An Investor’s Tour of Hong Kong Part II

Today's comment is by our guest writer, Tony Chan. Tony is General Manager of Fiduciary Services at Global Consultants and Services Ltd. Tony is based in Hong Kong with our Asian correspondent, Jack Flader. Tony has worked in Hong Kong and Asia for over 10 years in stock-broking, banking and now fiduciary services.

Dear A-Letter Reader,

If you read my A-Letter comment yesterday, you already know about some of the intriguing investment opportunities available in my hometown of Hong Kong.

Yesterday, I covered Hong Kong's alternative property investments and transportation plays; and explained why a great red tide of Chinese retail investor's cash is getting set to flow towards Hong Kong, pushing up stocks there.

Today, let's continue our tour through Hong Kong and into greater China. I have included specific stock symbols where appropriate for the stocks I mention by name. But once again, this is just my overview of places to see and experience here - not investment recommendations.

A Shopping Nirvana

As you travel through Central Hong Kong, you will notice the abundance of designer shops and retail outlets. These stores target and cater to the ultra-chic around the Mandarin Oriental Hotel (where guests will stay during the upcoming Asian Advantage Tour).

Most of these shops are located within the Landmark and the International Finance Centre (IFC) shopping malls. (As I mentioned yesterday, the IFC is the tallest building in Hong Kong.)

Shopping is a local pastime of Tai Tais and visitors alike. Shoppers love to visit Hong Kong malls because big-ticket items are much cheaper with no sales tax. Plus, they use the Hong Kong dollar, which is fixed to the depreciating USD.

Every year, 25 million foreign visitors come to Hong Kong, eager to splash their cash on Western label goods (imported with no taxes). To these visitors and locals alike, Hong Kong is indeed a shopping Nirvana.

If you visit one of the big malls, you will begin to understand this shopaholic tendency. Pacific Place is a beautiful mall located in the urbanized area Admiralty - in the eastern side of Central Hong Kong. Pacific Palace is owned by Swire Pacific (0087.HK). Wharf Holdings (0004.HK) owns 2 big malls - Times Square and Ocean Terminals - where the big cruise liners disembark.

Big-Ticket Items Tax-Free

One of the hottest big-ticket items for visitors to Hong Kong is jewelry and more specifically: watches. If you visit the local chain Chow Tai Fook (owned by local conglomerate New World Developments - 008.HK), you will see the demand coming from China tourists - the rich Chinese love western designer labels.

For electronic gadgets, there is an electrical goods chain called Gome (0493.HK). With 587 stores throughout China, it is fast becoming China's equivalent to Tandy. For the ladies, you must visit a SaSa store (0178.HK) - a Hong Kong-based chain which stocks every major brand of cosmetics and perfume you can imagine.

SaSa operates on high profit margins as it imports brand cosmetics from other developing countries and sells them tax-free. SaSa has around 95 retail stores and counters in Asia where women will spend half their incomes on themselves.

If you are tired of shopping, you may want to stop by some local food outlets. Café De Coral (0341.HK) serves Asian fast-food - Chinese style. With over 330 outlets in Asia and over 200 outlets in North America, this local eatery is fast becoming the McDonalds of the East.

Huge International Expos Featuring
Goods Made in China

Gracing the magnificent harbor-front in Hong Kong is the Hong Kong Convention and Exhibition Centre, where large international expos and conventions are held year-round

Hong Kong is the regional center for the international convention business. Global Sources (Nasdaq - GSOL) has its home in Hong Kong and organizes many B2B sourcing fairs. In addition to running major trade shows, Global Sources publishes trade directories listing over 1.8 million products and more than 150,000 suppliers.

Also involved in the sourcing from China is the Li and Fung Group (0494.HK), which is one of the world's largest export and sourcing firms. In addition to managing the supply chains for many of the U.S.'s top merchandise outlets, Li and Fung privately owns Toys R Us. This company also owns Convenience Retail Asia (8052.HK), which has 950 "7-11 type" stores throughout Asia.

Macau - Las Vegas of the East

Let's move on from Hong Kong to Macau - often called the Las Vegas of the East.

You can easily reach Macau by taking the one hour ferry ride from Hong Kong to the former Portuguese enclave. Since the deregulation of gaming in 2004, the big players of American gambling like Sands and Wynn Resorts have moved in to setup spectacular hotels and casinos.

Last month, Las Vegas Sands (LVS) Chairman and CEO Sheldon Adelson opened the group's Venetian Macao. It's a giant casino, hotel and convention complex that cost US$2.4 billion. Sands Group expects to spend as much as US$12 billion on 14 more hotels with casinos offering a total of 20,000 rooms by the end of 2009. No wonder analysts are saying this is Sheldon's biggest gamble.

Local players like the established Lisboa (owned by Shun Tak Holdings - 0242.HK) and the newer Melco (0200.HK) are building their own mega-hotel casinos to attract the gamblers to Macau as well provide family style resort vacations. In the 3 years of deregulation, Macau's tax revenues on gaming have already surpassed that of Las Vegas in the first half 2007.

Oh - and try the Portuguese wine and Macanese food - a fusion of East and West which even Hong Kong can't beat.

Shenzhen - Enter the Dragon

From Hong Kong, you can take a day trip into Shenzhen. The border train runs from Kowloon 60 miles north into Lo Wu station, which is the border crossing and gates to the Middle Kingdom - the literal meaning of "China."

Shenzhen has grown quickly from a sleepy border town in the marshes to a major city servicing cross-border trade. Property prices have doubled (yes up 100%) in 2006 alone and major developers like Shum Yip Investments (0517.HK) have done very well.

An opportunity to visit Shenzhen Overseas Chinese Town (owned by OCT listed in Shenzhen) is interesting and you can see the ("Disney style") Chinese theme parks and leisure facilities. The leisure industry in China is one of the fast growing sectors as richer consumers take more holidays to enjoy their wealth. China Travel (0308.hk) is the dominant travel agent in China.

Mr. Li Ka Shing - Asia's Biggest Tai-Pan

A visit to the Peak of Hong Kong is a great way to conclude your investor's sightseeing trip.

As you reach the tram station office in Garden road - you will be greeted by a wax-work of Mr. Li Ka Shing - Asia's richest man. Mr. Li is the local Tai-Pan ("Tai-Pan in Chinese means the big boss of a major conglomerate or Hong") of companies Hutchinson Whampoa (0016.HK), Cheung Kong Holdings (0001.HK), Hong Kong Electric (0006.HK)...and the list keeps going!

With a net-worth of US$19.9 billion, the self-made Mr. Li is revered to the Chinese like Mr. Gates and Mr. Buffet is to the United States. He is so influential that foreign heads of state like Tony Blair and George Bush often call on him for advice on China. But you can get a free picture with him at the gates of the Peak tram!

The Peak - A Statement in High Living

Moving up the steep incline of the peak tram, you will gaze into the windows of expensive apartments where yuppies relax from a hard day at work. As the city prospers, so have property prices and these guys have truly made it both at work and at home. Local property developers like Chinese Estates (0286.HK) and Hysan (0014.HK) made their fortunes building homes for the burgeoning middle class of Hong Kong.

The Peak shopping centre and Tower was developed by Hang Lung Properties (0101.HK) and is one of Hong Kong's major tourist attractions. As you reach the top of the 550 meter climb, you will see magnificent views of the city with illuminated skyscrapers lit up like a Christmas trees at night.

At the top of the Peak is where the Mr. Li and the other Tai-Pans live with their Tai's Tai's and Princelings (Princelings are the privileged rich kids of Tai-Pans and Tai-Tai's.).

At the Gates to the Middle Kingdom

As you climb to the observation tower to watch the sunset over the Fragrant Harbor- (the real meaning of "Hong Kong"), a sense of Zen-like calm will befall you.

Below you, lays Asia's most modern city full of office workers, investors, and tourists going about their daily business. Above the urban madness in the calm hilltops stand the magnificent houses of the Tai-Pans and Tai-Tais', enjoying the very Peak of their lives.

Far beyond the mountains of Kowloon, you may just see the lights of Shenzhen that rises like a Phoenix from the marshes.

To the South, the magnificent Ching Ma bridge connects Hong Kong to the mainland. To the East, the big container ships move "made in china" cargo out through the world's shipping lanes. To the North, you can almost imagine the invisible Big Red Gates that lead into China - a consumer market of 1.3 billion people - the biggest untapped market in the world.

As these Big Red Gates metaphorically open, a red tide of capital sweeps into Hong Kong, turning everything it touches into gold. And as you reflect on all the opportunities of your Hong Kong visit, the ideas you have digested will become as clear as the fresh mountain air you breathe. At that moment, you will know why Hong Kong is known as the Gates to the Middle Kingdom.

TONY CHAN, General Manager
Fiduciary Services
Global Consultants and Services Ltd
Central Hong Kong
tony@gcsl.info

EDITOR'S NOTE: This October, our Investment Director, Eric Roseman will lead a select group of investors through all these fascinating Hong Kong sites during our Asian Advantage Tour, as we head towards Singapore, Bangkok and Phuket. Along the way, our guests will hear the secrets of the Asian investment world right from the mouths of all our Asian financial experts on location. Want more details? Call our Director of Membership Services, David Newman right now at 1-866-765-7506.

The Bush-Bernanke Bailout Team Swings into Action!

On Friday, the White House announced a plan to help the housing industry and individuals who are having trouble securing credit. Overall, this hardly bold plan will aid about 4% of those in distress. That's barely a dent in an industry that's still largely frozen since late July amid the worst credit crunch in nine years.

Also on Friday, Fed Chairman, Ben Bernanke, said he would do "whatever is necessary to help the economy." That means he'll expand bank credit to alleviate the crisis in commercial-backed paper and the mortgage-backed securities market.

A Windfall is Headed Towards Municipal Bonds

Like a well-rehearsed play, the Fed is now readying itself for another round of interest cuts, starting on September 18. This script follows the history of former Fed chief Greenspan and all the others that preceded him since the Fed was created in 1913.

You and I might not agree with the Fed's long-term performance record. (It's been horrific!) But in order to avoid a recession in an election year in 2008, the Fed and the White House are still coming to the rescue. This should put a floor on the crisis.

But in my eyes, their quick action will also open the door for another round of speculation. Over time, I see this flood of speculation ultimately leading to disastrous consequences for the financial system.

Honestly, I believe institutions should be allowed to fail. It sends the wrong message if we always bail them out. But if the financial system is truly threatened, then the creation of credit is the only way to avoid the day of reckoning - at least for now.

Meanwhile, huge bargain are available in the non-Treasury market right now, especially in municipal bonds.

If you love value like I do, consider the distressed tax-free national and state-issued municipal bond fund sector. Several closed-end municipal bond funds now trade at huge 9-10% discounts below their net asset value and pay about 5% in effective yields. These securities have been mauled since July as credit spreads tightened.

I'd be accumulating these cheap, tax-free bonds now ahead of a fresh round of monetary easing. Municipals should easily outperform taxable bonds over the next 12 months and give the conservative investor some tax-free yield ahead of higher taxes if the Democrats win the White House in November 2008.

ERIC ROSEMAN, Investment Director

Privacy & Rights

You Never Know Who Might Be Listening...

If someone wants to monitor your conversations through the telephone, they don't necessarily need to tap your phone. A number of ingenious alternatives are available.

One ingenious monitoring method is an ordinary extension telephone. An eavesdropper impersonates you and asks the telephone company to install an extension phone to an existing line. When you pick up the phone, the surveillance tape begins rolling. Executives who install private lines that bypass a central PBX are particularly susceptible to this attack.

Cell phones are also vulnerable to this attack. It's now routine for police to get a court order to obtain the same cell phone number as a suspected criminal. A person dialing your cell number will have his number displayed not only on your phone, but on an identical one carried by an investigator. Text messages may be monitored this way, too.

Another common surveillance device is a modified telephone that functions as a combined wiretap and room bug. It operates normally but conducts room audio over spare wires in the telephone cable. Many telephones are working as room bugs without any modifications. They may be remotely activated by telephone to transmit all room audio.

Cell phones may also be converted into room bugs. Many cellular telephones have an auto answer feature and allow you to turn off the ringer. Let's say you're in settlement negotiations in a lawsuit. To learn your opponent's strategy, all you need to do is to say something like, "Give me your very best proposal when I return," and leave the room. Just leave your auto-answer cell phone in the room, with the ringer turned "off." When you've left the room, dial your cell phone and listen while the other side reveals its strategy.

It's also possible to turn a cell phone into a room bug by installing the appropriate software in it. This can be done remotely, without your knowledge, by your cellular service provider or others with the requisite knowledge. This is possible even if the phone is switched off. This attack is increasingly common in corporate espionage situations and was approved for use in criminal investigations. Commercial software such as FlexiSpy Pro is also available for this purpose. The only way this form of surveillance can be defeated is by removing the battery from your cell phone.

There is no single strategy to follow to defeat these attacks. One strategy is to pay very careful attention to billing statements from your telephone company to make certain you're not paying for an extra extension or extra handset you never ordered. Another is to hire a counter-surveillance professional to examine your telephone system and meeting rooms to insure they haven't been compromised.

To avoid wiretaps, don't discuss anything confidential on a phone listed in your name. Instead, purchase prepaid private cellular service. The per-minute cost is significantly higher than if you have a service contract, but you can obtain your cell phone and purchase prepaid calling cards for it without a credit check and without showing proof of identify. Cricket (www.mycricket.com) and Virgin (www.virginmobileusa.com) are two U.S. providers of this service.

MARK NESTMANN, Privacy Expert & President,
The Nestmann Group
www.nestmann.com

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Asia Advantage Tour
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