New World Development Shares Plunge 13% Amid HK$20 Billion Loss Estimate: What Investors Need to Know
By Clare Jim
HONG KONG (Multibagger) - Shares of leading Hong Kong property developer, New World Development (HKG: 0017), plummeted by 13% after the company projected a staggering net loss of up to HK$20 billion ($2.6 billion) for the fiscal year ending in June. This decline pushed the stock to close at HK$6.83 on Monday, marking a 21-year low.
Highlights:
- Projected Loss: New World Development expects a net loss of HK$20 billion for the financial year.
- Share Price: The stock closed at HK$6.83, a 21-year low.
- Core Operating Profit: Expected to fall by up to 23% due to revenue shortfalls.
- Impairment Losses: Estimated at HK$9.5 billion, contributing to the overall loss.
- Debt Concerns: The company has one of the highest debt-to-equity ratios among Hong Kong developers.
- Market Conditions: Weakening liquidity in Hong Kong's residential and commercial property markets is a significant concern.
Detailed Breakdown:
New World Development attributes the substantial loss to several factors:
- Core Operating Profit Decline: The company forecasts a 23% drop in core operating profit due to insufficient revenue.
- Impairment and Fair Value Losses: Non-cash and unrealized items totaling HK$9.5 billion.
- Interest Rate Hikes and Currency Depreciation: Continued increases in interest rates and the depreciation of the Hong Kong dollar have negatively impacted the company’s financials.
Despite these losses, the company emphasizes that the provisions are one-off non-cash items and do not affect cash flow.
New World Development has been under scrutiny for its high debt-to-equity ratio and its efforts to reduce debt. Although Hong Kong's property market hasn't experienced defaults similar to those in mainland China, investor anxiety is rising due to sluggish property markets.
The projected full-year loss follows a first-half net loss of HK$7.4 billion. JPMorgan analysts noted that the pro-forma core net loss might only be between HK$2 billion and HK$3 billion when excluding non-cash items.
"For New World Development, the more important consideration is not earnings, but the balance sheet and refinancing ability," JPMorgan stated. The developer secured HK$16 billion in loan arrangements in July and August, indicating some financial maneuverability.
However, Goldman Sachs issued a "sell" rating, noting that the indicated loss could increase New World's net gearing by 1.5 percentage points to 78.4%. This comes despite efforts to dispose of assets and buy back perpetual bonds. The investment bank also highlighted the risk of no dividend for the second half of the fiscal year.
New World Development’s market capitalization has dwindled to approximately $2.2 billion, a significant decline of nearly 80% since its peak in mid-2021, coinciding with the onset of the debt crisis in China's property sector.
Analysis: Breaking It Down for You
So, what does all this mean for you, the investor or everyday person?
1. Impact on Investments: If you own shares in New World Development, this news isn't great. The company is struggling financially, and its stock has reached a historic low. Be cautious and consider consulting with a financial advisor about your holdings.
2. Market Sentiment: The fall in share price and projected losses reflect broader concerns about the property market in Hong Kong. Weakening liquidity and high debt levels can lead to more volatility and potential losses in property-related investments.
3. Dividend Risk: The potential for no dividend payout means that if you were counting on dividend income from New World Development, you might need to adjust your expectations and financial planning.
4. Long-Term Outlook: While the short-term outlook is grim, the company's efforts to secure loans and reduce debt could stabilize its financial situation. However, this is a challenging period, and recovery might take time.
In summary, New World Development's significant projected loss highlights the challenges facing the Hong Kong property market. Investors should be aware of the risks and consider how these developments might affect their financial decisions. Always stay informed and consult with financial professionals to navigate these turbulent times.