New World Development – After the Rumour, What are the Implications on its FY23 Result?

Robust Operating performance

In FY2023 (July 2022 to June 2023), New World Development (NWD)’s total revenues increased by 40% to HKD 95.2 billion. The core profit increased by 21% to HKD 11.0 billion. The contracted sales in Hong Kong and Mainland China were HKD 8.6 billion and RMB 15.1 billion in the same period. The operating performance remains robust.

In the recent three months (July 2023 to Sep 2023), NWD generated over RMB 5 billion in total contracted sales in the mainland already. Unlike other developers, the Group is less affected by the poor sentiment in the Chinese real estate industry. As we mentioned before, perhaps due to homebuyers’ concern about suspended projects, they instead seek out the pre-sale projects developed by Hong Kong developers who have higher capital strength and lower risk of properties being abandoned. The Group is one of the beneficiaries of this trend.

The recent relaxation policies in real estate (including relaxation of mortgage restrictions in tier one cities and relaxation of purchase limit in different cities) also boost the NWD’s sales. 

Dividend Cut and Deleveraging are Positive to Credit Profile

Regarding the disguised equity rumour of three projects, the management took legal action against the rumour. The actions included reporting to the police and providing clarification. The management felt angry about the rumour, since NWD could not react by showing the recent actual figures, given that it was in the black-out period of the result release.

After the completion of the tender offer from Chow Tai Fook Enterprise (CFTE), NWD would dispose all NWS shares and receive proceeds of around HKD 21.7 billion. The Group commits to declare a special dividend of HKD 4 billion.

Besides, NWD cuts the final regular dividend to HKD 755 million (HKD 0.3 per share), decreased by around 80% YoY, to enhance the liquidity profile. Both the tender offer and dividend cut are positive to the Group’s credit profile. The proceeds are expected to be used in the repurchases of bonds (including perpetual bonds) and loan repayment.

NWD emphasized no right issues or equity issuance for fund-raising in the foreseeable future, showing its greater confidence in its financial status. Besides the tender offer, the Group is seeking another round of corporation actions to unlock the value of different business units.

The deleveraging plans are continued. For example, they would further reduce the capex (decreased at least 50% YoY from the HKD 24 billion level in FY 2023) and lower the general and administrative costs. The large-scale projects construction (like 11 SKIES, K11 ECOAST etc.) entered into the final state, allowing them to suggest the above cost-cutting measures.

Short-term Liquidity Remained Strong

Regarding the credit profile, as of the end-June 2023, NWD’s net gearing ratio (treating perps as equity) is at 48.7% (47.2% in pro-forma basis after the tender offer and special dividend). The Group targets a net gearing ratio of mid-high 30% by June 2027. The adjusted net gearing ratio (treating perps as debts) is 82.9%.

All the banks in NWD’s business network (more than 60 banks) maintained their credit lines. They also secured the refinancing of HKD 30 billion loans at HIBOR + 1.1% in 1H23. The refinanced rate remained low.

The cash to short-term debt ratio was 1.1 times. NWD had HKD 55 billion cash and HKD 39 billion undrawn credit facilities. Since their short-term liquidity remained strong, they should be able to go through the down cycle and overcome the current headwinds in the Hong Kong and Mainland China markets.

Default Risk is Still Under Control

NWD will enter into “harvest time”. A number of investment properties will be gradually completed by 2026. In 2026, the Group is expected that their earnings structure will be improved to around 50% core profits being recurring profits by 2026 (versus around 30% now), equivalent to having an earnings guidance on recurring profits of at least HKD 5 billion by 2026. Its outlook is clear and positive.

Over the medium- to long-term, the Group has a number of ways to replenish the liquidity, such as the disposal of non-core assets, a dividend cut, pledging more assets (only around 20% of IPs and properties under development are pledged), securitization or spit-offs of K11 IPs or/and even the rights issue (the last resort). The last two opinions (spit-off of K11 and rights issue) allow the Group to get the funds over HKD 20 billion, considering the IPs amounted up to HKD 204 billion and market cap of HKD 37.5 billion.

As such, we believe that the Group’s default risk is still under control. Investors could consider the bonds with different tenors. Amongst these, the bonds, NWDEVL 4.750% 23Jan2027 Corp (USD) and NWDEVL 5.875% 16Jun2027 Corp (USD), is currently yielding at over 13%, which are attractive.

For those investors who do not have a high exposure to NWD, they could consider the perpetual bonds with a lower entry cost. The prices of these two perpetual bonds, NWDEVL 6.250% Perpetual Corp (USD) and NWDEVL 4.800% Perpetual Corp (USD), are around $53 and $44 respectively, with a current yield close to 11%. These perpetual bonds have higher advantages in terms of yield compared to the NWD’s shares with only 5% to 6% dividend yield (excluding the special dividend), and the two perpetual bonds also have a strong capital appreciation opportunity.

However, investors have to pay attention that the terms of perps are more complicated. The Group could suspend the perps coupon, which does not result in a bond default. The perps are riskier than the fixed-tenor bonds. The price volatility of the perps would be more significant. It is noted that these perpetual bonds are also senior unsecured bonds. In the event of an unexpected debt default by the Group, these perpetual bonds are in the same priority of claims as the fixed maturity bonds.