B12| Friday, August 9, 2019 THE WALL STREET JOURNAL.
Hong Kong Needs Urgent Action
Festering economic problems and political stalemate threaten the city’s status as a global financial powerhouse
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FINANCIAL ANALYSIS & COMMENTARY
Hong Kong is the freest economy in the world, but by some measures its society is among the most unequal.EDUARDO LEAL/BLOOMBERG NEWSZillowChief Executive Rich Bar-
ton doesn’t think small. In a confer-
ence call for investors Wednesday,
he likened the company’s disruption
of the real-estate industry to land-
ing the first man on the moon.
Zillow is still grounded, though.
The real-estate giant delivered a
mixed second-quarter update, send-
ing its stock tumbling. Revenue for
its new Homes segment edged past
Wall Street’s estimates, while Pre-
mier Agent and Mortgage revenue
arrived in line with expectations.
Guidance for the third quarter
was disconcerting, with losses in
the Homes business expected to ac-
celerate. The forecast for the Inter-
net, Media & Technology segment,
which includes the legacy Premier
Agent business, also was tepid.
Zillow said in February that it
was shifting its business model to
buying and selling homes. Zillow’s
stock was up 64% as of Wednes-
day’s close, reflecting investors’ en-
thusiasm about the company’s pros-
pects in the automated iBuying
process, but shares were down
more than 15% on Thursday. Con-
cerns over the path to profitability
have grown. While Zillow said it ex-
pects to earn 4 to 5 percentage
points before interest expense per
home on iBuying, Wednesday’s
news that losses would grow raised
doubts.
There are other concerns, too:
Agent churn within Zillow’s Premier
Agent business has been unsettling,
although the company said Wednes-
day that advertiser retention has
stabilized. Zillow has been introduc-
ing a new monetization model for
the business in select markets,
where agents pay only once a trans-
action has closed on leads gener-
ated through Zillow rather than on
upfront impressions. While this may
draw and retain more agents, Zillow
said the deferred revenue will
weigh on near-term profit.
Zillow has high hopes for a meta-
morphosis, including rapid growth
not only in actual home transac-
tions but in adjacent services like
mortgage origination, title and es-
crow. And while the iBuying oppor-
tunity is undeniably massive—just
1% of market transactions today
would translate to a $20 billion
business, according to Zillow—com-
petition is fierce.
Investors will need to see more
stability before they are over the
moon. —Laura FormanHong Kong is in the midst of its
worst political violence since the
semiautonomous city’s handover
to China in 1997. Defusing the cri-
sis—and maintaining Hong Kong’s
status as a global financial power-
house and conduit for capital into
China—requires urgent action not
only on grievances including police
accountability and stalled electoral
reforms but also on deep, festering
problems with the city’s economic
model.
That means curbing the power
of Hong Kong’s property tycoons
and monopolies; finding a govern-
ment-revenue model that doesn’t
depend on sky-high property
prices; and spending far more
state resources on public housing
and public assistance immediately.
By some measures, Hong Kong is
already among the most unequal
societies in the world.
Most of Hong Kong’s most ur-
gent economic problems relate to
land. Median income growth has
been modest over the past decade,
but residential property prices
nearly doubled in real terms from
2010 to 2018, according to the
Bank for International Settlements.
That far outpaces increases even
in other notoriously bubbly mar-
kets such as Canada, where prices
are up about 40%. Hong Kongers
live in tinier apartments and pay
more for them than nearly any-
where else.
Part of the issue is Hong Kong’s
hilly geography, which means new
space for building is limited. But
an arguably much bigger problem
is the vested interests of the gov-
ernment and big property develop-
ers in keeping prices high.
Hong Kong’s low tax rate and
big fiscal surplus—the government
over the past three years earned
on average close to 20% more than
it spent—is in fact funded largely
by government land sales, which
were 27% of total revenues in fis-
cal year 2017-18.
To make matters worse, the
proceeds of land sales go into the
Capital Works Reserve Fund,
which is slated for infrastructure
development. Hong Kong already
has exemplary infrastructure. Resi-
dents watch in frustration as theauthorities splurge on Beijing-
backed political white-elephant
projects like the multibillion-dollar
sea bridge to Macau and high-
speed rail link to Shenzhen, all
while they can’t afford basic hous-
ing.
High property prices also make
it hard to start small businesses—
particularly since antimonopoly
enforcement already is weak. Hong
Kong, unlike most of its global
peers, didn’t even have a compre-
hensive competition law in sub-
stantive effect until 2015. That has
enabled property tycoons to fortifyCritics say land supply could be
boosted much more rapidly and
cheaply by redeveloping existing
brownfield commercial and agri-
cultural sites as housing.
Mainland China’s political model
works to the extent it does be-
cause citizens sacrifice a direct say
in their future with the under-
standing that things will continue
to improve.
Denying people a say while si-
multaneously offering no real hope
that things can improve is a far
tougher sell.
—Nathaniel Taplintheir empires with near-monopo-
lies in areas such as utilities,
transport and grocery stores, rais-
ing prices and stifling growth.
The government’s main solution
to exorbitant property prices is
the Lantau Tomorrow Vision, a
proposed land-reclamation project
near the territory’s largest island
with an estimated cost of about
$80 billion. New apartments, how-
ever, wouldn’t be available until
the early 2030s—meaning a whole
generation of young people could
essentially remain priced out of
the market even if the plan works.Zillow’s
Path to
Profit
Gets Murky
Uber Struggles to Maintain Its Speed
Too fast, too furious days may be ending as results indicate intense competition hasn’t flagged
Ubermay be losing some speed,
but there is plenty of power under
its hood.
The ride-hailing giant reported
mixed second-quarter results amid
stiff competition. On the bright
side, gross bookings of $15.8 billion
were in line with analysts’ esti-
mates, while monthly active con-
sumers and trips beat them.
Uber said total adjusted revenue
in the quarter was affected by
roughly $300 million in driver ap-
preciation awards associated with
its initial public offering, without
which revenue would have been
largely as expected. Similarly, strip-
ping out “excess driver incentives
and referrals,” core platform
revenue of roughly $3 billion
topped estimates.
Using Uber’s profitability metric
for adjusted earnings before inter-
est, taxes, depreciation and amorti-
zation, losses appeared to moderate
compared with the first quarter.
Still, a quarterly operating loss of
nearly $5.5 billion was its largest
ever. And while that includes ex-
penses related to its offering, it also
reflects intense competition. That is
all the more disappointing to inves-
tors after the company suggested in
the first quarter that promotions
and aggressive pricing by ride-hail-
ing competitors could ease.
In a conference call on Thursday,
Chief Executive Dara Khosrowshahi
said he is seeing improvement in
the competitive environment. Ad-
justed net revenue as a percentage
of bookings may offer a more re-vealing lens into how Uber is faring:
This yields a core platform “take
rate” of 18.2% for the second quar-
ter, in line with analysts’ expecta-
tions. But embedded in that calcula-
tion is a ride-share take rate of 19%,
down slightly from that of the first
quarter. And while Uber Eats’ take
rate improved 2 percentage points
sequentially, Uber attributed that
improvement to new delivery fees.In other words, Uber lost a lot of
money before complicated adjust-
ments and competition remains
intense.
Uber’s shares are up just 3% from
the closing price of its first day of
trading back in May. Investors
shouldn’t rule out a significant im-
provement in business economics,
though, much likeLyftdemon-
strated on Wednesday.
It may do better than that. While
Uber has multiple competitive mar-
ketplaces to juggle, its strategy of
leveraging the novelty of Uber Eats
to bring new riders to its legacy
platform appears to be working.
The company said that 40% of new
Eats consumers in the quarter had
never used Uber’s platform. More-
over, Lyft’s $417 million in cash and
cash equivalents looks like chump
change compared with Uber’s
$11.7 billion.
The good news, then, is that
Uber may ease off the gas but can
always throw more money at the
problem whenever Lyft’s
headlights get too bright in the
rearview mirror.
—Laura FormanOVERHEARD
The owner of the golden
arches tries to cultivate a
wholesome image—not just in
its home country but abroad
as well. An attempt to do that
at McDonald’s in Japan has
failed spectacularly, but it has
been a commercial success,
proving once again that “sex
sells.”
Its summer-themed McFizz
drinks come in glasses portray-
ing young couples in innocent
courtship. But tilting the
glasses in certain ways por-
trays them as going well past
that stage in several images
posted on social media. The
poses are too racy to describe
in a PG-rated newspaper. As
English-language Japanese cul-
ture website GaijinPot puts it,
though: “The whole thing
brings a new meaning to the
slogan, ‘I’m lovin’ it.’ ”
Luckily for McDonald’s, the
Japanese have a sense of hu-
mor. The glasses “are becom-
ing a prized collectible,” Gaijin-
Pot reports.Who Moved Kraft Heinz’s Cheese?
The best thing that can be said
aboutKraft Heinz’s results is that
it was only the second-worst day
of 2019 for the sprawling food
company—so far, at least.
Kraft Heinz Co. shares fell
nearly 9% after the company an-
nounced it had suffered a 5% sales
drop in the first half of the year
from a year earlier and that it took
$1.22 billion in impairment
charges. Back in February it re-
vealed a $15.4 billion write-down
in the value of its Oscar Mayer and
Kraft brands, sending the stock
crashing by 27%. The
shares touched an all-time
low Thursday.
It seems quaint that food com-
panies thought to be in Kraft
Heinz’s crosshairs—or those of
Brazilian private equity company
3G, which teamed up with Warren
Buffett’sBerkshire Hathawayto
take control of the company—used
to rise on acquisition hopes. 3G’s
radical cost-cutting model now
looks discredited.
While the packaged-foods busi-
ness remains severely challenged
by secular trends such as changing
tastes, aggressive pricing by su-permarkets and the rise of store
brands, those that have invested,
such asConagra, have fared
better.
Kraft Heinz Chief Executive Mi-
guel Patricio diagnosed what he
said were some opportunities for
targeted spending and marketing,
but his tone was one of exaspera-tion rather than optimism.
“Our brands are icons. It’s our
job to ensure they are living
icons,” he said.
Those icons seem unlikely to
come close to recapturing the
widespread appeal they once had.
In many consumers’ minds there is
little difference between Kraft Sin-
gles American cheese and private-
label brands, for example.
There is no guarantee that in-
creased ad spending will rekindle
consumer preferences for Kraft
Heinz’s brands. Yet the alternative
approach of lowering prices to re-
capture market share not only
risks creating margin pressures
but exposes the company to
swings in commodity prices, espe-
cially in its cheese and meat
categories.
That the company is facing
these problems when consumers in
the U.S., where it generates over
two-thirds of its sales, are doing
well only underscores the straits it
is in. One hesitates to think of
what might happen if the Ameri-
can economy weakens.
—Justin Lahart
and Spencer JakabShare-priceperformance,
yeartodateSource: FactSet60–40–2002040%2019ConagraBrandsKraftHeinzNew delivery fees helped improve a performance metric for Uber Eats.ERIC HERCHAFT/ZUMA PRESS