Despite doubling in price this year, it looks like there might still be more value to be found in New World Development shares. The group is a large property player in Hong Kong and has majority interests in a number of companies listed in Hong Kong. New World China Land and New World Department Store hold the group's property and retail business in the mainland, respectively, while NWS Holdings is its infrastructure arm with projects in Hong Kong, Macau and the mainland. Meanwhile, New World Development, itself, holds the group's huge property interests in Hong Kong and has a market capitalisation of about HK$76 billion. The company's stakes in its listed subsidiaries based on their market capitalisations are collectively worth more than HK$51 billion. (See table.) This implies that investors are valuing the assets held directly by New World Development - this includes New World Tower in Central, the Grand Hyatt and Renaissance hotels, K11 mall, the New World Centre in Tsim Sha Tsui, and many hectares of undeveloped land in Hong Kong - at a bargain price of HK$24.5 billion. Property companies are typically valued using a price-to-book ratio, a measure of the firm's share price to its "book value", or the value of the firm if it went into liquidation today. This is a theoretical but conservative number, because it does not capture all the profits the firm will make in the years ahead as a going concern. Yet, New World Development shares trade at a huge 61 per cent discount to this net asset value. This makes New World Development look cheap. Purer play Hong Kong property peers such as Hang Lung, Hysan, Swire Properties and Sino Land trade at price to book ratios of between 0.68 and 1.04, while Hong Kong conglomerates with extensive property interests like Cheung Kong, Sun Hung Kai, Henderson Land and Wharf trade between 0.70 and 0.84, according to Bloomberg. New World Development's dividend yield of more than 3 per cent is at the high end paid by its peers, while its consolidated net debt to total equity ratio of about 35 per cent looks manageable. The company plans to launch the sale of more than 3,300 residential units in Hong Kong next year, which should sharply raise its property earnings. The amazing thing is that New World Development still looks so cheap even after its near doubling in share price since the start of the year. The question perhaps is not whether it is cheap today, but why was this stock so heavily discounted one year ago? The answer is well known to anyone who owns this stock: New World Development has been grappling with succession issues, after chairman and controlling shareholder, Cheng Yu-tung, stepped down in March. His son, Henry Cheng Kar-shun stepped into the chairman's role but investors were mindful of the last time the son was in charge. In 1989, Cheng retired as managing director of New World Development and passed control to his son, Henry. He led New World Development to make a number of loss-making acquisitions that ramped up the group's debt. Cheng Yu-tung had to retake the reins, sell prized assets to repay debt and nurse the group back to health. New World Development's share price dropped by more than 5 per cent in February this year on news Henry Cheng would succeed Cheng Yu-tung as chairman. But, more damaging for shareholders, was the firm's surprise announcement in October 2011 of a large and deeply discounted rights issue. The dilutive offering came even though the group appeared to have ample cash. This led to a huge plunge in its share price and some to suspect that it was an attempt by the controlling shareholder, who was partially underwriting the issue, to increase its stake on the cheap. New World Development continues to trade at a 61 per cent discount to book value for its Hong Kong property assets does make it look attractive. Although it may not completely close this valuation gap with its peers, its share price looks attractive.
