Hong Kong Property Pain Worsens for New World and Scion CEO

(Bloomberg) — New World Development Co.’s shares fell as much as 14% Monday morning, as Hong Kong’s property downturn weighs on the firm owned by the billionaire Cheng family.

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The company said late on Friday it expects to post a loss of as much as HK$20 billion ($2.6 billion) for the financial year ended in June — its first annual loss in two decades.

New World has been grappling with higher debt levels than its peers and a plunging share price — adding pressure on 44-year-old Chief Executive Officer Adrian Cheng, the third generation to run the business, to turn things around.

The developer cited asset impairment, losses on investments and higher interest rates for the decline. A revaluation of the group’s investment and development properties including a goodwill assessment will lead to a non-cash loss of HK$8.5 billion to HK$9.5 billion, the company said. Meanwhile, core operating profit is expected to drop as much as 23%.

New World’s 5.25% perpetual dollar bond fell 2.5 cents to 84.2 cents on the dollar Monday morning, set for the largest daily decline since Aug. 5.

The sizable asset writedowns “could raise its leverage ratio and hurt the developer’s deleveraging plan,” said Patrick Wong, a real estate analyst at Bloomberg Intelligence. “This could also raise investors’ concerns about potential risk of further valuation decline of its investment properties particularly Hong Kong office buildings.”

The company said in an email that the writedown was a proactive move to position the company “for the upcoming interest rate cut cycle where the overall property market is expected to rebound.”

The developer has been under scrutiny in recent years over its high level of borrowings. Net debt to equity was 82.7% as of the end of last year, compared with 41.4% at rival Henderson Land Development Co. and 21.2% at Sun Hung Kai Properties Ltd., according to BI.

New World’s writedown reflects a broader problem among developers. Hong Kong’s residential prices have plummeted to an eight-year low. Office and retail sectors remain weak, reducing rental income and hence the value of developers’ investment properties.

The city’s most prestigious office towers have seen value decline significantly in the past few years. CK Asset Holdings Ltd.’s landmark Cheung Kong Center, for instance, lost one-third of its rental value over the four years ending in 2023.

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The lackluster residential market also limits New World’s potential income from selling apartments. It’s putting pressure on developers to discount their projects in order to lure buyers. New World priced a new project in the middle-class neighborhood of Kai Tak In July at the cheapest level for the district since 2016.

Despite the headwinds, Cheng has been ramping up efforts to improve the firm’s financial situation. The company recently completed more than HK$16 billion in loan arrangements and debt repayments in July and August, including early refinancing of some loans due in 2025. The company said in the email that it has completed more than HK$50 billion of debt arrangements and repayments this year.

New World is also offloading lower-tier assets to raise cash, and said in February it was planning to dispose HK$8 billion of non-core assets for the fiscal year ended in June 2024.

New World’s profit warning coincided with executive appointments on the same night at the Chengs’ private investment vehicle, putting the family’s succession plan back into the spotlight. The clan announced that one of Adrian’s brothers had been appointed as co-CEO at Chow Tai Fook Enterprises Ltd., taking charge of the North Asia region for the family’s deep-pocketed investment firm. That means four of the siblings now each effectively controls a key part of the family business.

–With assistance from Shirley Zhao, Lorretta Chen and Shikhar Balwani.

(Updates with bond prices in the fifth paragraph)

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