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Wealthy property heir bets big on troubled Hong Kong

That bet needs to pay off, especially as Beijing’s tightening grip on Hong Kong limits investment options elsewhere for its tycoons.”We want to be the leading and the largest Hong Kong developer in the Greater Bay Area,” New World’s Deputy Chief Financial Officer Edward Lau said in an email. “We have a significant capex and growth plan.”

To fund his China strategy, Cheng is borrowing money and selling assets. His shift shows the challenges faced by the new generation of Hong Kong tycoons – from Li Ka-shing’s son and successor Victor Li to the Lee brothers who now run Henderson Land Development Co, the city’s third-largest property empire by market value – as China’s growing heft in the former British territory upends the business landscape their fathers built their fortunes on.

New World CEO Adrian Cheng has left his family exposed to some of the city's largest projects at a time when the coronavirus pandemic and political unrest is crippling its economy.

New World CEO Adrian Cheng has left his family exposed to some of the city’s largest projects at a time when the coronavirus pandemic and political unrest is crippling its economy.Credit:Bloomberg

While its gaze may be swivelling to the mainland, New World’s long-running focus on Hong Kong has meant some of its most costly building projects are coming to fruition just as the wider political uncertainty puts a question mark over the city’s future.

As executive vice-chairman in 2018, Cheng helped win a bid to build and operate a 28-hectare sports complex at the site of Hong Kong’s old airport, including a 50,000-seat stadium and 10,000-seat arena. It is targeted for completion in 2023. While the local government will fund the building cost of HK$30 billion, New World will cover all future operating costs and pay the government 3 per cent of the complex’s gross income.

Cheng also spearheaded New World’s successful bid in May 2018 for a HK$20 billion shopping-and-entertainment complex at the airport. The 3.77 million-square-foot Skycity, scheduled to open in phases between 2023 and 2027, will include the biggest mall in Hong Kong, but is being built as retail sales in the city continue their year-long slump and tourism is almost non-existent given the virus border curbs.

An arts patron who’s on committees of museums in New York, London and Paris, Cheng also drove the re-development of New World Centre, a group of drab 1970s buildings in Hong Kong’s Kowloon district, into Victoria Dockside, a $US2.6 billion office and commercial project which includes an art and culture complex.

“It’s impressive that New World won a lot of contracts, mostly related to Adrian Cheng’s energetic and aggressive style,” said Simon Lee, co-director of the international business and Chinese enterprise program at the Chinese University of Hong Kong. “But New World paid lots of money in getting those contracts and we don’t know if the tourism market will rebound.”

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That uncertainty is likely to be reflected in New World’s earnings, due to be reported next week. As the pandemic batters its businesses, adjusted net income in fiscal year ended June is likely to drop about 12 per cent from 2019 to HK$7.9 billion, the steepest slide since 2011, according to the average of 12 analysts’ estimates compiled by Bloomberg. The profit drop could be worse than the estimates on lower sales, according to a Bloomberg Intelligence report published Thursday. New World declined to make Adrian Cheng available for an interview.

The Hong Kong that Cheng is operating in is a different place to the boom town where his grandfather Cheng Yu-tung got his start. The company patriarch was an apprentice at the Macau gold shop of a family friend, Chow Chi Yeun, who founded Chow Tai Fook. He then married Chow’s daughter and eventually used the profits from selling gold to get into the property market, founding New World in 1970. These days, his son Henry, still New World’s chairman, is Hong Kong’s second-richest man with a $US20 billion fortune.

The Chengs have made efforts over the years to diversify out of Hong Kong, but with mixed success. A partnership with Donald Trump to build the Riverside South buildings on Manhattan’s West Side soured, with Trump filing an unsuccessful lawsuit. The Hong Kong investors eventually sold the project. The Chengs have bought an Irish plane leasing company, an Australian utility and a resort in the Bahamas.

It’s a testing time for the Cheng family businesses, especially for Adrian Cheng. He must be under some pressure to prove the new business model actually works.

Jackie Yan, a professor who specialises in corporate management and strategy at the University of Hong Kong

Now any expansion out of Greater China is likely to be even more difficult for Adrian Cheng. The national security law introduced by Beijing earlier this year – which gives Hong Kong’s government new powers to go after the opposition – has further increased tensions between China and the West. Countries such as the US, UK and Australia are strengthening scrutiny on deals involving companies with links to China. Henry Cheng was one of several tycoons who expressed support for the new law ahead of its approval by the National People’s Congress.

“In the past, people thought diversification was good, but now there are risks in overseas markets,” said Raymond Cheng, an analyst at CGS-CIMB Securities, who has an add rating for New World’s stock. “If Hong Kong-based companies want to invest overseas, they will be regarded as Chinese companies and it will be more difficult for them do business.”

That means expansion into mainland China probably offers New World one of the few new avenues of growth. New World has invested in six urban redevelopment projects in Guangdong, according to the company, and plans to open 36 of its K11-brand retail and commercial projects in nine mainland cities and in Hong Kong by 2025. It currently has 12 such projects. In August, New World won a 4.1 billion yuan bid for an upscale commercial complex site in central Shanghai, triggering an effusive statement from the company’s China subsidiary hailing the new boss’s “extraordinary assertiveness, sharp and unique insight, and innovative business thinking.”

Funding such expansion has seen New World sell $US1.45 billion of bonds in 2020, about 7 per cent of the record $US20 billion in offshore corporate bonds that analysts say were issued by Hong Kong and Macau borrowers this year. The company is raising funds in a strategic way to help it generate returns that exceed the cost of debt, said Lau, the deputy CFO.

Still, it’s borrowing much more than its peers. During the same period, Hong Kong’s other large indebted developers raised a combined $US2.2 billion, according to data compiled by Bloomberg.

“This is a lot of US dollar bonds for investors to digest given they are also vulnerable to bad headlines,” said Owen Gallimore, head of credit strategy at ANZ in Singapore. “The New World group has always run with the highest leverage among the Hong Kong property blue chips and more onshore exposure. Bond investors aren’t adequately compensated for the risk at the moment.”

New World's long-running focus on Hong Kong has meant some of its most costly building projects are coming to fruition just as the wider political uncertainty puts a question mark over the city's future.

New World’s long-running focus on Hong Kong has meant some of its most costly building projects are coming to fruition just as the wider political uncertainty puts a question mark over the city’s future.Credit:Getty Images

In the fiscal year through June 2020, New World sold more than HK$10 billion in assets, including its stake in a major shopping mall adjacent to the Macau ferry terminal. It recently agreed to sell Hong Kong public bus routes it owns to a consortium of investors for HK$3.2 billion.

New World says it’s targeting to dispose of HK$15 billion of what it calls non-core assets in the fiscal year ending June 2021. These sales are meant to fund Cheng’s bet on a new future. Yet, it’s also one that’s looks more uncertain.

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So far, investors seem to be taking a wait-and-see approach. Shares of New World are down 13 per cent in 2020 amid a 22 per cent slump in the Hang Seng Properties Index. Spreads on the company’s 6.25 per cent perpetual bond widened about 116 basis points over the same period, a 28 per cent jump and largely in line with the broader Asian dollar bond market, data compiled by Bloomberg show.

“It’s a testing time for the Cheng family businesses, especially for Adrian Cheng,” said Jackie Yan, a professor who specialises in corporate management and strategy at the University of Hong Kong. “He must be under some pressure to prove the new business model actually works.”

Bloomberg

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