Hong Kong’s Wealthiest have lost US$15 billion in the protests. What does it mean for Luxury?

According to a (paywalled) Financial Times report, since the civil unrest in July, an estimated US$15 billion has been wiped off the net worths of Hong Kong’s 10 richest people. Dealing with dual headwinds of a mounting Sino-US trade war, and escalating protests that have shaken the East-Asian financial hub, economists and business owners are not seeing much upside for the territory, with indicators prompting a recession by year’s end.

“If the People’s Liberation Army comes, I will probably just stay at home, anticipating the withdrawal of all foreign investment from Hong Kong and possible economic collapse of China that will follow,” Ms Kan, 22, told the Financial Times.

As a result of the turmoil, some of Hong Kong’s wealthiest individuals, including the Administrative Region’s richest Li Ka-Shing, and fellow billionaire, real-estate developer Peter Woo, have broken their silence, urging for renewed calm and reflection following the heightened tensions flight disruptions out of Hong Kong and severe market volatility as we head into week 11th of protests. In 2017 Knight Frank’s annual Wealth Report’s analysed key economic indicators and consumption patterns, segmenting the data according to factors like the presence of luxury stores or “footprints”, wealth growth and the population of ultra high net worth individuals worth US$30 million or more in each country. Suffice it to say, China took pole position with Hong Kong taking first place ahead of Singapore and New York.

Hong Kong accounts for slightly more than 5% of global luxury sales and the growing civil unrest in China’s Special Administrative Region (SAR) has put a temporary (hopefully) end to the city’s contribution to global luxury revenues. Long considered the mainland’s international ‘gateway”, Hong Kong’s SAR status made it a bastion of democracy, rule of law, transparency and efficiency. The “One Country, Two Systems” agreement came to a grinding halt after Carrie Lam’s unfortunate proposed ‘Extradition Bill’ threatened to further impugn the rights of Hong Kongers who have grown accustomed to western-style freedoms after 150 years of British rule.

Potential luxury fallout in Hong Kong

An unnamed source from The Hour Glass Hong Kong familiar with operations of Patek Philippe Landmark boutique and they said that while the store is shuttered during protests, customers who have made pre-orders still come to fulfil their purchases when the stock arrives in store. The Hour Glass employee added that while there’s a drop off in tourist visits, the opinion was that at the higher spectrum of luxury goods like timepieces, the clientele tends to be returning customers or loyal collectors rather than curious shoppers.

Patek Philippe at Hong Kong’s Landmark hotel is operated by The Hour Glass

While some commentators have likened the rights movement in Hong Kong to the gilets jaunes movement in another luxury-loving capitol, Paris, Hong Kong protesters are not targeting high-end retailers or the wealthy but rather the perceived encroachment of democratic rights from Beijing; a perspective best encapsulated when Financial Times spoke to some protestors who expressed that they’re resisting the mainland’s heavy handedness in running the region which is supposed to be autonomous till 2047. Meanwhile, Beijing continues to fan the flames, labelling the protestors “rioters” and “terrorists” while staging military exercises on the border.

“Sales in Hong Kong retreated, additionally impacted by the relative strength of the Hong Kong dollar and the recent street protests,” – Richemont Group statement

richemont logo

Luxury watches as a barometer?

Luxury conglomerate Richemont was the first holding company to report a hit to business over ongoing protests in Hong Kong. A statement which accompanied its quarterly earnings reported cited unrest in Hong Kong with an unexpected drop amounting to 2% fall in sales in overall  last quarter revenues as well as a 3.9% fall in its stock price. That said, strong demand in the mainland, amounting to 9% rise in comparable revenue for the quarter to June 30, offset the losses. Considering that the effect was not as pronounced with other luxury groups like Swatch and Hermes, UBS analysts familiar with the situation stated that Richemont Group suffers greater exposure to risk in Hong Kong with an estimated 11% of its revenue coming from the territory while rival, Swatch takes only 10% of revenues from Hong Kong. Fellow competing holding company, LVMH, was the only luxury group who posted double digit growth citing that accelerating demand in Asia helped it beat sales expectations.

Bernard Arnault LVMH

Bernard Arnault, LVMH chairman and chief executive

“We are entering the second half of the year (2019) with confidence and count on the talent of our teams and the common passion to further strengthen in 2019 our lead in the world of high-quality products.” – Bernard Arnault, LVMH chairman and chief executive

LVMH recorded revenue of 25.1 billion euros in the first half of 2019, up 15%. Organic sales growth was 12% compared to the same period in 2018. LVMH Watches & Jewellery business recorded revenue growth of 4%, driven by jewellery and buoyed by effective repositioning of TAG Heuer. Good growth and gains in market share by Bvlgari also helped account for profit from recurring operations growing 5%. Swatch Group similarly announced positive results though it mentioned that they too were affected by the Hong Kong protests.

“Hermès sales were very dynamic in the first half of 2019, in all regions and in all business lines. This sound growth reflects the House’s creative drive, outstanding know-how, and the relevance of its craftsmanship model which helps strengthen local integration.” – Axel Dumas, Executive Chairman of Hermès

According to Hermès 23 July 2019 earnings report, the group’s consolidated revenue amounted to €3,284 million in the first half of 2019, up +12 % at constant exchange rates and +15 % at current exchange rates, ahead of the 11.6% sales growth recorded in the first quarter.

According to Business of Fashion, UBS data explained the earnings discrepancy across the different conglomerates due to the “difference in results lies in a recent inventory glut for Richemont over the past two-to-three years, compelling the firm to buy back unsold products from the market.”

Hong Kong real estate prices have only fallen 1% from its record high

Hong Kong Real Estate is proving remarkably resilient

11 weeks since the proposed extradition law triggered mass unrest, overall Hong Kong real estate prices only retreated 1% since the Centaline main property index reached a new record at the end of June. Property analysts cannot seem to find agreement on the potential fallout from the Hong Kong protests either – speaking to Bloomberg, Bank of America Corp.’s Karl Choi predicted a 10% short-term decline with other analysts believe that a variety of factors including lack of supply will keep declines to single digits. Bloomberg’s own analyst, Patrick Wong,  believes that the ultimate long-term risk to the property market would be the loss of Hong Kong’s status as a key international financial hub – a looming threat given Beijing’s signal of willingness to send military troops to quell “terrorist acts”.

That’s not to say that the Hong Kong real estate industry is completely unaffected. Peachpattha Pakakan, Vice-President of marketing for The Residences at Mandarin Oriental in Bangkok, a 52-storey ultra-luxury condominium completed last week, told South China Morning Post that they have decided to defer the sales launch of the ultra luxury apartments.

The Residences at Mandarin Oriental in Bangkok

In recent years, Chinese investors have taken a shine to Bangkok’s upscale condominiums because of the potential capital gains from the growing scarcity in the Thai capital. Beijing’s strict capital controls makes Hong Kong a critical launch pad for Chinese high net worth individuals looking to move funds out of the mainland for overseas investments, typically using proxies in the autonomous region to make purchases for them.

Where Hong Kong’s wealthiest stand

Hong Kong billionaire Peter Woo

In an op-ed in Monday’s edition of the Hong Kong Economic Journal, billionaire Peter Woo, the largest shareholder of developer Wheelock & Co., wrote that “Going against the extradition bill was the ‘big tree’ of this movement. This one and only big appeal has already been accepted by the government, so this tree has fallen,” further opining that people are simply continuing to “stir up trouble” for an issue which no longer exists. It is worthy to note that Wheelock & Co derives 38% of its revenues from the mainland, making Woo one of the most exposed to risk from prolonged protests among Hong Kong’s property billionaires. Woo has already seen US$1 billion wiped off his net worth.

Pictured Right: Hong Kong’s richest man, Li Ka-Shing

Fellow property magnate and multi-industry billionaire entrepreneur Li Ka-shing echoed Woo’s sentiments, taking out ads in South China Morning Post, condemning the violence. The 90-year-old billionaire himself has seen a loss of US$3 billion of his net worth. Meanwhile, Cathay Pacific Airways Ltd’s biggest shareholder, billionaire Merlin Swire, called for “restoration of law in order” in a statement last Tuesday but Cathay’s woes are largely self-inflicted following decision taken by a large majority of Cathay’s staff to support the protestors, prompting Beijing to exert economic pressure on the airlines by banning Cathay staff who have participated in the protests from the skies over the mainland. Cathay’s stock price fell to a 10 year low but earlier in the week, had a brief 7.4% rally following condemnation from its majority shareholder. That said, Cathay shares have yet to recover to benchmark levels. There may be short term economic costs to be paid once the protests are over but the city may never recover from the long term damage to its reputation as a stable business and financial hub at the gateway of greater China.