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Business trends

Hong Kong service sector hammered by coronavirus

Financial fallout spreads across wide range of businesses, from railways to retail

TOKYO -- The economic damage from the coronavirus pandemic has reached Hong Kong's all-important service sector, as businesses from railways to retailers report the ill effects of the contagion.

Guangshen Railway, which operates train service between Hong Kong and mainland China, is expecting to record a net loss of between 450 million yuan and 550 million yuan ($63.6 million and $77.7 million) for the first three months of the year. The company, which has run the 173-km through-train service connecting Kowloon and Guangzhou for almost a century and is listed in both Hong Kong and Shanghai, made 390.3 million yuan in profit for the same period last year.

Guangshen's board said in a filing last week that it expects a "significant decrease" in revenue due to the virus. The company was directly hit as the Hong Kong government suspended service from Hung Hom Station, the territory's terminal, subsequently halting Canton-Kowloon trains from Jan 30. The additional measure less than a week later by the local government to shut down the main border of Lo Wu, brought "significant reduction in the volume of passengers" travelling to Hong Kong on its Guangzhou-Shenzhen Intercity Express Trains.

The lockdown of Wuhan, which lasted over two months until the end of March, also took a toll as the company's long-distance passenger services to the city were suspended. The train operator also blamed self-quarantining in other mainland cities, which slashed demand for long-distance passenger services connecting other destinations in mainland China.

The train operator was able to weather ongoing anti-China protests in Hong Kong since last summer, which cut visits from the mainland, by enhancing freight services. While passenger numbers fell by 4.7% to 85.13 million people last year, revenues rose 6.8% to 21.17 billion yuan. Operating profits rose 1% to 1.07 billion yuan, although increased finance costs meant annual net profit fell 4.5% to 748 million yuan. The virus, however, dragged the company into the red.

Hong Kong's aviation industry continues to suffer as flagship carrier Cathay Pacific Airways revealed on Thursday that it and subsidiary Cathay Dragon only carried 311,128 passengers in March -- down 90% from the year before. The passenger load factor for the month was 49.3%, a 34.6-point plunge.

"We saw significant declines across all traffic types," said chief customer and commercial officer Ronald Lam. Demand dropped "rapidly and tremendously" especially after the Hong Kong government banned all non-resident visitors, including transit passengers, in late March.

And there is no recovery in sight. The airline is operating a "bare-bones passenger flight schedule" in April and May, running at only 3% of normal capacity. Cathay, which is one of the largest airlines in the region and carried over 100,000 daily passengers in the pre-virus period, had only 302 passengers on one day in mid-April.

"As the economic impact of the global COVID-19 pandemic is intensifying, a recovery timeline in our customer demand remains impossible to predict," Lam said. "We still do not see an improvement in our advance passenger bookings."

Adding to its woes was low-cost subsidiary Hong Kong Express, which extended suspension of service to June 18. The airline grounded its entire fleet on March 23 with plans to resume flights on May 1, but scrapped the arrangement "in response to the latest development of the COVID-19 pandemic and travel restrictions imposed by governments around Asia Pacific," the Cathay unit said in a statement.

The territory's retail businesses are being hammered as the virtual lockdown continues.

Sa Sa International Holdings, a major cosmetic products chain store, said last week that revenue for the January-March quarter dropped 56.5% to 892.4 million Hong Kong dollars ($115.1 million). Its Hong Kong and Macau operations, which account for over 70% of total revenue, dropped 62.0% during the period, hit by a 80.8% decline in transactions by mainland tourists.

The Hong Kong-listed company has closed nine stores since October to save on rent, but Chairman and CEO Simon Kwok Siu-ming said in a filing that the group would "continue to downsize its store network in Hong Kong," while negotiating short-term rental concessions with landlords, reducing salaries and cutting inventory to preserve cash. As the customer mix shifted to more local Hong Kongers than mainlanders, the company is adjusting the product mix as well, meeting new demand for protective and pandemic-related products.

The jewelry sector, which is mainly dependent on mainland Chinese shoppers, has also been hit hard. Luk Fook Holdings International disclosed on Thursday that in the first three months of the year, same-store sales dropped 57%. Its Hong Kong and Macau operations fell 60% compared to a year ago, with gold and gem-set jewelry diving 53% and 67%, respectively.

Similar to Sa Sa, the jewelry chain has been cutting costs, including furloughing staff with no pay, negotiating rental reductions with landlords, and squeezing inventory.

Fashion retailer I.T is expecting over HK$300 million in net loss for the fiscal year ending February, a reversal from HK$442.599 million in profit a year before. On top of the social unrest since last summer, the virus outbreak "further aggravated the already difficult operational environment," Chairman Sham Kar Wai said in a statement. "We expect our business will continue to face strong headwinds ahead."

Responding to the ever-worsening situation, the finance committee of the Hong Kong legislature on Saturday passed the second round of an anti-epidemic fund and various relief measures, bringing the local government's commitment to HK$287.5 billion, or 10% of the territory's GDP.

"Given the epidemic's unprecedented impact on Hong Kong's economy, the government has to dig deep into its fiscal reserves accumulated over the years to help our businesses and people," said chief executive Carrie Lam.

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