CNBC Transcript: Kevin Tan, Executive Director, Alliance Global Group

Following is the transcript of a CNBC interview with Kevin Tan, Executive Director of Alliance Global Group. The interview was broadcast on Managing Asia on 13 April 2018, 5.30PM SG/HK time.

All references must be sourced to a "CNBC Interview".

Interviewed by Christine Tan, Anchor, CNBC.

Part 1

Christine Tan (CT): Let's talk more about your mall expansion because you're in the process of adding four new malls this year, taking the number to 18 and you want to target 28 malls by 2020. Now Kevin, that's a lot of rental space you're talking about. Are you confident you will be able to realize full leasing potential for all your projects?

Kevin Tan: We've been able to achieve a lot. I mean when we started Eastwood, and that was the time we had started our BPO business as well as our lifestyle mall business. I mean that time we were purely a residential developer, our rental income that year was really barely even a 100 million pesos. Last year we had finished with a rental income of about 12 billion pesos and we have a very ambitious target all the way to 2020. And so I think, and we're very confident, I think our businesses, our rental businesses, both our office leasing as well as our lifestyle mall business is thriving. I think we're building malls that are quite manageable in terms of size and in terms of offerings. So I'm quite fairly confident that we will be able to really achieve our objective.

CT: Right now you're expanding at a time when the Philippine economy is doing very well. Have you ever thought about what happens if the economy turns south? Do you have a Plan B?

Kevin Tan: First off, we're very confident with the economy and I think we're even more confident now because obviously the government has the right mandate to improve infrastructure. And of course we're also quite excited about tourism.

The country is growing right now at around six to seven percent per annum I think. Even with the infrastructure push in the short term, you're probably looking at another additional half to one percent per annum, and you know when all the infrastructure projects have come into play you're talking about maybe another two percent. So I think we're, we're very bullish about it. But of course you know, you can never be too sure.

We're pretty diversified. We have a very strong residential business, we obviously have a very strong office business and we have a very strong lifestyle mall business, so it again provides us this agility for us to be able to move.

CT: So you can weather any volatility.

Kevin Tan: Well, I'd like to think we can, yes.

CT: Right now all your mall expansion is in the Philippines? Any plans, any ambitions to go overseas?

Kevin Tan: Right now, not yet. I think the Philippines is still a big country, there's still a lot we can do to develop places outside Metro Manila, so right now everything is really concentrated in our capital. That's why we're developing half of our townships, more than half of our townships are actually outside Metro Manila. We're already now present in all the major cities, so now we're even looking at second tier cities, and we look to develop these areas as well in future.

CT: Well since then you've went on to develop other lifestyle malls under Megaworld, like McKinley Hill, Forbes Town, Venice Grand Canal, just to name a few. Do you have a distinct formula whether it's tenant mix or design that you use for each and every one of your project?

Kevin Tan: I think the formula that we have is the fact that all our designs are very different. We implore really thematic designs. The Venice Grand Canal is obviously patterned after Venice, Italy. We created a mall in Chinatown called Lucky Chinatown and there is what we call the Chinatown Walk, which is basically you sort of transform into the old Chinatown with architecture and features that bring you back to that sense. Our Uptown Mall obviously has a more different flavor, so what we try to do is we try to reinvent and recreate ourselves as we go along. We don't usually follow any particular pattern, but one thing is for sure, we try to create a really unique tenant mix, we try to bring in retail partners that have never been in the Philippines before. For example here in Uptown, I would say a great majority of our partners are first in Manila, so you can only find these retail partners here in our mall.

CT: So you try to give it a unique spin?

Kevin Tan: Yes, we give it a unique spin and we try to surprise the market a bit with some of the design and the innovations that we produce.

CT: Do you always get your concepts right? Is there one that's more challenging than the rest?

Kevin Tan: I mean, of course in anything that you build there will always be parts of it that are challenging, there will always be parts of it that will be successful, nothing's ever sure to begin with. But we quickly adapt to and change certain things in order to improve the customer experience.

CT: Let's talk about this digital disruption because the traditional retail model, as you know, around the world is getting disrupted by online businesses. What are you doing here in the Philippines as far as your lifestyle malls are concerned to gear up for this big disruption that's happening?

Kevin Tan: Our shop, our lifestyle malls have inherently been more focused on dining and entertainment. Retail is a very big component of our business, but I wouldn't say it's the biggest component, and so in a way I would say that is quite fortunate for us in view of what's happening right now.

I think in the Philippines, online shopping still has a long way to go. There are some inherent challenges with the trade of this market. But I think it will come someday, and so we're prepared, we are preparing for it, that's why we… it's important for us to offer very unique experiences. We were the first mall to go very thematic, so that offers obviously an experience that you can't find online. We're very heavy on food and beverage, we've always been heavy on food and beverage, and so that's an experience that you cannot find.

CT: So you try to improve the physical experience?

Kevin Tan: Physical experience, right. And we're also very big in, for example, nightlife. In our lifestyle malls, we have things like bars, clubs, and again, these are things you can't find and experiences that you cannot replicate online. So I think it's really creating experiences that are unique, experiences that still allow people to get out of their houses and interact with other people and I think that's what defines our lifestyle malls at this point.

CT: So you're confident you can survive the onslaught of this online disruption?

Kevin Tan: I believe so, we're pretty confident, plus the fact that we built our lifestyle malls within our communities and our communities are already in themselves their own captive market. So I think that's why we're very confident about our business.

CT: You know you have your traditional mall operators in this country, like the SMs, the Ayalas, do you think you can overtake them one day?

Kevin Tan: I mean we have a very different business model to SM and Ayala and I think that's what makes us all unique and that's what enables us to thrive together in this market. Obviously we're really more into the township developments, so we're looking at, when we develop, it's really a package, we develop the community, we develop the residential, we develop the offices, we develop the retail and lifestyle malls and then we develop all the other institutional components that put into that.

CT: So it's not direct competition?

Kevin Tan: I don't, I wouldn't say it's really direct competition, because it's really, our offerings are quite different from theirs. Whenever they come in to develop a place, it's very different from how we develop a place, so that's why we're able to thrive together.

Part 2

CT: Although your family has made a name for itself in real estate, the family also has a significant business in hotel and resorts which includes gaming. There are lots of new players in the gaming market these days, how are you gearing up to beat the competition?

Kevin Tan: Obviously the competition is also intensifying with the opening of all these new integrated resorts, but I think we're also quite confident because the tourism numbers have also increased. When we opened in 2009 for example, tourism in this country was barely three million a year. Fast forward to last year about eight years later, we're now almost seven million so you can see that the numbers are growing. Of course we're still pale in comparison with our other Asian neighbors, but I think we're on track with all the new amenities, all the new airports coming on board, as well as the new infrastructure being built and all the new hotels and integrated resorts.

So we think tourism numbers will continue to increase and that will really benefit our business. From our side we continue to invest heavily in our gaming business, this year we're about to open our Phase Three which will in fact almost double the current gaming capacity we have right now.

We're also about to turn over a thousand hotel rooms from various brands such as Hilton, Sheraton, Holiday Inn, and Okura. Next year we're rebranding one of our original hotels to the Ritz Carlton, it'll be the first time Ritz Carlton ever has entered into the Philippines. We're very bullish with the prospects of gaming, we've also started construction again in our latest gaming resort in the bay area alongside the other integrated resorts and that's set to open by 2021, so again we remain committed and invested in this business.

CT: Well you have lots of competition from Singapore, from Macau. Do you think the Philippines has what it takes to become a major gaming market?

Kevin Tan: I think so, definitely our location is a very strategic one, we're within a four hour flight time to a great majority of Asian destinations, our service culture here is quite good and our pricing is relatively good as well. There are a lot of components that really make the Philippines a very competitive market space for the gaming industry.

CT: Let's talk about an incident last year, a very tragic incident where a gunman stormed Resorts World Manila, and killed 13 people. Your shares fell as a result, how did you and your family handle such a difficult situation?

Kevin Tan: Well it was very new to us of course, quite unexpected but our concern at the time was just really the families of the victims during the incident and so we spent a great majority of our efforts to really address their needs. We've learnt a lot from that incident. We've improved our operations, we've improved our security, our surveillance, and I think we're a much better operator today because of that.

CT: Well these days, Alliance Group as a holding company has also made a move into infrastructure. You're the president of the newly created Infracorp Development which handles projects in the government's public private partnership scheme. You've got a monorail project going and you're now involved in the expansion of the airport in Manila. How are things coming along? What's the latest?

Kevin Tan: Yeah we're very excited about the government's push to build up the infrastructure and now the government's new thrust to accept unsolicited proposals. We definitely saw a very good opportunity to participate in some of these PPPs.

So the first project we've proposed is this Port Bonifacio Makati Skytrain. We will create a sky train that connects Uptown Bonifacio and Bonifacio Global City to the MRT3 which is a major mass transit line that connects the North and South of Metro Manila and this project looks to benefit 100,000 passengers a day. It's an innovative solution to a current concern that this community has right now.

The second project is the NAIA Redevelopment Project. We had joined forces with six of the largest conglomerates in the country. Obviously the seven of us recognize the urgent need to fix the current situation of our major gateway here in Metro Manila, the NAIA, or the Ninoy Aquino International Airport. Recognizing that the airport is really a catalyst for economic growth and recognizing that the airport is now operating above capacity, we felt that it was timely for us to propose to partner with the government in order to redevelop the airport to improve the capacity and do it quick, fairly quickly.

We recognize the great strides the government has been doing in order to improve the current airport but we felt that maybe if we partnered up with government we would be able to put some innovative ideas on the table in order to be able to implement programs quickly.

CT: What other infrastructure projects are you eyeing?

Kevin Tan: The cornerstone of our country's development is really connectivity and convenience, so…

CT: So you're talking about expressways, monorails, roads?

Kevin Tan: Expressways, monorails, any people movers, anything of the like. I mean, our objective is to create utmost convenience for the community that we build and as well as the greater community around us. We are now currently studying several projects that will really greatly benefit the riding public in the areas where we are currently located at. These are projects that are related to townships, as well as our tourism and state developments.

CT: So overall your family group as a whole has a diversified real-estate business, it now has an infrastructure business, and you also have a hotel and resorts business, and a brandy business which you made an acquisition last year. In terms of revenues and earnings, do you expect record earnings for Alliance Group this year?

Kevin Tan: I think so, I mean definitely our real estate business is doing very very well, we expect record growth for that this year. For our gaming business, we are opening new hotels. We're doubling capacity in our gaming floor, so I think again we're looking to end the year with record numbers. Our whiskey business which we just got into a few years ago is doing exceptionally well, our brandy business continue to grow both here in the Philippines and in Spain, so overall I think all our business units are performing quite well, and we're also fortunate to be in the situation where the Philippines is really experiencing really great economic growth right now. Our foreign remittances are still growing, and our consumption is also at an all-time high so we're quite confident, Christine.

Part 3

CT: You're 38-year-old, the eldest son of property magnate Andrew Tan, who is one of the richest men here in the Philippines. As the eldest son being involved in the family business over the years, do you think you've managed to prove yourself to the father over the years? You managed to gain some credibility with him? Have you gained his trust?

Kevin Tan: I think, some credibility and some trust but obviously there's, I mean, it's still a long process. It's always going to be constantly like that, like you're always going to constantly have to always prove yourself and I think that's going to be the case for a long, long, long time.

CT: He sounds like a tough boss.

Kevin Tan: He is tough, but also occasionally understanding, but definitely a visionary. I was fortunate enough to be in a front row seat to watch him steer our company to where we are today.

CT: How would you describe your relationship with your father? What are your conversations like with him?

Kevin Tan: Well previously, I guess when I was starting, it was a lot more, I would say, commanding in the sense, but today I think our relationship has turned into more consultative or collaborative.

CT: You mean he actually listens to you now?

Kevin Tan: Well, occasionally. I wouldn't say all the time but occasionally. There's already, there's some of that but just the same, he's the visionary, we take the lead from him. So it's really now upon us to see how we can continue and reinvent the business and really also bring it to new heights.

CT: Your father is 65-year-old, still young, and still overall in charge of the business. Do you get a sense that he's grooming you to take over from him one day?

Kevin Tan: I think so, I mean that's something that's quite clear and especially now that he's relinquished a lot of the day-to-day operations to us and he's focused a lot more now on this overall strategic vision for the company. But we still consult him on quite a number of things, especially when we want to expand or when we want to request for capital. These are things that we have to still deal with him on.

CT: In terms of leadership and management style, how are you different from your father?

Kevin Tan: I try to be like him.

CT: You try to be like him?

Kevin Tan: I try to be like him, I try to learn from his management style.

CT: In what way?

Kevin Tan: He's a very hardworking person, quite hands-on. He's also a firm believer in talent. And he would teach us early on to respect the hierarchy, for example, in our company, so we respect seniority, and we respect experience. He also possesses a great deal of humility and integrity. These are qualities I would like to be able to possess.

CT: So, you're the second generation running parts of the family business now. I understand there's a family constitution being drawn up and that will be ready in a couple of years. What are some of the issues you're trying to address there, what will it look like?

Kevin Tan: You know, we're a second generation and the third generation, or our third generation is still quite young. So I think in terms of timing, it's the best because then you can craft it, and I think the constitution does not necessarily affect our generation but affects maybe the third or fourth.

Right now we're learning from other families. To be honest, we're seeing some good examples and also seeing some examples that might not be applicable to us. So we're trying to get bits and pieces of that and we're trying to put it together. There aren't any major issues to be addressed at this point in time, but I think it's really more of setting the right tone already so that we can prepare how we raise the third generation and how we raise the fourth generation.

CT: And finally as his eldest son, ready to take over him when he retires one day, what is your vision for the company? What is your vision for the family business?

Kevin Tan: Our vision for Alliance Global is we want to continue to invest in people, and we want to continue to invest for the people. We feel that investing in tourism is a great multiplier in terms of generating jobs.

If you develop tourism, it's a good chance for you to be able to develop cities and provinces outside Metro Manila.

CT: You're adding to growth in the country?

Kevin Tan: Adding to growth, actually growth to the rural areas outside Manila and so we're remaining committed to tourism, we're remaining committed to developing outside Metro Manila and creating jobs. Another mandate for AGI is to continue to invest in young people, and continue to target the very young demographics of the country, and so be it our lifestyle malls, McDonald's, or some of our FMCG brands.

We also remain committed to putting the Philippines in the global map, by first off exporting Filipino-made products all over the world like we're doing with Emperador. But at the same time, we also want to give Philippines that much needed credibility when we do our foreign acquisitions. When we become the largest investors in certain countries like the UK or in Spain, I think it's good for the Filipino company, but more importantly, it's very good for a country like the Philippines to be the investors this round.

END

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