Thursday, January 29, 2015

Book Review – Gordon Wu - The Man Who Turned the Lights On

In my research and investing I stress three things: people, structure and value.  I look for companies that are controlled and managed by quality people, have corporate structures that align minority and majority shareholder interests and trade at valuations that are below fair value if not outright cheap.  

This article is about people.  One person in particular - Sir Gordon Wu Ying Sheung - who founded and built Hopewell Holdings into one of the largest companies in Hong Kong.

Gordon Wu – The Man Who Turned the Lights On by Rosemary Sayer is a good telling of his and the Hopewell story from an insider’s perspective.  

This is likely a ‘pay for play’ book meaning that the subject likely sponsored its writing or publishing in some shape or form.  As such, it should be read more like an autobiography than an objective biography.  I say this as it seems to gloss over many of the subject’s shortcomings, and likely avoids many others. 

While many criticize these books for not being objective, I personally like them as they many times pair a good writer with interesting people who would not write it themselves or realize someone could do a better job.

Even more so, these books provide an insider’s view on what was happening at the time.  This perspective is helpful.  As an analyst I’m outside and don’t really know what the management is thinking when they make important decisions.  Books like these help to better understand how the management and controlling shareholders make decisions.

During the early 80s and mid 90s, Hopewell was a key holding of many foreign investors in HK and virtually every brokerage and I-bank research department covered it.  Hopewell and Gordon Wu had a big profile as they were consistently in the press.

What I particularly like about biographies like this one is its insight into the entrepreneurs’ early years.  Gordon grew up in an upper middle-class family in Hong Kong.  His father founded and owned one of Hong Kong’s largest taxi companies that was built from the ground up in the aftermath of World War II. The family was wealthy enough to send eight of their nine children to college in the United States, where several eventually settled. Three earned places at top US universities including Gordon who studied at Princeton.

Living and studying in America made a big impression on him. The book notes that he made good friends there, and enjoyed the feeling that in the US everybody was created equal. Hopewell is named after the town in New Jersey that first inspired him to get into construction, and his eldest son, Thomas Jefferson Wu, is named after the third president of the United States.

Gordon Wu made one of the largest single gifts to any university – US$100m to his alma mater in 1995. Several years ago he hosted and paid for his entire graduating class and their spouses to come and see what he built in Hong Kong and China.  .

He was one of five Asian students studying at Princeton in 1958.  The book notes that Gordon actively circulated and made friends with his fellow students and did such classic American things such as attending Christmas and Thanksgiving dinners at friends’ and roommates’ houses.

Unlike many in his family who studied medical science, Gordon studied engineering. Also unlike many in his family, Gordon returned to Hong Kong.

Early Setback

The biggest takeaway from this book for me is that like many other successful entrepreneurs, he faced an early setback.

Hopewell Construction, the predecessor of the now Hong Kong listed Hopewell Holdings, was founded in 1963 with funding from his parents. Gordon was 28 years old at the time. One of its first projects was the Central Building in Wan Chai (now better known as the building that houses the Tai Yau Shopping Plaza). 

The setback occurred in the aftermath of Hong Kong’s 1965 property crash and mini bank run.  During this time one of Hong Kong’s largest, the Heng Seng Bank, suffered a major run and was quickly bought by HSBC where it remains today. 

Gordon quickly realized the extent of his problems and locked himself in his office to figure out a solution. Property prices fell to a level that made his land bank and existing projects unprofitable. Selling existing properties would not cover the losses.  The brief details of this episode imply that Hopewell Construction would likely go bankrupt.  Realizing this he “…wrote up a four-page summary with graphs and charts that were typical of his engineering style and went to visit his bankers…” at HSBC.  The plan impressed the bank officers and he received a loan.  Despite this, his family was mad at him for going into debt.  According to the book, he worked around the clock to keep the business afloat and meet his repayments to the bank.  By 1967 the property market started to improve and Gordon eventually formed a new company – Hopewell Holdings – that better separated his and his family’s interests.   

Many children of successful entrepreneurs are not very successful, or never get to the same level as the founder (see related blog post here).  Among the rare few who go on to do well, many go through early setbacks or ‘tests’ that likely provide life-long lessons.  Two similar circumstances come to mind.

Djarum’s Hartono brothers faced potential ruin in 1961 when their cigarette factory was destroyed in a fire about the same time that their father, who was also the company's founder, passed away. The brothers responded to the setback by building the first modern cigarette factory in Indonesia, and revamped and modernized Djarum’s management and corporate structure.  They are now the richest people in Indonesia according to Forbes (see here).

Saratoga Capital’s Edwin Soeryadjaya seemed next in line to take over Astra International, only to have the family lose control of the group as it needed to sell its stake to cover older brother Edward’s Bank Summa debts.  Founded during the Asian Financial Crisis, Saratoga is now one of the largest private equity groups in Indonesia, and Edwin is ranked number 26 on the Forbes list (see here).

Early In China

The second most interesting story is how Gordon organized a meeting with the most well-known and the wealthiest property developers in Hong Kong to build China’s first luxury hotel.  Participants in the May 1979 lunch included heads and representatives from Cheung Kong, New World, and Sun Hung Kai.  This was to be their first property project in China.  They would later become some of the some of the largest privately-held business groups in the world’s largest country with most of their wealth coming from property development.  Gordon was the one who organized the lunch and the project, and spent much of the next five years making the hotel project happen. He had the tenacity, vision and execution skills to get it done.

I won’t go into details here as the book provides good insight into doing business in early 1980s’ China.  For instance one problem in getting the new hotel approved was that it alone would use 2% of the electricity generated in Guangzhou at the time.  Tales of government officials’ naivety about the outside world, training staff on how to apply make-up and use modern washers and driers make one realize how much China has changed in the last 30 years.  Working and travelling between Hong Kong and Guangzhou gave him his next idea.

The third most impressionable story was how Hopewell designed and built the 122km Shenzhen to Guangzhou super highway, the first privately-owned toll road in modern China.  China now has the world’s most extensive highway and expressway system and the second largest number of cars in the world (see here).  Gordon Wu was an important catalyst in kick-starting it all and like the hotel project, he had to jump over many hurdles to get it all done.

But there’s a lot more in this book that is also interesting and others may find more interesting: building some of the first privately-owned power stations in China and the Philippines; insight into the long-term relationship with William Purves who eventually led the HSBC group; and trying his best to build a mass rapid transport system in Bangkok that was ultimately stopped by Thaksin Shinawatra.  

An interesting chapter sheds light on how he and Hopewell dealt with and survived the 1997/98 Asian financial crisis.  Hopewell’s projects in Thailand and Indonesia were going nowhere; the projects were leveraged and there were questions on whether contracts would be honored.  Hopewell’s stock price fell 87% in the 12 months to August 1998, and fell a further 25% over the next two years hitting a low around HK$2.  The press was vicious in criticizing him and Hopewell.  The chapter’s title “From Hero to Scapegoat”, sums up Gordon Wu’s experience in this trying time.  The company and stock have done well since the crisis.  Its shares have had fairly steady upward climb reaching an all-time high of HK$35 in Feb 2013.  A 16x increase 16 years, not including dividends.

There are also tales of Gordon Wu negotiating with Jiang Zemin to fix the Hong Kong / Shenzhen border crossing, being knighted by Prince Charles from the UK, being the first to float the idea of a bridge and tunnel linking Hong Kong and Macau (1978), and the support and tenacity of his wife during the early years and when the going got tough.

Gordon Wu and Hopewell are still around.  He’s turning 80 this year and is now Hopewell’s Chairman.  His eldest son, Thomas Jefferson Wu is managing director and Gordon’s wife Lady Wu Ivy Sau Ping Kwok is a non-executive director.

My main criticism of the book is the same as other books I’ve reviewed on this blog.  There's no index.  Gordon Wu and Hopewell broke a lot of ground in China and Asia.  Historians – as well as lonely analysts like myself – would benefit from an index.  

Gordon Wu is not your rags to riches businessmen.  He came from a well-to-do family and made the most of his education and background.  He thought big and had the balls to carry out his dream.  Like most successful business people he overcame setbacks and criticisms.  I suspect, but have no way of knowing, that there are likely some ghosts in the cupboard that are not covered in this book.  As Ir. Ciputra once told me in a short interview many years ago, "In property and construction, you have to get your hands dirty”.   

This book serves as a good reminder of the pioneering spirit and how one person can make a very large impact.  Being from the US, I mostly take highways, and other infrastructure for granted, much as I suspect the 20-somethings and below in China do now.  We don’t notice it when it’s working well, but complain when it’s not available or broken. 

I doubt many can think of the people or corporation that made it all happen.  Gordon Wu’s successful projects in China and Asia broke new ground and not only benefited the people who use Hopewell’s infrastructure, but by showing it could be done, he inspired many to copy him.

Here’s to the pioneers.

Wednesday, January 14, 2015

2X United States Trip Report – Midwest and Silver Spring/Washington DC

In 2014 I spent close to three weeks in the United States which is the longest I've been there since returning to Asia in 2006.  My first trip was to Des Moines, Iowa and Hadley, Minnesota during a very pleasant mid-August holiday.  The second was to Silver Spring, Maryland, which is a nice inner-beltway suburb of Washington DC, during the recent Christmas holidays.

Des Moines, Iowa and Hadley, Minnesota (with a side-trip to Sioux City, South Dakota). August 2014

My impression after spending 10+ days in America’s mid-west is that its heartland is going well and is an exceedingly pleasant place.  My sister and brother-in-law moved there from suburban Washington DC last year.  They were lured by more interesting and ultimately beneficial job opportunities, better pay, lower cost of living, less traffic, and more friendly people (the last one is my opinion).  Iowa’s winters sound brutal, but weather during my short August stay was very good.

An opportunistic visit and tour of Iowa’s beautiful statehouse left me feeling that there's a bit of hope left for my native country.  The reason being that Iowa is one of the few states that draws realistic boundaries in the state legislature.

Let me explain.

In my opinion there are two big problems in the US.  The first is Gerrymandering and the second is the Congress’ exemption from insider trading rules and is worthy of a much longer post (link to more information here). 

The bigger problem is Gerrymandering.  Gerrymandering is the process of allowing the incumbent party or office holder to draw or redraw the boundaries of his/her constituency in a way that gives the incumbent the best chance of winning and therefore remaining in office (reference here).  Combined with modern cartography incumbents draw up increasingly precise voting districts.  (It also leads to some bizarrely shaped voting districts that can be seen here.)

Gerrymandering is nothing new in the US with the term coming into general usage as early as 1812 (see here).    Also known by the more generic term ‘redistricting’ it is likely the key reason for the large and growing gap between ‘red’ (republican) and ‘blue’ (democratic) states.

With the catchment area redrawn to favor either Democratic or Republican majority, there’s little likelihood of a change in party.  The real fight is not on the official Election Day but during party or primary elections.

To win a local seat in an already Republican area, an up-and-coming politician needs to be even more republican than the incumbent; and to save his/her seat the incumbent needs to be perceived as being more Republican than the challenger.  Thus we get deeper hues of red and blue over time.

Worst of all is that it leads to a static government.  A 2013 Bloomberg article noted that, In every congressional race from 1964 to 2012, at least 85 percent of incumbents nationwide retained their seats, according to the Center for Responsive Politics” (see here).

There are however signs showing that Americans are more centrist than news headlines imply. The majority of Americans actually agree on many perceived controversial topics such as marijuana legalization, infrastructure improvement, and same-sex marriage (see here).  

Is Iowa the best state in the country…?

What made the trip to Iowa’s state capital so interesting is that Iowa is one of the only states that does not practice Gerrymandering.  Since 1980, Iowa’s stat
e legislature has given its redistricting plans to a non-partisan state agency (more information here).  

Library, State Capital Building, Des Moines, Iowa
Senate Chamber, State Capital Building, Des Moines, Iowa
This insight was provided by a very proud and knowledgeable tour guide at Iowa’s beautiful state capital building.  Given its responsible electoral proceedings, perhaps it’s a good thing that the Iowa caucus kicks off the Presidential election season. 

Ag goes high-tech

A key take away from my mid-west trip was the wide-spread use of technology in agriculture.  

Before he moved to a better paying insurance company, my very smart computer-programming-double-masters-brother-in-law designed and programmed GUIs that are used in agricultural equipment and services.  His previous company manufactured tractor add-ons that plant highly engineered seeds within a millimeter or so of where they are needed.  According to him, this requires a lot of things to come together – robotics, GPS, and tons of programming.  Add in seed development, pesticides, herbicides, harvesting and storage-related technology and it’s clear that technology and innovation are driving America’s agricultural sector.

One can see this in the corn fields that surrounded our vacation home in Hadley, Minnesota.  It has been at least 35 years since I last visited my corn-farming relatives in Chesterville, Ohio (link here) and one can easily see the difference between now and then.  Back then there was a decent amount of space between the corn stalks and one could clearly see the furrows and walk through the fields.  This is no longer the case, as the stalks are now packed so tightly together that no light seems to pass through them

US$500k tractor.  More Star Wars than Little House on the Prairie.
Iowa State Fair, 2014
Technology and more-intensive land use are reflected in raising land prices.   US farmland has been one of the best investments in the last 10-15 years, having increased by almost four times since the late 1990s (source here).

In fact the entire landscape has been changed due to the addition of massive windmills sprouting all over the area.  Hadley is in the southwestern part of Minnesota and one of the windiest places in the United States.  

Sioux Falls has good Cambodian food

A day trip to Sioux Falls, South Dakota proved interesting and underscored that America’s melting pot experiment continues far beyond its major cities.  The reason I say this was due to a very good meal at the Phnom Penh Restaurant (link here).  The owner/manager is the son of the restaurant’s founder and took up the family business after a career in the US Marines.   I did not expect to see Asian food so far in-land, but it proved to be the best Cambodian food I've ever had. 

I don’t think this was an isolated thing. While Iowa, South Dakota and rural Minnesota are certainly paler and blonder compared to my native Washington DC, there are many non-European restaurants and my sister and brother-and-law’s colleagues are from China, South America, Europe and other places. My medical doctor sister told me of a recent patient whom they were unable to treat as her hospital does not have on-call translation services for Dinka speakers.  Live Bosnian and Spanish translation is available on most days, but Dinka needs to be scheduled and is done via telephone.  This outsourced service provides interpretation services for over 200 languages (link here).

Silver Spring/Washington DC.  Christmas Holidays 2014

If the heartland is becoming multi-cultural, it’s even more so where I grew-up.  

I've been back several times to my hometown of Washington DC and Silver Spring, since venturing off to New York and then Asia due to my still unfulfilled wanderlust, but the past holiday trip there made me realize just how much the place has changed. 

Spending most of my career in Emerging Markets where the change is rapid one forgets that progress and change also occurs in developed countries, just at a different pace and without as much fanfare. 

Foreign Exchange Quotes
Columbia Mall, Columbia, Maryland
Most noticeably Silver Spring now supposedly has more Ethiopians than many cities in Ethiopia.  This could very well be true as some seven Ethiopian restaurants are located there if the recent Google search is accurate (search for "Ethiopians in Silver Spring". Video of local politician courting their vote is here).  

This is in addition to several Vietnamese and at least one each Jamaican, Myanmar, and Nepalese restaurant.  

The wide variety of international cuisine reminds me of another point about the US that many miss when they criticize Americans for being so insular: our history of the world coming to America.   Most who came and stayed did so because it was better in the US than in their native country.  America's collective view of the world from those we meet from other countries is that life outside of the US is not so good.

On another level it’s like asking the question of why go abroad when the rest of the world comes to America?  Who needs to go to Vietnam if a good bowl of Pho is a short drive away?

Local neighborhood going upmarket

The increasingly diverse racial and food mix is just part of the significant changes in Silver Spring and the greater Washington area since I was a high school student.

What used to be a virtually empty ‘downtown’ Silver Spring is now a nice collection of chain and independent restaurants, shopping malls, and even a new H&M.  It is also the global headquarters of several companies and organizations including the Discovery Channel and the American Film Institute. 

In fact the entire DC area has changed, with many neighborhoods that for decades were red-light, drug-dealing, no-go zones now being among the most fashionable places to live in DC, if not the entire US. Rents at one brand new loft near Washington’s ballpark are not too far from Hong Kong’s.

As an old high school friend put it several years ago… Neighborhoods you never knew existed are now too expensive to afford”…

Growing frustration with unequal growth? 

While still at the margins, the US’s very unequal growth in income and assets in the last 20 or so years seems to be more prevalent. 

My conservative Georgia-based cousin who works in the construction industry noted that there is little to no trickle-down.  "The rich just horde their money", is basically how he put it.  His view was shared by others in casual conversations.

The tide could be turning however.  In a recent Washington Post article - which somehow did not make it to the front page - journalist Niraj Chokshi noted that the minimum wage in Washington DC and 20 states rose on 1 January 2015.  Five states, including the still stateless Washington DC, will index their minimum wage to the inflation rate, bringing the total to 15 (see here).