knight Frank’s Director & Head of Research & Consultancy for Greater China notes that in October 2013, the primary residential market was the most active among Hong Kong’s property sectors.

A number of new residential projects launched offered attractive packages to lure buyers, which served to further quieten the second-hand market. “Developers’ aggressive pricing strategies revitalised the market with the return of long-term investors and local buyers seeking to upgrade their homes—both hindered by the Double Stamp Duty previously—as well as Mainland buyers who were previously saddled with the Buyer’s Stamp Duty,” he adds.

Rents soften as expats exit Another interesting trend is that some expats are forced to relocate to less prestigious locations or downsize their accommodation as their employers cut their budget and trim housing allowances. This resulted in the softening of luxury residential rents.

Savills Deputy Managing Director Peter Yuen also predicts luxury apartment prices to end the year 5% to 10% down from 2012 and anticipates a similar correction next year as government measures take effect.

SG-HK private home prices: 93% correlation since 1998, but HK’s has risen 111% since its recent trough in 4Q08, while SG risen 62% 2Q09

Note: Both property indices are rebased to 100 in 4Q98 PPI: Property Price Index, only for private residential properties in Singapore Source: CCL, URA, Barclays Research

FIRST

Rents are softening across all major office districts except Island East while Central has been hardest hit and vacancy in the area remains stubbornly high.

Central Grade A offices hardest hit by high vacancy rates

Is Central Hong Kong a ghost town in the making?

O

ffices in Central Hong Kong have been seeing more empty chairs at empty tables with rising vacancies as demand from larger banks and professional services remain weak and other tenants currently downsizing or looking to surrender floors. Central Grade A offices are hit by the highest vacancy rate since January 2010 at 5.4%. Consequently, rents have fallen over the last nine quarters, with an accumulated decline of 20% since the second half of 2011.

“Rents are softening across all major office districts except Island

East while Central has been hardest hit and vacancy in the area remains stubbornly high,” says Simon Smith, Senior Director for Asia Pacific at Savills Research.

Not much demand for large offices Smith adds that demand for large spaces of over 10,000 sq ft is limited.

Although some asset management firms are entering Central, they are looking for areas of less than 7,000 sq ft. STI Asset Management and Balyasny Asset Management took up 6,400 sq ft and 5,800 sq ft in 100 Queens’ Road Central and

Two Exchange Square respectively.

Only a few cases of larger occupiers renewing their leases were observed in Central in Q3/2013.

Dampening office rents This trend will carry on until 2014 as Fitch Ratings predicts office rents in the main business district of Central to continue to be dampened by lack of expansion demand from foreign financial institutions. For offices outside Central, Fitch says rents will probably edge up but the increase will be limited because of the narrowing gap between Central and non-Central rents.

Fitch notes that the outlook of the commercial property sector in Hong Kong is sensitive to two key factors: the Chinese economy and the Hong Kong residential market. Any unexpected slowdown in China or sharp decline in Hong Kong residential prices will cause downward pressure on office and retail rents.

Grade A office vacancy rates, Jan 2006 - Sep 2013

Source: Savills Research & Consultancy

The Chartist: COMMERCIAL PROPERTY WON’T ESCAPE THE DOWNTURN UNSCATHED It looks like Hong Kong office market is on its way to becoming more lethargic. Activity beyond Central remains disappointing. According to CBRE, in Causeway Bay, the surge of activity has decelerated after all Sunning Plaza tenants have found alternative space. The only notable transaction was for LinkedIn, who leased the only remaining floor of over 16,000 sq ft in Hysan Place.

On the other hand, Barclays said that while they believe affordability affordability may be healthier in the commercial property market, this segment is unlikely to escape the downturn unscathed. Past cycles have shown that the housing, retail, and office markets are highly correlated. As home prices decline, they expect retail property to be affected by the potential negative wealth effect on local consumption with a secondary knock-on effect affecting office rental demand.

Hong Kong property-affordability as measured by monthly mortgage

Sources: CEIC, Barclays Research estimates

Hong Kong Island vacancy rate

Sources: CLSA, company data

HONG KONG BUSINESS | JANUARY 2014 11

FIRST

Cash-flush tourists in HK

STARTUP WATCH

Travel porn app

T

he slower economic growth in China did not make a lasting dent on tourist spending, and it seems the Chinese still love to buy their Louis Vuittons and Chanels in Hong Kong as the city’s retail sales for October rose 6.3% by value and 5.8% by volume. Barclays analyst Phoebe Tse notes that pickups were seen for most discretionary segments like jewellery & watch and clothing & footwear other than department stores. The latest figures from the Hong Kong Tourism Board show that Hong Kong received a total of 44.4million inbound visitors from January to October 2013, and 33.5 million or 75% of which are from Mainland China.

Shoppers from China retain a preference for premium brands, and are willing to pay for well-known and niche products. The Hong Kong Trade Development Council polled 1,600 middle class consumers in eight major cities. 85% of interviewees had purchased international brands in the previous year, apparel being most popular, on 74%. 57% typically preferred “generally recognised famous brands.”

But while international retailers regard Hong Kong as a perfect place to reach the affluent Chinese market, SURVEY

Shop ‘till you drop in Hong Kong

they are becoming more cautious in their expansion plans. Soaring rents and increasing labor costs make some retailers consider bypassing Hong Kong and instead entering the Chinese market directly.

Base rents in major shopping centres remain on an upward trajectory, according to Simon Smith, Senior Director for Asia Pacific at Savills Research. “Generally speaking, rents in shopping centres are fluctuating less than those for high-street shops. This is attributed to the difference in lease structures, including rental terms,” says Smith.

Bigger bonuses for bankers in Hong Kong Hong Kongers may expect to have slightly higher performance bonus for 2014, but bankers in particular will enjoy extra pay this year with a latest survey from jobsDB showing that the Financial Services sector will get the biggest bonus (5.3 months of basic salary). jobsDB Hong Kong’s General Manager, Justin Yiu, shared that the Hong Kong economy remained steady this year and most businesses are able to keep good performance. “The high bonus growth reflects that the (financial) industry is recovering.”

As for pay rise, the projected rate for 2014 is 3.8% on average. “The inflation for this year is 4% and we can see that the pay rise can’t keep pace with inflation. Our survey indicates that employers are not optimistic about the future,” says Yiu. He adds that employers should study the feasibility of family-friendly policies that can increase work efficiency and help attract talents.

12 HONG KONG BUSINESS | JANUARY 2014

Dubbed as the ‘travel porn’ app, Spottly makes it easy for people to create and share beautiful notes of their travels.

Co-founder Edwyn Chan shared that the company already has US$450,000 total funding from 500 Startups, Cherubic Ventures and private angels. Spottly targets to raise $2m next year.

Cheapest 3D printer Soaring rents and increasing labor costs make some retailers consider bypassing Hong Kong and instead entering the Chinese market directly.

Makible is the creator of the MakiBox 3D printer, priced at $200 and promoted as the cheapest of its kind in the market. Although MakiBox is a smaller 3D printer, it can still print objects as large as 14 iPhone 5s stacked in two columns.

Makible, founded by Jon Buford, was launched in 2011 with $50,000 in funding. Makible is based in Hong Kong with a 3000 square foot facility for both development and production.

Optimize ad spend

MultiChannel bills itself as the first universal digital marketing platform with an integrated dashboard built to optimize management, provide suggestions and optimize spending on marketing campaigns across multiple channels such as Google AdWords US, Yandex Russia or even Baidu China, through a single, automated, Al-empowered solution. It just raised $3m in seed funding from founder Dmitry Fedotov.

FIRST

Meet the man behind airport pay-in lounge concept in Hong Kong

F

ifteen years ago, a bad experience led founder & CEO of Plaza Premium Lounge Management Limited Song Hoi-see to an airport concept that would forever change business travelling.

Hong Kong Business recently had the chance to speak with Song Hoi-see, founder and CEO of Plaza Premium Lounge Management. He shared his inspiration in pioneering the airport pay-in lounge concept in Hong Kong over a decade ago.

HKB: How did you come up with the idea of an airport pay-in lounge? What was your inspiration?

SH: I founded this concept based on my personal bad experience as a business traveller in the old Kai Tak Airport many years ago, when I started my own business leaving my bank job, I travelled on my own expenses (economy class) and I found the airport experience to be very unfriendly and uncomfortable. There was nowhere to fax or charge my old school laptop, moreover, sometimes the airport would be so full that you would struggle to find a seat.

At my previous job in an American bank, I had enjoyed corporate privileges including business class travel, I had seen the advantages of efficient travel services, spanning from limousine services to

business centre facilities in the airport lounges.

I saw an opportunity in the market, as like myself, 85 percent of travellers fly economy class, in other words they don’t enjoy such comfort and convenience, that’s when I started brainstorming and observing passenger behaviour, and consequently, launched Plaza Premium Lounge, an airport lounge opened to all travellers regardless of airlines or class of travel. I didn’t settle at that, I researched extensively and observed what travellers would want in a lounge facility, and introduced services to exceed the expectations of travellers.

HKB: What three goals are you focused on right now?

SH: We are actively opening many lounges globally, next year we will increase our network to London Heathrow, Sydney Kingsford, Mumbai, Abu Dhabi among other projects. We are very happy that travellers and airports are recognising the value that we bring to the airport, and we will focus on working with the airports to create premium airport service products, namely airport lounges, day hotels and meet and greet services, to enhance the airport experience for all travellers. My vision is to be the household name for premium airport

Song Hoi-see Founder and CEO Plaza Premium Lounge Management

services worldwide, we have an extensive network and it is my hope that when someone from Hong Kong travels abroad, they know that when they stay at Plaza Premium Lounge, they are well taken care of and at ease when they travel. Also, like I do when I travel internationally, I see Hong Kong brands abroad and feel proud of it. I would like for travellers to know that we are a Hong Kong brand, as this is a good reflection of the entrepreneurship opportunities and environment that Hong Kong presents.

OFFICE WATCH

Plaza Premium flies to Hong Kong Hong Kong International Airport is out to bring back its lost crown as the world’s best airport with the opening of Plaza Premium Lounge’s flagship pay-in lounge, the largest of its kind in Hong Kong. Occupying 15,000 sqft in the West Hall, the ultra-stylish facility will be the largest commercial airport lounge in Asia. It is set to be a must-visit destination for tourists, as its service, facilities and ambience is truly one of a kind.

It is designed for ultimate convenience and optimum comfort, the expansive 24-hour lounge will appeal to both business and leisure travellers. Hong Kong-based designer Kinney Chan was the genius behind the interior concept.

It includes custom-made furniture and other local dining treats. There’s also an in-lounge bakery and salad bar for travelers looking for something to satisfy their cravings. The lounge design concept hosts careful partitioning and design details create separate environments for work, relaxation, dining, or socialising. The new lounge is also designed to take full advantage of the breathtaking view of the airport tarmac.

14 HONG KONG BUSINESS | JANUARY 2014

West Hall

West Hall Lounge

The Galleria

The Social area

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FIRST DEAL WATCH

See how Fosun shifts to bonds

Smaller HK banks maintained tight risk control

Hong Kong banks top takeover wishlists

S

maller Hong Kong banks are currently the acquirers’ line of sight, attracting interest from cash-flush Chinese banks as well as other larger Singaporean and Malaysian banks, who all see huge potential in expanding to Hong Kong.

“Foreign banks may look to boosting market presence by acquiring second-tier institutions with established branch networks, as they can also offer access to yuan deposits in addition to US and Hong Kong dollar funding that can be lent to companies investing in or trading with China,” believes Fitch Ratings.

Result of acquisitions Steven Chan, analyst at Maybank Kim Eng advised: “We believe the acquisitions will result in savings on funding cost, cross-selling of fee income products and cross-border banking business.”

In late October, Yue Xiu Group’s subsidiary announced that it was making a voluntary conditional offer to acquire up to 75% of Chong Hing Bank. Franco Leung, Assistant VP at Moody’s Investors Service believes that Yuexiu Group’s business will diversify following the acquisition, but it will also inflict temporary financial burden and execution risk to the primarily real estate company.

However with municipal government support expected to offset the higher leverage, and the likelihood that the 16 HONG KONG BUSINESS | JANUARY 2014

group will gradually reduce its debt through asset redeployment over the next 12-18 months, Leung is confident that the acquisition will result in a permanent rise in leverage.

The CHB acquisition is still subject to approval by the Hong Kong Monetary Authority. This continued supervision of CHB post-acquisition is understandable, given how credit ratings could suffer due to lax oversight.

Tight risk control Fitch maintains that smaller banks in Hong Kong have so far maintained tight risk control despite the growing competitive pressure.

“Potential acquisitions could have an impact on these banks’ ratings if the transactions result in a shift in management strategy. In particular, a re-orientation of credit strategies, asset concentrations toward the mainland, or a perceived weakening of governance or risk controls could exert pressure on their ratings.”

Along with CHB, Wing Hang Bank has also been approached by independent third parties interested in acquiring a stake in the bank.

Maybank Kim Eng’s Chan believes Singapore and Malaysian banks could be in the running because a WHB acquisition will give them exposure to four out of the five offshore renminbi clearing centres, as well as previously mentioned strategic benefits.

Karen Yan spearheaded Latham & Watkins team as it handled Hong Kong-listed firm Fosun International’s HK$3.9 billion convertible bond offering.

In November, Fosun just completed the issuance of 5-year convertible bonds due in 2018. UBS and Morgan Stanley were Joint Global Coordinators and Joint Bookrunners on the offering. Yan, who co-lead the deal with Hong Kong partner Eugene Lee, boasts of 15 years of experience in initial public offerings, private equity transactions, and mergers and acquisitions. “We are delighted to have advised Fosun International, a high profile active player, on this sizable issuance. This deal was done in a compressed time frame and showcased our deep bench of high yield expertise,” Yan said.

JC Group raises HK$50m

The acquisitions will result in savings on funding cost, cross-selling of fee income products and cross-border banking business.

With expertise in corporate finance and investment funds, Judy Lee led Appleby’s team in acting as Cayman counsel for JC Group Holdings in relation to its listing on the Growth Enterprise Market of the HKSE on 21 November 2013 with gross proceeds of HK$50 million. The group will use around half of the net proceeds from the offering for the diversification of product offerings. The remaining half will be used for enhancement of existing restaurant facilities, the strengthening of staff training, marketing and promotions, as well as for additional general working capital.

Another sizeable transaction Lee handled was China Resources Gas Group’s US$1.5 billion global medium term note programme.

FIRST NUMBERS

A look at happiness levels in Asia

Among those in their 30s (30 – 39 years old)

13

Among those in their 30s (30 – 39 years old)

Check 13 • Significantly high happiness levels among Malaysians (35%) right into their 30s. out what makes Among those in their 30s (30 – 39 years old) Asians happy • In Hong Kong (20%) and Singapore (22%), this group is relatively unhappier.

• Significantly high happiness levels among Malaysians (35%) right into their 30s.

• Significantly high happiness levels among Malaysians (35%) right into their 30s.

• In Hong Kong (20%) and Singapore (22%), this group is relatively unhappier.

• In Hong Kong (20%) and Singapore (22%), this group is relatively unhappier.

Happiness Index 2013

China

China

22%

22%

22% Hong Kong

63%

63% 63%

18%

13%

13% Hong Kong

China

13

18%

Malaysia

61%

61%

20% Very happy

13%

35%

50%

20%

13%

Rather happy Not very happy Not happy at all

A race to the most number of fans

Singapore

Hong Kong

18%

Malaysia

35%

61%

Check out the 10 most popular brands on Facebook Malaysia

H

Singapore

ong Kong’s indisputable love and addiction to shopping, has been Korea proved through the survey ofSouth social media brands locals follow. Social Baker’s latest report on 10 Facebook brands used by local fans show that BeeCrazy, an HK-based daily deal site, topped the list with 489, 443 followers as at October this year.

Two other brands followed - Groupon Hong Kong, and Group Buyer, with 417 021 and 402 436 local fans, respectively. In total, the top 10 brands have 2.87 million local fans combined, but is 7.9% down from last year’s 3.1 million. © Ipsos

© Ipsos

Deal sites dominate BeeCrazy and Groupon HongKong maintained their lead but with a reduced number of fans, with BeeCrazy losing over a third from its previous 798,000. Groupon HK’s fan base was down 16% from its previous 497,000 followers. Group Buyer, which climbed up a notch to third, has had its number of fans balloon by 35%, from just 298,000 in 2012.

Fourth this year is the Hong Kong outlet of 7-Eleven. The store giant attracted 315,697 local fans, a huge jump of 80% from its mere 175,000 last year. 7-Eleven was formerly ranked sixth.

Samsung Mobile, which just released Galaxy Note 3, the latest Android-based smartphone in 32GB and 64GB versions, came in fifth, with 258, 569 local fans.

Samsung Mobile is the world’s 9th most popular brand on Facebook and leads the pack of mobile phone makers. Its local 18 HONG KONG BUSINESS | JANUARY 2014

35% Singapore

21%

21%

55%

50% 50%

55%

21%

20% South Korea

13% © Ipsos

12%

55%

13% Very happy Rather happy

Very happy

22%

Rather happy 74%

Not very happy

12%

Not happy at all

What gives Not happy you greatest happiness 22%very Not happy at all

22%

What gives you greatest

South Korea 12% 74% 12% are happy/rather happy, the top happiness • Of those who Facebook account, Samsung Mobile HK, family, their relationship with their spouse as well as basic n happiness? also made it to the list with 198 094 fans. It is 12% 74% 12% currently ranked eighth.

HK CHINA SINGAP Chain Convenience store Circle K Hong Kong is ranked sixth, with 208 648 local 54% 59% 40% MY HEALTH MY HEALTH MY HEAL fans, 21% higher than last year. Managed by Convenience Retail Asia , Circle K has over 43% 42% 41% SPOUSE SPOUSE SPOUSE 300 outlets in the city. Online retail shop 38% Japanese Korean Fashion made it to the 41% 39% HEALTH HEALTH OF FINANCES FAMILY/ seventh spot, with 203 638 local fans. Beauty FAMILY/FRIENDS and health retailer of skin-care brand SK-II TOP 3 HK, is at number 9 with 195 594 fans. Cotai BOTTOM Water Jet, a high-speed ferry service that 3% gives you greatest happiness?

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3%of t • Of those who are happy/rather happy, the top happiness 2% their health and health 2% boosters are primarily CHARITY

SOCIAL R

LEAVE COUNTRY needs such as their living conditions.

New entrants family, their relationship with their spouse as well as basic Q2.

Earlier we asked you, taking all things together, if you would say you are very happy, rather happy, not ve Five of these most popular brands are new what does or could make you, personally, happiest in your life. For each of the following, please indicate wha HK SINGAPORE KOREA MALAY entrants in this competition, displacingCHINA Ocean Park Hong Kong, I want to TRAVEL 54% 59% 40% 44% 53% HEALTH MY HEALTH SPOUSE SPOUSE by tungnam.com.hk,MYStarbucks Hong MY HEALTH Kong, Cathay Pacific41% Airways, and HK.apm, 46% 43% 42% 35% RELATIO SPOUSE SPOUSE LIVING SPOUSE compared to the same time in 2012. The WITH PA CONDITIONS 38% 41% new entrants are Samsung Mobile, Samsung 39% 41% 35% HEALTH of HEALTH OF HEALTH MY HEALTH FAMILY/FRIENDS FAMILY/FRIENDS Mobile HK, JapaneseFINANCES Korean Fashion, SK-II FAMILY/ TOP 3 and Cotai Water Jet. Whilst the number of local fans may BOTTOM 3 actually say something about the success of 3% 5% 4% 6% companies, another CHARITY important factor to4% noteBELIEFS EXPRESS CHARITY COUNTRY WELLBEING CHARITY is number of people3% actually talking about 4% 3% 3% 5% LEAVE COUNTRY CHARITY SOCIAL RE the brand. Jacky Tan,COUNTRY headWELLBEING of marketingLEAVE PRCOUNTRY 3% 2% , 2% 1% 2%the term ‘ talk density’ at Evorich has coined SOCIAL REGONITION CHARITY LEAVE COUNTRY LEAVE COU LEAVE COUNTRY meaning the total number of Facebook ‘Likes’ Earlier we asked you, taking all things together, if you would say you are very happy, rather happy, not very happy or not happy at all. What we now want to know is times 100%. TanQ2. says: “Rule of the thumb, any what does or could make you, personally, happiest in your life. For each of the following, please indicate what does or could bring the happiness in your life Facebook page that has more than 10% talk Source: Ipsos Q3 2013 density is considered pretty good.” © Ipsos

© Ipsos

FIRST The Analysts’ call

How good is HSBC in cost management?

Barclays - Sharnie Wong

Outlook for Hong Kong and UK improving

Home market Hong Kong proves to be a bright spot for HSBC

H

SBC’s revenue growth prospects in Hong Kong look promising as revenues stand to benefit from Japan’s quantitative easing and China’s stabilising economy, poised to expand beyond the 7% mark in the medium-term. Barclays analyst Sharnie Wong says Japan’s monetary

The bank has an improving outlook in its two home markets of Hong Kong and UK. policy and China’s relentless growth are seen to support economic expansion within the Asian region.

The bank’s positive performance bucked concerns on the weakness of emerging markets and inflation of capital requirements, and the management’s more positive outlook are reassuring.

“Operating performance was strong as usual on costs, and could mark a turning point in revenues, with Q2 concerns on credit quality also calmed,” she says. “HSBC has a large competitive advantage due to its large US$ deposit base, strong pricing power and global reach,” Wong adds.

In 3Q, Hong Kong revenue rose 2.5% quarter-on-quarter and 12% year-on-year while pre-provision profit was up 4% quarteron-quarter with growth especially strong in retail banking and wealth management.

Fee income from investment product sales in Hong Kong improved, while NII rose on 20 HONG KONG BUSINESS | JANUARY 2014

slightly better mortgage spreads and mild rise in mortgage balances , Wong says.

“Management believes Hong Kong’s property transaction volumes have troughed at current levels, as evidenced by the latest discounts by the local developers to sell inventory. In CMB and GBM, loan growth was driven by term loans to the commercial real estate (+6% quarter-on-quarter) and manufacturing (+5% quarter-on-quarter) sector,” she says.

Excluding the $100-200mn provisions in the Private Bank relating to the investigation into tax transparency for US citizens which were not disclosed, this quarter-on-quarter cost reduction would have been 2%. But the GB&M performance looks particularly strong with costs flexing down with revenues in the quarter, maintaining the cost: income ratio at 51% in the first nine months of the year.

Analyst Adam Chan of CCB International says the bank has an improving outlook in its two home markets of Hong Kong and United Kingdom, with management upbeat on HSBC’s growth in those areas.

Among the highlights of HSBC’s improving outlook was the underlying expenses of US$9.5b for the quarter which was down 4% year-on-year as reflected in 9% ‘positive jaws’ for underlying year-to-date figures. Core Tier-1 (Basel 2.5) was also up by 60 basis points half-on-half to 13.3% while CRD IV core Tier-1 increased 50 basis points to 10.6%.

“Margins for the group were largely flat sequentially at 2.22% as the slowdown in trade margins is close to a inflection point.”

It is perhaps a little myopic to focus on cost movements in a single quarter, but for a bank that is struggling with revenue growth and that has initiatives underway to reduce the cost base by more than 15%, we continue to see expenses as a significant issue. Year on year we estimate that underlying Q3 costs have fallen by 1%, but the quarteron-quarter headline trend looks less supportive with 5% growth.

However, this improves to a 1% quarter-on-quarter reduction on an underlying basis excluding restructuring costs, UK customer redress and, in Q2, the $430mn credit on reduced UK health benefit costs.

BNP Paribas - Dominic Chan HSBC continued to achieve positive cost-to-income jaw for 3Q13, with flat underlying revenue growth yearon-year and a 4% drop in underlying operating costs. It achieved another US$400 million in sustainable cost savings in 3Q13, though part of this will contribute to the compliance cost build up.

CCB International - Adam Chan

Private Banking had a loss driven by legal provisions for a DOJ settlement and goodwill charges. FX income was down 31% QoQ to US$660m given lower volatility in global currency markets.

Compliance costs continue to materially increase as headcount has increased 1,600 since year-end.

The group remains committed to a progressive dividend and will look to neutralize the script take-up as early as next year.

FINANCIAL INSIGHT

There is healthy limited partner appetite for Asian funds

PE in Asia rebounds from 2012 beatdown

The first half of 2013 showed a convincing turnaround for private equity.

T

he private equity market in Asia saw a marked slowdown in 2012, with deal, exit and closed funds values all heading south.

But there are signs of strong recovery, with the first half of 2013 showing a convincing turnaround, delivering double-digit growth in buyout and exit deal values.

In its 2013 Asia Pacific Equity Report, Bain and Company revealed that global deal value in the region, (including Japan), decreased to $49 billion in 2012, from a previous $61 billion in 2011 - roughly a $12 billion decline. In fact, throughout the Asia Pacific region, it was only Korea that saw an increase in deal value. Japan, Southeast Asia, India, Australia, New Zealand and China, suffered deal value decreases. However Bain points to a few factors believed to have contributed to the overall growth of private equity in 2012. Whilst private equity investors continued to expect high returns from the asset class in

22 HONG KONG BUSINESS | JANUARY 2014

Global deal value in the region, (including Japan), decreased to $49 billion in 2012, from a previous $61 billion in 2011 - roughly a $12 billion decline.

Asia, firms have not been able to deliver these returns, more so because of the increased macroeconomic uncertainty that prevailed during the year.

Despite the turndown, mainland China still remains the epicenter for private equity activity, particularly in the country’s real estate sector, which is driven by strong growth for secured loan financing. Competition has also increased, both from additional private equity funds and corporates, while options to drive successful exits dwindled due to initial public offering (IPO) markets experiencing a downturn.

Rebound in 1H 2013 Thankfully the first half of 2013 showed some and deal values picked up. According to Mergermarket’s H1 2013 Mergers & Acquisitions Trend Report, private equity buyouts in Asia-Pacific (excluding Japan), have so far experienced a buoyant

2Q 2013, with deals values at US$6.5 billion, consisting of 61 deals in 1Q 2013.

The 2Q 2013 value also contributed a healthy 12.5% to the total value of global buyouts for that quarter, registering the highest percentage in almost three years since 3Q 2011. Combining the first two quarters led to a 1H 2013 total of $14.8 billion for 111 deals, or 21.6% higher than the $11.4 billion for 110 deals posted the same period last year.

Mergermarket identified the $4.5 billion bid to acquire Australia-based Port Botany as the biggest buyout deal of 1H 2013, single-handedly raising the deal value in the Transport sectors by 2,060% and making it the most active sector by value.

Not only did private equity firms create more deals in 1H 2013, they were also able to secure more successful exits. The aggregate value of private equity exits in Asia Pacific, (excluding Japan), rose by 33.3% to $11.8 billion from 58 deals, from $8.9 billion from 44 deals during the same period last year. Almost the entire value of exits in the first half of the year was accounted for by trade sales, amounting to $11.4 billion from 52 deals. But Mergermarket noted

FINANCIAL INSIGHT lukewarm interest in India.”

Daniel Yong

Derek Cheng

Firm partners more cautious in PE investments

that 2Q 2013 delivered a weaker performance than 1Q 2013. Private equity was also supported by the record high exits registered in 1H 2013, where Industrials & Chemicals saw its exit value and deal count reach $3.1 billion and 13 deals, respectively, the highest on Mergermarket record since 2001.

China still a focus With private equity activity picking up as we head towards 2014, analysts still point to China as the prime hotspot for the region, although interests in Japanese and Korean general partners and India limited partners have also increased. “The vast majority of the activity that we have witnessed has been China focused, particularly China real estate,” said Jeffrey Kirk, Corporate & Commercial partner at global law firm Appleby.

Kirk says the year has been marked by the growth of private sector lending by private equity houses and funds, that provide secured loan financing to borrowers, particularly those who operate in and develop Chinese real estate. He also believes this trend is driven by two factors.

Firstly, by a renewed interest by private equity houses in the Chinese property market, as Chinese residential housing prices have risen.

Secondly, this trend is driven by demand for private sector financing has ballooned, especially given the

high interest returns generated, and which could indicate private equity houses using debt as a lucrative investment class.

“If you look at the amount of investment activity across the Asia Pacific region, 40% occurs in China,” said Wen Tan, Partner at FLAG Squadron Asia, specifically an Asia Pacific focused private equity investment firm. “And then you get reasonable chunks or 10-15% in each of Japan, India, Australia. All the other markets are single digit percentages.”

Other trends Limited partners of firms are now being more cautious when entering into private equity investments, says Daniel Yong, Corporate/Investment Funds Director at Stamford Law. “General partners can no longer afford to take their investor base for granted in fund raising exercises or that re-ups are automatic.

Limited partners are more selective in capital allocation but general partners with a compelling track-record, clearly articulated strategies and who come to market at the opportune time will ride the momentum in fund raising,” said Yong.

“We see increased interest in Japanese and Korean general partners and while China will continue to attract limited partner interest, there is, for the moment, continued

Jeffrey Kirk

Wen Tan

Future rankings and major deals UBS Investment Bank topped the Financial Advisor League during 1H 2013 by value, advising on three transactions totaling $6 billion. In addition, London and Sydney-based international law firm Herbert Smith Freehills, led the Legal Advisor rankings by value with four deals worth S$6.5 billion in the first half of the year, followed by the South Korean firm Kim & Chang which surged to second from 12th position.

With Austin Sweeney as lead partner, Herbert Smith Freehills acted as the international legal counsel for Goldman Sachs on its equity investment of S$110 million in Den Networks Ltd, the largest private equity deal so far in India’s cable and satellite sector and one of Goldman Sachs’ largest private equity investments in Asia. Goldman Sachs was also attracted to the growth potential of Den Networks, currently India’s leading cable TV distribution company reaching an estimated 11 million households in over 150 cities across 13 key states. Den Networks is listed in India on the Bombay Stock Exchange and the National Stock Exchange. Led by partner Tommy Tong, Herbert Smith Freehills also advised Asia Coal, a Hong Kong listed company, on a HK$150 million subscription of new shares by a third party investor and convertible bond redemption, involving a change in control and an application for a SFC whitewash waiver from an obligation to make a mandatory general offer and approval of off-market share repurchase under the SFC Code on Share Repurchases.

Asia-Pacific (excl. Japan) buyout trend

Source: Mergermarket

HONG KONG BUSINESS | JANUARY 2014 23

ANALYSIS: ART ONLINE

Rides on a Solitary Journey by Chow Chun Fai

Hong Kong’s local artists get more exposure online

A shift towards online promotion of artworks is becoming more apparent.

Is the Hong Kong Art Space trending well on a social media platform?

A

fter years of focusing on the commercial landscape of art, a shift in focus towards development and promotion of local artists is emerging. Trends in the HK market show an increased presence online, as well as a market growth in internationalism of galleries, and it is hoped one day that the numerous art fairs cropping up all over HK will bring further international attention to the local art scene through both traditional and social media platforms.

Trends in the local market Artshare bills itself as the first global online platform dedicated to the exhibition and sale of contemporary Chinese art. With a bilingual website in Chinese and English, Artshare claims to offer unique access to artworks and an in-depth curatorial expertise. “Unlike any other forum, artworks are selected from a

24 HONG KONG BUSINESS | JANUARY 2014

High rent prices may prevent new contemporary galleries from entering the market, or prevent them from utilising proper exhibition spaces.

powerful group of leading private collections, established and emerging artists, internationally renowned galleries, as well as other sources in Artshare’s unique network,” explains AlexandreErrera, Artshare.com Founder and CEO. “In addition, the global platform has seen an increasing number of events, exhibitions, and panels about art being held in HK. It is also the world’s first web-based platform to offer collectors the opportunity for physical, private viewings, whilst providing a private sales avenue to work with collectors on sourcing and selling art.”

Errera also observes increase in an internationalisation of the market, where an increasing number of foreign collectors are coming to HK and looking closely at what is happening in the market. Other galleries such as de Sarthe Gallery, have welcomed interest from western galleries that moved to HK and are

now focusing more on Asian artists.

Founded by Pascal and Sylvie de Sarthe in Paris in 1977, de Sarthe Gallery opened in HK in 2011. The couple has recently been joined in the business by their son Vincent, who is based in Beijing.

Another shift in the market has been the growth of interest in HK’s home-grown talent, says non-profit arts space, Spring Workshop. “Our native artists and organizations are beginning to receive the attention they very much deserve.” Comitted to an international cross-disciplinary program of artist and curatorial residencies, exhibitions, music, film and talks, Spring is anchored in the Wong Chuk Hang industrial neighborhood of HK, having opened in its current layout in August 2012.

It provides artists with residencies, including local artists Joao Vasco Paiva, Samson Young, Lee Kit, Yuk King Tan, Nadim Abbas and Ho Tzu Nyen, as well as international artists Michael Friedman, and Yang Fudong.

Challenges in the physical space With the emergence of the online platform, the need for physical space in that realm is relatively removed.

However tiny studio spaces and

ANALYSIS: ART ONLINE Many Westerners complain about the lack of museums in HK.

Parade 5 by Almond Chu

soaring rents are still the underlying factors framing financial difficulties of being an artist in HK. “The beauty of being online, and not having a physical gallery space is that rent is not an issue!” says Artspace.“This is an important aspect of our business model.However regarding museums, and until M+ opens, this is definitely an issue.”

Many galleries are feeling the pinch, with high rent prices being a problem for any business in HK. de Sarthe believes that such high rent prices may prevent new contemporary galleries from entering the market, or prevent them from utilising proper exhibition spaces.

“As for museums, I hear many westerners complaining about the lack of museums in HK. There are a few museums and art centres.”

Despite this, de Sarthe is encouraged about the future outlook:“The HK Museum of Art is having great exhibitions which unfortunately does not appeal much to the international art community. M+ will change the dynamic for contemporary art, but we should not forget that we are in HK and culture was never a priority.

This will change with time.”

Other non-profit organisations such as Spring working to provide thoughtful arts programming in interesting spaces, are accepting of the rent reality. “Part of the delight of engaging with art is to see the different environments where artistic community flourishes. I chose to locate Spring Workshop

in Wong Chuk Hang because it is a dynamic, textured and changing neighbourhood that is full creative industries – yet it is just a few minutes from Central.” By being in an industrial neighbourhood, Spring is able to have high ceilings, outdoor terraces and big studios to help create the sort of dynamics that could be created by a greater physical space.

Spring also acknowledges that Asia Art Archive and Para Site are internationally recognized arts organizations which, alongside other established non-profit organisations such as Soundpocket and HK New Music Ensemble, who regularly feature high-quality displays that would not be available to see elsewhere.

A bright future ahead Perhaps there is a way to go before HK can call itself an art capital, but the future of the art market looks upbeat. Artshare is positive that they will we see more collectors and art lovers coming to HK for fairs, auctions etc, and what we are also seeing is that the HK art scene is gaining increasing attention globally, by collectors, institutions and curators.

“Artshare.com is based in HK, so this is where we have our team, organise our exhibitions, and source artworks. We plan to keep it this way and increase our team, focusing on bringing more content to our website, such as videos.” They also note that Themarket is getting more and more

international: Art Basel Miami will have a strong focus on young Chinese artists, and the Armory Show in NYC will be focused on China.

Residencies for artists Likewise, Spring offers residencies in HK to artists, writers, curators and musicians from all over the world, often in partnership with Asia Art Archive or Para Site.

“During their stay, we ask them to offer workshops, exhibitions or concerts that are free and open to the public so that HK artists and art lovers can learn from them. We also create projects that increase the international exposure of our HK artists, such as a large-scale exhibition in Holland at the Witte de With Center for Contemporary Art that we will be co-hosting in May 2014 that features eight HK artists.”

Currently on view at Spring is an exhibition called “The Social Contract” which requires the viewers to sign a legally-binding contract saying they will not talk about what they have seen inside. “This artwork is not so much about what is actually inside, but about the nature of privacy and freedom and social obligation,” stresses Spring.

“Despite the seeming restriction on speech, the artists intend to create more freedom for the viewers by liberating them from the obligation to discuss the art that they have seen.

Next we will be hosting the artist Ming Wong for a residency from December 2013 to February 2014.”

Two Indeterminate Lines by Bernar Venet

HONG KONG BUSINESS | JANUARY 2014 25

COVER STORY

Find out where you should invest your hard-earned cash

14 promising investment picks for 2014

Place your bets on these winning investments for the Year of the Horse.

B

y most accounts, a nascent and patchy global economic recovery is underway, promising new opportunities for investors. But the question remains: should investors remain cautious, or take the risk and take bigger gambles? Are equities still attractive?

Which markets will outperform in the next 12 months?

Hong Kong Business interviewed several top investment analysts to get the answers to these critical questions. In doing so, we uncovered 14 of the most promising investment picks for 2014 – picks that could bring great returns amid the prevailing uncertainty and risk.

1. US equities According to most analysts interviewed, US Equities are predicted to shine in 2014, and are a steal given their current valuations and projected returns. Karen Lim, Head of Retail Sales, Southeast Asia at Alli-

“US equities are a good buy and will likely remain so in the long term.”

ance Bernstein, is confident that US equities are a good investment. “We believe that current valuations suggest that US equities are a good buy and will likely remain so in the long term, even in a higher-interest-rate environment brought about by the end of the Fed’s expansive monetary support,” Lim concurred.

A survey by online brokerage firm E*TRADE revealed 63% of Asia Pacific customers said they were very confident or confident about the short-term performance of the US equity markets.

“Our survey findings demonstrate that despite global economic uncertainty, individual investors remain confident in the foundations of the US economy and see considerable prospects for growth,” said Helen Chan, VP of Asia Pacific at E*TRADE. However, equities in general are considered to be a good investment given their valuations, and projected

returns relative to other asset classes, says Herve Lievore, Senior Macro and Investment Strategist at HSBC Global Asset Management.

Lievore says; “With the current economic backdrop, corporate assets are the preferred asset classes relative to top quality government bonds based on valuation and expected earnings over the medium to long term.”

2. China equities Whilst equities in general are projected to shine in 2014, China equities will measure up with US equities as two of the most preferred picks in the category.

Gary Dugan, CIO of Asia & Middle East at Coutts think this could be China’s year. “Although some investors may be disappointed with the slower pace of growth in China next year the growing awareness of the better quality of the Chinese economy should encourage larger foreign investment inflows and more domestic investment in the equity market.”

The same E*TRADE survey found that around 51% of Asia Pacific investors were either confident or very confident of the short-term

COVER STORY performance of Asian equity markets.

3. RMB investments Aside from investing in equities, stakeholders in China should also consider buying up RMB investments, as the currency could hold well into next year.

“The long-term economic prospects of the mainland China market and the trend of currency appreciation have made RMB investments appealing, especially to investors with close proximity to mainland China, such as in Hong Kong,” said Vineet Vohra, Regional Head of Wealth Development, Asia-Pacific, HSBC. Vohra also cited the latest Hong Kong Monetary Authority statistics, which show that total RMB deposits have reached CNY695 billion at the end of July, a year-on-year increase of 23.4%. And whilst its appreciation has tempered, Vohra argues that the RMB has been the best performing Asian currency so far this year, up almost 4% against the US dollar over the last 12 months since August.

4. Domestic currency time deposits Asia’s increasingly cash-flush investors are leading the way in RMB investments, and will veer towards domestic currency time deposits in 2014.

“Over the next 12 months, domestic currency time deposits are generally a hot pick by Asia’s affluent,” says Vohra. This prediction is a shift from 2013, which has seen most Asian investors loading up predominantly on managed funds, mutual funds, unit trusts and domestic stock.

5. North Asian markets China will share the investment limelight with neighbors Korea and Taiwan, to become the most preferred markets in North Asia.

Haren Shah, Chief Investment Strategist, Investment Strategy Group, Wealth Management, at Citi Asia Pacific, says their company favor the North Asian markets, especially China, Korea and Taiwan.

“Valuations are cheap, and they are cyclical and export-oriented

economies. We do feel in 2014, these markets will get rerated and outperform other Emerging markets.”

6. Asian bonds Although some analysts have professed their aversion towards bonds as a worthwhile investment opportunity, others are not ruling out Asian bonds altogether, given their relative strength compared to other regional bonds. HSBC’s Lievore again champions Asian issuers to provide a better risk profile relative to their Latin American or Europe, the Middle East and Africa counterparts, offering a comparative advantage in times of uncertainty.

“Asian bonds offer resistance in terms of credit quality. Yields in Emerging Market bonds have risen since the beginning of the year amid higher US yields and, more importantly, widening credit spreads.”

7. Emerging market ex-Asia bonds However Lievore notes that Emerging Market ex-Asia bonds could offer “good” opportunities for those looking at a longer term horizon.

Emerging Market bonds in general are also viewed more positively by investors compared to government bonds, and are very competitive compared with other regional bonds.

“Though only a few investors liked government bonds, we found

Albert Cheng

Gary Dugan

Greg Davis

that if forced to buy bonds, onethird would prefer Europe peripheral bonds, one-third would choose Emerging Market bonds and only 6% would favor Japanese Government bonds,” said Ajay Singh Kapur, CFA, Equity Strategist, Merrill Lynch (Hong Kong), BofAML. 8. Corporate and emerging debt markets Longer-term investors who are able to ride out the pending volatility in 2014, primarily caused by the expected quantitative easing by the US Fed, should also look into corporate and emerging debt markets. Lievore predicts that if spreads widen and bond markets correct significantly, this may potentially create opportunities in corporate and emerging debt markets for long term investors.

He concludes that HSBC does not think these markets are overvalued, but rather that short term volatility is likely.

My favorite asset class for 2014

Sources: BofA Merril Lynch Global Research

Asian bonds have relative strength compared to other regional bonds

COVER STORY 9. Indian stocks Surprisingly, in South Asia Indian stocks are catching the attention investors due to their stellar earnings. But Lievore again cautions against investors playing the market only in the short-term: “On India, despite the strong profitability for Indian stocks, the market continued to be driven down by macroeconomic factors. While the medium to long term prospect of Indian stocks remains intact, short term risks are sufficient to justify a move from overweight to neutral.”

10. European markets Investors eyeing the European markets are advised to opt for the bigger European economies, which are expected to ride the tailwind of a US market recovery. “Within the European markets, the markets that we favour will be Germany, France and the UK. These markets will benefit from recovery in the US plus their valuations are some of the cheapest among the major markets,” said Alliance Bernstein’s Lim. “It is important to follow the liquidity and as such feel that the European and Japanese markets will outperform the US among the developed markets,” she added.

11. Consumer and information technology In terms of specific sector picks, analysts and investors are also

favoring Asian consumer and IT sectors, which have been among the best-performing areas in the region.

BofAML’s Kapur, citing response from his company’s recent investor survey, says: “The consensus seems to going with the year-to-date winners – consumer and information technology sectors.” He also warned investors to avoid several underperforming and therefore riskier picks, based on their investment strategy: “Energy and materials are the least favorite sectors in Asia. Contrarians should buy cyclicals and financials and reduce exposure to high flyers.”

12. Data defined storage The area of IT is currently a blazing investment hotspot in Asia, and this includes the area of data defined storage. “‘Big data’ has been a buzzword for several years as organisations grapple to gain value from increasingly large and complex data sets,” says Shahbaz Ali, CEO of Tarmin, a data defined storage provider.

“This focus will continue in 2014, though investors would do well to explore the Data Defined Storage.”

Ali explains further, stating that this new data-centric approach optimizes the value of big data analytics and shuns the usual media-centric approach to storage, letting the data define the infrastructure rather than the other way around. He also says that KPMG’s £66 million big data investment fund is indicative of the

Pick the right idea for you and you’re on your way to success!

burgeoning value and importance of data and analytics solutions.

Haren Shah

Herve Lievore

Karen Lim

Shahbaz Ali

13. Gold For those investors looking at relatively safe gambles, gold still remains a popular choice, but only when integrated in a well-balanced portfolio. “Despite the trend towards equity investments, the World Gold Council believes that investors should continue to allocate a portion of their portfolio to gold as a form of long-term wealth preservation and diversification of assets,” said Albert L. H. Cheng, Managing Director, Far East, World Gold Council. “We found that a 5%-6% allocation to gold is ‘optimal’ for investors with a well-balanced 60/40 portfolio,” said Cheng.

He further explains the 60/40 portfolio concept as allocating investments with approximately 60% in equities and alternative assets, and 40% in cash and bonds. “This holds true even for investors that already hold commodities, real estate and hedge funds,” says Cheng. He also advises that riskier portfolios should hold a higher percentage of gold investments, because gold can help manage risk and provide core stability to portfolios by protecting purchasing power, reducing portfolio volatility, and serving as a high-quality liquid asset.

14. Index funds and Exchangetraded funds (ETFs) The idea of a well-balanced portfolio, capable of surviving the volatility of 2014, is also at the core of why index funds and exchange-traded funds will be in demand going forward. Gregory Davis, CIO for Asia Pacific, The Vanguard Group, says that index funds and ETFs can help investors avoid many of the risks of market timing and manager and stock selection, whilst still keeping costs and tax to a minimum.

“There is a deep body of academic research that highlights that the single most important decision any investor makes is the asset allocation decision and it is in capturing market returns and balancing your portfolio’s asset allocation that indexing can be effective,” says Davis.

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HONG KONG’s top 25 accounting firms

Making sure all accountants are accounted for

PwC and Deloitte are HK’s largest accounting firms KPMG reports the biggest upsize amongst the Big 4.

C

ontrary to rumors of downsizing in the accounting industry, Hong Kong’s 25 largest accounting firms in general have actually increased staff strength in 2013. Total employment rose by over 5% to 13,080.

PricewaterhouseCooper (PwC) and Deloitte Touche Tohmatsu, with each having 2400 staff, tied for the top spot in this year’s rankings. Deloitte, previously at second, climbed up the ladder when it added 200 more staff this year while PwC reduced its number by 100.

The Big Four PwC finished off the year with a significant deal when it announced the proposed merger with management consulting firm Booz & Co. to complement PwC’s advisory business.

According to spokesperson, this merger will bring 275 Booz partners and more than 3000 people to the PwC network in 33 countries.

Ernst & Young is third with 2,100 staff, up from 2000 in 2012.

Amongst the Big 4, KPMG made the biggest upsize to 2000 from only 1700 last year.

Altogether, the Big 4 comprises

30 HONG KONG BUSINESS | JANUARY 2014

Altogether, the Big 4 comprises 68% of the total employment of the 25 largest accounting firms.

68% of the total employment of the 25 largest accounting firms .

Outside the Big 4 BDO, came in fifth with 1000 employees, unchanged from last year.

Preceding firms have staff strength in less than four digits.

Effective Feb 2013, BDO has appointed HK based Stephen Darley to the position of BDO CEO for the Asia Pacific region.

RSM Nelson Wheeler is sixth with 430 employees, up from only 400 in 2012. Poh Weng, RSM’s managing director said that the company has performed Internal Control work for three companies that have successfully listed in Hong Kong Stock Exchange (HKEx) this year.

HLB Hodgson Impey, which acted auditors and reporting accountants to eight companies that have successfully listed in HKEx, ranked 7th with 350 employees.

Three firms landed at 8th place, each with 300 employees - Crowe Horwarth, Mazars, and SHINEWING. Mazars, previously at 9th spot, added 20 more employees. SHINEWING’s staff strength meanwhile increased by 50 more employees.

According to Roy Lo, Deputy Managing Partner, SHINEWING, the firm’s most significant milestone would be the merger of the former entity of its Hong Kong office, Ho and Ho & Co., with SHINEWING Certified Public Accountants in Beijing.

The merger has since formed the Hong Kong member firm.

Baker Tilly Hong Kong is 11th with 255 staff. Its major projects this year include reestablishing a payroll services department and integrating Baker Tilly Hong Kong Restructuring and Recovery Ltd. “According to Invest Hong Kong, a record 213 companies from 33 countries have been set up or expanded in Hong Kong in the first half of 2013, we see an increasing demand for HR Business Process Outsourcing services, mainly from overseas clients, setting up in Hong Kong, and have positioned ourselves in this space accordingly, said Baker Tilly’s managing director Andrew Ross.

Ross added that Baker Tilly Hong Kong has been in the forefront of developing the startup community in Hong Kong . It has assumed the mantle as audit and business advisory sponsor of InvestHK’s inaugural StartmeupHK Venture Programme which aims to support the global expansion of high impact ventures.

Grant Thornton, at 12th post maintained its 200 staff.

The smaller players Some of the smaller players with staff less than 200 also grew their numbers this year while the others maintained their numbers. Only KLC Kennic Lui & Co., reported reduction in the number of staff.

Patric Wong CPA, a traditional CPA firm in practice for 38 years and serving small and medium clients majorly, maintained its staff strength of 100 in 2013. According to a spokesperson, the whole firm is undergoing a re-engineering and expects manpower restructuring in 2014. The firm, ranked 14th this year.

While it has maintained its staff strength of 85 this year, Ting Ho Kwan is looking at investing more manpower and resources in the future as it is expanding its clientele to include more IPO engagements.

HONG KONG’s top 25 accounting firms

Largest accounting firms in Hong Kong Ranking 2012

STAFF 2012

STAFF 2013

2013 Accounting Professionals

Managing Partner

PricewaterhouseCoopers

1

2500

2400

<2400

Ms. Cassie Wong

Deloitte Touche Tohmatsu HK

2

2200

2400

<2400

Joseph Lo

3

Ernst & Young

3

2000

2100

1500

Agnes Chan

4

KPMG

4

1700

2000

<2000

Andrew Weir

5

BDO

5

1000

1000

<1000

Albert Au

6

RSM Nelson Wheeler

6

400

430

50

Mr. Wong Poh Weng

7

HLB Hodgson Impey Cheng

7

330

350

<350

Raymond Cheng

8

Crowe Horwath

Charles Chan

ACCOUNTING FIRMS 1

SHINEWING Mazars

8

300

300

<300

10

250

300

250

Mr. Barry Ip

9

280

300

237

Mr. Stephen Weatherseed

11

Baker Tilly Hong Kong

11

230

255

<255

Andrew Ross

12

Grant Thornton

12

200

200

<200

Daniel Lin

13

Cheng & Cheng

13

180

180

<180

Andrew Cheng Hong Kei and Francis Cheng Hong Cheung

14

Patrick Wong CPA Limited

14

100

100

<100

Patrick Wong Lung Tak

PKF Hong Kong

14

100

100

<100

Henry Leung

Pan-China

14

100

100

<100

Patrick Ng

17 Wong Brothers & Co.

17

94

94

<94

Charles CL Chow

18

HLM & Co.

19

80

87

<87

Clement Leung

19

Ting Ho Kwan & Chan

18

85

85

20

Stephen Ting

20

FTW & Partners

20

69

70

7

Lawrence Wong

21

Chang Leung Hui & Li

21

53

68

<68

Paul CY Tsi

22

C K Yau & Partners

23

48

48

40

Joseph Yau

23

KLC Kennic Lui & Co.

22

51

47

42

Kennic Lui

24

Philip Poon & Partners

24

40

45

<45

Philip Poon

25

CCTH CPA

25

38

38

<38

David Yim Kai Pung

*The list is based on the information provided by the company or their website.

HONG KONG BUSINESS | JANUARY 2014 31

legal briefing

New tax treaty stimulates business traffic Residents of Canada and Hong Kong will start enjoying tax reliefs next year.

S

een as a result of relatively fast negotiations, new tax treaty between the Government of Canada the Government of the Hong Kong Special Administrative Region of China is expected to stimulate business traffic between the two highlydeveloped entities.

Tax law experts stressed that the Canada-Hong Kong tax treaty, signed on November 11, 2012, poses a critical maturity to the business relations of the parties involved. They agreed that cross-border trade and investments will increase once implementation of tax reprieves takes effect next year.

The advantages of the new pact extend beyond residents of the involved parties. Non-Hong Kong businesses involving intermediaries in Hong Kong may also benefit from the tax treaty, especially those in mainland China.

Lyne M. Gaulin of Miller Thomson LLP said the tax treaty intends to avoid double taxation and prevent fiscal evasion with respect to taxes on income.

“Since it has been held that the Canada-China Tax Treaty does not apply to Hong Kong, there was a need for a separate tax treaty between Canada and Hong Kong,” Gaulin noted.

“This positive development should promote business between Canada and Hong Kong and could also have an impact on the structuring of certain

“The treaty rate of 5% on cross-border dividends compares favorably to other tax treaties and can be beneficial for Chinese investments in Canada...” inbound investments into Canada,” he added.

What are the key aspects of the treaty?

Peter Botz of McMillan LLP cited the key benefits of the treaty to Canadian companies which include the ability to repatriate after-tax active business profits from Hong Kong to Canada as “exempt surplus” free of Canadian tax.

On the other hand, Botz noted residents of Hong Kong will gain from the reduced withholding tax rate for cross-border dividends, interest and royalty payments.

“The treaty rate of 5% on cross-border dividends compares favorably to other tax treaties and can be beneficial for Chinese investments in Canada through a Hong Kong company, or for Canadian outbound investment through a Hong Kong company,” he said.

Botz added that Hong Kong residents will also 32 HONG KONG BUSINESS | JANUARY 2014

Jim Wilson

Lyne Gaulin

Peter Botz

benefit from the residency tie-breaker rules that may help international business principals who have family or business connections in both Canada and Hong Kong.

Jim Wilson, of Gowling Lafleur Henderson LLP, also cited the standard dual resident tie-breaker rules for individuals, a common feature in many of Canada’s other tax treaty agreements, as one of the key aspects of the tax pact. “In light of the significant number of Hong Kong residents who have moved to Canada since the late 1980s and the number of situations where questions regarding residence exist, the inclusion of these tie-breaker rules should help dual resident individuals ascertain with a significant degree of certainty in most cases the jurisdiction in which they would be considered resident,” Wilson said.

Wilson and Koh both agree that another key aspect is the provision on business profits. Under the treaty, Hong Kong residents conducting business in Canada will only be taxed on business income earned through a permanent Canadian establishment.

Is this a unique new tax?

According to Wilson, changes made to the Treaty terminology make it applicable only to the relevant parties. For example, Article 1 of the Treaty refers to “residents of one or both of the Parties”, as opposed to “residents of one or both of the Contracting States.”

Article 4 has similar changes in terminology, where the term “national” in Article 3 of the Treaty only has a unilateral definition for Canadian nationals.

“Since Hong Kong is not a sovereign state, the signing of this Treaty has led to certain departures from the more traditional language seen in Canada’s other tax treaties,” Wilson said.

“Only time will tell if this provision becomes problematic for Canada. On the surface, it seems that the entitlement to treaty benefits, subject to the limitation of benefits provisions in the Treaty, is a relatively easy test to meet for Hong Kong residents.”

When will the treaty come into force?

According to Miller Thomson’s Gaulin, will come into force on the date of the later of the notification by Canada and Hong Kong that the Tax Treaty has been ratified in accordance with their respective domestic laws.

In Canada, the Tax Treaty, he said, will apply to tax withheld at source on amounts paid or credited to non-residents on or after January 1 in the calendar year following the year in which the Tax Treaty enters into force. The Tax Treaty will generally apply to other Canadian taxes for taxation years beginning on or after January 1 in the calendar year following the year

CMO Briefing

Making your brand’s info stand out

Experts explain how saying the words is not enough in the content marketing environment.

C

ontent Marketing is one of the biggest buzz words of 2013. It aims to attract customers by constantly creating valuable content, but how do companies best execute an effective strategy to communicate this content in the market?

The best information in the world is useless unless it is adequately marketed, and it needs to stand out from the other junk that already clutters up a customer’s inbox. Dave Murray, Director of the Content ROI Center at the CMO Council says that whilst the market is still young in Southeast Asia, there is the potential of content marketing to build brand presence, predispose buyer markets, prime sales pipelines, and up-sell and cross sell customers. However according to Ms. Ho Lee Yen, Chief Marketing Officer of AIA Singapore, content marketing strategies still need to strike a balance between consumer engagement to build brand affinity and meet clear business objectives.

Social media branding Brand affinity and reputation is the approach taken by CMO Chris J Reed, from mig33. “The key to this is the content, it’s free and compelling.

LinkedIn gives opinion leaders and business leaders a dedicated, targeted platform for them to express themselves and market their personal brand and their thoughts on business. Simply put the LinkedIn content engagement model makes LinkedIn money.

Anyone with a B2B platform can do the same, and a B2B Content Marketing Strategy should be making money, not costing money.”

This is a view echoed by Steven Tan, Regional Director, CMO Council Asia Pacific. According to Tan, companies look to build their brand, attracting website visitors, blog subscribers, and social followers. “At Aspect Software, I started 34 HONG KONG BUSINESS | JANUARY 2014

The best information in the world is useless unless it is adequately marketed.

the Aspect Customer Experience (ACE) and the BPO CXO Exchange leveraging great contents to nurture and engage our customers through inbound lead generation. The objective is to build greater customer intimacy, understand the voice of the customers better and to solicit inputs and feedback for better decision making.” In addition, Tan says at Seagate Technology, separate dashboards measuring lead generation effectiveness also complements the automation analysis.

“Social media has become an important vehicle for marketers to use to create content,” says Senior Director of Global CRM Marketing, Nicholas Kontopoulos. “Whether people are discussing social issues, what’s trending in the cultural or sports worlds – or what will be the next Gangnam style viral video – all of these are opportunities to engage your customers. But unlike traditional marketing, which focuses on talking at people, content marketing is about talking with them.”

A traditional approach Other companies are more conservative in their approach, trusting that well-crafted content can be used in both traditional and on-line environments.

Laura Ashton, VP Marketing at Philips Lighting - Growth Markets explains: “In my experience, content still needs to be delivered through both offline and online media,” Ashton says. “SEM and digital campaigns are vital but many customers throughout Asia still like the immediacy and hightouch of a quality brochure or catalogue, receive mail and attend face to face events rather than going online.” But Kontopoulos stresses that creating content is the easy part. “You are doing that every time you post something on Facebook, Twitter or Instagram. What is difficult is creating content that moves people. You still need to listen to your customers: hear what they are talking about, when did they talk about it and where, who is doing the talking and why.”

One thing appears clear in today’s market: organizations need to bring more precision and strategic thinking to content specification from an end to end process. Roger Stadler, Managing Director from MediaBuzz says the rule of thumb when communicating with customers is to create and distribute only relevant quality content to influence purchasing decisions, especially in the era of social media, but warns that there is no silver bullet when it comes to content marketing strategy.

“Copying individuality is kind of impossible, so staying active in social media, writing articles and blogs, sending newsletters and creating engaging videos are still the best way to gain attention.” Real content marketing is a task that involves a brand truly becoming a publisher, not just a marketer, and too many companies are still engaged with customers without having developed solid and consistent strategies in place.

CIO Briefing CIOs are facing many challenges which can quickly overwhelm a traditional organized IT department.

Big Data, or just big problems?

See how companies are preparing for the technology phenomenon in the local market.

B

ig Data is set to impose both challenges and opportunities for growth in the Asian market, testing the adaptation of local companies to this new technology. The technology phenomenon will impose both challenges and opportunities for companies, but what does that really mean for the local market?

Miao Song, Group Chief Information Officer at Golden-Agri Resources sees key opportunities with this growth. “It becomes a core competitiveness advantage for enterprise to differentiate from other others,” Song says. But she stresses that to achieve this, the concept must “start from small”, and be a step-by-approach to achieve goals.

Key opportunities Ofir Shalev, CIO Employee Health & Benefits APAC at Mercer sees the market from a big industry growth perspective. “Combined with the rate and penetration of mobile phones, the growing flow in social media and the growing connectivity of the consumers, it is a great opportunity for companies to leverage Big Data and Analytics to gain new market insights, developing a 360-degree view of the customer, developing new products and services based on data and addressing threat, fraud and security issues.”

“We are also currently implementing an analytics project, pulling medical benefits data, claims data and financial data from various sources and systems, making information easily accessible and transforming the raw data into meaningful and useful information.” There are just as many challenges surrounding the adoption of this technology. Craig Stires, Research Director of Big Data and Analytics at IDC Asia/Pacific, says

36 HONG KONG BUSINESS | JANUARY 2014

39% of organizations in AsiaPac are not analysing whole sets of data they are collecting.

research shows that 39% of organizations in AsiaPac are not analysing whole sets of data they are collecting, and there is a need to mitigate future risk driving a boom in storage of data. But actually driving profits has proved a challenge.

“Lacking a business case with expected returns, the costs of doing more with that data is too much for many organizations to bear,” he says.

“Compounding this issue there are precious few data scientists in the market, who also have the specific industry expertise and business acumen.

Without these people to lead the process, many organizations don’t know where to look for the lowhanging fruit.”

Key challenges But Paul Toohey, Global Portfolio Director, Advanced Analytics, Hewlett-Packard Company thinks that the Big Data phenomenon could cause more problems than solutions unless CIOs are well prepared and move from the suppliers of technology to the provider of business solutions.

“The explosion in both internal and external data sources creates many headaches around storage, processing power and the ability to integrate and conduct analytics across multiple data types,” Toohey says.

“Combined with the heightened expectations of business users to have a single view in near to real time, CIOs are facing many challenges which can quickly overwhelm a traditional organized IT department.” Ruoyu Bao, Director, Global Analytics Hub, Lenovo echoes Toohey’s concerns, raising the issue that when companies launch projects aimed at gaining a competitive advantage, they fail to implement the execution capability for the outcome.

Song agrees that complexity, volatility and volume can be problematic, but perhaps the hardest issue to control is with regards to maintaining professional skill sets. Whilst Bao also acknowledges the company is the process of setting up a Global Analytics Hub, most of the candidates interviewed at Lenovo are overseas and are students.

“Leveraging big data is going to be increasingly important for us to widen our lead,” he says. Shalev also believes that the major challenge with the adoption of this technology is related to a potential gap in skill sets. “A good Data Scientist is problem solver with a business acumen, strong analytical skills with a solid background in statistics, machine learning and computer science.”

Big Data may only work well for those prepared to up skill in order to mitigate future risk.

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傑出室內設計獎2006–2013 Outstanding Interior Design Award 2006–2013

design for the elite

Interior Design

Architecture

普特朗建築及室內設計 工程管理 查詢熱線: (852) 2239 6888 3/F, No. 77, Wong Nai Chung Road, Happy Valley, Hong Kong

www.zchron.com

References: Commercial projects Carlsberg Escada Leica Residential projects House, Belleview Drive, Repulse Bay Apartment, The Mayfair Apartment, The Leighton Hill

12,000 S.F. 7,000 S.F. 5,000 S.F. 6,000 S.F. 6,000 S.F. 2,200 S.F.

ANALYSIS: ASIAN ECONOMICS thus far. To be fair China and Korea are making slow progress in a few areas, but the pace of reform in those economies is not enough to fundamentally alter the macroeconomic backdrop that investors presently face and will likely face in the next year or two.

Meanwhile India and Indonesia have important national elections next year making meaningful reform highly improbable.

Exports won’t launch economic growth to a higher plain

The longest, boring, slowdown ever

What drives economic growth? By Duncan Wooldridge, Economist, UBS

T

his has become boring. We feel like we’re sitting around wishing something good would happen knowing full well that it won’t. Our fundamental view early on was that Asia’s current sluggish growth was in fact “stru-cyclical”; i.e, a combination of cyclical weakness coupled with a decline in trend economic growth. However, our assumptions about the magnitude of improvement in exports remain very conservative. And if you look at our growth forecasts for the next two years you can see that our Asian economic team collectively do not believe exports, via the income linkages, will launch economic growth to a higher plain.

Part of this is because on a volume basis we only expect exports to improve by 2-3 percentage points next year. That would leave exports growing well below long-term experience, even though it represents a mild cyclical improvement consistent with better US and European growth that our global colleagues predict.

However, the other reason that exports will likely fail to restore economic growth to its long-term

38 HONG KONG BUSINESS | JANUARY 2014

trend of nearly 8% is because of debt.

It should suffice to say that private sector debt for Asia ex Japan is now very high and it has come a long way in a short period of time. For us that means debt overhang is becoming a problem for the more indebted economies such as China, north Asia, Hong Kong and Singapore. These highly leveraged economies will inevitably suffer from diminishing marginal benefits of increasing debt.

The beauty of reform But as we’ve written before even the lower debt economies will find it more challenging in a world where the Fed is expected to begin reversing course, given current account deficits in India, Indonesia, and Thailand. Importantly those deficits are increasingly concomitant with banking liquidity risk as LDRs have increased sharply in recent years.

And this is where it gets boring once more. The beauty of reform is that it could potentially create a way out of this scenario. We could get off the excess credit growth treadmill. But most of the region has demonstrated little to no appetite for an aggressive reform agenda

Even the lower debt economies will find it more challenging in a world where the Fed is expected to begin reversing course.

Very low real rates We’ve aggregated our Asian economic team’s quarterly projections for real GDP, inflation, and policy rates. These projections suggest that economic growth will not materially change for the better and consequently we believe the average policymaker in the region will not enthusiastically embrace higher rates or at least relative to inflation. In the absence of much higher inflation monetary policy will likely focus on sustaining growth. Consequently, overall real rates are anticipated to remain very low by the team.

Asian currencies will generally be weakening against the USD over the next two years, once markets get beyond the initial enthusiasm for improving exports in the next quarter or two. Real rates affect currencies over time and if the US Fed is gradually becoming less accommodative during the next two years (that is the UBS view), while Asian central banks remain reluctant to raise real rates because of weak economic growth, then the average Asian currency should logically drift weaker. Our views, which were perhaps anti-consensus a few years ago, have now become consensus.

Asia ex-japan real annual GDP

Source: CEIC, UBS estimates

HONG KONG BUSINESS | JANUARY 2014 39

CO-PUBLISHED CORPORATE PROFILE

Ricoh innovations create business efficiencies in mobile era

Find out how Ricoh has successfully delivered the desired quality and cost through developing new products and services for its customers.

O

ver the years, the needs of Ricoh’s customers have evolved from purchasing industry-leading hardware to seeking ways to improve business processes and IT solutions, especially in the era of a multitude of smart mobile devices including iPads, iPhones and Android-based devices that companies and individuals use to improve productivity and mobility.

Ricoh anticipated the wave early and began delivering IT services and business process outsourcing such as the I-invoicing service and unified communications services to fulfil rapidly changing customer expectations. By combining its experience and strength in service support, Ricoh has evolved into becoming a solid partner for its customers.

“Ricoh changed from being an output printing company to whole business process services provider,’’ says Sergio Kato, Associate Director of Ricoh Company Ltd., and Deputy General Manager of Business Solutions Group.

Founded in 1936 in Tokyo, the Ricoh Group is a leading global solutions provider with a strong heritage in customer focused

technical excellence. The company’s global network provides complete outsourcing, managed print services and high level production printing, allowing companies to realise their ideas.

Best quality and cost Ricoh operates in 200 countries and regions. In the financial year ending March 2013, Ricoh Group had worldwide sales of 1,924 billion yen (about US$20 billion).

Kato explains that previously, Ricoh customers often made inquiries about quality and cost. Ricoh has successfully delivered the desired quality and cost through research and development to those customers. But now, customers demand the quality of the information.

“Due to the complexity of the information, customers want to optimize the information. The content has to be

“Ricoh changed from being an output printing company to whole business process services provider. ”

Sergio Kato shares the future office technologies and Ricoh as a total office solutions company

40 HONG KONG BUSINESS | JANUARY 2014

useful,’’ Kato says.

“Customers receive a lot of information in different modes – email, PDF, even in handwriting. They want to input such information into their processes. The customer wants to manage the whole process from input to output. So, we developed our technology not only for printing, but also for the input function – the scanning technology. Our product used to be called the copier, now we call them multi-function devices – not only for printing but also scanning, storage, and transmitting data. This is how we engaged in the input processes.

“The next stage was that the customer began to request seamless process optimisation. This involves devices connected to the network, networking functionality and digitalized information.

This is how Ricoh entered the IT environment. Customers wanted us to manage the network. So we started the IT networking service.

Business process efficiency Once they have the network, customers want to improve the efficiency of the business processes. Then we enter this area.’’

He cites how Ricoh developed I-invoicing, or intelligent invoicing, to help improve business efficiency at companies.

“There are two types of invoicing – account payables and account receivables.

Often, invoicing in done on paper. But now it has become electronic. Our solution is different. Some partners, suppliers of a business may not be able to adopt electronic invoicing. So we developed I-invoicing services to support companies and their partners in stages. We developed the business platform for digital invoicing and also we set up the business process through diverse modes of invoicing – paper, PDF, email etc.’’

Kato explains that invoices are scanned

by Ricoh devices and are transformed into one format that is then passed on to the company. The company will then issue the invoice – an e-invoice via electronic

CO-PUBLISHED CORPORATE PROFILE

Aaron Yim, Managing Director of Ricoh Hong Kong calls for workplace innovation data interchange, or create PDF, or even paper invoices for those who want paper invoices.

“Our platform can adapt to these requirements. This is why we call it intelligent invoicing. The customer can manage most efficiently a mixture of information types.

We support these customers and suppliers to transform from paper to digital with our change management services,’’ Kato elaborates.

Through such innovative offerings to companies, Ricoh has transformed itself from being an output printing company to a whole business process services provider.

“People work everywhere. Many activities are offsite and many people accessing information from many locations from many devices have to be managed.

Managing this accessibility is difficult.

There are security and compliance risks.

For this we use our data encryption technology. We also have developed applications such as those for IC card authentication.’’

Ricoh becomes a partner in major transformations Sergio Kato, Associate Director of Ricoh Company Ltd., and Deputy General

From left: John Harrison, Jardine Shipping Services; Gautam DS Bardoloi, Hong Kong Jockey Club; Henk Ten Bos, Ageas Insurance Company (Asia); Ken Madrid, Crown Worldwide Group Manager of Business Solutions Group, cites two case studies to illustrate how Ricoh became a partner in improving business processes.

Referring to a US food company, he says the chief information officer, who did not have a permanent desk at his workplace, wanted mobility. Ricoh listened to their wishes and adapted its technologies.

“One of the technologies was the Unified Communications Services (UCS) to support their mobility requirements.

You connect with a few clicks, wherever you are. We have developed an iPad application for this. Thanks to carrier technology and bandwidth speeds, the images are life-like.’’

The project at the US-based company is on-going.

The Unified Communication Services that Kato is referring to, provides real-time

“People work everywhere. Many activities are offsite and many people accessing information from many locations from many devices have to be managed.”

interactive audio and video communication with multiple locations via the internet. It is compact and lightweight.

Delivering real-time information on proceedings He says Ricoh will introduce technologies as a pilot project, test it and once the customer accepts the concept, implements the ideas.

The IMF and World Bank Group 67th annual meetings in Tokyo is another example. Ricoh created an app to support conference presentations of numerous delegates.

“Everyone in a conference room can share your presentation. It is paperless.

Whenever the presenter flips to the next slide, it is synchronised to shift automatically. So everyone is on the same page,’’ Kato elaborates.

“If anyone wants to track back, a participant can do so independently of others. You can also change to working mode and take notes during the presentation. Then he can upload everything to his destination – his email, or company storage server.’’

At the IMF/World Bank meetings Ricoh also set up digital signage to deliver realtime information on proceedings.

HONG KONG BUSINESS | JANUARY 2014 41

Co-published corporate profile

SMEC Celebrates its 20th Anniversary in Hong Kong

High-ranking guests who flocked into the event is just icing on the cake.

R

ecognised around the world for providing high-quality, practical solutions for social and physical infrastructure projects, SMEC recently celebrated its 20th anniversary in Hong Kong. Senior officials from the Hong Kong Special Administrative Region, the Liaison Office of the Central People’s Government, the Australian Consulate-General Hong Kong, and leading members of the Hong Kong civil industry celebrated with SMEC at a cocktail reception.

The Australian Consulate-General of Hong Kong, Mr Paul Tighe, delivered a speech highlighting SMEC’s excellence, confirming that Australia rightly has a reputation in Hong Kong as a reliable provider of high quality products and professional services. He added that for over 20 years, SMEC has contributed to

that reputation and, in the process, left an impressive legacy in the development of Hong Kong’s public infrastructure.

“The Australian Government is proud to count SMEC among the wide variety of businesses that make up the Australian presence in Hong Kong and which are recognised for their professionalism and creativity,” said Mr Tighe.

Ricky Yim, SMEC Asia Managing Director, said, “We are proud for such recognition and will continue to deliver value to our customers and our communities.”

The Guest of Honour was Mr CK Hon JP, Director of Civil Engineering and Development. In Mr Hon’s speech, he mentioned the importance of the civil infrastructure to the Hong Kong economy, as well as to the work force behind it. He commented that Hong Kong Government

SMEC has played a significant design role in the development of all of Hong Kong’s new railway projects, including Admiralty Station.

42 HONG KONG BUSINESS | JANUARY 2014

is working to deliver a long term sustainable plan to increase land supply through reclamation and cavern development, all of which will require the expertise of experienced engineering firms like SMEC. “I think no one here would dispute with me that the construction market of Hong Kong is right now embarking upon another golden age. In fact, in the most recent published Report of the World Economic Forum on Global Competitiveness, Hong Kong has advanced two places to be the world’s number seven most competitive economy. Amongst the key pillars for determining competitiveness, we remain number one in the quality of infrastructure for the fourth consecutive year,” said Mr Hon. Now in its 20th year of operation in Hong Kong, SMEC has played a significant design role in the development of all of Hong Kong’s new railway projects, including Admiralty Station, part of Mass Transit Rail’s (MTR) South Island Line (East) extension.

The South Island Line has five stations and 7 km of underground and elevated structures.

SMEC provided permanent works and major temporary works design for Admiralty Station’s cavern and tunnel. Situated directly below busy roads, an underpass and a car park with shallow rock cover, the station cavern spans 24.5 m, is 16 m high and 105 m long. Upon completion, Admiralty Station will be one of the largest and busiest underground stations in Hong Kong.

Aside from this, SMEC is also heavily involved in the design review of 15 km of tunnels for the 26 km express rail link project. The project will connect West Kowloon in Hong Kong with Shenzhen - Guangzhou in mainland China, linking Hong Kong to China’s 16,000 km highspeed rail network. SMEC is involved in the design review of the 11 ha West Kowloon terminus development for this express rail link project. There will be nine long haul platforms and six shuttle platforms at the terminus. A number of significant design projects have also been secured by SMEC, including the Shatin Central Link. This is a strategic rail corridor connecting Tai Wai and Admiralty. It will serve areas of East Kowloon and connect the New Territories, East Kowloon and Hong Kong Island.

CO-PUBLISHED CORPORATE PROFILE

Leather Making is “A Spirit of the Heart”

See how Artisan & Artist* perfected craftsmanship in 30 years

A

rtisan & Artist* is a leading Japanese leather company specializing in distinct leather bags and cases for camera aficionados worldwide. It prides itself in crafting leather goods of the highest quality, functionality, and timeless sophistication.

Founded by Seichiro Hangui in the early 80’s, the company believes that “each and every product is created with passion, Spirit of the Heart.”

Hangui saw a need for functional bags in Japan, and to meet the rising demands, one of his first designs were multicompartmentalized cases and pouches for cosmetics and make-up brushes.

An international brand His creations caught the attention of luxury department store Barneys New York and commissioned him to produce a series of customized pouches. From then onwards, Artisan & Artist* was propelled into a well sort out name in the international arena. A photographer enthusiast himself, he later

expanded his product lines for cameras and for multi- functional purpose.

Class and simplicity combined Artisan & Artist* produces simple, classic and durable camera bags and cases with meticulous thoughtfulness for the user.

Made of soft lambskin and lined with suede, the case delicately cushions and protects the camera.

Each bag also has removable interior dividers and a system of Velcro fasteners and nylon straps with sturdy buckles. Only high-quality Italian lambskin leather is used to make the cases. The leather is treated with Endocladiaceae, a natural product derived from seaweed. The bags are also made from a combination of supple leather and water and stain resistant canvas.

Artisan & Artist* chooses the state of the art “Dharma Press” to cut materials with millimeter-level precision. The sewing

“Seeing the need to accommodate the female market, the company created a line of unisex camera accessories. ”

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44 HONG KONG BUSINESS | JANUARY 2014

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OPINION

Tim hamlett

Manpower shortage?

What manpower shortage?

A

campaign is under way to drive down the level of local wages.

Of course it is not described like that. Employers may be insanely greedy but they are not stupid. So we are presented with a “manpower shortage”. What this was doing as the lead story on the front page of the SCMP I do not know, but the campaign is gathering steam so we need to consider exactly what it is.

The most eye-catching feature of the Post’s headline was the announcement that “industry leaders” feared the manpower shortage. I thought Hong Kong’s industries had all long since migrated to more congenial environments north of the border where stroppy workers are dealt with properly … and shot. On closer inspection, though, it seemed that “industry” was being used in the more general sense to apply to three pursuits which have to be done here because this is where the customers want the work done: construction, restaurants and old folks homes. These are, apparently, “key sectors recently identified by the government”, which was news to me. How can construction be a key sector? Either a building is needed or it is not. If other industries are prospering then more buildings will be needed, and if not, not. Anyway leaving aside the official status of the three industries where was the evidence for a shortage and what was the government supposed to do about it?

We’ll take the second question first. The government was supposed to reform the importation of labour scheme so that the proprietors of building firms, restaurants and aged homes could benefit from the resulting influx of labour. Among the benefits would be a reduction of wage levels in the industries concerned.

This is an elementary feature of those laws of supply and demand on which employers are so keen when discussing minimum wages.

More pay, fewer workers. More workers, less pay.

For it is an elementary fact of economic life that there is no such thing as a manpower shortage. This is not only because half the workforce are not men, but also because there can only be a shortage at a particular wage level. The way the invisible hand works is that items in short supply become more expensive, conjuring up more supply. There is no job in Hong Kong that cannot be filled – at C.Y. Leung’s salary level.

And indeed it turned out that the main evidence the “industry leaders” were offering for a shortage was that they were being compelled to pay higher wages.

Let us start with Thomas Ho On-sing, chairman of the HK Construction Association. Mr Ho’s complaint was that “A cement mixer with no experience is getting paid $1,100 a day”. Now I have no idea what a cement mixer does – in normal English it means one of those machines which you shovel materials in and tip cement out of.

I suppose Mr Ho is referring to some kind of machine operator, I suppose also that since experience is valued the job involves some skill and judgment. We may also suppose that it is done outdoors in a relatively dirty and dangerous environment. And the question which then arises is: what is wrong with the 46 HONG KONG BUSINESS | JANUARY 2014

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

There is no such thing as manpower shortage

person doing this job being paid $1,100 a day? The job has some unattractive features and it is only right that these should be offset by generous financial compensation. I have no doubt that Mr Ho could recruit people in Bangladesh – or the Philippines – willing to do it for half as much. Where is the benefit in that for Hong Kong as a whole?

Next up we have Simon Wong Ka-po, President of the Federation of Restaurants and Related Trades, as the food biz now calls itself.

Mr Wong fondly recalled the days when you could recruit a waiter for $35 an hour, and complained that it was now necessary to offer $60. So? This means that if you work 40 hours a week, which is enough for most of us (I have been a waiter), then you will take home $2,400 a week or, in round figures, $10,000 a month. Would Mr Wong, I wonder, like to live on $10,000 a month?

The old folks home spokesman did not have any horror stories of being forced to pay decent wages for a change. He was barking up a different money tree. The government “should pledge that a certain percentage of people will be getting a place in subsidised homes”, he said. Oh yes. So much more congenial than giving people a decent pension and letting them make their own choices.

The following day we had a contribution to this chorus from Shirley Yuen, the chief executive of the Chamber of Commerce.

Miss Yuen cantered through the usual material: disappointing number of imported workers, why can you not import a waiter, etc. and then got down to the nitty gritty. “The unions say we should protect local workers by not importing workers. But are we protecting them when we do not do so? If we don’t do so, will we even lose the whole industry?” To which the answer is “No”. No ifs, no buts, no maybes. We will not lose a whole industry and the suggestion is a silly scare tactic which will frighten nobody.

Business people are entitled to try to persuade us that what is good for them is good for us.

Sometimes no doubt this is true. Exhibitions of shameless greed make this less obvious.

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ECONOMICs

Ian Perkin

Mainland’s Third Plenum reforms to boost Hong Kong?

T

he good news on the Hong Kong SAR economy is that the bad news is not getting any worse. According to the Government’s third quarter economic report and forecast, issued on November 15, growth in the September three months was 2.9%. This maintained the pace of the first two quarters of the year – 2.9% and 3.2% respectively – and shows the economy on course for average 3% growth for the year.

Reaching that annual target – the mid-point in the previously forecast range of 2.5%-to-3.5% - requires only 3% growth in the current three months. Given the tepid global growth and the difficulties faced by the major industrialized economies the Hong Kong outcome is anything but surprising.

But the big question facing the SAR is a Mainland one: How the reforms instituted by the Third Plenum of the 18th Communist Party Central Committee in its November gathering affect China and what, if any, benefits will flow on to Hong Kong?

Talk of “unprecedented” reforms and comparisons with the momentous decisions taken in the 1978 Third Plenum (reform and opening under Deng Xiao Ping) were a step too far. First reports after the meeting seemed to confirm this, but subsequent announcements have suggested considerable progress on the Mainland reform agenda. The next test is how much of the proposed reform will be implemented – and over what time frame. The proposed “deepening” of domestic Mainland reform ought to have flow-on benefits to the SAR through enhancing the Mainland’s domestic growth prospects.

So too should plans to accelerate Yuan exchange rate convertibility, faster land reforms and business project approvals, tax reforms and an even tougher anti-corruption drive. None of these measures will help boost the SAR much in the short term.

For the short-to-medium term the HKSAR is faced with riding the fortunes of the global economy and that will mean modest growth through 2014.

As the third quarter economic report made clear, the good news is that Hong Kong’s pace of real economic growth this year (calendar 2013) will be double that of 2012. The bad news is that this means real growth will be just 3 per cent for the year. Nominal growth for the 12 months - that is before adjustment for prices - will be down for the third year in a row (just 4.5% compared with 5.5% in 2012 and 9% in 2011).

Looking through the third quarter report, out on November 15, it was difficult to find a specific bright spot. The one exception – and it is a modest one - might be the continued growth in services exports, especially continued travel and tourism growth. This ties in with the last column in this series, which outlined the benefits of the continued surge in Mainland arrivals and how they underpin the local travel and tourism market. Exports of services in Q3 rose by 4.9%. Although down on the previous two quarters (5.3% and 8.9% growth) this was a respectable outcome in the broader context.

48 HONG KONG BUSINESS | JANUARY 2014

IAN PERKIN Independent Economic Consultant perkin888@hotmail.com

Gross Domestic Product and Price Growth ‘12/’13

As the government report noted, this was “thanks to expansions of inbound tourism and cross-border financial activity”. The bigger components of GDP were, however, lackluster.

Domestic consumption grew by a real 2.8% but this was well down the first half of the year (see accompanying table). Government consumption was also weak.

Investment grew just 2% with building an construction up just 2% and machinery and equipment up 7%. Merchandise exports grew 6.2% but imports rose faster at 6.8%. Services exports were up 4.9% outpacing imports, which grew only 2.4%. Employment figures and wages remained firm and inflation was under control (if slightly higher), with the Composite CPI rising 5.3% (headline) and 4.3% (underlying inflation).

Looking to the immediate outlook, the government said there are still old and new challenges preventing the global economy from switching to a higher gear. These included the US economic performance, the continued Eurozone weakness and the slowdown in some major emerging markets.

Offsetting these factors, the Mainland economy remained resilient, “which should lend some support to trade and production activity in Asia going forward”.

OPINION

Hemlock

Decline of the Hong Kong property ad

H

ow long before Beijing declares that the new island off Nishinoshima, Japan is historically Chinese territory, and sends fisheries patrol vessels to lurk menacingly on the horizon? It’s not just the Western Pacific that’s seeing new real estate cropping up right now.

Hong Kong newspaper readers will have been slightly perturbed lately by full-page ads showing a curly-haired little boy dragging a creepylooking toy monkey across a deserted field and giving no clue as to what product or service was being promoted other than the word ‘Visionary’.

The ad, it turns out, was for a new development in sunny Tung Chung.

The Standard reports that Joel Chan, the ex-boyfriend of one of casino king Stanley Ho’s daughters, is thinking of trading his Home Ownership Scheme unit in Kowloon Bay for an apartment there. I think this is supposed to make the rest of us want to buy one too (it also reminds us that Stanley Ho has so many female offspring that some are sadly reduced to almost literally slumming it in search of a mate).

Celebrity-Property-Purchase-Watch also reveals singer Karen Mok’s apparent interest in The Avenue – the Urban Renewal Authority excrescence on what used to be Lee Tung or Wedding Card Street in Wanchai. This project is also being widely advertised. While Nan Fung pushes a ‘kid with sinister ape doll’ concept, the theme here is some sort of 1930s retro-glamourchic. But if we are nostalgic for anything, it should be for the glory days of property ads themselves. Something has changed. Misleading artists’ impressions have not been banned exactly, but the vendors are now required to cram a lot of not-so-small print onto the ads, stating quite plainly that any and all visuals are, in all likelihood, crap. The fun has gone out of it.

New regulations on the sale of new property are now kicking in. The new law came into effect some six months ago, and after dragging their feet and even delaying launches to avoid the impact, developers are finally having to embrace unprecedented degrees of honesty. The sales brochure for The Avenue makes it clear that this is a densely crowded location (and due to become even more so when Hopewell opens its new mega-hotel a few blocks away). Flick down to page 46, and zoom in, and you see how cramped these flats will be, especially once you

50 HONG KONG BUSINESS | JANUARY 2014

subtract bay windows and balconies. The price list presents the same degree of honesty in dollar terms. Beforehand, developers were essentially free to cheat and lie and con. There is even a bureaucracy dedicated to enforcing the rules.

Developers and their slimy intermediaries can still use some psychological trickery. By offering rebates and payment of stamp duty, they can pretend to cut prices. By releasing units in batches and tweaking the pricing each time, they can engineer an initial clamour to buy, which – they hope – will gather momentum even as the prices rise as later batches go on sale. And they can sit you at a table, put a form in front of you and give you five minutes to sign, or the deal’s off. All of these depend on the buyers being to some extent stupid rather than just lied to.

More projects are in the pipeline. You won’t hear about it much in the Standard, which is dedicated to talking up prices, but some analysts foresee a steep correction in the Hong Kong property market – as much as 50%. Of course, they’ve been saying this for ages and there’s still no serious sign that the US Federal Reserve is going to stop printing money, which is underpinning equities as well as real estate.

But the little green bits of paper still have some purchasing power, and there’s only so much anticipated debasement of the currency you can price into an asset before it ceases to make sense.

Why would Joel Chan or Karen Mok, or anyone, buy now?

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

Why would you buy now?