3 Reasons Why There’s Still Upside for New World Development

New World Development Company Ltd (SEHK:17) is one of Hong Kong’s leading listed property developers. It was founded in 1970 by Cheng Yu-tung, whose eldest son Henry Cheng Kar-shun, currently serves as the company’s director.

In preparation for his retirement, Henry Cheng is gradually handing over management of the company to the third generation of leaders. New World Development has performed well in recent years and I anticipate further growth potential as a result of the following three factors.

1. New generation of leaders

Henry Cheng’s oldest son Adrian Cheng joined New World Development in 2006 and was appointed as Executive Vice-Chairman in 2015. In recent years he has gradually taken over leadership of the company. Adrian’s younger brother Brian Cheng was appointed as Executive Director of NWS Holdings (SEHK:659) in 2009 and is responsible for overseeing the group’s infrastructure business and merger and acquisition affairs.

His 38-year-old sister Sonia Cheng is the manager of the group’s hospitality business and was recently appointed as a non-executive director of Chow Tai Fook Jewellery Group Ltd (SEHK:1929). These new appointments complete the handover of New World Development to the third generation of leaders.

New World Development has given its full backing to the new leaders. In the three years following his appointment as Executive Director and Joint General Manager in March 2012, Adrian Cheng oversaw a period of continuous growth in which the company became one of Hong Kong’s largest property developers and received over 100 awards.

2. Improving performance

In addition to injecting new ideas into the company’s management strategy, the next generation of leaders will also help to drive an increase in its profits.

Year Revenue (billion HK$) Profit attributable to shareholders (billion HK$) Annual change (%)
2013/14 56.5 9.73 -31.3
2014/15 55.25 19.11 96.5
2015/16 59.57 8.67 -54.7
2016/17 56.63 7.68 -11.4
2017/18 60.69 23.34 204
H1 2018/19 49.27 11.28 0.13

Source: New World Development earnings reports

As the table shows, profits have fluctuated significantly in recent years. However, profits during the past five years are much higher than 10 years ago, when net earnings were less than HK$4 billion.

During the 2017/18 financial year, both revenue and profits increased, with profits more than tripling to HK$23.3 billion. Performance during the latter half of 2018 was even more impressive, with revenue increasing by an annualized rate of 76% to nearly HK$50 billion.

According to the company’s interim earnings, revenue from property sales more than tripled on a year-on-year basis to HK$29.91 billion (+202.3%), accounting for 60.7% of the group’s revenue. Based on these figures, I expect strong growth in revenue during the 2018/19 financial year.

The hospitality arm of the company is managed by Sonia Cheng, who was appointed as CEO of Rosewood Hotels following its acquisition by New World Development in 2011. In March this year, Rosewood Hotels opened a new hotel in Hong Kong on the site of the former New World Centre. The company also owns 15 other hotels across China and Southeast Asia. As a high-end luxury hotel, Rosewood Hong Kong promises to provide a stable source of revenue for the firm in the coming years.

3. Better-than-average NAV

Shares in New World Development are currently trading for approximately HK$12.30 per share, a 41% discount to the company’s net asset value (NAV) per share, which is just over HK$21. This is significantly higher than other industry competitors such as Henderson Land Development (SEHK:12) with a 30% discount to NAV and Sun Hung Kai Properties (SEHK:16) which has a 29% discount to NAV. I expect this discount to narrow as the company’s performance improves.



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