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Hong Kong’s succession drama is unfolding at a crucial time for the city’s property sector. Shares in New World Development, the developer owned by the billionaire Cheng family, were suspended from trading on Thursday amid reports it was considering replacing 44-year-old heir Adrian Cheng as chief executive.
Trading in the shares was suspended pending the disclosure of inside information. Trading in its subsidiary, New World Department Store China, the holding company for department store chains in mainland China where Cheng is chairman, was also suspended.
The most immediate concern for investors is New World is expected to suffer losses of HK$20 billion ($2.6 billion) for the fiscal year ending in June. Falling sales, impairment charges and investment losses have pushed the group to its first annual loss in two decades. Its shares have fallen 43 percent over the past year, significantly underperforming its sector peers and partly reflecting the weakness of Hong Kong’s property market.
The housing market slump that began in late 2021 has worsened this year, with existing home prices falling to the lowest level in nearly eight years in June. Higher interest rates have Depressed demand for commercial and residential properties in Hong KongMeanwhile, the renminbi’s depreciation against the dollar has made property purchases in Hong Kong more expensive for mainland Chinese buyers, who account for nearly three-quarters of the city’s high-end home sales.
But not all of New World’s underperformance is due to broader weakness in the sector. Its total debt to equity ratio stands at more than 70%, more than three times that of local rival Sun Hung Kai Properties. Its operating margins have nearly halved over the past six years, to 10% at the end of last year, less than a third of those of local peers. The stock now trades at just 0.1 times book value.
Since last week, following Hong Kong’s expected half-percentage point interest rate cut to 5.25 percent, investors in the city’s developers have been closely monitoring property transaction figures for signs of a turnaround in sentiment.
Since then, however, the number of new home sales has only continued to decline. Even when signs of recovery begin to appear, the biggest challenge will be getting rid of unsold residential units (which already hit a two-decade high last year). With or without a change at the top of New World, hopes for a quick recovery seem entirely unfounded.