(Bloomberg) — Shares of New World Development Co. fell as much as 14% Monday morning, as a slowdown in Hong Kong’s property market weighs on the company owned by billionaire Cheng’s family.
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The company said late Friday it expects to post a loss of up to HK$20 billion (US$2.6 billion) for the financial year ending in June – its first annual loss in two decades.
New World had higher debt levels than its peers and a falling share price — adding pressure on 44-year-old CEO Adrian Cheng, the third generation to run the company, to turn things around.
The company attributed the decline to asset impairments, losses on investments and higher interest rates. The company said the revaluation of the group’s investment and development properties, including the valuation of goodwill, would result in a non-cash loss of between HK$8.5 billion and HK$9.5 billion. Meanwhile, net operating profit is expected to fall by up to 23%.
New World’s 5.25% perpetual bonds fell 2.5 cents to 84.2 cents on the dollar on Monday morning, heading for their biggest daily decline since Aug. 5.
The massive writedowns “could raise leverage and hurt the developer’s plan to reduce debt,” said Patrick Wong, a real estate analyst at Bloomberg Intelligence. “It could also raise investor concerns about the potential risk of further downgrades of its investment properties, especially office buildings in Hong Kong.”
The company said in an email that the write-down was a preemptive move to position the company “for the upcoming rate cut cycle as the overall real estate market is expected to recover.”
The developer has been under scrutiny in recent years over its high level of borrowing. Its net debt-to-equity ratio stood at 82.7% at the end of last year, compared with 41.4% at rival Henderson Land Development and 21.2% at Sun Hong Kai Properties Ltd, according to BI.
New World’s delisting reflects a broader problem among property developers. Hong Kong’s housing prices have fallen to their lowest levels in eight years. The office and retail sectors remain weak, reducing rental income and therefore the value of investment properties for developers.
The city’s most prominent office towers have seen their value fall dramatically over the past few years. For example, CK Asset Holdings Ltd.’s landmark Cheung Kong Centre lost a third of its rental value over the four years to 2023.
The lackluster housing market also limits New World’s potential income from apartment sales. That puts pressure on developers to lower prices of their projects to attract buyers. New World in July priced a new project in the middle-class Kai Tak neighborhood at the lowest level for the area since 2016.
Despite the headwinds, Cheng has stepped up efforts to improve the company’s financial position. The company recently completed more than HK$16 billion in loan and debt repayment arrangements 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 in loan and debt repayment arrangements this year.
New World is also selling lower-tier assets to raise cash, and said in February it planned to shed HK$8 billion of non-core assets in the financial year ending June 2024.
New World’s profit warning coincided with executive appointments made the same night at the Cheng family’s private equity firm, putting the family’s succession plan back in the spotlight. The clan announced that one of Adrian’s brothers had been appointed co-chief executive officer of Chow Tai Fook Enterprises Ltd, taking charge of the North Asia region for the family’s vastly wealthy investment firm. That means four siblings now control a major part of the family business.
–With assistance from Shirley Chow, Loretta Chen, and Shekhar Balwani.
(Updates to bond prices in paragraph 5)
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