- Ten weeks of increasingly violent protests have plunged the Asian financial center into its most serious crisis in decades. Traders have punished the city's stocks in turn, sending Hong Kong's stock market to a seven-month low on Tuesday.
- Hong Kong officials, meanwhile, have cautioned that protracted tensions could also inflict lasting damage to the local economy. The city — home to seven Fortune Global 500 companies including tech giant Lenovo — grew at its weakest pace since 2009 in the first quarter.
- During the past two weeks, a range of multinational companies - from HSBC to Hyatt to Disney - have pointed to the political turmoil in Hong Kong as a negative headwind during conference calls with investors.
Two months of protests in Hong Kong are starting to take a toll on some of the largest global companies, adding to a host of geopolitical concerns as the U.S.-China trade war drags on.
During the past few weeks, management teams at a range of multinational firms have taken to earnings calls to warn of dire consequences if the clashes escalate — including lost revenue and deterred business investment. Many of these companies are already feeling the strains of higher tariffs and a weakened Chinese currency.
Ten weeks of increasingly violent protests have plunged the Asian financial center into its most serious crisis in decades. The growing unrest, sparked by a controversial extradition bill, also represents one of the most formidable popular challenges to Chinese president Xi Jinping since he came to power in 2012.
This week, demonstrations at Hong Kong's International airport suspended check-ins for two straight days, causing hundreds of flight cancellations. Scuffles broke out as thousands of protesters barricaded passageways in the main terminal building, and riot police fired pepper spray to disperse crowds. On Wednesday, flights out of the financial hub resumed as the airport obtained a court order intended to restrict the protests. But, companies are still wary of further disruptions.
Chinese officials condemned the latest rounds of demonstrations, calling them "the first signs of terrorism" in an indication of escalating rhetoric. The territory's chief executive, Carrie Lam, added the violence was pushing Hong Kong "down a path of no return." U.S. President Donald Trump, citing U.S. intelligence, said Tuesday said Tuesday the Chinese government was moving troops to its shared border with Hong Kong, raising concerns that a possible intervention could be on the horizon.
Traders have punished the city's stocks in turn, sending Hong Kong's stock market to a seven-month low on Tuesday.
The iShares MSCI Hong Kong ETF — which closely tracks Hong Kong shares — has plunged 10% over the past six months. The fund now sits 16% below its recent highs in early April. By contract, the iShares MSCI World ETF (URTH) — which tracks shares across the world, including the U.S. — is down only fractionally since then.
Hong Kong officials, meanwhile, have cautioned that protracted tensions could also inflict lasting damage to the local economy. The city — home to seven Fortune Global 500 companies including tech giant Lenovo — grew at its weakest pace since 2009 in the first quarter.
Hong Kong's economy bounced back in the second quarter, but still fell short of analyst expectations, growing at just 0.6%. Warning signs are flashing in specific sectors, including retail, where sales plunged 7% in June versus the prior year. Double-digit declines are expected for July and August.
"If a further escalation triggers capital flight ... the city's property market would be hit hard, resulting in a deep recession," Julian Evans-Pritchard, Senior China Economist at Capital Economics, said in a note to clients Wednesday.
Earlier this summer, Hong Kong-based cosmetics maker Bonjour Holdings cut its full-year profit forecast, citing the political unrest. In their most recent earnings calls, global luxury brands Prada, Hugo Boss, Gucci parent company Kering and Cartier parent Richemont, all said the protests weighed on sales in Hong Kong due to store closures and decreased tourist traffic, even as demand in mainland China grew.
Other luxury retailers, like L'Occitane, have suffered even steeper setbacks in Hong Kong. Sales in the city, the company's fourth-biggest market, plummeted 19% last quarter.
"Hong Kong has been challenging," L'Occitane Vice-Chairman Andre Hoffmann said on the firm's most recent earnings call. "We lost several trading days in the quarter due to the protests. Chinese tourists spending in our shops has declined — all these are a bad cocktail for our business."
With the second-quarter earnings season entering its final laps, companies beyond retail — from financial juggernaut HSBC to media giant Disney — have also pointed to the political turmoil in Hong Kong as a negative headwind during conference calls with investors.
Airlines could stand the most to lose from heightened tensions. Hong Kong's airport, the world's eighth busiest, hosted over 400,000 flights and 75 million passengers in 2018. Government officials say the transit hub alone contributes 5% to the city's GDP.
Just last week, Cathay Pacific, Hong Kong's flagship carrier, reported better-than-expected earnings. However, the company flagged that the protests hampered passenger numbers in July and would adversely impact future bookings.
Since Friday, the company has fired two airport employees and suspended a pilot for his involvement in the demonstrations. China's civil aviation authority has also ordered Cathay Pacific to bar employees who participated in the protests from flying to the mainland.
Shares of the carrier have tumbled more than 7% in just the past two trading days, touching their lowest level since June 2009.
Concerns are mounting for other segments of the tourism industry. Several major hotel operators have detailed to investors how the continued unrest is impacting their bottom lines. Tourism to Hong Kong, especially from mainland China, has fallen sharply over the past two months, denting hotel revenues. Occupancy rates dropped 20% in June from a year earlier and are projected to decline 40% in July.
And, on Wednesday, the U.S. State Department issued a new travel advisory for the city, urging increased caution due to the unrest.
IHG, the world's third largest hotel group, outperformed its industry peers in Greater China. But in Hong Kong specifically, revenue per average room — a key industry metric — dropped 0.4% in the first half of the year, in part due to the ongoing political uncertainty. That compares to a 5% gain in Macau, another Chinese territory across the river from Hong Kong.
IHG CFO Paul Edgecliffe-Johnson said last week the company is closely watching the situation, noting Hong Kong accounts for 15% of the company's total business in China.
Marriott International President and CEO Arne Sorenson, meanwhile, said that the Hong Kong market performed fairly well last quarter but was not as sanguine looking toward the second half of the year.
"Obviously, what's happening on the streets...is not a positive sign for travel into that market," Sorenson said on August 6. "I suspect that we'll see that Hong Kong weakens [in the current quarter]."
CFO Kathleen Oberg added that Marriott expects revenue per available room for the Asia-Pacific region to come in below forecasts in the second half of the year, citing "cautious corporate demand in China and continued political demonstrations in Hong Kong."
Hyatt executives have echoed those sentiments. CEO Mark Hoplamazian said on the company's earnings call on August 1 that they, too, expect to see a drop in hotel occupancies this quarter, owning to softened demand for Chinese leisure travel.
With more rounds of demonstrations slated for the rest of the month, other business leaders are bracing for further fallout from the violent clashes.
Disney, for instance, said visits to its Hong Kong park could suffer. Members of its Cast Members Union went on strike last week, disrupting rides.
"[These protests] are significant...and, while the impact isn't reflected in the results we just announced, you can expect that we will feel it in the quarter that we're currently in," Disney CEO Bob Iger said on the company's earnings call last week. "We'll see how long the protests go on, but there's definitely been a disruption. That has impacted our visitation there."
The financial sector is yet another industry feeling the pinch.
Ongoing protests have created more headaches for HSBC, which controls around 30% of the city's banking market. CEO John Flint recently stepped down after just 18 months on the job, and the bank is planning significant layoffs.
HSBC CFO Ewen Stevenson cautioned last week that further escalation could eat into the bank's profits.
"Do we expect some impact on the second half? Yeah, inevitably, it will be," Stevenson said on the company's earnings call on August 5. "If the current situation continues for a prolonged period of time, it will impact confidence."
Executives as U.S. investment banks are also contemplating next steps. including possibly allowing employees to work remotely. Citigroup, which boasts a headcount of 4,500 in Hong Kong, has temporarily closed certain branches over the past few months as a precautionary measure. Goldman Sachs, with 1,500 employees in Hong Kong, is also making contingency plans.
"This is dealing a very serious blow to Hong Kong's long-term competitiveness — as an international city, as a destination of choice for foreign financial services firms," Stephen Roach, Yale University senior fellow and former Morgan Stanley Asia chairman, said. "The government needs to take this latest escalation of tensions much more seriously."
— Reuters contributed to this report.