New World Development Co., one of Hong Kong's major property developers, is bracing for an unprecedented financial downturn, forecasting a net loss of up to HK$20 billion ($2.6 billion) for the fiscal year ending June 2024. This projected loss marks the company's first annual deficit in two decades and has led to a sharp 13% decline in its share price, hitting its lowest level since 1986, according to Bloomberg data.
The developer, led by CEO Adrian Cheng, is grappling with a significant asset writedown and deteriorating market conditions. The substantial impairment losses, estimated between HK$8.5 billion and HK$9.5 billion, are attributed to a revaluation of the company's investment and development properties, including a goodwill assessment. This revaluation is driven by a combination of factors including higher interest rates, asset impairment, and recent losses on investments.
"The writedown reflects our proactive approach to positioning the company for the upcoming interest rate cut cycle and a rebound in the property market," said New World in a statement. Despite the severity of the write-down, the company argues that these are non-cash, unrealized losses that do not impact its cash flow directly.
The financial strain is exacerbated by New World's high debt levels. With a net debt-to-equity ratio of 82.7% at the end of last year, the company is under greater pressure compared to its peers such as Henderson Land Development Co., which reported a ratio of 41.4%, and Sun Hung Kai Properties Ltd., at 21.2%. This financial leverage is a critical concern, particularly as the company struggles with plummeting residential property prices and weak demand in the office and retail sectors.
The Hong Kong real estate market has seen significant declines, with residential prices dropping to an eight-year low. The commercial sector is also under strain, with prestigious office buildings like CK Asset Holdings Ltd.'s Cheung Kong Center losing a third of their rental value over the past four years. This broader market weakness is reflected in New World's financial difficulties, as rental income from its investment properties dwindles.
To address its financial challenges, New World is offloading lower-tier assets and has recently completed over HK$16 billion in loan arrangements and debt repayments. The company has also initiated plans to sell HK$8 billion worth of non-core assets by the end of the fiscal year. Despite these efforts, analysts remain cautious. Sam Wong, an equity analyst at Jefferies LLC, notes that New World's situation is "severe," emphasizing the need for asset sales and more realistic pricing strategies.
Shares in New World dropped to HK$6.83 on Monday, marking a 21-year low and reflecting broader concerns about the company's financial health. Analysts at JPMorgan highlight that while the reported loss is significant, the core concern should be New World's balance sheet and refinancing capabilities. The investment bank points out that despite the loss, the company's core net loss might be between HK$2 billion and HK$3 billion when excluding non-cash items.
Goldman Sachs, however, has expressed concern that the anticipated loss could increase New World's net gearing ratio by 1.5 percentage points, potentially impacting its ability to pay dividends. The bank has given the developer a "sell" rating, indicating risks associated with the company's financial stability.
The timing of New World's loss announcement coincides with a reshuffle in the Cheng family's private investment vehicle. One of Adrian Cheng's brothers was recently appointed co-CEO of Chow Tai Fook Enterprises Ltd., managing the North Asia region. This move has intensified scrutiny of the Cheng family's succession plan and its impact on the broader business strategy.
