New World Development - CEO change following record loss
- FY24 net losses reached HKD19.7bn, in line with profit warning
- Final dividend has been omitted
- Eric Ma appointed as new CEO, reflecting parent’s continued support on the company
- Rate cut beneficiary, Maintain BUY with HKD12.32 TP
Final dividend omitted. Given the record net loss, the company has decided not to pay a final dividend. Full-year DPS therefore amounted to HKD0.20, down 91% y/y.
Appointment of new CEO. Dr. Adrian Cheng has tendered his resignation to cease his role as the Chief Executive Officer of NWD with effect from 26 September 2024. His has also been re-designated as a Non-executive Director and Non-executive Vice-chairman of the company, and ceased to serve as a member of the Executive Committee as well as chairman and a member of the Sustainability Committee of the company. Meanwhile, Mr. Eric Ma, previously the company’s Chief Operating Officer, has been appointed as the new Chief Executive Officer and a member and the Chairman of the Sustainability Committee for a fixed term of three years. Prior to his appointment as Chief Operating Officer in Jan-24, Mr. Ma was an Executive Director and Chief Executive Officer of NWS Holdings Limited which is currently majority-owned by Chow Tai Fook Enterprises. He also served the Hong Kong government as the Secretary for Development from Feb-17 until the expiry of his term in Jun-17 and joined China Resources (Holdings) as a Non-executive director in 2022. We believe such a move is positive to share price as this reflects the parent’s commitment and support to resolve challenges facing this debt-ridden company.
Lower development profit on sharply reduced contributions from Hong Kong projects Segment profit from property development fell 34% y/y to HKD5.8bn as contributions from Hong Kong, which stemmed primarily from the sale of Mount Pavilia, The Masterpiece and 888 Lai Chi Kok Road, tumbled 85% to y/y HKD499m. On the other hand, China projects contributed HKD5.3bn, largely the same as in FY23. Key projects booked included Hangzhou River Opus, Guangzhou Park Paradise and Shenyang New World Garden.
Strong net order book in China and Hong Kong. In FY24, contracted sales from China reached Rmb12.5bn, of which about 85% came from the Greater Bay Area and Yangtze River Region. In the same period, New World sold HKD1.5bn worth of properties in Hong Kong. Key contributors included Uptown East, The Knightsbridge and 888 Lai Chi Kok Road. In China, unrecognised gross revenue from contracted sales of properties amounted to Rmb16.3bn, which would be booked in FY25 and FY26. In Hong Kong, unbooked attributable income of the company’s contracted sales of HKD11.2bn is expected to be recognised in FY25 and FY26, respectively.
The Pavilia Forest on sale. Since its initial launch in Jul-24, New World Development has sold 330 units at The Pavilia Forest, a 50/50 JV with Far East Consortium, for HKD2.3bn. Initial market response has been satisfactory. The Pavilia Forest will provide 1,305 units. Given high development costs, this development is unlikely to produce any profit. In 2025, the company also plans to offer Wong Chuk Hang Station Package 5, 8 Castle Road and the State Theatre projects for pre-sale. In FY25, contracted sales targets in Hong Kong and China are HKD6bn and Rmb11bn respectively.
Expanding rental income base. Segmental profit from property investment was 9% higher at HKD3.5bn in FY24. Contributions from its Hong Kong rental portfolio grew 12% to HKD2.5bn. The growth was led by K11 Musea and K11 Art Mall, which registered strong tenant sales growth of 17% and 16%, respectively. Occupancy at K11 Musea and K11 Art Mall stayed high at 97% and 99% respectively. About 40% of 83 King Lam Street in Cheung Sha Wan has been pre-leased and occupied. This newly completed Grade A office building should provide fresh contributions to the company in FY25. The first phase of entertainment portions of 11 Skies near the Hong Kong International Airport (HKIA) and Hong Kong-Zhuhai-Macau Bridge will open in phases from 2Q25. This will be followed by retail, dining and professional services portions which are scheduled to open in phases starting from 4Q25, subject to the development schedule of the HKIA and SKYCITY complex project. In China, rental portfolio saw 3% growth in segmental profit to HKD955m in FY24. Scheduled to open from late 2024, K11 ECOAST in Shenzhen has achieved pre-leasing rate of >50%.
Partnering with China SOEs to unlock farmland value. New World is co-operating with SOEs such as China Resources Land and China Merchant Shezhou Holdings to develop residential projects in the Northern Metropolis. These strategic co-operation initiatives allow New World to unlock the hidden value of its farmland there without stretching its balance sheet further. As Jun-24, New World owns agricultural land of 15.84msf in terms of attributable land area, of which about 90% is in the Northern Metropolis.
Improving cost control. New World has imposed stricter cost control with general and administrative expenses down 17% y/y to HKD4.2bn in FY24. Capex was also 23% y/y lower at HKD14.8bn as large-scale investment properties were largely completed.
Near term refinancing remains manageable. Excluding discontinued operations, financing cost from continuing operations jumped 20% y/y to HKD5.5bn led by a higher average borrowing cost of 5.0% (FY23: 3.9%). This was despite a lower gross debt level of HKD152bn as of Jun-24 which came down by 8% y/y or 4% h/h. Consolidated net debt increased 4% h/h to HKD124bn from Dec-23’s HKD119bn, mainly due to capex requirement for ongoing development projects. Coupled with revaluation and impairment loss on investment and development properties, gearing climbed 5ppts h/h to 55% as of Jun-24. As of Jun-24, short-term debt amounted to HKD41.6bn, of which, 50% has been refinanced or repaid. Coupled with a cash and bank balance of HKD28bn and undrawn facilities of HKD18.3bn, near-term debt repayment should remain manageable. Suspension of dividend payment and capex reduction (target <HKD15bn for FY25) should also help reduce the company’s cashflow burden.
Ongoing non-core asset disposals. In FY24, NWD sold HKD7.7bn worth of non-core asset disposals including D Park (HKD4bn) and Qianhai project (RMB1.4bn). Since Jul-24, New World has achieved non-core asset sales of HKD3.8bn, representing 29% of its FY25 target of HKD13bn. Recently, NWD has reportedly received an offer from CR Longdation to buy K11 Art Mall in Tsim Sha Tsui. Following the disposal of K11 Concept Management (the asset operator for K11 and K11 Atelier brand) to Dr. Adrian Cheng for HKD209m, New World is in discussions with its parent Chow Tai Fook Enterprises to sell its 75% stake in Kai Tak Sports Park Limited. These should enable New World to further streamline its operations with better cost control.
Turning over a new leaf. YTD, share price of New World Development has plunged 32% on concerns over the company’s financial risk and dividend policy. Meanwhile, the stock is trading at 82% discount to our appraised current NAV, >2SD below its 10-year average of 59%. We believe the change in top management is positive to the stock as it demonstrates the parent’s commitment and support to address challenges facing the company. While interest rate pivot should also boost sentiment towards the stock given its relatively high gearing, the progress of financial deleveraging would continue to dictate its share price performance. Our target price of HKD12.32 is derived by assigning a target discount of 75% to our Jun-25 NAV estimate. Maintain BUY.
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