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Jardine Matheson: the Hong Kong conglomerate under pressure

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Via Financial Times

When clashes between police and protesters spilled into the heart of Hong Kong’s business district this week, one company provided the backdrop.

Jardine Matheson’s status as one of the largest property owners in Central, as the district is known, is at the heart of a fortune that dates back almost two centuries to the opium trade with China’s Qing dynasty.

But as unrest engulfs the Asian financial hub, Jardine Matheson is among the territory’s largest and most exposed conglomerates. It has been one of the biggest winners from an economic boom in Hong Kong, but one that has also seen inequality spiral and the property market become increasingly unaffordable for many.

Assets owned by the 187-year-old company — hotels, numerous office towers, a vast shopping and dining complex, a Mercedes dealership — form the core of Central, one of the densest business districts in the world. Franchises it controls, such as 7-Eleven, are ubiquitous in the area.

“The key family conglomerates, including Jardines, are all facing pressure with no visibility as to when these troubles may end,” said David Blennerhassett at Ballingal Investment Advisors.

The group derives at least a third of its revenues from the city, according to analysts’ estimates, who also point out that a significant portion of that income comes directly from its businesses in Central. Jardines has grown into a conglomerate with more than 460,000 employees and has nearly doubled its annual revenues over the past 10 years to $42.5bn in 2018.

The threat of chaos in Hong Kong notably intensified this week, as the scent of tear gas wafted through the financial district, businesses shut down and banks and law firms sent employees home.

Analysts predict revenue at the conglomerate will fall this year, having risen in each year since 2015. The risks for the group deepened in September, when protesters began linking some of Jardines’ assets with support for Beijing.

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Its retail sales holding company Dairy Farm, one of the earliest companies established on Hong Kong island in the 1880s, holds a 50 per cent stake in Maxim’s Caterers. Maxim’s and its franchises, including Starbucks, became the target of protester attacks after Annie Wu, the daughter of the founder of Maxim’s, criticised protesters at the United Nations human rights council.

The strains facing the business are evident. Shares in Dairy Farm, which also operates stores including 7-Eleven in Hong Kong, have fallen by almost a fifth since the protests began earlier this year. The company’s third-quarter statement, released earlier this month, blamed weak consumer sentiment.

But far from being a pro-Beijing company, Jardines has had a fraught relationship for most of its history with the rulers of China, from the Qing dynasty’s Daoguang Emperor to the Communist party.

Along with Swire Group, Jardines is one of the original foreign trading houses, or “hongs”, that smuggled opium into China starting in the 1830s. The trade led to the opium wars with Britain and kicked off a long period of foreign interference in China, referred to today by the Communist party as its “century of shame”.

Both Jardine and Swire have remained under the control of the families that launched the businesses. Ben Keswick, a relative by marriage of the Jardine family, became the so-called “taipan”, or top boss, of Jardine Matheson at the start of the year, taking over from his uncle Henry Keswick who held the job since 1972. Barnaby Swire holds a similar role at his eponymous company.

The two “hongs” are a final holdover from Asia’s bygone colonial era.

Many of Jardines’ China-based businesses were wiped out in the early 1950s after Mao Zedong and the Communist party came to power in 1949. Following a communist insurgency that culminated in a series of deadly riots in Hong Kong in 1967, the group began a diversification campaign that helped spread its businesses into several new markets across the region.

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“This is a century-old institution that was here in the 60s when things were really ugly,” said one adviser who is familiar with the workings of the group. “I doubt they will make any long-term decisions right at this moment. It’s also tough for them to make any sudden changes given how big they are in Hong Kong.”

Jardines has long exhibited wariness toward China’s reach into its home base.

HONG KONG - OCTOBER 17: Martha and Ben Keswick attend Mandarin Oriental Hong Kong's 50th Anniversary Gala on October 17, 2013 in Hong Kong. (Photo by Jessica Hromas/Getty Images for the Mandarin Oriental Hotel Group)
Ben Keswick, a relative by marriage of the Jardine family, took the top job at Jardine Matheson earlier this year from his uncle Henry Keswick who held the job since 1972 © Jessica Hromas/Getty

When talks between the UK and China kicked off in the early 1980s concerning the handover of control of Hong Kong to Beijing, Jardines was quick to defend itself from Chinese influence by redomiciling from Hong Kong to Bermuda.

By 1994, with the handover of Hong Kong just three years away, the company delivered another blow to the city by delisting from the local bourse and relisting in Singapore. But Jardines has since changed tack on China. As the country’s economy boomed through the 2000s, the group built up a large business in China.

“[Jardines] functioned in effect as a kind of bridge-builder between Hong Kong and China, between the outside world and China,” said Steve Tsang, a professor of Chinese history at the School of Oriental and African Studies. “They have always tried not to get involved in the politics.”

The company has sought to distance itself from the Hong Kong protests and has made few public comments on them. Its leadership keeps a low profile and declined to speak with the FT for this article.

The unrest was set in motion in June when the Hong Kong government proposed passing a bill that would allow people in the city to be extradited to mainland China. In response, more than 1m people took to the streets.

From the top floors of Jardine House, the company’s flagship office space in Central, it has had a prime view of the protests seizing key areas of Hong Kong’s downtown over the past week. Hong Kong Land, Jardine’s property holding company that contributed 27 per cent of the group’s profits in the first half of 2019, is one of the most visible groups in Central.

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The property portfolio is the “jewel in the crown” for Jardine, according to one analyst, but is being buffeted by a decline in rents in those Central areas snared by protests.

“Jardines is all over Central,” said Raymond Cheng, a property analyst at CIMB. “Retail property has definitely been hurt by the protests.”

Mr Cheng noted that office space, the bulk of Hong Kong Land’s portfolio, would hold up better than retail shops.

The economic outlook for Hong Kong after months of protests is gloomy, according to analysts. “Recent monthly statistics echo no signs of a quick turnround,” Kelvin Lau, Standard Chartered’s senior economist for greater China, said of general retail and tourism in Hong Kong after the city posted its first decline in gross domestic product growth since the global financial crisis 10 years ago.

The decline of the city is palpable at Jardines’ flagship hotel, the Mandarin Oriental, in Central. Occupancy levels in the hotel were 49 per cent in the third quarter, compared to 71 per cent in the same period in 2018.

On Thursday, the roads outside the Mandarin were strewn with bamboo scaffolding poles and bricks that protesters had torn out of the sidewalk. The remains of makeshift barricades the police have used to control crowds still blocked sections of the street. Like many hotels in the area, weekday rates have been reduced for visitors who walk in. The hotel management will even throw in a free room upgrade and a complimentary breakfast.

With the Hong Kong government on Friday forecasting the first recession for the city in a decade, Jardine Matheson faces further tests.

Additional reporting by Archie Hall in London

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