Hong Kong's New World Development gets shareholder nod to sell unit (updated)

CTF Services

02/11/2023 11:16

(Adds voting result in paragraph 1, 3, details on company debts
in paragraph 10, investor comment in paragraph 15, updates share
prices)
    By Clare Jim
       HONG KONG, Nov 2 (Reuters) - Shareholders of Hong Kong's
New World Development (NWD)  0017.HK  on Thursday approved a
deal to sell the company's lucrative construction subsidiary in
a buyout deal to help it cut debt.
    The property developer, which has one of the highest debt
ratios among peers after a years-long expansion spree, would
receive $2.8 billion from the sale of NWS Holdings  0659.HK  to
its major shareholder.
    The deal "generates immediate value for shareholders,
repositions the company around its property businesses, and
supports its broader efforts to reduce leverage in the
expectation of persistently high interest rates," NWD said in a
statement, after independent shareholders voted overwhelmingly
to approve the plan.
    Falling property prices and rising interest rates have put
the city's top developers under pressure in one of the world's
most expensive property markets.
    Chow Tai Fook Enterprises (CTFE), which holds about 45.2% of
NWD shares, offered in June to buy roughly 97% of NWS stock.
    NWD has said it would pay a special dividend of HK$4 billion
($511 million), or HK$1.59 per share, on completion of the deal.
    "The deal is good for NWD's shareholders because, first, the
company's debt ratio will drop, and second, they will get a high
special dividend," said Alvin Cheung, associate director of
Prudential Brokerage in Hong Kong, who does not hold NWD shares.
    Analysts said the $2.8 billion, which is equivalent to 15
years of dividend income from NWS, would give NWD an immediate
liquidity boost, but they cautioned about the impact on future
profits. In the 2023 financial year, NWD posted a net profit of
HK$900.9 million, 28% less than a year ago. Without NWS, it
would have posted a net loss of HK$510.1 million. 
    "NWD's balance sheet will be strengthened... yet it is
inevitable we see some negative impact on future earnings and
dividends," said CLSA analyst Alvin Wong in a report, who
slashed NWD's target price to HK$10.96 from HK$29.90 after the
firm cut its dividend by 63% to preserve capital.
    
    DEBT REDUCTION
    NWD's total borrowings including loans and bonds stood at
HK$185.3 billion as of end-June, while it had total cash of
HK$54.5 billion. Its net gearing ratio, including perpetual
bonds, was around 80%, analysts said.
    After a string of Chinese developers defaulted since
mid-2021, investors have been dumping NWD's shares and bonds.
The stock has lost 33% so far this year, and three of its
perpetual bonds were traded at 40 cents on the dollar level.    
    Reuters reported early this year NWD was talking to
investors about a sale of a majority stake in an office tower by
offering a guaranteed capitalisation rate of around 4%, a deal
structure that highlighted its eagerness for extra liquidity. 
    Company CEO Adrian Cheng told an earnings conference in late
September the firm would use part of the proceeds from the NWS
deal to repurchase bonds, including high-coupon perpetual bonds,
and repay loans, a move analysts said could reduce interest
expenses and book gains from buying back debts at discounts. 
    Other efforts to deleverage include cutting capital
expenditure and lifting rental incomes, the company said.
    "It's going to be tough 2-3 years for Hong Kong businesses
to recover; it's not going to be easy for New World," said a
fund manager who holds NWD's dollar bonds and declined to be
named because he was not authorised to media. "But it's not a
default scenario," he added, saying banks and NWD's parent
company were being supportive.
    Shares of NWD closed up 0.95%, while NWS eased 0.2%. The
Hang Seng Property Index  .HSNP  rose 1.9%.   
($1 = 7.8227 Hong Kong dollars)

 (Reporting by Clare Jim; Editing by Lincoln Feast and Elaine
Hardcastle)
 ((clare.jim@thomsonreuters.com;))