LI, Tao @ Hong Kong

Despite the city establishing itself as a global financial center, the Hong Kong Stock Exchange has fallen behind its Singapore rival in attracting overseas listings, according to a report released by Lingnan University.

Though the number of new listings on the Hong Kong exchange led the world in 2009, and the city is once again on target to become the largest IPO fundraising center this year, the city’s bourse is still not considered “globalized” as it is dominated by local and mainland firms.

Of the over 1,300 companies listed on the Hong Kong stock exchange as of Friday, about 250 of them are from the mainland while only 16 are from abroad.

In comparison, Singapore ranks third in foreign listings with a total of 299 – 149 from the mainland, 66 from Hong Kong and Taiwan, and 84 from other markets at the end of 2009.

And there were a further 495 overseas companies listed in New York and 613 foreign enterprises listed in London at the end of 2009.

Although Hong Kong has a privileged position as a listing destination for mainland companies, a lack of exposure to international companies is “risky” in the long term, said Jesus Seade, vice president of the university and head of the research group. He added that the further diversification of the mainland’s economy will lead more companies from there to list abroad rather than in Hong Kong.

According to international financial data provider Dealogic, seven companies from the mainland listed in the US this week – the most seen in a single period of that duration.

Dangdang and Youku, dubbed the Chinese Amazon and Youtube, surged 87 percent and 160 percent respectively on their first day of trading on the New York Stock Exchange Wednesday.

Hong Kong is now losing out to Singapore in attracting smaller and high-tech mainland firms, according to the study. Hong Kong-listed mainland firms also tend to have poorer post-IPO performances than those that list in New York and Singapore, which seems to imply that the expected corporate governance benefit of listing in Hong Kong is less than expected.

“Complacency about our prospects as a leading financial center would be ill-advised,” said Seade. “We need to make our financial markets and products more user-friendly and attractive to global users to stay competitive, alongside Hong Kong’s inherent strengths as a financial center and the powerful magnet effect of being part of China.”

New niches are emerging, however, with major foreign natural resource firms and European luxury companies starting to float on the exchange.

UC Rusal, the Russian and foreign resources company, and L’Occitane, the French high-end consumer product company, have both successfully listed in Hong Kong this year. Reports say mining companies from Mongolia, Brazil and Nigeria are also queuing up to list in the city.

Leonard Cheng, dean of the Business School at the Hong Kong University of Science and Technology said that globalization as well as diversification is now a crucial topic for the city, since it faces competition not just from abroad, but from mainland cities as well – particularly Shanghai.

China Daily

(HK Edition 12/11/2010 page3)

http://www.chinadaily.com.cn/hkedition/2010-12/11/content_11686034.htm

A woman looks at sports shoes at a Li Ning store in Hong Kong. The recent lackluster performance of city-listed mainland sportswear makers indicates a major cooling down in the sector. Jerome Favre / Bloomberg

Rapid expansion, but mismanagement of distribution networks creating problems

The recent lackluster performance of Hong Kong-listed mainland sportswear makers indicates a major cooling down in the sector, which – according to analysts – is a response to the effects of rapid business expansion in the industry, particularly among premium brands.

On November 24, sportswear designer and distributor China Dongxiang Group Co Ltd reported that its orders received for the second quarter of 2011 grew only 2.8 percent, far below the industry average and market expectations.

Shares of Dongxiang, which owns the “Kappa” brand on the mainland slumped 13 percent to HK$3.60 that day, leading the downturn of major mainland sportswear makers including Li Ning, 361 Degrees, and Anta Sports Products Ltd, which decreased 3.6 percent, 4.5 percent and 5.8 percent respectively.

“The market widely expected its order book to grow at an annual pace of 20 percent. The flat growth rate surprised the whole market and led to a major slump in the entire sportswear sector,” Core Pacific-Yamaichi analyst Bill Chen told China Daily.

A failure to improve the management of its real-time inventory controls with a fast growing network of distributors has caused a serious inventory backlog at Dongxiang, but this is not the first time the issue has reared its head.

Dongxiang’s order book for the first quarter of 2010 increased by only 11.8 percent from a year ago, or merely half the increase seen in the same period of 2009. Facing a severe inventory backlog, most distributors in response had already started to reduce their orders.

“The sharp slowdown in orders gives more credit to the view that Dongxiang’s brand is aging and its brand equity deteriorating,” said Hong Kong-based CCB International analyst Forrest Chan.

Nevertheless, the company has continued to open new stores at a much higher rate than the growth in their orders over the past four years.

In 2006, Dongxiang owned 1,138 stores on the mainland, but it tripled its presence in the next three years to 3,511 by 2009.

According to data provided by Chan, only 24 percent of Kappa stores are located in first-tier cities. Meanwhile, 60 percent are in second- and third-tier cities with the remaining 16 percent in fourth-tier cities.

“For the first half of this year alone, it opened another 300 stores on the mainland. But Dongxiang’s Kappa products are priced in the a mid- to high-range, which are still beyond the buying power of the majority of consumers, especially in second and third-tier cities,” said Chen.

Another premier sportswear brand, Li Ning, is facing even bigger pressure in managing its distributors efficiently now that it has 10,000 shops on the mainland.

“It is a good philosophy to seize the market ahead of others when you are secure about market growth,” said Christina Lie, an analyst at First Shanghai Securities. “But efficient management of its vast network of distributors is a much more important factor in sustaining business growth.”

According to Lie, although Li Ning shops are in nearly every corner of the nation, most of its distributors only operate out of a single location.

Li Ning’s order book for the first quarter of 2011 increased by only 12 percent on an annual basis – a slower-than-expected growth rate and also a reflection of its failure to efficiently manage its extensive distribution network.

According to a research report released by US-based consulting firm Frost & Sullivan, sportswear expenditure per capita on the mainland was only $2.90 in 2006, which lags far behind most developed countries.

“Fast economic growth, urbanization, as well as disposable income growth will drive the market to grow at about 21.3 percent per year until 2011 on the mainland,” said the report, estimating that total sales will reach $10.4 billion next year.

Both Dongxiang and Li Ning’s business are growing at a rate lower than the market average, however.

In sharp contrast, second-tier sportswear brands are currently enjoying much better growth prospects.

Anta Sports Products Ltd, for example, said earlier it received 21 percent more orders for the second quarter of 2011 compared with that of a year ago, while Xtep International achieved 25 percent year-on-year growth in its second quarter order book.

“Anta also owns thousands of shops on the mainland but its inventory control and business network are maintained rather successfully,” said First Shanghai’s Lie. “Most of its distributors own several Anta shops, which allow them to operate their stores efficiently.”

Core Pacific-Yamaichi’s Chen agrees. He noted that since second-tier sportswear makers such as Anta, Xtep and 361 Degrees strategically price their products at lower levels compared with those of premier brands, this helps them snatch up market share more easily in second- to fourth-tier cities where people’s spending ability is still relatively weak.

But aside from the inventory problem, premier brands like Li Ning and Dongxiang also face strong competition from overseas players, who are making inroads into smaller cities with cheaper products after securing a foothold in first-tier cities. The potential entry of overseas brands into second and third-tier cities will bring even more of a challenge to Li Ning and Dongxiang.

For example, Adidas said just last month that it intends to open more than 2,500 stores in smaller Chinese cities by 2015, in the hope of growing its business in the Greater China market at a double-digit annual rate.

“Confronting the better known Adidas brand, we cannot expect Kappa and Li Ning to gain, especially when they lose their pricing advantages,” Chen added.

China Daily

(HK Edition 12/07/2010 page3)

http://www.chinadaily.com.cn/hkedition/2010-12/07/content_11660898.htm

China Datang Corp Renewable Power Co, the country’s second-largest wind-power producer, said it plans to expand its installed capacity by 2,000 megawatts annually from 2012 after raising the capacity to at least 5,500 MW by 2011 from 4,000 MW at end-2010.

Capacity may increase to as much as 6,000 MW by the end of next year and it will be further boosted through developing wind as well as diversified projects for the next 10 years, the company’s president, Hu Yongsheng, said.

“Offshore wind power has become a new driver for growth and we are also diversifying the renewable energy business to the solar and biomass areas,” Hu told a media briefing on its initial public offering Monday.

The company has set a price range of HK$2.33 to HK$3.18 a share, earning up to $1.01 billion in its share sale on December 17. The company had briefly postponed its IPO plans two weeks ago when Asian markets fell, spooking investors. Previous reports had put the Datang IPO at $1.5 billion.

Established in 2004, the wholly-owned renewable-energy unit of China Datang Corp, which had an installed capacity of only 79.9 MW in 2005, has attracted a total of $260 million in investment from seven key investors for its Hong Kong initial public offering, according to the IPO prospectus.

About 45 percent of the net proceeds from the share sale will be used for the construction of wind power projects in three of the company’s operating regions, including the Inner Mongolia and northeastern development region, the central and western region as well as the southeastern coastline areas.

“The company operates in China’s rapidly growing wind power sector, which benefits from regulatory support and increasing domestic demand for electricity,” said Chen Jinhang, chairman of Datang Renewable Power.

The company owns the world’s largest wind power project in terms of installed capacity – the Saihanba GW wind farm in Inner Mongolia – and the first offshore wind farm in China, Shanghai Donghai Bridge Wind Farm, which has a capacity of 102 MW.

China has already set up a target of raising the use of non-fossil energy to 15 percent of primary energy consumption in 2020, and reducing its carbon emission intensity by 40 to 45 percent relative to the size of its economy (ie the amount of carbon dioxide emitted for each unit of GDP) by 2020 from 2005 levels.

New energy sectors have seen tremendous growth in the country in recent years, with wind power, in particular, posting a growth rate of over 100 percent in the past three years.

In 2007, Datang Renewable Power generated 285.9 million yuan in net electricity sales. The figure jumped to 612.6 million yuan in 2008 and exceeded 1.38 billion yuan in 2009, representing a compound annual growth rate of 120 percent.

The strengthening cost efficiency of wind turbines will help Datang Renewable Power achieve a relatively high return from wind power projects, said the company.

In July 2009, the National Development and Reform Commission, the top economic policy planner, set benchmark tariff rates ranging from 0.51 yuan to 0.61 yuan per kilowatt-hour for onshore wind power plants.

The new tariff range is much higher than the previous tariff of 0.382 yuan and slightly higher than the 0.5 yuan set under the public bidding system. The higher tariff will help boost the profitability of wind farms.

“As a key theme in the Central Government’s 12th Five-Year Plan, clean energy is no doubt a hot sector in the following years. This will make relevant stocks rather attractive,” Castor Pang, research director at Cinda International, told China Daily.

According to Danish wind energy counsultancy BTM report, China ranked second in the world in terms of wind power installed capacity at end-2009. Datang Renewable Power ranked second in China and eighth in the world, said the same report.

Reuters contributed to this report.

China Daily

(HK Edition 12/07/2010 page2)

http://www.chinadaily.com.cn/hkedition/2010-12/07/content_11660895.htm

An employee folds shirts in a clothing factory in Dongguan. As most Hong Kong SMEs in the Pearl River Delta region enjoy a thin profit margin, many can no longer afford to continue, said FHKI Deputy Chairman Stanley Lau. Angelo de Silva / Bloomberg

FHKI: Rising yuan, operating costs spell trouble for firms

About 30 percent of Hong Kong-funded small and medium-sized enterprises (SMEs) operating in the Pearl River Delta (PRD) region may not survive the next two years as a rising yuan and operating costs eat up their profits, the vice chairman of the Federation of Hong Kong Industries (FHKI) said Thursday.

“To these 60,000 to 80,000 Hong Kong SMEs in the PRD region, the rise in labor as well as material costs due to anticipation that the yuan will appreciate means that at least 20 to 30 percent of them will contract or close down their businesses completely,” said FHKI Deputy Chairman Stanley Lau.

China’s producer price index (PPI), a major gauge of inflation at the wholesale level, has climbed 5.5 percent for the first 10 months through end-October, according to figures released by the National Bureau of Statistics on November 11.

Since most Hong Kong SMEs are original equipment manufacturers (OEM) which enjoy very thin profit margin – only about 5 to 6 percent – Lau said many of them can no longer afford to continue.

“Only a 5 percent appreciation of yuan will eat up these OEM’s profit margin by at least 2.5 percent. If they are not able to lift export prices or raise productivity, it is clear many them will soon be edged out,” said Lau.

However, passing rising production costs to their overseas buyers is also not easy, Lau said, since most Hong Kong manufacturers do not hold significant markets share and are easily replaced once they lose their low-cost advantage.

“Unless they can open up the market through their own brands, which would put them in a much stronger negotiating position in regards to price, Hong Kong SMEs will continue to encounter problems in their operations,” Lau added.

Albert Lau, vice chairman of the Hong Kong Small & Medium Enterprises General Association agrees that most Hong Kong-founded companies are facing unprecedented challenges due to rising costs on the mainland.

“The projection that 30 percent of Hong Kong SMEs operating in the PRD will close in the next two to three years is not an exaggeration. Many of them have already quit making products for others and entered the trading business,” Albert Lau told China Daily.

Other than rising costs and appreciation of the yuan, Albert Lau said an increase in regulatory activity lately is another predicament for SMEs.

He cited the Guideline for Collective Bargaining on Wages in Enterprises of Guangdong Province, published in August, as one factor. It outlines a detailed bargaining procedure, including the stipulation that if one side makes a request for collective wage bargaining, the other side must give its reply within 15 days and may not refuse without a proper reason.

“To most small Hong Kong companies, all the procedures are costly. If they find that it is no longer affordable to continue the business, they will eventually choose to quit,” he added.

China Daily

http://www.chinadaily.com.cn/hkedition/2010-12/03/content_11645619.htm

Hong Kong’s retail sales rose 21.6 percent in October – the fastest rate in eight months – helped by strong inflows of inbound tourists and improved economic circumstances which gave a boost to local consumer confidence.

Sales surged to HK$27.8 billion last month, compared with a 17.2 percent gain in September, the Census and Statistics Department said Tuesday.

Retail sales also increased 19.6 percent by volume year-on-year in October, faster than the 15.8 percent growth seen in the previous month.

Commenting on the figures, a government spokesman said the sustained robust sales of “big ticket” items and consumer discretionaries are reflective of the firm consumer sentiment as well as vibrant tourist spending.

He added that improving job and income prospects and the prevailing strength of inbound tourism should remain favorable to the retail business in the coming months.

Hong Kong’s jobless rate also remained steady at 4.2 percent for the August-October period, during which the employment numbers reached a three-year high and the number of unemployed dropped to a two-year low, according to government data.

During the mainland’s Golden Week holidays between October 1 and 7 this year, mainland visitor arrivals to Hong Kong totalled more than 660,000, a 21 percent increase from the same period in 2009, the Hong Kong Tourism Board reported.

Jewelry, watches and clock sales in October rose 40 percent by value from a year earlier while electrical goods and photographic equipments as well as motor vehicles climbed 32 percent and 30 percent respectively, according to the government.

“Since mainland tourists are the major force in buying luxury goods in the city and automobiles are basically sold for local consumption, the October data shows that Hong Kong’s retail market is booming across the entire spectrum,” said Kelvin Lau, an economist at Standard Chartered Bank.

Lau believes fast growing sales will sustain for the next few months driven by strong economic growth. The Hong Kong government raised its full-year GDP growth forecast earlier in November to 6.5 percent from 5-6 percent after it reported a better-than-expected 6.8 percent rise in the third quarter on the back of strong exports and consumption figures.

However, Lau pointed out that the latest tightening measures on the property market taken by the government point to major uncertainty about sales growth in the near future.

“Market sentiment on real estate affect people’s spending significantly in the city,” Lau said. “We’ve seen a notable drop in property transactions after the new government measures, but we have yet to notice a decrease in home prices. If they remain firm, however, the city’s retail sales growth is likely to continue.”

The government on November 19 imposed new measures in a bid to cool the city’s red-hot property market by imposing heavy stamp duties on properties resold within two years and tightening mortgage restrictions.

Property broker Colliers International Ltd said it expects residential transactions may fall by as much as 30 percent from current levels of 11,000 units sold per month over the next quarter.

China Daily

(HK Edition 12/01/2010 page2)

http://www.chinadaily.com.cn/hkedition/2010-12/01/content_11632747.htm