Table of Contents
New World Development (0017.HK) is one of the major real estate developers in Hong Kong. In recent years, it has attracted attention due to changes in the market environment and adjustments in corporate strategies.
Financial Pressure and Asset Disposal
- High debt and rating risks: As of the end of 2023, the Group's net debt ratio is approximately 49%. Although lower than some of its peers, international rating agencies (such as Moody's) have placed its "Ba1" rating on the watch list, reflecting concerns about its liquidity and refinancing capabilities.
- Sale of non-core assets: Since 2023, the Group has accelerated the sale of non-core assets for cash, including the sale of Discovery Park Shopping Mall in Tsuen Wan, Hong Kong for approximately HK$2 billion and the exit from some joint venture projects in the Mainland. The goal is to dispose of another HK$8-10 billion of assets in the next year to optimize the debt structure.
Hong Kong property market downturn
– Double blow to the property market: Affected by the US interest rate hike and China's economic slowdown, Hong Kong's residential transaction volume fell by more than 30% year-on-year in 2023, and the office vacancy rate climbed to 16%, dragging down the rental income of commercial projects such as K11 under New World.
– Policy response: The Group adjusted its launch strategy, for example, selling the remaining units of “The Pavillion III” at a price lower than the second-hand price in the same area and offering high-ratio mortgages to attract buyers, reflecting the pressure to destock.
Strategic transformation and Greater Bay Area layout
– Shifting the focus of the mainland to the south: reducing investment in second-tier cities and concentrating resources on core cities in the Greater Bay Area such as Guangzhou and Shenzhen. For example, the operation of Guangzhou Chow Tai Fook Finance Centre (“East Tower”) faces the challenge of oversupply of commercial real estate in the mainland.
– Sustainable development investment: Accelerate the “Artisanal Movement” brand strategy, combine cultural and commercial real estate (such as the 11 SKIES project), and increase investment in new energy infrastructure in an attempt to balance the risks of the real estate cycle.
Capital market reaction
– Share price under pressure: The share price has fallen by more than 35% in 2023, underperforming the Hang Seng Real Estate Classification Index (a decline of approximately 25%). Although it rebounded with the market in 2024, its price-to-earnings ratio (about 6 times) was still lower than that of Cheung Kong Holdings (about 8 times), indicating that the market has doubts about the effectiveness of its transformation.
– Dividend adjustment: The interim dividend was reduced by 25% year-on-year, the first dividend reduction since 2016, which caused concerns among some long-term investors.
Management Changes and Governance Adjustments
– Third-generation succession underway: Adrian Cheng (Vice Chairman and CEO) further takes over day-to-day decision-making and leads digital transformation (such as the NWD Innovations platform), but the family holding structure (Chow Tai Fook Enterprises holds approximately 45%) may affect strategic flexibility.
Key facts at a glance
- Interim loss: expected loss attributable to shareholders from continuing operations of HK$6.6 billion to HK$6.8 billion (profit in the same period of FY2024)
- Core operating profit: HK$4.35 billion to HK$4.55 billion, down 15%-19% year-on-year
– Main reasons for the loss: impairment of development properties of HK$3.3-3.5 billion, fair value loss of investment properties of HK$1.4-1.6 billion
– Results release date: February 28, 2024
In-depth analysis of loss structure
1. The real estate sector is under double pressure
- Impairment of development properties (accounting for 50% of losses): Affected by the market downturn, the realisable value of the project was lower than expected, resulting in an asset impairment of HK$3.3-3.5 billion.
– Fair value decline in investment properties: fair value losses of joint venture projects increased to HK$1.4-1.6 billion year-on-year, reflecting valuation pressure on office and retail properties
2. Sharp decline in non-recurring income
– Fixed rate bond redemption proceeds plummeted to HK$15 million (the specific figure was not disclosed in the same period last year)
- Missing one-off gains: A reversal of fair value of investment properties of HK$1.257 billion was recorded in the same period last year
The resilience of core business is evident
Despite the book loss, the core operating profit excluding non-cash items still reached HK$4.35-4.55 billion:
– Calculation basis: Excluding non-operating factors such as fluctuations in investment property valuations, taxes, financial expenses, gains and losses from asset disposals, etc.
- Narrowing annual decline: down 15%-19% from the core profit in fiscal year 2023 (approximately HK$5.36 billion), showing the resilience of the main business
Market focus
1. Industrial environment linkage: The reduction reflects the continued adjustment of the Hong Kong real estate market. In 2023, the cumulative decline of residential buildings was 7%.
2. Interest rate sensitivity test: The impact of the Fed's interest rate hike cycle on the financing cost of Hong Kong dollar bonds
3. Progress of strategic transformation: Can K11 art commercial complex and northern metropolitan area plan support mid- to long-term valuation recovery?
Definition of professional terms
– Fair value loss: a book loss resulting from revaluing investment properties to market value, which does not directly affect cash flow
– Impairment losses: Losses incurred when the estimated sales price of a project is lower than the development cost
– Core operating profit: an indicator that reflects the cash generation ability of the main business, excluding non-recurring items such as valuation fluctuations
Outlook and Risk Points
– Opportunities: The removal of Hong Kong’s “tough measures” on residential properties may stimulate property transactions. The Group’s land bank costs are relatively low (mostly agricultural land conversions from earlier years). If interest rates peak, the profit outlook may improve.
– Challenges: The prolonged sales cycle of commercial real estate in the Mainland may delay the return on projects in the Greater Bay Area; the refinancing cost of US dollar bonds is high (about HK$15 billion of debt due in 2024), and we need to be vigilant against liquidity events.
It is recommended to pay close attention to its interim results for fiscal year 2024 (expected to be released in February 2024) and the sales progress of the Greater Bay Area projects. In the short term, the stock price may still be dominated by market sentiment and interest rate policies. For the latest data, please refer to the HKEX announcement or the real-time updates on the Bloomberg terminal.
Further reading:
- Sai Kung's top luxury building "Ao Long" has become the hardest hit area in the property market! 3-bedroom units suffer losses 30% reveals the dilemma of luxury homes. The trend of celebrities selling their shares to cash out hides three major warning signs
- New World Development is in debt crisis: net debt ratio may rise to 88%, can asset shuffling break the deadlock?
- Negative equity pain
