FinanceAsia Achievement Awards — Part 1

Our fictional case study, revealed here, makes our awards for private banking stand above the rest.

FinanceAsia is pleased to announce the winners of our Best Private Banks. Congratulations.

In the coming days we will announce the remaining awards for countries, overall deal awards and house awards.

We will host a dinner to present the awards in Hong Kong on January 27.  

UBS is FinanceAsia's best global private bank in Asia of 2015 while DBS Bank is our best Asian private bank.

Both categories were decided by the responses to a similar case study requiring an integrated response among client relationship, investment banking, and investment teams.

The case study for the global banks is presented here. Asian banks were faced with a similar family scenario but on a smaller scale and of a more generic nature so it could fit any local market. The fictional case study's level of detail and grounding in real-world issues require a sophisticated response by candidate private banks, making this the most prestigious award of its kind.

The confidential nature of the pitches means FinanceAsia cannot go into the detail. However, we can explain that the difference between UBS and its rivals came down to its philosophical approach.

The case study is designed to present banks with fictional situations that are inspired by the real world, which means they are difficult to address and often lack a simple solution – or any solution at all. This year's challenge involved a dysfunction within the family that was impacting the share price of its main listed asset. The UBS solution emphasised keeping the family together and involved, and maintaining majority control of the listed group.

Rival pitches emphasised other tacks. They put first the desire for the second generation of heirs to go their separate ways in business and in life.

These other pitches did not ignore the need for maintaining harmony in the family but there was a difference in emphasis. For UBS, its solution stemmed entirely from the view that the family had to maintain majority control of the listed asset. That was to buy time so that longer-term solutions could be put in place. Other banks placed less importance in this.

There is no “right” or “wrong” on paper. In real life, the best path might depend on individual quirks and family dynamics that cannot be captured in a case study. There were differences in specific recommendations, such as which company assets were considered core and which could be disposed; there were also areas of universal agreement, such as a Reit exit for some assets or the need for a family-wide philanthropic endeavour.

But FinanceAsia was impressed with the thought that went into UBS’s case, its family-first approach, and the holistic solution that flowed throughout all aspects of its recommendations, including corporate finance, trusteeship, and wealth management.

The level of detail we requested from banks pitching as best Asian private bank was a lot less. We found shared ideas around working to restore family harmony.

DBS offered the most specifics around how that might actually happen. It was also the most proactive when it came to suggesting financial planning ideas and proposed a direction involving corporate finance transactions. It was also the most transparent about its own remuneration terms.

Please click to the next page to read the fictional case study.

Fictional case study scenario


One of Hong Kong’s biggest property developers, Leung Zhuo-kay, recently passed away aged 93. His death in January 2014 has set off a battle over the inheritance, revealing family splits as well as challenges in the governance of the company. Your pitch is to one of his sons, who is looking for advice on reconstituting his wealth in a way that will be acceptable to the rest of the family and minimises publicity regarding the transition.

The elder Leung was born in Guangzhou in 1921 and emigrated to Hong Kong in 1948. He established Jo San Properties (JSP) in 1958. It became Hong Kong’s second-largest real-estate developer on the Hong Kong Stock Exchange by market cap.

Leung Zhou-kay became a habitué of the Forbes list of billionaires. As of 2014, the magazine estimated the family’s net wealth to be $12 billion.

Leung Zhou-kay transferred the controlling interest in JSP into a family trust, which was was set up as a perpetual trust, in which neither the trust nor the underlying assets can be dissolved. In the trust deed, Zhou-kay named his wife and four children as the beneficiaries and the trust appointed the four children to co-manage JSP.

Although the trust structure is legally robust, the patriarch’s death has unleashed internal family disputes that are eroding the corporate value of the business: JSP shares have fallen from their 2013 peak of HK$143 to HK$89 today.

Most of that decline occurred from October 2013 to March 2014, in the well-publicised run-up to his death and thereafter. But the stock continued to decline despite the subsequent rally in Hong Kong stocks in the first half of 2015, and has been a poor performer since.

The family today

The matriarch So Mak-tai was born in 1929 near Guangzhou and married Leung Zhou-kay in 1960. Now aged 86 she controls 40% of JSP through the trust fund, making her the largest shareholder. She currently serves as chairman after the eldest son, Harold, was ousted from the position in March 2015. She would prefer to pass the formal titles on to her other children.

Although she does not have any day-to-day role, no board direction or important deal gets done without her consent.

Harold Leung is the oldest son, born in 1962 in Hong Kong. Upon his father’s death, he inherited the chief executive officer and chairman titles at JSP, along with 15% of the trust’s assets.

For most of his life he was very active in helping his father run the business but in 2002 he was kidnapped by triads in Macau and, according to media reports, freed after the family paid a substantial bail (the police were never formally involved; the press reported that So Mak-tai negotiated directly with the kidnappers).

In 2003 Harold asked his father for permission to marry Queenie Tam, a lawyer he met shortly after the kidnapping. Leung Zhou-kay forbade the union (she comes from a modest, low-income family of no repute) and Harold instead married another woman whom his father had chosen, from another major Hong Kong business family. That woman died of natural causes in 2009 and Harold moved Queenie Tam into his residence, although he did not risk his father’s wrath by actually marrying her. He is childless.

Following Zhou-kay’s death last year Harold planned to give Queenie a seat on the board, a move resisted by other family members. Queenie continues to wield influence upon Harold and the other family members blame her for Harold’s decision to acquire entertainment and technology businesses during his brief tenure as CEO.

In turn the siblings accuse Harold of suffering from bipolar disorders as a result of his kidnapping.

At a March board meeting So Mak-tai used her shareholding power to force Harold to take a leave of absence. He did so, issuing a statement saying he would take a temporary leave to pursue personal interests. The local media had a field day.

Cecil Leung is the second son, born in Hong Kong in 1965. He is managing director of JSP, with responsibility for property-related companies in the business: Jo San Property Development, Jo San Property Investment, JS Transport (an infrastructure operator for roads, ports and air cargo and logistics), and related businesses such as hotels, property management, construction and insurance and mortgage services. He also oversees the land bank.

Cecil Leung owns 15% of the family trust assets. He is married and has three children, none of whom show much interest in the business, although the permanent trust stipulates that they will inherit it.

Fifi Leung is the only daughter, born in Hong Kong in 1969. She is managing director of JSP with responsibility for its mainland China arms in property development and property investment.

She is on the board of Jo San Financial Limited, a wealth management and brokerage firm operating in Hong Kong, China, and Taiwan. JSP owns 70% of JSFL; the other 30% is owned by Beijing-based Giant Securities. She is also on the board of Jo San & Co, a structured products-focused lender. JSFL and JS&C have the Jo San brand name but operate as separate corporate groups.

Fifi owns 15% of the family trust assets. She is married and has two children but her children (both sons) are excluded from Leung Zhou-kay’s permanent trust because she is a woman.

Douglas Leung is the youngest sibling, born in Macau in 1974. He was made managing director of JSP only last year, having previously avoided the family business – he earned a chemistry degree in the UK and spends his money and free time supporting research into climate change. He is also the only family member to have a presence on Facebook and Instagram (albeit under aliases).

He owns 15% of the family trust assets.

During Harold’s short rein he acquired two sets of businesses, which the family has put under Douglas’s administration under the name Jo San Teletech (which is why he’s now a managing director, technically equal to Cecil and Fifi, who didn’t want to deal with the Harold/Queenie acquisitions). These are Wei Jo San, a mobile telephone services company, a data centre, and Ni Hao Movies, a mainland-based cinema operator with subsidiaries in South Korea and Australia.

The businesses don’t fit the traditional, conservative company profile but they are profitable and sustainable.

Douglas is married and has two children; as a male his children are eligible (or indeed bound into) the perpetual trust. The eldest, a daughter, is interested in fintech; having since obtained her Harvard MBA, she’s talked to his father about Jo San backing an initiative in this area. Douglas’s younger child, a son, is a violinist.

Please go to the next page to read about the case study challenge and for details on the fictional corporate structure.

Cast study: The challenge

Your client is Douglas Leung. Yours is one of several private banks that provide services to him. You have conducted complete due diligence on Douglas, his family and the Jo San empire, and you are fully confident that they meet strict know-your-client legal and ethical standards.

Douglas’s net wealth is approximately $1.5 billion but it consists entirely of the inheritance of JSP shares via the perpetual trust. Douglas has four concerns. A solution that meets all four is likely to win your bank a much bigger wallet share from Douglas and, potentially, from other family members, as well as fees related to any required transactions.

First, the public family feud has been very embarrassing to the family. Douglas was not personally involved in the dispute but he was always close to Harold, whereas Cecil and Fifi are openly hostile to the eldest brother. They fear he will file a lawsuit alleging improper dismissal and the family is worried about more bad press and the impact it can have on the company’s image and performance.

But it’s obvious that this is not the harmonious family envisioned by Leung Zhou-kay. Douglas entered the family business in an attempt to stabilise the situation. He recognises the affiliates for which he is responsible are attractive businesses but his goal is to exit JSP-related responsibilities within three to five years.

The second related issue is the corporate structure. The listed company accounts for most of the family’s businesses but there is no agreement among the siblings or the mother as to how to move forward.

The falling stock price is not just a reflection of uncertainty over the death of Leung Zhou-kay: the land bank has been mismanaged and is nearly depleted, the infrastructure arm has taken on too much debt to develop projects based on shaky assumptions, a fall in new projects has slammed earnings, and Fifi’s China business is overexposed to tier-3 and tier-4 cities where residential prices are collapsing.

Cecil and Fifi also want to ditch Harold’s acquisitions, and while Douglas wouldn’t mind selling them, he also thinks they could help the company grow in new directions.

Thirdly, the family can’t agree on how to divvy up the wealth among their own children. The vision of Leung Zhou-pak was a harmonious transition to the sons of his sons. But the sons of his sons are uninterested or wastrels. The only grandchild with an aptitude for the family business is Douglas’s daughter but the rules of the perpetual trust state that it applies only to male heirs.

Fourthly, Douglas’s wealth consists of JSP shares, which he’d like to diversify. He needs permission from his siblings and his mother to cash or trade those in amounts above HK$5 million a month. (This applies to all the beneficiaries.) Therefore while he lives like a billionaire, enjoying the company properties, the company private jets, and so on, he is actually relatively cash-poor.

He also has no meaningful investments other than the company stock, and while there’s no sign that JSP will go bust, its glory days are behind it and the fall in the share price has made clear that the family lacks other engines to grow Jo San, other than by either restructuring the existing businesses or acquiring new ones.

Douglas would like to hear your pitch: how you advise him to proceed, the role your bank would play to support this, and an understanding of how you will be remunerated for advice and services rendered.

Corporate structure

Jo San Properties is the Hong Kong-listed vehicle. The current market cap is HK$200 billion ($25.8 billion), with 2.2 billion shares outstanding. The shares offer a 2.9% dividend yield and are valued at 9x earnings. Company debt outstanding is HK$50 billion and sustainable. The Leung perpetual trust owns 50% of the shares. Institutions own another 40% and mutual funds own 10%. Professional managers in JSP and its affiliates are not compensated with shares.

* JSP wholly owns Jo San Property Development, Jo San Property Investment, JS Transport (an infrastructure operator for roads, ports and air cargo and logistics), and related businesses such as hotels, property management, construction and insurance and mortgage services. The property companies are well managed. JS Transport has invested heavily in public works in Hong Kong and Guangdong province that were based on overly optimistic – even fantastical – government projections; the forecast is that this subsidiary will start to lose money in 2016.

* It also wholly owns Jo San Land Bank, which boasts 40 million square feet of Hong Kong real estate. But 75% of that now comprises completed investment properties whilst properties under development account for just 25%. The ratio used of the land bank to be 50/50 just five years ago; its composition has also changed, with a whopping 50% in shopping centres, up from only 20% five years ago.

Cecil Leung is the MD responsible for JSP and its Hong Kong businesses.

* JSP wholly owns two businesses in China: Jo San Property Development China and Jo San Property Investment China. These are run by Fifi Leung. The property development company last year lost money for the first time since its establishment in 1994 because of overexposure to residential space in tier-3 and tier-4 cities. It has relatively few assets in Chinese tier-1 cities, although it is reasonably diversified among retail, office, hotel, industrial, and warehouse properties.

* JSP also owns companies in a division called Jo San Teletech. First is Wei Jo San, a mobile telephone services company based in China. JSP owns 49% and the rest is owned by a consortium of mainland telecom operators and conglomerates. JSP wholly owns Jo San Data, a Hong Kong data centre business. And it wholly owns Ni Hao Movies, a mainland-based cinema operator with subsidiaries in South Korea and Australia. Jo San Teletech’s various businesses are small in relation to the main business but the most profitable.

Douglas Leung now manages Teletech but the other family members are hostile to it either because they don’t understand these businesses or perhaps out of spite because they think Harold bought into them on Queenie’s advice.

JSP owns stakes in two other companies that share the Jo San brand, as they were founded by Leung Zhou-kay and other partners in the 1970s. These entities went their own way, with their own corporate structures, but Fifi Leung sits on their boards. These are:

* JSP owns 70% of Jo San Financial Limited, a Hong Kong-based brokerage and wealth management service with operations also in China. It manages over HK$70 billion in client assets and reported an after-tax profit of HK$150 million in 2014. The other 30% is owned by Beijing-based Giant Securities, the ninth-largest securities firm in China.

* JSP also owns a 30% stake in Jo San & Company Limited, a financial entity with businesses in Hong Kong, China and Taiwan focused on structured products, mainly to consumer borrowers. JS&C is also listed in Hong Kong but it is plagued by bad debts – a situation that is worsening as China’s economy slows. Fifi Leung wants the JSP board to consider backing JS&C’s management in executing a massive HK$3 billion share placement to support the margin and term loan books, but Cecil is worried this will anger JS&C’s institutional investors and attract more bad press to the Jo San brand.

JSP is rated A1/A+. Its most recent foray into the capital markets was in 2014 when it raised a $350 million 10-year callable note, which was oversubscribed and currently trades at a spread of around 170-180 basis points over US Treasuries. The Leung family prefers to maintain a conservative posture toward debt.

¬ Haymarket Media Limited. All rights reserved.
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