New World Development subsidiaries self-financing

New World Development (NWD), Hong Kong's fourth largest property developer, fell out of favour with investors in recent years. The company, controlled by the Cheng family, has historically been pretty weak in the disclosure stakes and its costly diversification into new business areas attracted a fair degree of criticism. 

Recently, there have been signs of change and, since reaching a low on 1 June, NWD's share price has risen almost 80% to HK$12.80 - a move that while significant leaves the stock well down on its 1999 high of HK$26.90. In part, the recent rise reflects improved sentiment towards the Hong Kong property market and the fact NWD was looking very cheap both in relative and absolute terms. In addition, investor interest has been heightened by management roadshows to Europe and North America to meet with fund managers.

"The key reason for the roadshows is we want to be a more transparent company. Traditionally, alot of Chinese family-controlled companies have kept everything to themselves. We have taken steps to be more open and also to address investor concerns about management's inaccessibility," says Tommy Cheng (Cheng), assistant to NWD managing director Henry Cheng.

NWD's message to fund managers in recent weeks has been this - borrowings are coming down as a result of property sales and partial sales of its telecom interests and the parent group will in future concentrate its efforts its core competency of property development in Hong Kong, leaving the now-profitable subsidiaries to finance their own expansion.

Since the start of 2000, NWD has brought its consolidated net debt down to around HK$24 billion ($3.08 billion) from HK$30 billion and plans are in place to reduce this by a further $5 billion by the end of this year, so cutting its gearing to below 35%. 

The bulk of the debt reduction to date has come from property sales - NWD's core business - so many are looking at the group's efforts to sell stakes in its telecom operations as a measure of the company's commitment to the more focused strategy it has been touting.

So far, a 16% stake in its New World Mobility mobile phone business has been sold to Chase Equity Capital for close to HK$1 billion, but efforts to find a buyer for the fixed line network have been far from smooth.

Australian company Davnet earlier this year ditched plans to buy a 74% stake in NWD's fixed line operations after conducting due diligence. Rather controversially, Davnet said it pulled out owing to falling market share and the fact the business had lost key personnel. These comments were subsequently retracted in a public apology after NWD threatened legal action. Davnet also forfeited a HK$130 million deposit it paid to NWD before commencing due diligence. NWD is in talks with another potential buyer.

"We are going to be selling 50% of the fixed line business. The valuation that Davnet put on the business was HK$2.5 billion; we hope to strike a deal at around that figure," says Cheng.

Looking ahead, New World Telephone, the holding company for the fixed-line and mobile phone businesses, may be listed, as might New World Services, which owns and operates buses and ferries in Hong Kong and provides construction and engineering services. NWD's other main subsidiaries, New World CyberBase, New World China Land and New World Infrastructure already have listings in Hong Kong.

New World China Land and New World Infrastructure, involved in mainland China property projects, and roads and bridges respectively, are keen to access renminbi financing in China's capital markets. "Going forward, we would very much like to tap into the Chinese equity market or even the bond market," says Cheng.

Although the Chinese authorities are making the right noises about opening up their capital markets to foreign/Hong Kong companies, it is likely to be some time before a clear set of rules and regulations is in place for this to come about. For now, renminbi financing for New World China Land and New World Infrastructure will likely remain confined to project loans.

For the six months ended December 1999, NWD reported a net loss of HK$907 million on turnover of HK$9.14 billion, compared with a profit of HK$633 million and revenues of HK$9.60 billion a year earlier. The latest figures included a HK$1.58 billion exceptional loss arising from the listing of New World China Land. Managing director Henry Cheng has said he expects to report a profit for the year ended June when the company releases its results next month. 

Excluding New World CyberBase, NWD expects its earnings before interest, tax, depreciation and amortisation (EBITDA) from sources other than property sales to be some HK$5 billion in the year to June 2001. This EBITDA, says Cheng, will be sufficient to finance the growth of the non-property businesses going forward.

To help finance further investment in property development, NWD has unused credit facilities totalling HK$11 billion.