- Recently, there are some selling pressures on New World Development (“NWD”)'s bonds, mainly a lingering impact from the panic selling triggered by the Group's profit warning announcement on 30 August.
- Currently, the correlation between NWD bonds (especially perpetual bonds) and share price is quite high. A significant share price decline will put selling pressure on NWD bonds. Therefore, the NWD bond sell-offs can be simply understood as being dragged down by NWD's share price performance, rather than meaning NWD unable to repay the debts.
- The profit alert highlighted several key points:
- The core operating profit for FY24 is expected to be only HKD 6.5-6.9 billion, down approximately 20% YoY. This reflects core operating profit of only around HKD 1.7 billion in the second half. Based on the core operating profit in the second half year of FY24, the Group could not cover the interest expense in the same period, representing an interest coverage ratio of less than one time, which is somewhat a red flag.
- The attributable loss to shareholders is estimated to be HKD 19 to 20 billion, mainly due to two reasons:
- In November last year, the Group disposed of its shareholding in NWS Holdings to Chow Tai Fook Enterprises (CTFE) for HKD 21.8 billion (HKD 9.15 per share). However, NWS Holdings's adjusted net asset value (the sum of the net asset value, the unrecognized equity value of FTLife and other adjustments) was about HKD 12.6 per share, resulting in an accounting loss of HKD 8.3 billion. If considering just the change in the shareholder equity, the transaction would result in a loss of HKD 2.6 billion.
- The changes in fair value of investment properties and impairment of development projects amounted to a combined loss of HKD 8.5 to 9.5 billion.
- Notably, the above-mentioned accounting loss from the disposal of NWS Holdings shares and the impairment loss are non-cash expenses that do not impact NWD’s cash flows. These have little impact on the Group's operating and credit performances.
- At the moment, the keys for NWD is to ensure liquidity, financing channels available and debt repayment on time. The HKD 17.8 billion proceeds from the disposal of NWS Holdings shares and target proceeds of HKD 8 billion from non-core asset disposal this fiscal year would ensure the Group to manage the short- to medium- term difficulties.
- The weak operating performance was also foreseeable, as the Group did not have significant residential projects recognised in FY24 and sold NWS Holdings, which results in losing at least HKD 3 billion in annualised operating profits.
- Investors should not conclude that NWD’s credit risk increased significantly due to its weak second half performance. It is quite reasonable for any property developer to face a certain degree of losses without projects recognised in the current period.
- Given NWD’s ability to access to bank financing (NWD refinanced over HKD 45 billion of loans year to date), a recent USD 400 million bond issuance, gradual completion of sizable investment properties and residential projects recognised, we believe operating performance will improve while the credit risk remains under control.
- Investors can take advantage of the current selloffs to invest in NWD bonds:
- "NWDEVL 4.750% 23Jan2027 Corp (USD)" and "NWDEVL 5.875% 16Jun2027 Corp (USD)" offer over 12% YTM, which is suitable for moderate investors.
- "NWDEVL 6.250% Perpetual Corp (USD)" and "NWDEVL 4.800% Perpetual Corp (USD)" offer over 12% current yield, which is suitable for aggressive investors. We expect that these perpetual bonds could potentially reach an internal rate of return (IRR) of over 20% and total investment return (including coupons and capital appreciation) in around five years. But investors have to notice that the Group could suspend the coupon payment of the perpetual bonds, which would not trigger the event of defaults.
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Declaration: 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.