New World Development Earnings: Dividend Cut and High Gearing the Key Concern, Valuation Lowered

We lower our fair value estimate of New World Development 00017, or NWD, to HKD 17 from HKD 21, as its fiscal 2023 (ended June 30) revenue and operating profit both missed Refinitiv consensus, which we think was due to compressed home prices and profit margins for residential properties. We are more concerned about NWD’s cut of its regular dividend by over 60% for fiscal 2023 (stripping out special dividend). While NWD’s net gearing ratio of 47% stayed elevated even after factoring in NWS’ business spinoff, we view the firm’s liquidity risk as manageable given limited short-term refinancing needs and pressure on cash flow. As soft homebuying demand in Hong Kong and mainland China should persist, we trim our forecast of NWD’s average selling price for residential projects, as well as of the gross margins and dividend payout through fiscal 2028, but are more positive on investment properties’ earnings amid retail sales pickup and floor area expansion. Despite our valuation revision, NWD’s shares remain slightly underpriced as we think the recent selloff on financing concerns is overdone.

With tourist traffic resuming in the first half of 2023, NWD saw a mild investment property income rebound of 4% year on year for fiscal 2023. Notably, flagship K11 commercial projects’ revenue and operating profit rose by 12% and 16% compared with fiscal 2022, respectively. Management reaffirmed an upbeat view on K11 malls’ brand equity in Hong Kong and foresees a 30% footfall increase during China’s National Day holidays versus last year. While competition among mainland China investment properties has intensified, we believe the gradual opening of K11 properties in Shenzhen and Hangzhou will translate to double-digit recurring revenue growth with steady margins over the next few years.