Hong Kong Developer New World Expects First Loss in 20 Years

(Bloomberg) -- New World Development Co., Hong Kong’s most indebted major property developer, expects to post its first annual loss in two decades after writing down assets following an extended real estate slump.

The company will record a loss of HK$19 billion to HK$20 billion ($2.4 billion to $2.6 billion) for the financial year ended in June, according to a filing to the Hong Kong stock exchange Friday night. The firm cited asset impairment, losses on investments and higher interest rates for the decline.

The developer, controlled by the family of billionaire Henry Cheng, has been under scrutiny in recent years due to its high debt levels. Concerns over its financial struggles and overall pessimism on the property market have weighed on the shares, which have been among the worst performers for real estate companies in the city.

Hong Kong’s real estate market is in a prolonged downturn amid expensive borrowing costs and a sluggish economy. Home prices are at the lowest in eight years, putting pressure on developers like New World. Record-high vacancy rates in the office market meanwhile continue to suppress rental income.

The troubles at New World have thrown succession matters at the family into the spotlight. Adrian Cheng, the chief executive officer of the property unit, had been widely seen as the strongest candidate to take over the business empire until his father indicated last year he was still looking for a successor. On Friday, the clan announced separately that Henry Cheng appointed another offspring as co-CEO of the private investment vehicle for the family. The move effectively gives four of the elder Cheng’s children key parts of the operations. 

Adrian needs to cut leverage at New World to bring the company back on track. The firm is counting on property sales to raise capital. Last month, it launched a new project in the Kai Tak district with condos priced at the lowest in eight years to capture demand. The company is also offloading non-core investment properties, which are expected to have raised about HK$8 billion by the end of June.

New World said its lack of revenue recognition from major projects including the Pavilia Farm I & II affected its core profit. 

In June last year, the Cheng family offered to buy out an operation from New World to help lower debt at the property firm. The transaction shifted cash from the family’s investment holding company to New World. But it also led to a one-time non-cash loss of nearly HK$8.3 billion for the property company. 

In addition, a revaluation of the group’s investment and development properties including a goodwill assessment will result in a non-cash loss of up to HK$9.5 billion, the company said. Core operating profit is expected to fall as much as 23% to HK$6.9 billion.

New World’s shares have tanked 35% this year, underperforming the benchmark Hang Seng Index, which is up 5.5%. 

(Updates with more details on losses throughout.)

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