China is cracking down, but Hong Kong’s economy is too precious to kill

Originally published as an op-ed in the Barron’s

In the 1990s, financiers used to mock “the FILTH”: British bankers or business people who “fail in London, try Hong Kong.” If you couldn’t make it anywhere else, you could still make it om the shores of the fragrant harbor whose ever-rising tide floated all boats. Hong Kong was the Manhattan, Las Vegas, and Los Angeles of Asia, all rolled into one—money, nightclubs, fast cars, world-class restaurants, stock-market booms, beaches, yachts, and dodgy go-go bars. It was a boomtown because it was the gateway to China. This was the staging post for the greatest gold rush of the 20th century: the reawakening of the Chinese dragon. Despite the recent crackdown on civil liberties, Hong Kong is far from turning into a financial backwater. As long as opportunity still exists, it will continue to attract foreign investors who feel more at home there than on the mainland.

Expats have long preferred Hong Kong to Shanghai or Beijing. The city boasts better schools, hospitals, and espresso bars. Google still works. Unlike on the mainland, business and society has felt free. While the British had never granted Hong Kong true democracy, the rule of law was clear. Private-equity firms enjoyed a fairly level playing field, taxes were low, the press was free, and the judiciary was independent. That’s why Britain fought so hard for the principle of “one country, two systems,” which was enshrined into law, for 50 years, when Hong Kong reverted to Chinese rule. China promised to give Hong Kong the democracy that Britain had denied its colony. Of course, the truth has emerged rather differently.

Suddenly, Hong Kong is out of fashion. Riots, the Covid-19 pandemic, and Chinese government repression have combined to scare away those same expats who made it their home. Six weeks ago, China imposed a broad national-security law on Hong Kong banning secession, subversion, and collusion with foreign countries. It’s already having a dramatic effect on the city’s media and politics. The new law eliminates civil rights that local residents have long exercised, and raises the specter of foreign business people being arrested for vaguely defined offenses and being deported to stand trial in China.

Beijing, far from liberalizing, is cracking down on dissent inside and outside its borders. The new security law explicitly applies beyond Hong Kong and covers non-Hong Kong residents, making this once freewheeling city dangerous for anyone viewed unfavorably by Beijing. Growing economic tensions between the U.S. and China have also led to tariff and nontariff barriers.

Last week, more than 200 police officers raided the head office of Apple Daily, the city’s most-read pro-democracy newspaper. Several managers were arrested, including the paper’s high-profile, millionaire owner, Jimmy Lai. Lai faces an array of charges, notably collusion with foreign countries, under the new law. He has a good relationship with the Trump administration and has testified before Congress in the past.

At the same time, China is trying to reassure the world that it should still do business with Hong Kong. For the foreseeable future, the city will still be the hub for inbound and outbound mainland investment. While Singapore has gained traction with private-equity professionals, boasting a transparent legal framework and increasingly broad tax treaty, Hong Kong is countering with incentives of its own. A new Limited Partnership Fund Bill hopes to establish Hong Kong as a prime Asian destination for private-equity and venture-capital funds. The legislation proposes Hong Kong as a domicile for private equity, venture capital, and real-estate funds and will attract private funds and family offices to Hong Kong. Domiciling in Hong Kong would give these firms direct access to the region and to Hong Kong’s robust capital markets. It will be a catalyst for growth in tech and financial services.

Officials have also announced plans to introduce a new carried-interest tax scheme, expected to be one of the world’s most liberal, intended to make the city a viable alternative to the Cayman Islands, especially for Asia-focused funds. The Hong Kong government is also planning to provide extensive tax concessions for private-equity funds’ “carried interest” performance fees. Singapore offers similar advantages, but Hong Kong is aiming to be even more generous to investors.

All of this will be attractive to investors as Hong Kong is still swimming in wealth. Tycoons have outperformed almost everyone else. With a population of only 7.5 million, the territory ranks seventh in the world with 96 billionaires and a combined wealth of $280 billion, according to Wealth-X’s Billionaire Census 2020. Of all world cities, only New York can boast more billionaires.

Hong Kong is clearly now part of the People’s Republic of China and, prompted by the government, mainland money is pouring in,but there’s little sign of foreign capital fleeing. Foreign investors who want to share in China’s economic growth have little choice but to use Hong Kong’s capital markets as their main vehicle. The Hong Kong dollar has held its trading band against the U.S. dollar. The stock market has seen heavy inflows from mainland institutions, and there are more and more “red-chip” companies, based in mainland China, but listed on the Hong Kong Stock Exchange. The Hang Seng Index fell sharply in the first quarter but has recovered 14% from its March low. The index is still 9% off its peak from two years ago, yet rumors of Hong Kong’s demise may be exaggerated, or just plain wrong.

Even though China has put a harness around the neck of its golden goose, Hong Kong’s economy is too precious to kill. Vietnam and Singapore are certainly benefiting from Hong Kong’s recent woes as expats move in and fund managers direct more money into those markets. Still, as long as Hong Kong’s financial advantages remain, Western professionals and investors may find themselves back in the gleaming office towers of Hong Kong Central quicker than they expect.

About BDA Partners

BDA Partners is the global investment banking advisor for Asia. We are a premium provider of Asia-related advice to sophisticated clients globally, with over 24 years’ experience advising on cross-border M&A, capital raising, and financial restructuring. We provide global reach with our teams in New York and London, and true regional depth through our seven Asian offices in Mumbai, Singapore, Ho Chi Minh City, Hong Kong, Shanghai, Seoul and Tokyo. BDA has deep expertise in the Chemicals, Consumer & Retail, Health, Industrials, Services and Technology sectors. We work relentlessly to earn our clients’ trust by delivering insightful advice and outstanding outcomes.

BDA Partners has strategic partnerships with William Blair, a premier global investment banking business, and with DBJ (Development Bank of Japan), a Japanese government-owned bank with US$150bn of assets.

US securities transactions are performed by BDA Partners’ affiliate, BDA Advisors Inc., a broker-dealer registered with the Securities and Exchange Commission (SEC). BDA Advisors Inc. is a member of the Financial Industry Regulatory Authority (FINRA) and SIPC. In the UK, BDA Partners is authorised and regulated by the Financial Conduct Authority (FCA). In Hong Kong, BDA Partners (HK) Ltd. is licensed and regulated by the Securities & Futures Commission (SFC) to conduct Type 1 and Type 4 regulated activities to professional investors. www.bdapartners.com

BDA Co-Founder and Senior Managing Director Charlie Maynard talks about opportunities in the Asian M&A market and how BDA runs an excellent sellside process and delivers the best results for clients.

In this working-from-home chat with BDA senior leadership, we talked to Charlie Maynard. Charlie co-founded BDA Partners with Euan Rellie 24 years ago in Singapore and New York. He has spent many, many years in different countries in Asia before and after founding BDA. We talked about the opportunities he sees in the Asia M&A market, and how BDA runs excellent sellside processes and delivers the best results for clients.

What opportunities did you see in the Asian market when setting up BDA in 1996?

We realised that there was a gap in the market, because the big banks were talking about being interested in global M&A and how important Asia was to them, but in reality they were much more focused on Western M&A and Chinese IPOs, where the big bucks were. While we understood that Asian M&A was a tough market, but we reckoned we could build a business by entirely focusing on it.

How has BDA evolved over the years?

When we started out in 1996, we were largely a buyside shop, working for large, primarily Western MNCs looking to acquire in Asia. The buyside work was very useful in terms of helping us understand sectors and what clients wanted. For the first ten years of BDA, the sellside market and particularly the private equity buyout based sellside market didn’t really exist. But around 2006-2007 there were signs that it was beginning to take off, and that was when we made the switch to focus on the sellside which is 80% or more of our business today.

The other two big changes were a few years back when we started both to build out and focus on our six core sector expertise including Industrials, Chemicals, Health, Technology, Consumer & Retail and Services as well as to set up a dedicated financial sponsors group coverage team which would focus full time on our relationships with sponsors.

How are BDA set up to deliver the best results for clients?

To run excellent sellside deals, you need to have global reach in order to access all buyers and be agnostic as to where the buyer comes from. There are very few parties that can really access all relevant buyers, regardless of geography, and why this business that we’re selling is attractive. We are one of the very few M&A advisories who can do that.

You also need to have the sellside process nailed. We are very, very process oriented. We systemize and automate the basic bits of a sellside process, which are normally repetitive, so we can focus on the difficult, critical bits which are specific to individual transactions and help our clients as fully as possible by adding real value. This is another key differentiator that we have in terms of systems and processes compared to our peers and competitors.

What can we expect from BDA Partners for the next five years?

If you do M&A, you want to be doing sellside M&A. The growth in the buyout market over the last 5- 10 years has been enormous in Asia. And if you look at the capital that has been raised over the last 1-3 years, it’s clear what we have seen to date is only a fraction of what we are going to see in the future. It’s a huge and rapidly growing market, but because of the complexity and global reach required, there are very few advisors that can effectively service this market. Sellside M&A advisory will remain our core business and we’ll continue to focus on raising our deal size.

Beyond that, we started to get involved in debt advisory and restructuring by a partnership with Zerobridge, as well as trying out principal investing with BDA Capital Partners. There are quite a lot of exciting opportunities for other avenues of growth in addition to the core M&A business.

What have been the biggest challenges in BDA’s journey so far?

The hardest challenge has been creating the global network we have today, where each person in each office can deliver much more than they are able to do individually. This has taken a lot of time and it is completely and utterly about the people inside BDA. It’s ever evolving and must always be improving and progressing through our team efforts. Keeping the team moving forward and focused across nine different offices and 12 different time zones will always be challenging.

What are you most proud of about BDA?

It is the team that has created this seamless global network that allows us to deliver the best results for our clients. I love our team and I love our team spirit. Very, very few organisations have as diverse and international a team which truly works together in a fast, coordinated and intelligent way. I love the fact that we have so many people from so many countries liking each other and enjoying working as a team – and that this teamwork delivers great results.

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Latest insights from BDA

About BDA Partners

While there has been broad discussion on how businesses and markets have responded to the coronavirus outbreak and how they will adapt to a post COVID-19 world, arguably, no industry has received as much attention as clinical diagnostics. With the heightened focus on testing, terms such as antibody test and nasopharyngeal swap have jumped from medical journals to the front pages of newspapers the world over.

Thanks to previous experience with SARS, Asian IVD companies in many cases have led innovation in combating SARS-CoV-2. Regulators worldwide are closely studying the rapid response and mobilization of testing resources seen in China and Korea at the outset of the pandemic. However, even with the situation stabilizing in East Asia, companies in the region continue to innovate – developing more rapid point-of-care tests and antibody testing platforms, not to mention the urgent research into a possible vaccine being led by companies like CanSino and Shenzhen Geno-immune in China, Bharat Biotech in India, SK Biopharma in South Korea, and Takeda in Japan, to name only a few examples.

While the response to the pandemic has lifted the valuations of diagnostic tools and technologies companies globally, Asian companies have been trading, on average, at over 30x trailing EBITDA, led primarily by premium valuations achieved by Chinese diagnostic tools companies. We expect the spike in valuations will create opportunities in the space and accelerate consolidation efforts in the region, especially in China where the IVD market is less concentrated and the rise of import substitution in the diagnostic products space has attracted increased investment from both healthcare companies and firms in other industries looking to capitalize on the trend.

While year-to-date M&A activity has been muted across all industries, BDA and our partners William Blair continue to participate in deal activity in the diagnostics space, including the recently announced sale of FountainVest’s stake in Chinese IVD business Shanghai Kehua Bio-engineering in China and the sales of Stratos Genomics to Roche and of Exalenz to Meridian Biosciences in the US and Israel, respectively. We have also seen significant capital markets activity in the diagnostic tools and technology space so far this year.

In many ways, the coronavirus pandemic has accelerated a growth trend already taking place in Asia. Thanks to a focus on preventative care to reduce healthcare costs and the increasing prevalence of diagnostic testing, the Asian IVD industry had been poised to achieve double-digit growth over the next five years, even before the first cases of COVID-19 were reported.

While it could be argued that the impact from COVID-19 on the diagnostics space will be short-term, BDA has seen an interesting dynamic emerge where demand for more routine test kits, such as flu tests, have fallen due to COVID-19. We expect this will be temporary and not dampen mid-term demand. If anything, the pandemic has triggered increased spending on development that will spur further innovation for years to come.

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Contact BDA healthcare team

Andrew Huntley, Senior Managing Director, Asia/Europe: ahuntley@bdapartners.com
Lei Gong, Managing Director, Shanghai: lgong@bdapartners.com
Kumar Mahtani, Managing Director, Mumbai: kmahtani@bdapartners.com
Peter Moreno, Vice President, New York: pmoreno@bdapartners.com

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COVID-19: Impact on opportunities in the China health sector

About BDA Partners

Since the coronavirus (COVID-19) outbreak in December 2019, it’s become evident that the disruption to the economy will impact not just China but the rest of the world. Obviously, there is still a lot of uncertainty about what will happen –but the effects are already dramatic. Major cities are locked down. A mass quarantine of tens of millions of people. Millions are stuck and banned from travelling in and out of China. Thousands have died.

Businesses are taking drastic measures. Thousands of Chinese factories are yet to reopen. Tens of millions of professionals are working from home or on rotation. Students are on extended breaks.

Global airlines have mostly suspended flights to China. Travel and visa restrictions have been established in almost 100 countries.

The global supply chain has been disrupted. Countless businesses have been impacted by the outbreak of the coronavirus.

Not surprisingly, demand for most discretionary goods has dropped dramatically across the region. Tourism, hotels and airlines are decimated. Retail stores and restaurants are in deep trouble. Consumer staples such as groceries, rice, instant food and toilet paper have remained resilient. The epidemic has helped supermarkets and e-stores attract new online customers without extensive marketing and promotional efforts.

Some sectors might benefit from the virus outbreak –but not most. Anything that is related to digital, direct-to-consumer, healthcare: online supermarket, food delivery, digital home entertainment, online games, online education, healthy foods, consumer health and drugs, will benefit.

Surgical masks, alcohol sanitizers and other hygiene products are the most obvious beneficiaries of the coronavirus disruption.

We think the coronavirus outbreak will accelerate the shift towards online shopping and entertainment, boosting online segments. The new O2O, ecommerce delivery model fits well with consumer needs when they are asked to stay at home. The new habits people pick up in the next few months will last, in many cases, forever.

We saw US$40bn in global lost productivity due to SARS in 2003 and US$55bn during the 2009 H1N1 swine flu pandemic, both of which involved China. Those numbers could be dwarfed by this new virus –which could delay growth of hundreds of billions of dollars.

Global growth will resume as long as the coronavirus doesn’t last too long. Three lost months will be a big hit. Six lost months could mean some countries tip into recession. It is too early to assess how big the impact is, but we are impressed by a sense of calm and resilience by financial players.

Q1 profitability will be negatively impacted globally. M&A deals will slow down dramatically in the next couple of months. Valuations may drop in the short term but should bounce back sharply. Post-virus, there will be pent up demand, from delayed consumer discretionary spending, and delayed spending on consumer durables. We expect deals to rebound once the virus is contained. In the meantime, there will be good buying opportunities in China and beyond.

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Contact the BDA Consumer & Retail team

Euan Rellie, Senior Managing Director, New York: erellie@bdapartners.com
Karen Cheung, Managing Director, Hong Kong: kcheung@bdapartners.com
Vivian Ren, Managing Director, Shanghai: vren@bdapartners.com