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NWD's HK$123.66 Billion Debt Crisis: Can They Recover?

NWD's HK$123.66 Billion Debt Crisis: Can They Recover? 14th October 2024 – As New World Development (NWD) embarks on a new era under non-family leadership, the pressing question becomes: How much debt must be shed for the company to regain its financial footing? New World Development’s debt crisis is a cautionary tale of ambitious expansion colliding with economic headwinds. The company’s net gearing ratio, a key measure of financial health, has ballooned to an alarming 55%, up from 43.2% just two years prior. This level of indebtedness is unsustainable in the current high-interest rate environment and poses a significant threat to NWD’s long-term viability. Only look at the interest payments alone. With an estimated average financing cost of 5%, the company is burdened with monthly interest payments of approximately HK$625 million. This financial drain not only hampers NWD’s ability to invest in new opportunities but also erodes shareholder value, as evidenced by the company’s market capitalisation plummeting from HK$102.7 billion in 2019 to a mere HK$20.4 billion today. The company must significantly reduce its debt load. But how much is enough? Most analysts concur that NWD should aim to bring its net gearing ratio down to around 35-40% in the medium term. This level would align more closely with industry norms and provide a much-needed buffer against market volatility. To achieve this, NWD would need to pare down its debt by approximately HK$30-40 billion over the next 2-3 years. This debt reduction target is ambitious but necessary. It would require a multi-pronged approach, combining asset sales, operational streamlining, and a strategic reassessment of the company’s portfolio. NWD has already begun this process, divesting non-core assets such as the D-Park shopping centre and stakes in its infrastructure arm, NWS Holdings. The company has announced plans to sell an additional HK$13 billion worth of assets in 2025, including the Kai Tak Sports Park. However, asset sales alone will not be sufficient. NWD must also focus on improving its operational efficiency and cash flow generation. This could involve renegotiating contracts, optimising its property management practices, and potentially scaling back or postponing capital-intensive projects that are not immediately accretive to earnings. The company’s new CEO, Eric Ma Siu-cheung, faces the unenviable task of balancing these debt reduction efforts with the need to maintain NWD’s competitive position in the market. Ma must navigate the delicate process of unwinding some of Cheng’s more ambitious projects without completely abandoning the company’s aspirations for growth and innovation. One potential area of focus could be NWD’s mainland China operations. While expansion into the mainland was a key pillar of Cheng’s strategy, the current economic slowdown and regulatory uncertainties in China’s property market make this a prime area for reassessment. Selectively divesting or scaling back mainland projects could provide a significant boost to NWD’s debt reduction efforts. As NWD embarks on this debt reduction journey, it must also contend with broader market challenges. Hong Kong’s property market remains sluggish, with weak demand in both the residential and commercial sectors. The company’s ability to generate cash flow from property sales and rentals will be crucial to its debt reduction efforts, but this may prove challenging in the current economic climate. Moreover, NWD must navigate the changing dynamics of Hong Kong’s business landscape. The city’s role as a global financial hub is evolving, and the company must adapt its strategy accordingly. This may involve a shift away from ultra-luxury developments towards more affordable housing options or a greater focus on mixed-use projects that can generate stable, recurring income. The risks for NWD are immense. If it fails to substantially lower its debt, the company could face additional credit rating downgrades, increased borrowing costs, and possible liquidity problems. In the most severe scenario, NWD might have to resort to selling assets under distress or even consider restructuring. For Eric Ma and his management team, the challenge is clear: they must drastically reduce NWD’s debt while simultaneously charting a new strategic direction for the company. This will require difficult decisions, potentially including further job cuts, project cancellations, and a fundamental reassessment of NWD’s business model. For Adrian Cheng, watching from the sidelines in his new role as non-executive vice-chairman, the next few years will be a test of his legacy. The “grand visions” he championed during his tenure as CEO now hang in the balance, their fate tied to NWD’s ability to navigate the treacherous waters of debt reduction and strategic realignment. Stay tuned for more updates. Don't forget to like, comment, and subscribe for the latest in financial news! #kennethluk @kennethluk3153