- New World Development (“NWD”) released its financial results for the first half of the fiscal year 2025 (from July to December 2024) last Friday. The Group came close to achieving cash flow breakeven, with a cash flow (defined as operating cash flow plus proceeds from asset sales, minus capital expenditures, interest and tax expenses) of negative HKD 200 million during the period. This indicates that the Group can largely cover its expenses through its operational activities without relying on new financing for daily operations.
- This aligns closely with the cash flow projections we made in our late December article, "New World Development - Navigating Through Its Darkest Hour?", and thus meets our expectations.
- NWD’s bond prices have rebounded significantly. Its "NWDEVL 4.750% 23Jan2027 Corp (USD)" has surpassed its price before the sharp drop in January (now around $80), while longer-term bonds and perpetual bonds have recovered approximately 90% of the losses incurred during January’s decline.
- This performance is a marked improvement over the second half of fiscal year 2024:
- Core operating profit rose to HKD 4.42 billion (H2 FY24: HKD 2.03 billion).
- Interest coverage ratio was approximately 1.3x (H2 FY24: only 0.6x).
- NWD’s leverage ratio has slightly increased, largely due to a one-time impairment loss of HKD 6 billion and a net loss attributable to shareholders in this period, which negatively impacts leverage metrics:
- Net gearing ratio (treating perpetual bonds as debt) is around 91%.
- Net debt to total property assets is approximately 57%.
- In the short term, the Group still faces some asset impairment pressure, so we expect these leverage ratios to continue rising slightly over time.
- Key Highlight: NWD successfully refinanced its debt, safely navigating the refinancing crisis that the market had previously been concerned about:
- As of the end of 2024, the property asset collateral ratio rose slightly to 34%.
- This ratio likely has not yet reflected the group’s recent move to pledge a significant amount of assets to banks, converting unsecured loans into secured ones. As a result, this ratio is expected to rise further in the next earnings results. However, this at least ensures the group’s refinancing ability, a critical prerequisite for on-time debt repayment.
- NWD’s sales performance was not bad, with its "price-for-volume" strategy still effective in Hong Kong. The debt pressure did not negatively impact the sales in mainland China:
- The attributable contract sales in Hong Kong amounted to HKD 5.2 billion.
- Total contract sales in mainland China reached RMB 7.5 billion.
- Sales in both regions outperformed the second half of 2023 and the first half of 2024, roughly on par with the first half of 2022.
- The significant recovery in bond prices is also a major advantage for the Group. Generally speaking, the real estate industry exhibits strong "reflexivity". If bond prices fall to low levels, it could lead to greater difficulties in sales, asset disposals and financing. Thus, the current rebound in NWD’s bond prices suggests the group may be able to break out of a vicious cycle, stabilising its operations and financing while making it easier to sell assets compared to before.
- Conclusion: Given the recent successful refinancing under the challenging period, fair sales amount and sufficient operating profit to cover interest expenses for the period, NWD should be able to continue selling assets to reduce debt and gradually repay the debts, maintaining a barely cash flow breakeven. Therefore, we maintain our view that NWD will likely repay its debts on time. However, investors holding or planning to purchase its bonds should remain mindful of the following bond-related risks.
Bond Related Risks
One of the NWD’s debt repayment methods is to dispose of its non-core assets, which involves an execution risk. If the Group ultimately fails to dispose of a significant amount of non-core assets, it could increase its liquidity pressure. If the disposal prices of these assets are too low, it could also show a weaker-than-expected asset monetization ability, affecting its debt repayment ability.
The confidence crisis in the Chinese real estate industry is still showing a sign of proliferation. If the homebuyers’ confidence in the NWD brand is undermined, it could lead to a sharp drop in NWD’s contracted sales. At the same time, the Group could 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.
Due to the strong reflexivity in the real estate industry, if NWD’s bonds decline due to unfavourable rumors (such as debt restructuring or failure to secure refinancing), even if these rumors are not true, it could affect the Group's financing and asset disposal abilities.
If NWD experiences slight liquidity pressure, it can suspend the coupon payments on its perpetual bonds, which does not constitute a debt default. This means that perpetual bond investors cannot seek legal recourse for unpaid coupons and principal. They could only wait for the Group to improve its operational condition to repay the accumulative coupons, or until the Group defaults on its debts and the perpetual bonds would be restructured along with other fixed-tenor bonds.
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.
