New World Development: Noncore Business Disposal Strategically Positive, but Valuation Lowered

We view New World Development’s 00017, or NWD’s, proposed privatization of its subsidiary NWS, which mainly engages in toll roads, construction and insurance businesses as positive but we do lower our fair value estimate following a review of our key real estate earnings assumptions. NWD’s parent company Chow Tai Fook plans to acquire all NWS shares held by NWD at a 14.5% premium, leading to a total consideration of around HKD 21.8 billion. With the proceeds, NWD intends to distribute an HKD 1.60 per share special dividend, repay debt and shore up cash flow needs. Overall, we think the transaction benefits NWD’s shareholders the most, as the special dividend will likely lift NWD’s dividend yield to over 15% from 8% previously. That said, after taking a fresh look at key assumptions, we trim our fair value estimate to HKD 21 from HKD 45 due to downward revision on margin forecast and potential impact from NWS’ divestment. Following our adjustment, we think NWD’s shares are fairly valued.

We believe the divestment is in line with NWD’s long run business objective of selling none-core assets. With HKD 21.8 billion estimated proceeds from divesting NWS and HKD 6 billion prior asset sales in fiscal 2023, NWD should have reached targeted HKD 25 billion capital recycled for fiscal 2023 and 2024 combined. As such, we expect NWD to temper its pace of asset disposal over the next couple of years. For NWD’s financial strength, as the group aims at improving balance sheet, we think more needs to be done to rein in its heightened gearing ratio. Aside from NWS’ privatization, NWD should further streamline capital expenditure and retire high-cost debt to reduce net gearing to below 40%, in our view.