Choosing China: Cathay owner Swire backs its bet, 20 years on

Swire Properties

30/06/2017 11:13

By Clara Ferreira-Marques 
    HONG KONG, June 30 (Reuters) - In the run up to Hong Kong's 
handover to China in 1997, Britain's venerable trading houses in 
the city faced a choice: back Beijing, or back away. Swire, 
which started trading tea and silk in Shanghai more than 150 
years ago, chose China. 
    More than 80 percent of its staff are now in China, Hong 
Kong or Macau, along with its core businesses, from airlines to 
property, bakeries and Coca Cola bottling plants - even if Swire 
House is still in Westminster and the Hong Kong office 
overlooking Victoria Harbour owes more to British club chintz 
than new China. 
    "If you look back at what was being said before the 
handover, most of the worst cases that people were fearing did 
not happen," said John Slosar, chairman of Swire Pacific Ltd 
 0019.HK  and Hong Kong veteran of almost four decades. 
    "Hong Kong became the biggest (initial public offering) 
market in the world - bigger than New York and bigger than 
London. No one thought that would be the case, or that that 
would be the result of reunification with China - but it was." 
    It hasn't all been plain sailing: Swire Pacific reported an 
almost 70 percent drop in underlying profit in 2016, dented by 
its best-known brand Cathay Pacific Airways Ltd  0293.HK , 
battered in turn by aggressive Chinese rivals.  
    Swire has grown since 1997 - revenue and assets almost 
tripling from 1997 to 2016 - but by some measures other firms 
such as CK Hutchison Holdings Ltd  0001.HK  have grown faster. 
    Choosing China was not obvious, two or three decades ago.  
    Swire's rival Jardine Matheson Holdings Ltd  JARD.SI  moved 
its domicile to Bermuda in the 1980s and then angered Beijing 
again in the sensitive pre-handover years by shifting its 
primary stock exchange listing to London, and its Asian listing 
to Singapore. 
    It later restored ties.  
    Swire, on the other hand, tied its fate to the mainland. 
    Most emblematically, it struck the ultimate Hong 
Kong-mainland venture - a cross shareholding deal with Air China 
Ltd  601111.SS   0753.HK . The Chinese flag carrier owns 29.99 
percent of Cathay Pacific, which in turn holds roughly 18 
percent of Air China. 
    Swire also owns Dragonair, bought to access China's tightly 
regulated skies. Dragonair, now Cathay Dragon, became a wholly 
owned unit in 2006. 
    Slosar, who is also Cathay Pacific's chairman and a former 
chief executive of the airline, said he visits Air China on most 
trips to Beijing. 
    "As markets change, will we change how we work together and 
what we get out of it? Sure, probably," he said of ties with Air 
China. "But it's a good relationship." 
    Certainly, it has been lucrative: Air China reported almost 
$1 billion in profit in 2016 - albeit almost flat on the year 
prior. Cathay, by contrast, posted its first annual loss since 
2008 and only its third since the company was founded. 
    Cathay is in the throes of a three-year turnaround plan, and 
last month announced it would cut 600 jobs, among management and 
head office staff. Pilots and crew, much tougher for Cathay to 
cut, have so far emerged unscathed. 
    "We are trying to make ourselves more efficient, but we are 
still trying to grow the airline," Slosar said. "You can never 
say never, but that (reducing pilot and crew headcount) hasn't 
been the focus of attention." 
     
    TAIKOO LIFE 
    In the 1970s, British trading houses dominated Hong Kong's 
business life, and their presence is still keenly felt. You can 
fly in on Cathay, stay at Jardine Matheson's Mandarin Oriental 
hotel, shop at CK Hutchison's Watson pharmacy chain and then 
have dim sum for lunch at Maxim's restaurant - again part of the 
Jardine empire. 
    Some things have changed: The group, which argues it was 
always less colonial than it was perceived to be, is hiring more 
Mandarin and Cantonese speakers, Slosar said.  
    Other things have not. For Swire - whose Chinese name is 
Taikoo, meaning great and ancient - property has long been and 
still is a mainstay, even if Hong Kong retail has suffered as 
spending by mainland tourists dipped, forcing a rethink of its 
malls to add in better cinemas or more restaurants. 
    Swire has been less active in residential property, where 
Slosar said sky-high prices meant the group that helped 
transform entire blocks of Hong Kong was working through its 
existing portfolio, rather than investing in fresh plots. 
    "It is hard to imagine how it works with some of the land 
prices being paid," Slosar said. 
    There are risks ahead, including China's leadership 
reshuffle during the upcoming 19th Communist Party Congress, and 
potential changes as China navigates uncharted economic waters. 
    A peaceful transfer of power "seems very easy until you 
don't have it", Slosar said. But as befits a 'taipan', as 
trading house bosses were once known, he is also optimistic on 
the growth of an economy set to once again become the world's 
largest. 
    "China is big enough to have oil tanker characteristics," he 
said. "They can change direction, but they can't turn on a 
dime." 
 
 (Reporting by Clara Ferreira Marques; Additional reporting by 
Venus Wu and Donny Kwok; Editing by Christopher Cushing) 
 ((clara.ferreira-marques@thomsonreuters.com; +65 6870 3153;)) 
 
Keywords: HONGKONG ANNIVERSARY/SWIRE