Hong Kong SME business index up for the second quarter in a row

Sales Amount Sub-Index exceeds the 50.0 no-change mark for the first time.

The “Standard Chartered Hong Kong SME Leading Business Index” (Standard Chartered SME Index) continues to improve with the Overall Index rising for the second consecutive quarter, reading 49.5 for the first quarter of 2013. Releasing the figures today (10 January 2013), the Hong Kong Productivity Council (HKPC) notes that the mild increase of 3.2 points has pushed the Index closer to the 50.0 no-change mark. This indicates a brightening business outlook for local SMEs. Among all sectors, the business outlook for retailers is more optimistic with the Sub-Index reaching 51.9. However, over 50% of SMEs expect rising rents to prevail.

The survey is sponsored by Standard Chartered Bank (Hong Kong) Limited (Standard Chartered Hong Kong), which features an Overall Index comprising five Sub-Indices. For the first time, the Sales Amount Sub-Index exceeds the 50.0 no-change mark, registering 50.7 (up 5 points from the last quarter); which indicates improving business sentiments. For the third consecutive quarter, both the Investments Sub-Index and Staff Number Sub-Index are above 50.0. The Investments Sub-Index is registered at 54.9 (up 3.6), revealing more investment plans are in the pipeline. To increase production capacity and raw materials inventory, as well as the set up of new offices, factories and retail stores are the three major areas of investments cited.
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The Staff Number Sub-Index increases slightly to 51.9, indicating optimism in this aspect. Although SMEs are positive about their sales, the Profit Margin Sub-Index is still below 50.0 in anticipation of looming rise in operation costs. Despite that the Global Economic Growth Sub-Index is also below 50.0, a significant increase is noted.

For Industry Sub-Indices, both manufacturing (48.5) and the import/export trade and wholesale (48.6) industries show improvement, though their overall business outlook remains pessimistic for this quarter. Retailers hold a brighter view, however, with the Retail Industry Sub-Index reaching 51.9, the first time above 50.0.

Commenting on the findings, Mr Leo Lam, Director (Business Innovation) of HKPC, said, “Manufacturing SMEs expressed rising confidence in sales and global economic growth as the level of inventory has dropped significantly in the last quarter. New orders are expected for stock replenishment. SME retailers are positive about the business outlook with the Sub-Index rising to 51.9, which goes beyond the 50.0 no-change mark for the first time. In fact the single-digit sales growth in last October and November has surprised most retailers who would have expected a poor performance over the same period in 2011. Now they are looking forward to a better quarter as the coming Lunar New Year holiday will be another booming season.”

In terms of the major cost components, the ratio of direct materials cost and cost of goods sold to the overall costs maintains at 29%. The ratio of employee salary expense is expected to increase slightly, mainly driven by the modest annual salary increment. This is not expected to pose pressure to SMEs. The impact of the rise in minimum wage is yet to see when it takes effect in May. The ratio of rental expenses has also increased slightly, while over 50% of respondents expect rising rents in this quarter. Rent constitutes 30% of the total cost for the retail sector, up 4 percentage points against the last survey, which is the highest among the three sectors.

Mr Kelvin Lau, Senior Economist of Standard Chartered Hong Kong, said, “The improvement in the SME Index matches the recent rise in market confidence that the global economic cycle is turning up. We believe better growth is indeed ahead of us, but not without risks, like the US debt ceiling and a still fragile European economy. A gradual recovery in growth this year will mean that inflation pressure is likely to stay evident. Across the border, we see China achieving 7.85% growth this year, and the RMB appreciating by around 2% against the USD.”

This survey has also gauged SMEs’ views on their expectations of the 2013-14 Policy Address. While 25% respondents welcome tax relief from the Government, 20% look forward to more effective measures to rein the property market/rents as rising rent is a major challenge for SMEs. Another 17% are seeking support from the Government in securing financing and loan guarantee. On the issue of minimum wage and standard working hours, SMEs do not consider them a major problem for the time being.

Mr Lam added, “HKPC has set up SME One, which serves as a one-stop support platform to facilitate SMEs to understand various SME funding schemes offered by Hong Kong and mainland government organizations, as well as financing solutions available on the market. We will continue to step up our services and organize more programmes to assist SMEs in facing challenges.”

In this survey, HKPC has conducted telephone interviews with 810 SMEs in eight industry sectors during December 2012. To download a report of the “Standard Chartered Hong Kong SME Leading Business Index”, please visit the website: www.smeone.org. Results of the next survey will be released in April 2013.