Date: 27th September 2024
Broker: UOB Kay Hian
Company Overview
New World Development (NWD) is primarily engaged in property development, infrastructure and services, retail, and hospitality through hotels and serviced apartments. The group operates two listed companies: NWS Holdings and New World Department Store China. The company’s stock is traded on the Hong Kong Stock Exchange under the ticker 17 HK.
FY24 Financial Performance
For the financial year ending 30 June 2024, NWD reported an attributable loss of HK$17.1 billion. This loss was slightly better than the HK$19 billion to HK$20 billion expected during its earlier profit warning. Excluding non-cash items and losses from discontinued businesses, the attributable loss stood at HK$5.049 billion, which was significantly worse than UOB Kay Hian’s expectation of a HK$1.233 billion loss.
Dividend Suspension
NWD temporarily halted its dividend in FY24. This move was aimed at accelerating its deleveraging process. The broker notes that this aligns with the company’s current financial situation, which includes sluggish property sales in Hong Kong and high net gearing levels.
Investment Properties
NWD’s investment properties showed resilience amidst challenging market conditions. The segmental profit for Hong Kong’s investment property portfolio grew by 12% year-over-year, reaching HK$2.536 billion in FY24. The mainland China portfolio also saw a moderate increase in profit of 2.6%, amounting to HK$955 million. Notably, K11 Musea and Art Mall in Hong Kong posted 17% and 16% year-over-year growth in tenant sales, respectively.
Net Gearing and Financial Health
NWD’s net gearing worsened, rising to 55% as of June 2024, up from 49.9% in December 2023. When perpetual securities are considered as debt, this ratio escalates to 87%. Funding costs for FY24 were reported at 5.0%, and the company aims to reduce this to below 5% in FY25. Despite these efforts, NWD’s deleveraging progress is lagging behind expectations.
Key Management Changes
In FY24, NWD underwent significant management restructuring. Dr. Adrian Cheng resigned as CEO and transitioned to non-executive vice-chairman, with a focus on public affairs. Eric Ma, formerly the Chief Operating Officer (COO), has been appointed as the new CEO. Ma indicated that the company will continue focusing on its core property business and emphasized a commitment to improving profitability.
Strategy for FY25 and Beyond
To improve its financial health, NWD aims to focus on asset disposals and sales. The company has set a target of HK$6 billion in contracted sales for Hong Kong and RMB 11 billion for mainland China in FY25. Additionally, it plans to dispose of non-core assets worth HK$13 billion, compared to HK$8 billion in FY24.
Financial Forecasts and Outlook
UOB Kay Hian projects NWD’s net turnover to recover slightly in FY25, reaching HK$41.315 billion. EBITDA is expected to improve significantly to HK$12.705 billion, compared to HK$1.570 billion in FY24. However, the net profit for FY25 is estimated to be a modest HK$435 million, reflecting ongoing challenges.
Valuation and Recommendation
UOB Kay Hian maintains a “SELL” rating for NWD with a target price of HK$7.02, based on an 85% discount to its Net Asset Value (NAV) of HK$46.83 per share. The anticipated FY25 dividend yield is 2.5%. The broker believes that despite some improvements in funding costs and asset disposals, the company’s high gearing and weak property sales in Hong Kong remain significant challenges to profitability.
Share Price Catalysts
Key potential catalysts for the stock include a stronger-than-expected recovery in the Hong Kong and Chinese economies, as well as the removal of property cooling measures by the Hong Kong government. However, UOB Kay Hian cautions that the recovery of profitability may take time, and the company’s high leverage remains a concern.
