Last week, hours before the 23rd anniversary of China regaining sovereignty over Hong Kong, a sweeping national-security law went into effect giving China new powers in the semi-autonomous special administrative region (SAR). The “one country, two systems” approach in the 1997 handover agreement was supposed to allow Hong Kong, under the Basic Law (its mini-constitution), to continue its “way of life” – such as an independent judiciary, freedom of speech and the press, and a capitalist economic system – for 50 years (until 2047). The national security law, which seeks to quell anti-government unrest, overrides the territory’s self-governance and institutes controls similar to what is used in mainland China. It was passed by China’s parliament and put into effect by decree of Hong Kong’s Beijing-backed chief executive Carrie Lam, circumventing Hong Kong’s legislative process.

The law lays out 4 broadly defined categories of national-security offenses – secession, subversion, terrorism, and collusion with foreign actors. Under the law, which is to be interpreted by Beijing and would override any conflicting Hong Kong law, offending acts could include expressing support for protesters on social media, posting political slogans, waving flags with slogans, singing protest songs, possessing political pamphlets, and lobbying foreign governments, and be met with penalties of up to life in prison.

Even foreigners living outside Hong Kong are liable for offenses – including those committed outside the territory (such as speaking out online in support of Hong Kong democracy). Foreign news agencies and nongovernmental organizations will be more tightly managed. Officials have already removed books from the public library system and schools. Hongkongers are reportedly deleting social media accounts and asking websites to remove their writings. Suspected offenders can be wiretapped and surveilled, and there are bounties for people providing information on offenders. The government can monitor and control online activity (e.g. via requests to tech firms) and search electronics without a court order.

China has opened its own national security office in Hong Kong with its own officials, without answering to local jurisdiction. The new office will investigate cases, gather intelligence and oversee enforcement – policing “subversive activities” directly if needed. Cases may be tried by Hong Kong judges appointed by the Beijing-backed chief executive, or in mainland China, sometimes behind closed doors.

The new security law has received international blowback from foreign governments and businesses, threatening Hong Kong’s status as a global trading and finance center and re-export hub to China. The US (Hong Kong’s 2nd-biggest trade partner behind China) has announced intentions to rescind Hong Kong’s “special status” treatment, which has afforded it low or zero tariffs and exempted it from export controls. The US also suspended the export of sensitive technologies (e.g. chips) and dual-use technologies with both civilian and military applications (e.g. satellites, firearm sights) to Hong Kong. Australia, in turn, has suspended its extradition agreements with Hong Kong, while the UK has offered 3M Hong Kong residents with British National Overseas passports an expedited path to UK citizenship.

Big tech firms – including Twitter, Google, Facebook (WhatsApp), Telegram, Zoom, and Microsoft (LinkedIn) – have suspended compliance with requests for user data from Hong Kong authorities. TikTok pulled its app from Hong Kong altogether. (Apple is reviewing the law.) The Hong Kong government, however, has made it clear that noncompliance could result in jail time for employees.

Multinational businesses are concerned and some are reconsidering their presence in Hong Kong. In one poll by the American Chamber of Commerce, 40% of respondents would consider leaving Hong Kong in light of the new law. The international reach of the new law, as well as its controls over internet usage and data, may cause startups and other digital companies to look elsewhere. Some firms are already leaving or scaling back their presence, with commercial vacancy rates the highest they’ve been since the 2009 financial crisis. Singapore, Taiwan or Southeast Asia have risen to the top of the consideration set for those considering diversifying operations into other locations in the region.

Related Briefs:

Beyond Meat’s Founder and CEO Ethan Brown recently said the company’s plant-based burgers, now sold in 10-burger value packs for $14.99-15.99, were now price-competitive with about 20% of beef patties sold in US stores. While Beyond Meat is still maintaining a premium-priced position, it decided in Q2 2020 to price its products more aggressively to “make more inroads with the consumer” and take advantage of higher beef prices from recent supply-chain disruptions.

Beyond Meat, the world’s largest plant-based alt-meat producer, was able to cut prices in part due to surging sales in Q1 2020 after achieving profitability in late 2019. Its Q1 2020 net revenue was up 141% year-over-year ($97M), with healthy gross margins of 39% (as a point of reference, meat giant Tyson Foods had a 9.4% margin in its most recent quarter). While Beyond Meat’s US household penetration of 3.6% is still small, it represents an 80% increase over the prior year.

Achieving “meat parity” will be a key inflection point for alt-meat. Beyond Meat’s pricing strategy addresses what has been widely regarded as a major barrier to consumer adoption of alt-meat (now that its taste is largely considered comparable to traditional beef). According to its CEO, “[T]here’s no material obstacle to us being able to, over the long run, under-price animal protein.” Its long-term plan is to underprice animal-based beef within 3 to 4 years.

The market had already been taking notice of alt-meat’s potential. $930M of investment went into alt-meat companies (plant-based or lab-grown) in Q1 2020 alone, more than all of 2019 ($824M). Beyond Meat competitor Impossible Foods, which has been expanding as well, accounted for $500M of that funding. Traditional meat giants, including Tyson, Kellogg, Cargill, Nestlé and others, have also entered the space in droves.

Beyond Meat is ramping up activities to increase product availability and bring prices down even further with volume. It is expanding into Europe and Asia, and plans to sell directly to consumers through its website (using a fulfillment partner). Last month, the company launched its first European manufacturing plant (owned and operated by a partner) in the Netherlands. Beyond Meat separately announced it had acquired another plant in the Netherlands that, when operational at the end of 2020, will become the first facility outside of Missouri to handle its proprietary plant-protein texturizing process.

Beyond Meat is also expanding in China, the world’s largest meat market. It entered China in Apr 2020 through a partnership with Starbucks and later Yum China (e.g. KFC, Pizza Hut, Taco Bell). This was followed by a deal with Alibaba’s Hema “new retail” chain to bring its products to grocery shelves in 50 Shanghai locations initially, with potential for 200+ stores across China. It hopes to have production in China by the end of 2020.

The winner in the space is far from being decided – there is still an opportunity for established meat giants to catch up and leverage their economies of scale and reach. The stakes are high – UBS projects the $4.5B meat alternatives market will grow to become a $85B global market by 2030. The global market for meat, however, is $1.4 trillion. For now, consumers are the winners, with pricing coming down, quality and variety going up, and with better availability across international markets.

If the plant-based meat market takes off, we may see room for differentiated players to target different consumer preferences (e.g. non-GMO, gluten-free, plant-animal blends), with not all players selling to the same consumer. Nutritional improvements and new plant proteins will be among the next battlefronts, as well as emerging alt-meat categories such as lab-grown meat and pork, chicken and seafood substitutes.

Related Briefs:

Blackstone recently invested $800M+ for a 49% stake in a set of film-production facilities (3 studio lots and 5 neighboring office buildings in Hollywood, encompassing 2.2M square feet of real estate), in partnership with Hudson Pacific Properties. The studios count Netflix, Disney, and CBS – all major video-streaming players – as customers. The deal includes plans to build more studio sound stages using a million-plus square feet of development rights, and potential expansion to other film hubs (e.g. New York, London, Vancouver).

Blackstone, one of the world’s largest real-estate owners, prefers to invest in high-conviction themes and “sectors with strong tailwinds.” It believes that content production will see growing demand in an environment of constricted supply – particularly in expensive real-estate markets such as Los Angeles and New York where about half of studio space is already leased to production companies for terms of 3+ years. The sector also benefits from credit-worthy tenants such as Netflix and Disney.

Real estate with tech exposure – such as wireless towers and data centers – has lately been outperforming the market. Institutional investors are increasingly targeting the physical infrastructure underlying digital business models. Blackstone, for instance, has invested in film-production studios for streaming-content creation, industrial warehouses for ecommerce, wireless towers for connectivity, and life-sciences real estate. Blackstone also now has the benefit of advisory from Alphabet CFO Ruth Porat, who was recently added to its board of directors. Logistics has been Blackstone’s biggest theme, representing roughly one-third of its global real-estate portfolio in Q1 2020 (up from just 2% in 2010). It spent $25B on industrial properties in 2019, including a $19B deal to acquire 179M square feet of urban logistics properties to tap into the growth of ecommerce.

Similarly, JPMorgan in May 2020 established a joint venture with Chinese logistics real-estate investor New Ease to invest in logistics properties across China, with an initial $600M portfolio. Real-estate investor Colony Capital is taking a different tack, selling up to 90% of its $20B property portfolio of hotels and light-industrial real estate by 2021 to invest in network infrastructure (such as data centers, wireless towers, and fiber networks). Just this week, Colony announced a $3.5B partnership to invest in Vantage Data Centers’ portfolio.

In parallel, companies are selling off infrastructure assets to free up capital and invest in digital plays. For instance, Reliance Jio sold its tower assets to real-estate giant Brookfield for $3.7B as part of the restructuring in late 2019 that created the Jio Platforms pure-play digital subsidiary. Similarly, in Oct 2019, AT&T sold its remaining owned wireless towers in the US (1,000+ towers) for $680M in a sale-leaseback deal. More recently, the market has seen discussions circulating around Vodafone, Play Communications, Eir, Oi, and Telkom South Africa spinning off network infrastructure assets.

As COVID-19 closures and remote work threaten traditional commercial real-estate portfolios (e.g. office space, retail), mega-investors will continue to target digital-influenced opportunities. We can expect to see them amp up their prospecting for less obvious opportunities – their next set of high-conviction digital “themes” – and investing in the associated infrastructure. These might include ground equipment for satellite internet, industrial freezer and cooler space for online grocery, vehicle-to-infrastructure communications for autonomous vehicles, manufacturing locations in Southeast Asia, and other properties in emerging digital markets like India and Latin America.

Related Briefs: