Hong Kong property pain gets worse for New World and Scion CEO

(Bloomberg) — Shares of New World Development Co. were down as much as 14% on Monday morning as a slump in Hong Kong property weighed on the firm owned by the billionaire Cheng family.

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

New World has faced higher debt levels than its peers and a falling share price – adding to the pressure on chief executive Adrian Cheng, 44, the third generation to run the business, to turn things around.

The developer cited asset depreciation, investment losses and higher interest rates for the decline. A revaluation of the group’s investment and development properties, including a valuation of goodwill, will result in a non-cash loss of $8.5 billion to $9.5 billion, the company said. Meanwhile, core operating profit is expected to fall by as much as 23%.

New World’s 5.25% perpetual bond was down 2.5 cents at 84.2 cents on the dollar on Monday morning, set for its biggest daily drop since Aug. 5.

Large declines in assets “could increase leverage and affect the developer’s deleveraging plan,” said Patrick Wong, real estate analyst at Bloomberg Intelligence. “This could also raise investor concerns about the potential risk of further declines in the valuation of its investment properties, particularly office buildings in Hong Kong.”

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

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

The decline in New World reflects a wider problem among developers. Residential prices in Hong Kong have fallen to an eight-year low. The office and retail sectors remain weak, reducing rental income and therefore the value of developers’ investment properties.

The city’s most prestigious office towers have seen a significant drop in value over the past few years. CK Asset Holdings Ltd.’s landmark Cheung Kong, for example, lost a third of its rental value in the four years ending 2023.

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The weak residential market also limits New World’s potential revenue from apartment sales. Developers are under pressure to scale back their projects to attract buyers. New World established a new project in the middle-class Kai Tak neighborhood in July at the cheapest level for the district since 2016.

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

New World is also offloading lower-tier assets to raise cash and said in February it planned to divest HK$8 billion of non-core assets for the fiscal year ending June 2024.

New World’s profit warning coincided with executive appointments the same night at the Cheng family’s private investment vehicle, again putting the family’s succession plan in the spotlight. The clan announced that one of Adrian’s brothers has been named co-CEO of Chow Tai Fook Enterprises Ltd., taking over the North Asia region for the family’s deep-pocketed investment firm. That means four of the brothers now each control a key part of the family business.

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

(Updates with bond prices in fifth paragraph)

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