NWD (17 HK): Markets Pricing In A Bust

• 0.052x P/B! That's New World Development (17 HK)'s current trailing P/B ratio; roughly a quarter of the next comparable real estate peer.

• What's new? The latest decline followed an announcement on the 30th May that it would defer payments on its perpetual bonds.

• NWD's 6.15% and 4.8% perpetuals fell to 23 cents and 15.5 cents on the dollar on 2nd June, suggesting the market is pricing in the possibility of a bust.

What's New

• NWD announced a delay in interest payments for four tranches of PCSs.

  • The four sets of PCS total ~US$3.4bn. Savings from the deferrals (scheduled for June) are estimated at ~US$77.2mn.

  • Under current accounting standards, deferred interest payments are added to the principal and the residual NAV attributable to shareholders further diminishes.

  • My understanding is that these payment deferral do not constitute a technical default.

  • NWD is the second Hong Kong property developer to defer perpetual bond coupon payments in recent years after Road King Infrastructure (1098 HK).

• And NWD's PCSs? Bloomberg said “[New World’s] 6.15 per cent perpetual notes dropped about three cents to 23 cents on the dollar on June 2 after tumbling more than 30 cents on May 30, on pace for the lowest level since issuance. Its 4.8 per cent perpetual securities fell 10 cents to 15.5 cents [on the dollar], also on track for a record low and the biggest daily decline since October 2022.”

  • The deferral news arrived after company said late last month it would not redeem its $345mn perpetual bond by 16 June.

  • By opting out of the payment, the interest rate on the instruments increased to >10% from 6.15%.

• Just another layer of bad news. On the 28th Feb this year, NWD announced a loss of HK$6.63bn for 1H25 (June Y/E) versus a profit of HK$502mn in 1H24.

  • Last month, NWD reportedly told banks it was seeking refinance HK$87.5bn in loans by the end of June. Apparently, upward of 50 banks are involved.

  • NWD appointed Echo Huang CEO late last year, after Adrian Cheng’s replacement, Eric Ma, lasted only two months in the role.

• Offloading assets. To address its financial distress, NWD has been steadily offloading assets.

  • The big one was selling its entire 60.85% stake in NWS on the 20 November 2023 for HK$21.7bn.

  • Last, November, Chow Tai Fook Enterprises, the Cheng family’s private holding company, acquired NWD's 75% stake in the Kai Tak Sports park for HK$416.7mn and took responsibility for a HK$679.9mn loan tied to the development.

    • In June 2024, NWD also sold its 30% stake in a Shenzhen office tower to Chow Tai Fook Enterprises for RMB1.44bn.

• On Hong Kong's retail sector. Hong Kong's retail sales by value fell by 2.3%t in April from a year earlier, marking a 14th consecutive month of declines, government data showed.
  

  • A breakdown shows that consumer durable sales are down 23% year-on-year, though of interest, alcohol sales are up by nearly 30%

• No family buying of late. The Cheng family last bought shares in December last year, at HK$11.07/share (on average). Shares are down ~57% from that level.

  • The Cheng are subject to the creeper rule.

• Going bust? NWD (owned by Hong Kong's third richest family) going bust would be interesting, to say the least, for HK; and bonds at these prices suggest the market is pricing this in as a distinct possibility.

  • I think, somehow, NWD will remain on a life support system, until Hong Kong turns a corner. As and when.