Hong Kong’s major real estate developer New World Development Company Limited (also known as New World Group) estimated a staggering loss of HK$20 billion (US$2.6 billion) for the fiscal year ending in June, with its stock price plummeting by 13% on Monday, September 2.
The stock closed at HK$6.83 on Monday, hitting a new 21-year low.
In documents filed last Friday, the company stated that the expected loss reflects several factors: a 23% decline in core operating profit, fair value and impairment losses of HK$9.5 billion, and an additional one-time non-cash loss of HK$8.3 billion from selling a subsidiary.
The group anticipates further (net) losses due to rising interest rates and the depreciation of the Renminbi this year. These provisions, being one-time non-cash and unrealized items, will not impact the group’s cash flow.
According to Reuters, New World is among the Hong Kong property developers with one of the highest debt-to-equity ratios. Over the past year, its debt reduction plan has been closely monitored.
Although Hong Kong has not yet experienced major debt default events among mainland Chinese property developers, concerns among investors arise due to the weakness in the residential and commercial property markets, leading to worries about industry liquidity.
As New World forecasts an annual loss, its net loss for the first half of the year was HK$7.4 billion.
In a report, analysts from JPMorgan pointed out that New World’s loss “may not be as severe as it appears on the surface.” Excluding impairment losses and other non-cash items, the adjusted core net loss could be around HK$2-3 billion.
JPMorgan noted that for New World Development, the focus should not be on profitability but on the balance sheet and refinancing capability. The development company has secured loan arrangements totaling HK$16 billion in July and August.
However, Goldman Sachs highlighted that despite New World’s efforts to sell assets and repurchase perpetual bonds, the anticipated losses may cause the company’s net debt ratio to rise by 1.5 percentage points to 78.4% from December last year.
Morningstar stock analyst Jeff Zhang stated that while most of New World’s net loss is driven by non-cash impairments, “given the 18-23% decline in core operating profit, property sales for New World Development may also see a decrease.”
“In addition, in the weak real estate demand in Hong Kong and mainland China, the company faces persistent challenges that could impact its financial position.”
The investment bank has given the development company a “sell” rating, indicating a risk of not being able to distribute dividends in the second half of the year.
New World is expected to release its earnings report later this month.
Bloomberg noted that New World’s plight highlights the severe situation facing the Hong Kong real estate market, the latest sign of turbulence.
Since reaching its peak in mid-2021 (before the onset of the Chinese real estate debt crisis), the company’s stock has fallen by about 80%. Currently, the company’s market value is around US$2.2 billion.
The steep decline in New World’s stock has shaken investors’ confidence in the real estate industry and the overall market in Hong Kong. The Hang Seng Index fell by 1.7%, Henderson Land Development declined by 1.9%, with Cheung Kong Property Holdings and Sun Hung Kai Properties dropping by over 2%. The stock of Chow Tai Fook Jewellery Group, owned by the same family behind New World Development, plummeted by 4.1%.
New World’s business encompasses residential properties, commercial projects, hotels, and shopping malls. The group has also made extensive investments in mainland China, but the mainland is currently facing a prolonged real estate downturn. Housing prices in Hong Kong have also hit their lowest point in about eight years in July.