Last week, one of the most noteworthy stories from the Hong Kong stock market was about New World Development once again changing its chief executive.
As one of the four top developers here, it is unusual indeed for NWD to replace its chief for the second time in two months.
Its explanation was that the importance of its business in China had been continuing to grow, with 40 percent of its revenue in the past decade coming from there.
As such, it makes a lot of sense to appoint Echo Huang Shaomei, the executive director in charge of mainland operations, as CEO. After all, NWD is the most active of the four developers across the border.
However, current issues faced by NWD partly stem from rapid changes in Hong Kong over the past few years.
With persistently high levels of leverage, it is naturally under significant pressure. Nevertheless, the mainland's market problems should not be overlooked.
Although the mainland's share of revenue has further increased in the latest results, the primary reason for this is the Hong Kong market's poor performance.
Thus, even though there has been a decline in revenue from the mainland, its proportion of total revenue still rose.
Additionally, there is a very important factor that needs to be taken into account: the fair value change losses of NWD's investment properties have risen to HK$3.1 billion.
However, it remains unclear whether these losses are greater here or in the mainland. A detailed answer may only come once financial statements are released.
Nevertheless, given the continuous decline in mainland property prices, it is certain that the fair value losses there won't be insignificant.
Given the situation, is Huang truly the best choice to resolve issues facing NWD?
If the current "winter" of the Chinese property market persists, NWD cannot rely solely on the Chinese market to address its present high leverage problem.
As prices in both markets continue to slip, the fair value of its investment properties will also keep falling, which will only lead to an increase in its leverage ratio.
Therefore, asset disposals seem to be the best approach.
However, if the price fetched is lower than an asset's valuation in the annual report, this would lead to a one-time loss.
The overall asset scale will also decrease after sales.
If the reduction in assets exceeds the reduction in liabilities, this will also prevent NWD's leverage ratio from decreasing.
Given the current investment atmosphere in Hong Kong and China, how many buyers are willing to purchase NWD's assets at a high price?
The only way out seems to be selling them to the parent company.
Except that Chow Tai Fook Enterprises has already purchased NWD's assets thrice this year.
Excluding Kai Tak Sports Park, NWD has sold HK$23.35 billion worth of assets to Chow Tai Fook.
How many more assets can Chow Tai Fook buy and can it purchase them at a price higher than market valuation to help NWD resolve its leverage problem?
These remain unknown variables.
Faced with so many issues, NWD chairman Henry Cheng Kar-shun stated at the annual general meeting that any activities requiring cash would not be considered.
With that said, how should we interpret the letter of intent to develop the Northern Metropolis that NWD recently signed?
Given that it is just an letter of intent, it has no legal obligation.
Does this mean NWD still intends to invest even when it is in financial distress?
This letter of intent should therefore not be taken too seriously.
Andrew Wong is a veteran independent commentator
