Experiential Retail Expansion And Northern Metropolis Development Will Drive A Powerful Future Upswing

Catalysts

About New World Development

New World Development is a Hong Kong based developer and operator of high quality residential, commercial and experiential retail properties across Hong Kong and Mainland China.

What are the underlying business or industry changes driving this perspective?

• Recovery in Hong Kong property sentiment, combined with falling interest rates, is already translating into strong sell through for flagship residential projects such as the Pavilia series and HOUSE MUSE. This supports a sustained rebound in contracted sales and future development revenue.
• Policy support and structural upgrades in Mainland China real estate, particularly in tier 1 cities such as Shenzhen and Guangzhou, are unlocking demand for high quality projects such as Shenzhen Longgang 188 and Central Park View. This underpins higher pricing power and improving segment earnings.
• Rapid growth of experiential and luxury consumption in Hong Kong and Mainland China is driving strong foot traffic and sales growth at K11 MUSEA, Art Mall and new K11 projects such as Shenzhen ECOAST, supporting steady increases in recurring rental income and improved net margins.
• Acceleration of Northern Metropolis development and related transport infrastructure is catalyzing the conversion of over 15 million square feet of farmland into higher value residential and mixed use land bank. This is creating embedded asset value and future earnings visibility as projects launch from FY 2027 onward.
• Large scale refinancing that pushes out maturities to 2028, combined with disciplined CapEx cuts, lower funding costs and positive operating cash flow, is reducing annual financing expenses and creating operating leverage, which may enhance net profit as revenue normalizes.

Assumptions

This narrative explores a more optimistic perspective on New World Development compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming New World Development's revenue will grow by 13.3% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -62.0% today to 4.5% in 3 years time.
• The bullish analysts expect earnings to reach HK$1.8 billion (and earnings per share of HK$0.73) by about December 2028, up from HK$-17.2 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as HK$-2.7 billion.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 19.1x on those 2028 earnings, up from -1.1x today. This future PE is greater than the current PE for the HK Real Estate industry at 13.5x.
• The bullish analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.02%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Despite recent policy support, the Mainland China property market remains structurally weak with ongoing impairments on legacy projects and asset disposals at a loss, which could cap selling prices and slow volumes over multiple years, limiting revenue growth and delaying a sustainable recovery in earnings.
• The group still carries very high total debt of around HKD 146 billion and a net gearing ratio above 58.1%. Prolonged high funding costs or a slower than expected pace of deleveraging could erode operating leverage and keep net margins and earnings under pressure even if sales improve.
• Significant reliance on asset disposals and farmland conversion in the Northern Metropolis to recycle capital exposes the company to policy execution risk and potential buyer fatigue in a crowded divestment environment, which may constrain cash inflows and prolong balance sheet strain, affecting both cash flow and net profit.
• Large investment property and K11 projects such as 11 SKIES and new Mainland K11 malls depend on sustained growth in luxury and experiential consumption. Changes in consumer spending patterns, tourism flows or competition could lead to further valuation write downs and weaker rental growth, compressing segment results and overall net margins.
• The company has suspended dividends and perpetual bond coupons to preserve cash. Any need to pursue equity raising, liability management exercises or further refinancing in a volatile capital markets environment could signal continued financial stress, diluting shareholder value and constraining future earnings per share growth.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for New World Development is HK$9.51, which represents up to two standard deviations above the consensus price target of HK$5.36. This valuation is based on what can be assumed as the expectations of New World Development's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$11.0, and the most bearish reporting a price target of just HK$2.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be HK$40.2 billion, earnings will come to HK$1.8 billion, and it would be trading on a PE ratio of 19.1x, assuming you use a discount rate of 13.0%.
  
• Given the current share price of HK$7.27, the analyst price target of HK$9.51 is 23.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.