The former blue chip sets its sights on expansion and regaining investor trust after turning around with a huge profit Things could hardly have gone worse for New World Development (NWD) in 2003 after the property titan was booted out of the Hang Seng Index after having been a blue chip for 30 years. The firm posted its first loss since listing in 1972, spilling red ink to the tune of $4.81 billion, and its net debt soared to $31 billion, leaving it with a gearing ratio of 68 per cent. But since then managing director Henry Cheng Kar-shun, the eldest son of property tycoon Cheng Yu-tung, has apparently guided the company out of its trough. Two years ago NWD underwent a major revamp aimed at centralising strategy at a group renowned for its lack of management focus and incessant related-part transactions. 'I don't want to struggle with issues such as whether we are a blue chip or not. It's just a name and the most important thing is to stay profitable. This is a more practical target for us,' Mr Cheng said in an interview. 'Our business has been on track again after years of restructuring. 'We now have a clearer and more streamlined corporate structure and will focus on our core strength in Hong Kong's real estate business going forward.' Mr Cheng said New World had a land bank of four million square feet to develop over the next four years. It would also replenish its land bank by converting some of its 19.7 million sq ft of agricultural land, but it would be cautious in bidding for land at auctions, he added. 'I am cautiously optimistic about Hong Kong's property market. But it is too difficult to make a precise prediction on its outlook, given the fact that there have been ups and downs in the past.' Mr Cheng has reason to be vigilant since the firm was caught off guard by the Asian financial crisis, the root cause of the over-extended firm's suffering. While rivals such as Cheung Kong and Sun Hung Kai Properties used Hong Kong's great deflation to consolidate their dominant status, NWD barely endured a lost decade. Finally, in late 2002, NWD launched a radical and controversial restructuring under which it injected cash-spinning ports and infrastructure businesses from New World Services into its listed unit Pacific Ports. Since then, NWD has cut its net debt by half to $15 billion, for a gearing ratio of 25 per cent, and Mr Cheng is pledging to reduce that to less than $10 billion by year-end. The company's profit soared 377 per cent to $1.13 billion in the six months to last December, while its cash flow turned positive - to the tune of $3.21 billion - from a negative $785 million in the year-ago period. 'For years, our debt level had been the biggest concern for the market, but we are happy to say that it is no longer an issue for us now,' Mr Cheng said. He said NWD expected to receive about $4 billion this year from the sale of 2,000 residential units in six different housing projects in Hong Kong. He also outlined plans to invest up to $4 billion to beef up NWD's hotel portfolio by adding three new hotels with a combined 1,800 rooms over the next five years. They include a 320-room premium hotel project with the Urban Renewal Authority, a proposed extension of the five-star New World Centre in Tsim Shai Tsui and a four-star hotel in Chinese University in Sha Tin. Mr Cheng said the specifics of the latter two projects were not yet available. NWD runs three hotels with 1,972 rooms in Hong Kong, including the Grand Hyatt. The firm would also be interested in participating in the West Kowloon cultural project, if the government dropped its proposed single tendering for the project, which would restrict it to one developer, Mr Cheng said. Yet despite this picture of apparent well-being, institutional investors remain deeply sceptical of NWD after years of earnings disappointment and opaque business practices compounded by weak corporate governance. 'Only time will tell whether NWD can deliver decent earnings in the future,' said a property analyst with a regional securities house who still recalled with some horror his clients' shocked reaction to the firm's gargantuan 2003 loss. 'Earnings visibility for the company is still low and its return on assets is still among the lowest for listed developers in Hong Kong. But most of all, I think the biggest concern in the market has been lack of confidence towards the existing management.' A fund manager at a US-based asset management company concurred: 'The damage of its past was huge. It will take at least one to two years to change investors' mindset.' Most investors shy away from firms given to high levels of related-part transactions, a practice with which the group has been closely identified. They also reacted negatively to a selective disclosure in 2001 when weak earnings results were leaked - allegedly by management - to a group of favoured analysts. For JPMorgan's property analyst Raymond Ngai Chi-hung, concerns lie in the group's technology arm, New World TMT, dragging back earnings. It is likely to take more than talk from Mr Cheng to win back the investor faith that was badly shaken over the past eight years. Still, the fact that Mr Cheng feels sufficiently confident to talk up his diminished empire speaks for the change in mood at New World Development.