LO Funds Asia Diversified High Yield Bond, PineBridge Asian High Yield Bond, Pimco GIS Asia High Yield Bond and BNP Paribas Funds Asia High Yield Bond all held stakes in the NWD group that were close to or larger than Morningstar’s category benchmark at the end of April.
This benchmark, the JPMorgan Asia Credit Non-Investment Grade Index, had an approximate weighting of 2.5% in NWD bonds as of March.
That said, this data is as at May 30, and some funds had yet to publish holdings data for April, notes Morningstar’s senior analyst of manager research Arvind Subramanian in a June 3 report. Fund holdings could have further changed in May.
See also: New World’s distress worsens after shock delay on bond interest
Overall, the Asia high-yield bond category held approximately US$160 million ($205.81 million) worth of bonds by market value in February, writes Subramanian. “This value is likely to have declined since then, as bond prices have dropped in recent weeks,” he adds.
In comparison, funds in the Asia bond category, which typically hold between 15% to 30% of their portfolios in high-yield bonds, had relatively lower exposure to the NWD group.
However, Subramanian notes some exceptions. Oclaner Asian Bond held a 5.2% stake in NWD’s debt at the end of April, while LO Funds Asia Value Bond held a 2.5% position.
See also: New World Development’s third CEO in months faces second loss in 21 years
Other Asia bonds listed had smaller exposures of below 1% as at April, such as abrdn-Asian Credit Opportunities (0.9%), Manulife GF Asia Total Return (0.4%) and Fidelity APAC Strategic Income (0.4%).
Most managers had underweight Hong Kong
Morningstar’s analysts earlier reported that 89% of Asian bond funds held an underweight position in Hong Kong at the start of the year, reflecting widespread concerns among managers about weak fundamentals.
While Hong Kong credit was largely shielded from the Chinese property market sell-off between 2021 and 2023, it faced renewed headwinds in 2024, says Subramanian. “Investor concerns over NWD’s credit profile, along with a weak property sector's potential spillover effects on the broader economy, prompted many funds to trim their Hong Kong exposure.”
Recent events are likely to further temper fund managers’ sentiment toward the region, says Subramanian.
Asian high-yield bonds are coming off a “sharp rebound” in 2024, delivering an “impressive” 15% return after several years of lacklustre performance, says Subramanian. “This strong showing significantly outpaced those of their European and US counterparts.”
For more stories about where money flows, click here for Capital Section
The rally was driven by spread tightening across sectors like real estate and metals and mining, as well as “idiosyncratic turnarounds” among market heavyweights, such as Sri Lanka and Pakistan sovereign bonds and Indian corporate Vedanta Resources, according to Subramanian.
However, flows into Asian high-yield bond funds have remained sluggish, as investors tend to see a better risk-reward profile in global bond funds, particularly given elevated US Treasury yields in recent years.
“While the outcome of recent developments at NWD remains uncertain, its relatively large size in the market could weaken returns for the category and weigh on fund flows in the near term,” says Subramanian.
More on New World Development
NWD’s May 30 announcement for four perpetual bonds originally due June 9 to 22 followed the company’s failure to issue a call notice for one of them.
In total, NWD is postponing US$77.2 million of debt obligations, according to Bloomberg calculations.
The events underscore NWD’s weak financial profile as it struggles with a substantial debt burden, says Subramanian.
Morningstar Equity Research analyst Jeff Zhang is not surprised by the announcement, saying in a June 2 note that the delayed interest payment is “in line with expectations”, as NWD’s liquidity “remains tight”.
NWD had HK$156.5 billion ($25.66 billion) in debt outstanding as of December 2024. Zhang expects NWD to prioritise refinancing HK$87.5 billion in bank loans by July over the accumulated coupon payments that can be deferred.
NWD’s bank commitments reportedly exceeded 60% of total refinancing deals as at May 30, and negotiations with other creditors are ongoing. “We think the refinancing should go through, though banks may require higher interest rates and additional collateral,” says Zhang.
NWD’s deleveraging progress hinges on property sales in Hong Kong and mainland China, says Zhang. “While the recent acceleration in home sales has provided some relief, we anticipate a longer recovery period for the segment's profitability, as home prices gradually stabilise.”
Subramanian says NWD’s deferment could lead to an increase in borrowing costs for other companies in the Hong Kong real estate market, as the headlines prompt skittish investors to demand higher risk premia and stronger creditor protections.
However, Zhang does not expect the impact on the sector to be severe because most peers have comparatively lower debt burdens.
“While we believe NWD will likely avert a default, its net gearing ratio (55% at December 2024, excluding perpetual debt) should stay above most peers’,” says Zhang.
NWD previously shared that contracted sales for FY2025 ending June 30 reached about HK$24.8 billion — over 95% of the annual sales target. “Given strong property presales in fiscal 2025, we lift our fiscal 2026-27 revenue forecasts by 2%-3%, but foresee declining margins amid weak pricing,” Zhang adds.
Zhang has a three-star rating on “no-moat” NWD against Morningstar’s five-tier scale, and he is keeping his fair value estimate unchanged at HK$4.40.
“Most of our long-term forecasts are unchanged. We view NWD’s shares as fairly priced and prefer developers with healthier balance sheets and steadier dividend payouts, such as Henderson Land Development,” says Zhang.
As at 9.20am, shares in NWD are trading at HK$4.55.
Revolving door of CEOs
NWD is the listed property arm of Chow Tai Fook, owned by Hong Kong’s Cheng family. Chow Tai Fook owns a 45% stake in NWD, which mainly engages in residential property development and investment properties of retail malls and offices in Hong Kong and mainland China.
NWD also develops high-end hotels across Hong Kong, mainland China and Southeast Asia.
Additionally, NWD holds a 75% interest in New World Department Store China, which operates 24 department stores in mainland China.
Investors turned sceptical on the property developer last year after it reported its first loss in 20 years for FY2024 ended June 30, 2024. The firm saw a revolving door of CEOs last year, with three changes to the top job in two months.
Adrian Cheng, third-generation scion of the billionaire Cheng family, was replaced four years into his role after the flagship property business posted a loss of HK$19.7 billion for FY2024.
His father, Henry Cheng, introduced NWD’s current CEO Echo Huang in an employee townhall meeting on Nov 29, 2024. The company’s stock had been removed from the Hang Seng Index earlier that week following a quarterly review.
The 55-year-old Huang joined the group as the deputy CEO of New World China Land in October 2015 and was promoted to director and CEO of New World China Land in February 2020.
Henry’s other children — Adrian’s siblings — helm the family’s other businesses.
Sonia Cheng, Henry’s second-eldest child after Adrian, is CEO of the privately-owned Rosewood Hotel Group and co-vice chairman of the listed Chow Tai Fook Jewellery Group, alongside her cousin Conroy Cheng.
Brian Cheng is co-CEO of CTF Services, formerly known as NWS Holdings; while youngest son Christopher Cheng is co-CEO of the family’s private investment holding company Chow Tai Fook Enterprises.
Charts: Morningstar
