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Solid Operating
Performance with A Promising Future
In the first half of FY2024 (July 2023 to December 2023), New World Development ("NWD")'s revenue from continuing operations (after excluding the segments under NWS holdings) dropped by 25% YoY to HKD 17.1 billion. The significant decline was mainly due to a nearly 50% YoY drop in the recognition of property development revenues.
With higher margins on development projects recognized by NWD and the rental revenues from investment properties surging 12% YoY to HKD 2.7 billion, the core profit for the same period rose 12% YoY to HKD 4.9 billion, showing a solid operating performance.
Upon the completion of more investment properties, NWD’s rental revenues will see explosive growth. The Group maintains the guidance that about 50% of its core profit will be recurring profit in 2026 (currently about 30%). We estimate that its annual recurring profit is expected to reach HKD 5.0 billion to HKD 5.5 billion, demonstrating a promising future for the Group.
In the same period, NWD’s property contracted sales in Hong Kong amounted to only HKD 140 million, due to the absence of any new property project and the stagnant first-hand property market in Hong Kong. However, we believe that the market sentiment will be significantly improved after Hong Kong Government scrapping all tightening measures related to the stamp duty in the property market. We might see a pattern of more transaction volumes and stable prices in the Hong Kong property market, with a significant increase in the number of first-hand property transactions. The Group will launch the projects such as the King’s Road project in North Point and the redevelopment project in Kai Tak Mansion this year. These projects should bring NWD a strong cash flow from sales. It is expected that the Group will be the beneficiary under the policy.
In addition, NWD’s property contracted sales in the Mainland for the same period amounted to RMB 7.55 billion, representing an increase of about 28% compared to the second half of FY2023. The Group were less affected by the poor sentiment in the Chinese real estate industry.
Seven Deleveraging Measures will enable NWD to Overcome Difficulties
New World Development’s strategies are very clear. Amongst these, the focus is the seven deleveraging measures, including waiting for the completion of investment properties, sales of development projects, reduction of capital expenditures and operating expenses, the non-core asset disposal, corporate actions, dividend adjustments and repurchase of bonds at discount (see Table 1 for more details).
Table 1: NWD’s Seven Deleveraging Measures
|
Measure |
Details |
|
1. Waiting for Completion of Investment Properties |
|
|
2. Sales of Development Projects |
Hong Kong
Mainland China
|
|
3. Reduction of Capital Expenditures and Operating Expenses |
|
|
4. Non-core Asset Disposal |
|
|
5. Corporate Actions |
|
|
6. Dividend Adjustments |
|
|
7. Repurchase of Bonds at Discount |
|
|
Source: Company’s
announcement, iFAST Compilations Data as at 31 December 2023 |
|
We believe that these seven deleveraging measures will effectively enable NWD to overcome the difficulties in the industry. These also reflect the Group’s strong self-rescue ability so that the Group could maintain its commitment of not considering rights issues. At the same time, these deleveraging measures could effectively enhance the Group’s credit performance and alleviated its financial pressure.
NWD is Shrinking its Balance Sheet with Less Significant Liquidity Pressures
About the credit profile, as shown in Table 2, NWD is shrinking its balance sheet. After selling the NWS Holdings shares (which includes FTLife Insurance under NWS Holdings), the Group’s total assets reduced to around HKD 470 billion, with the liability to asset ratio dropped to 57.1%. The total property investment accounts for 69% of total assets, showing the Group transforms from a conglomerate to a near pure real estate company.
Although the Group's capital resources (including the cash and undrawn credit facilities) dropped to HKD 52 billion, it is still sufficient to cover its short-term debt (about HKD 50.7 billion, excluding the revolving loan). The Group’s non-core asset disposal of HKD 8 billion should bring a notable buffer to its liquidity. The overall liquidity pressure is less significant.
Table 2: NWD’s Credit Indicators
|
(HKD billion) |
Jun 22 (Consolidated with NWS Holdings) |
Jun 23 (Consolidated with NWS Holdings) |
Dec 23 (After Disposal of NWS Holdings) |
|
Total Asset |
635.9 |
609.0 |
470.2 |
|
Total Property Investment (Including Investment Properties, Properties Under Development and Properties Held for Sales) |
338.0 |
319.1 |
322.1 |
|
Total Debt* |
240.9 |
237.8 |
198.5 |
|
Total Cash |
62.2 |
54.5 |
39.0 |
|
Undrawn Credit Facilities |
42.8 |
39.4 |
13.0 |
|
Liability to Asset Ratio (%)* |
62.2% |
64.9% |
57.1% |
|
Net Gearing Ratio (%)* |
74.3% |
80.9% |
79.0% |
|
Net Debt / Total Property Investment (%)* |
52.9% |
57.4% |
49.5% |
|
Interest Coverage Ratio (times) |
2.9x |
1.9x |
1.9x |
|
Average Cost of Borrowings (%) |
2.5% |
4.0% |
5.1% |
|
*Total debt includes perpetual debt, and interest expense includes the distribution to perps Source: Company's Announcement, iFAST Compilations Data as at 31 December 2023 |
|||
In addition, at the end of the interest rate hike cycle, NWD was able to maintain an interest coverage ratio of around 1.9 times, which is not a satisfactory figure but still shows it has a certain degree of interest repayment ability. Meanwhile, the Group's leverage is not too high, with its net gearing ratio and net debt/total property investment at around 79% and 49.5% respectively. The latter reflects that even if the value of the Group's property assets depreciates by around 50%, the Group is still in a position to allow its creditors to get back the full amount of the principal amount, which indirectly shows that the Group's credit risk is not high.
Incidentally, only about 20% of NWD’s total property investment pledged as collateral for bank loans, which means that the Group can pledge more assets to secure more new loans. It still has a certain degree of financing ability.
With Manageable Default Risk, Investors could Bonds with Different Tenors or Perps
To sum up, NWD can take advantage of the following regular methods to repay the bond: accelerating property sales, asset disposals and borrowing more bank loans by using the credit lines or by pledging more assets. After scrapping all tightening measures related to the stamp duty in the property market, we believe that the first two methods will be much less difficult to be implemented.
In addition, NWD has a number of "magic tricks" to replenish its liquidity, including but not limited to rights issues, securitization or spit-offs of K11 investment properties, issuance of high-coupon bonds (as high as 10% or more) in the open market and shareholder’s loans from the controlling shareholders etc. The first two (rights issues and spin-off of K11 investment properties) could replenish the Group's liquidity by over HKD 20 billion. Therefore, the Group's default risk is still quite manageable.
Investors could consider bonds with different tenors. The bonds, "NWDEVL 4.750% 23Jan2027 Corp (USD)" and "NWDEVL 5.875% 16Jun2027 Corp (USD)", have a yield to maturity of 9.3%, which has certain attractiveness.
For investors who want to ride on this crisis and seek for very high returns, they could consider the NWD’s perps, "NWDEVL 4.800% Perpetual Corp (USD)" or "NWDEVL 6.250% Perpetual Corp (USD)", which have a net current yield of more than 10%. We wrote an article to discuss the return and risk of the perps. Investors might refer to “Small Bets for Big Wins? Could NWD and GLP Perps Be Super High-yield Strategy in Crisis?” for more information.
Related Risks
The downturn in Hong Kong and mainland real estate markets is not yet over. If the property market sentiments further deteriorate, leading to a significant decline in NWD’s sales ability and this situation lasts for a long period of time, then the Group might fall into liquidity crisis. Even the Group has a better credit profile.
If the interest rate remains high, this will affect the demand in the Hong Kong property market and depress the business sentiment in Hong Kong, indirectly affecting the rental revenues and valuation of commercial properties. These could affect the Group's sales ability on the one hand and slow down the progress of the Group's non-core asset disposal, or even result in lower disposal prices. The Group’s ability to liquidate its assets will be thus weakened.
The confidence crisis in the Chinese real estate industry is still showing a sign of proliferation. If the homebuyers’ confidence in the New World brand is undermined, it could lead to a sharp drop in NWD’s contracted sales. At the same time, the Group might need to record an impairment loss of its Chinese property projects instead of getting a profit margin premium of its projects at present. These will affect its asset value and liquidity.
In addition, NWD is reliant on bank loans for refinancing. If banks decide to tighten their financing limits with some reasons, it will significantly increase NWD’s liquidity pressure and default risk.
Related Articles:
Were New World Development’s Bonds Miss-sold?
New World Development – After the Rumour, What are the Implications on its FY23 Result?
Small Bets for Big Wins? Could NWD and GLP Perps Be Super High-yield Strategy in Crisis?
For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.
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