Shares of New World Development Co., Owned by Hong Kong’s Billionaire Cheng family, Drop by 14%

Shares of New World Development Co., owned by Hong Kong’s billionaire Cheng family, dropped as much as 14% on Monday morning due to a worsening property market downturn. The company revealed late Friday that it expects to report a loss of up to $2.6 billion for the financial year ending in June—marking its first annual loss in two decades.

The developer, led by 44-year-old CEO Adrian Cheng, has been contending with higher debt levels than its peers and a plummeting share price, intensifying pressure to navigate the firm through the challenging market conditions. The company attributed the expected losses to asset impairments, investment losses, and rising interest rates. A revaluation of its investment and development properties, including a goodwill assessment, is projected to result in a non-cash loss of between $1,09 billion and $1,22 billion, while core operating profit could decline by as much as 23%.

Additionally, the company’s 5.25% perpetual dollar bond fell 2.5 cents to 84.2 cents on the dollar on Monday morning, marking its biggest one-day drop since August 5.

In an email, New World stated that the writedown was a preemptive measure to prepare for an anticipated interest rate cut cycle, during which the overall property market is expected to recover.

The company has come under increased scrutiny over its high borrowing levels, with a net debt-to-equity ratio of 82.7% at the end of last year. This compares unfavorably to its competitors, with Henderson Land Development Co. at 41.4% and Sun Hung Kai Properties Ltd. at 21.2%.

New World’s financial challenges are part of a broader issue affecting developers in Hong Kong, where residential property prices have fallen to their lowest in eight years, and the office and retail sectors remain weak. This downturn has reduced rental incomes and the value of investment properties. Even the city’s premier office towers have suffered, with CK Asset Holdings Ltd.’s Cheung Kong Center losing a third of its rental value over the past four years.

The sluggish residential market also limits New World’s ability to generate income from apartment sales, forcing developers to offer discounts to attract buyers. In July, New World priced a new development in Kai Tak at the lowest level seen in the district since 2016.

Despite these difficulties, Adrian Cheng has intensified efforts to stabilize the company’s finances. In July and August, New World completed more than $2 billion in loan arrangements and debt repayments, including early refinancing of loans due in 2025. The company reports it has managed over $6,4 billion in debt arrangements and repayments this year.

To bolster its cash reserves, New World is also divesting lower-tier assets and announced in February plans to sell around $1 billion worth of non-core assets by the end of the fiscal year in June 2024.

The profit warning coincided with a series of executive changes at Chow Tai Fook Enterprises Ltd., the private investment arm of the Cheng family, bringing the family’s succession strategy back into focus. The Cheng family revealed that one of Adrian’s brothers had been appointed co-CEO at Chow Tai Fook Enterprises, overseeing the North Asia region. This development means that each of the four siblings now controls a key segment of the family’s diverse business empire.

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