Date: September 27, 2024
Broker: CGS International Securities

FY6/24 Results Overview

New World Development (NWD) reported disappointing FY6/24 results, which were within expectations. The company recorded a net loss of HK$19.7 billion, falling within its prior guidance of HK$19-20 billion. When excluding the loss from the disposal of NWS Holdings, the core net loss was estimated at HK$9.3 billion. As a conservative move, the company did not declare a final dividend for FY6/24, resulting in a total dividend per share (DPS) of HK$0.20, announced in the interim results.

Leadership Changes and Strategic Focus Shift

The company’s strategic shift was underscored by the recent change in leadership. Eric Ma replaced Adrian Cheng as CEO in January 2024, a move likely reflecting Cheng’s role in NWD’s aggressive expansion between 2016-2021. Under Eric Ma’s leadership, NWD aims to focus on deleveraging, with planned asset disposals, stringent capital expenditure controls, and a temporary halt on dividend payouts. NWD’s net gearing stood at 55% at the end of June 2024.

Deleveraging Strategy and Asset Disposals

NWD is targeting HK$13 billion in asset disposals for FY6/25, with HK$3.8 billion worth of disposals already completed between July and September 2024. The company’s deleveraging efforts include selling non-core assets, such as K11 brand management companies and an equity interest in Kai Tak Sports Park Limited. Management has also set a capital expenditure target of below HK$15 billion for FY6/25. With these efforts, NWD aims to reduce its net gearing to below 50% by FY6/27.

Property Sales and Debt Reduction

Property sales are seen as a vital source for reducing NWD’s debt. The company has set a target of HK$6 billion in attributable contracted sales in Hong Kong for FY6/25. Major projects include Pavilia Forest, Wong Chuk Hang Station Package 5, and the State Theatre Project. Additionally, NWD expects to achieve RMB11 billion in gross contracted sales in China in FY6/25, slightly lower than the RMB12.5 billion achieved in FY24.

The Greater Bay Area (GBA) and Yangtze River Delta (YRD) regions in China accounted for 58% of NWD’s total land bank by area at the end of June 2024. NWD believes that the Chinese central government’s support for the housing market, including controlling new home supply and cutting mortgage rates, will help stabilize property prices and boost demand.

Financial Adjustments and Outlook

NWD adjusted its FY25/FY26 earnings estimates, reducing EPS forecasts by 19% and 11%, respectively. The company also cut its net asset value (NAV) by 16%, resulting in a revised target price (TP) of HK$9.50, down from the previous HK$11.40. NWD still trades at a 78% discount to NAV, and the analysts reiterated an “Add” rating.

The company’s ability to deleverage and the change in leadership could serve as catalysts for a potential re-rating of the stock. However, downside risks remain, including lower-than-expected asset disposal values, increased refinancing costs, and weaker sales in property developments.

ESG Commitment

NWD is committed to achieving its “Sustainability Vision 2030” goals, which include a 50% reduction in energy and carbon emissions intensity by 2030. The company has raised over HK$39 billion through sustainability-linked loans, green bonds, and green loans since 2018. Additionally, NWD has been involved in social initiatives, such as donating its farmland for transitional housing projects in Hong Kong. Despite a previous incident at Pavilia Farm III related to substandard concrete, the company took swift action to resolve the issue and offered compensation to buyers. NWD’s ESG efforts have been recognized with a “BBB” rating from MSCI in FY23.

Financial Summary

• Total Net Revenues (FY6/24): HK$35.8 billion (-62.4% YoY)
• Operating EBITDA (FY6/24): HK$7.5 billion (-45.2% YoY)
• Net Profit (FY6/24): -HK$3.2 billion
• Core EPS (FY6/24): -HK$3.69
• Net Gearing (End of FY6/24): 55%
• Target Price (TP): HK$9.50 (16% upside)
• Dividend per Share (DPS) FY6/24: HK$0.20

Risks and Re-Rating Potential

Key risks for NWD include asset disposals achieving lower-than-expected values, higher refinancing costs, and weaker-than-expected property sales. On the other hand, faster asset disposals, positive rental reversions for investment properties, and a successful deleveraging effort could serve as catalysts for a stock re-rating.