Father-son team herald a New World order

Business | Ivan Tong 28 Sep 2018

I wrote a blog post in January this year about why Hong Kong property stocks would under-perform mainland property stocks.

There were two reasons this.

First, large southbound fund flows had a significant impact on the valuation of Hong Kong stocks and there was also a tendency by mainland investors to speculate on Chinese property stocks, which they are familiar with.

Another reason is that though local large-scale property developers have operated for decades, these conservative firms are facing a run-in period with the second-generation passing on the mantle to the third - and this is a change that the market needs time to digest and accept.

However, things change quickly.

In the last six months, southbound trade has seen signs of a decline and the risks for Chinese property stocks have increased.

Meanwhile, traditional Hong Kong property stocks have gradually become more valuable.

New World Development's (0017) full-year results ended June this year shows its net profit surged 204 percent to HK$23.3 billion, while its core profit reached HK$8 billion, up 12 percent yearly. Its property sales during the period was HK$24.7 billion, significantly better than expected.

As soon as the news broke, New World Development's shares rose 6 percent, and an important reason for this is that its ratings were raised by major investment houses.

Apart from this, many investors might have missed another equally important bit of news.

At the press conference, chairman Henry Cheng Kar-shun - who is gradually recovering from a stroke - kept talking about how he and his son Adrian Cheng Chi-Kong work together in the business - the father strategizing and the son executing - to demonstrate their perfect teamwork.

Adrian Cheng has focused on injecting innovative elements into the group in the past few years.

The K11 mall which he founded is a creative and imaginative brand that caters to young people.

It has successfully bridged the gap between the mainland and Hong Kong and has great potential in the Great Bay Area in the future.

In Hong Kong, the Victoria Dockside - an integrated commercial development formerly known as the New World Centre - will be completed soon.

Its annual rental income may exceed HK$2 billion, double the existing rental income of the company, according to the report of an investment firm.

New World Development's book profit doubled mainly due to the significant increase in the valuation of Victoria Dockside but the project will only start to generate income once it is completed in the coming year.

Many global fund managers who are not familiar with Hong Kong's market may be surprised that the valuation of Hong Kong property stocks remains low.

Now that US Federal Reserve has announced a rate hike, the Hongkong and Shanghai Banking Corporation has raised its interest rate by 0.125 percent as well as its prime rate for the first time in 12 years, with other banks following suit.

Also, a statement by the Fed shows that its monetary policy has changed from loose to neutral.

We still are waiting to see whether this could signal a rebound or is negative news for the property market.

However, the risks of investing in Chinese property stocks is increasing today.

A market rumor that the government will stop pre-sales of uncompleted flats has already caused the stock prices of mainland property firms to fluctuate widely.

Hong Kong property developers too are affected by changes in the property market but their overall financial situation is quite sound and stocks such as New World Development - which has a large and stable rental income and a very low gearing - should be a good choice for investors.

Ivan Tong is Editor in Chief of The Standard.

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