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May 31, 1998

Keeping it in the family

The IR approach of Hong Kong's family-owned companies

Understanding how a Hong Kong-listed but family-owned company is run is a mystery for all but the most savvy of foreign investors. Still, these family-managed fiefdoms are the blue chips that dominate the Hang Seng Index, and investors have supported their rapid growth for the last decade with infusions of capital. Despite a growing interest in communicating with investors, the inner dynamics of these empires are not always as transparent as investors might like. While the new generation of MBA-schooled family members take the helm, the looming specter of the billionaire patriarch remains in the background.

When investors try to understand the management principles upon which family-owned empires make decisions, it may be better to understand Confucian values than modern management theory. Things may not be what they seem.

Lennon Chan, deputy managing director of Tai Fook Securities, one of the largest domestic brokerage operations, has watched the growth of Hong Kong family companies with interest over the years. 'Investors must understand Chinese tradition,' says Chan. 'When power is handed over to the son, the father guides the process for many years to show investors that his offspring is capable of doing the job. The father has built a billion-dollar company on the back of property holdings and Hong Kong investors have confidence in the way things are handled. Everything the father says is respected and everyone knows he can control the son. Anyone who invests in Hong Kong should understand this concept.'

As it is, six families - Li Ka Shing, the Kwoks, Cheng Yu Tung, Lee Shau Kee, the Kadoories and the Woo Family - hold some 27.5 percent of HKSE market capitalization between them, according to Tai Fook Securities research. Of that total, Li Ka Shing and his son Victor Li themselves hold some 12.6 percent. These families have significant stakes in such companies as Cheung Kong Holdings, Hutchison Whampoa, Sun Hung Kai Properties, Henderson Land, Hong Kong China and Gas, China Light and Power, Wheelock & Co and others. Meanwhile, a host of other families push the family control of the HKSE to even higher levels.

'Management mentality in Hong Kong is changing for the better,' according to Chan. 'Most first generation leaders tend to be self-made salesmen par excellence who made their fortunes in property. Now we are watching the second generation come to the forefront. They are bringing a more international style of management to the companies and that global vision will increase as we head into the third generation. As these companies mature in the decades ahead, you can eventually expect to see non-family managers take the reigns for the first time.'

Strange attraction

Given the omnipotence of family rule in the former colony, it may seem unlikely that there is any real understanding of the importance of investor relations. Indeed, a recent Gavin Anderson & Co study (Investor Attitudes Toward Investor Relations in Asia) shows that most Asian companies have a long way to go before they reach the standards set for investor relations in the US.

Yet among those Asian companies mentioned most frequently as maintaining top quality shareholder communications, Hong Kong blue chips were far and away the winners. And, while HSBC (which is now UK-dominated) led the way with the most mentions for any company in Asia, the Hong Kong family-owned entities of New World Development, Cheung Kong Holdings, Hutchison Whampoa and Sun Hung Kai ranked next in line. This suggests that, despite the shortcomings, many of the Hong Kong families do more than just pay lip service to the idea of keeping investors informed and disclosing activities.

'If investors want to buy into Hong Kong, they do not have much choice but to invest in family-owned companies,' says Fabrice Baron, director of Gavin Anderson in Hong Kong. 'Family-owned business is a part of Hong Kong history that extends back to the days of British rule and the first hongs - the likes of the Jardines, Keswicks and Swires.'

In fact, these western families are still well represented in the market. 'Investors have long been used to the little respect Hong Kong family businesses have for minority shareholders,' explains Baron. 'What they essentially look at is the fundamentals of these stocks, the growth prospects, the valuation and the quality of management. And Hong Kong tycoons have shown strong management skills.'

Baron points out that there are a number of negatives that the Hong Kong families do face when trying to attract institutional capital. For instance, the fact that the father may be lurking behind the scenes and making key decisions does little for claims of management transparency. Also, the conglomerate nature of the businesses makes them more difficult for investors to understand than a pure play. In the global market, particularly in the US, many companies have been penalized for the conglomerate structure by investors attributing lower valuations to them.

'In a way Hong Kong companies do care what investors think, it is just not their top priority,' says Aubrey Ho, director of financial services at Gavin Anderson. 'That will change as institutional investors own larger positions in these companies. In some companies that stake has now risen to 40 percent, up from 15 percent just five years ago. Management will not be able to take these investors for granted much longer. And with the new OECD guidelines on corporate governance, there will be even more added pressure on companies to change their attitudes in this area.'

Long-time player

Ian McEvatt, chief executive of Indocam Asset Management Asia, is a long-time Asian investor. McEvatt agrees that the investor relations standards in Hong Kong's family-owned companies are not the same as in the US; but he insists that they are substantially better than in the rest of Asia.

The main issue facing investors, though, is being able to understand the 'tentacles and relationships' as well as the non-arms-length transactions that these conglomerates sometimes engage in. McEvatt notes that while the highest profile families are well-versed in handling companies in a way investors understand, others are less easy to invest in. In effect, major institutions more often leave these investments to the retail market. And sometimes the Insider Dealing Tribunal.

According to McEvatt, understanding the foibles of families is nothing new for most fund managers in the east or west. After all, one need only look at Rupert Murdoch's transfer of power to his 20-something son, Lachlan, as a case in point.

Given that background, Indocam carefully assesses the sense of responsibility of a family-owned enterprise. In the case of the Hong Kong market, some families have a better sense of responsibility to shareholders and greater transparency than others. 'Most of these companies, though there are some well-known exceptions, do not pay much attention to shareholder interests,' says McEvatt. 'It is not that they are ignoring investor relations, it is just that they have never heard about it before.'

Second-line problems

The essence of these companies is that the patriarch will rule as long as he lives and that is why most local investors will buy the stock. 'If you are looking at corporate governance, we are satisfied more or less with what we see with the top-liners,' McEvatt continues. 'It is when you get to the second-liners that the problems begin and that is where the major differences arise.'

Robert Auld, chief investment officer of Fidelity Investments in Hong Kong, agrees that the environment for investor communications is getting better as times goes by. However, Auld notes that the toughest companies in the world to analyze from an investment perspective are large holding companies. This is due to the underlying structure and the way money flows throughout this kind of organization. This is an issue that fund managers have had to deal with around the world. Still, Auld does not discount the management ability of the Hong Kong families by any means, and also points out that family rule (as in the case of Fidelity itself) does not preclude the ability to bring strong, external managers on side.

'The US market went through the conglomerate cycle in the 1960s, 1970s and 1980s,' recalls Auld. 'That was the era of the big conglomerates. Chief executives assembled a diversified collection of companies under the banner of a holding company and derived all the synergies from the combinations. That played well for a while in the market, but in the end investors wanted to go into the pure plays rather than the conglomerates. When fund managers started devaluing these conglomerates the management groups decided to strip out the assets and create higher-valued pure plays. It is hard to say where we are with this trend in Hong Kong. We don't know how all these organizational and governance issues will be resolved in time. We are not sure anyone does.'