Hong Kong tycoons to sell billions in assets to cut debt
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Recovery has been slow since Hong Kong reopened at the start of the year.
PHOTO: REUTERS
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HONG KONG – Swire Pacific has become the second notable Hong Kong company to announce plans to offload assets in as many days as part of efforts to reduce debt in the face of rising borrowing costs.
The conglomerate announced late on Wednesday that it will sell its United States beverage business to its controlling shareholder run by the wealthy Swire family for US$3.9 billion (S$5.28 billion).
The sale would lower one measure of the company’s indebtedness by more than one-third, it said in a statement.
The company also proposed a special dividend of about HK$11.7 billion (S$2.02 billion) representing about half of the expected gain from the disposal.
The deal came a day after the billionaire Cheng family announced a similarly structured US$4.5 billion deal to buy a unit owned by builder New World Development.
The move would effectively shift cash from the family’s investment holding company to New World, which is one of the city’s most indebted real estate firms.
Rising borrowing costs are making it tougher for companies across the globe to juggle their debt loads.
In Hong Kong, which imports its monetary policy from the US due to a currency peg with the greenback, the one-month cost of interbank borrowing has jumped to about 5 per cent from less than 1 per cent a year ago.
A rare downturn in the property market is adding to economic pressures, with major developers resorting to providing discounts and various perks to boost sales.
“Both deals make a lot of sense,” said Forsyth Barr Asia senior analyst Willer Chen. The asset sales will generate capital to strengthen the companies’ balance sheets while sharpening their strategic focus, he said.
Investor reaction to the Swire news was positive.
The company’s stock price jumped as much as 8.2 per cent on Thursday in Hong Kong, the most since August, before paring gains to 5.2 per cent.
New World shares are trading below the level before the deal was announced on Tuesday.
Under the agreement, Swire Coca-Cola, USA, will be sold to a wholly owned subsidiary of John Swire and Sons.
The US unit produces, sells and distributes Coca-Cola and other beverages in 13 states across the western US and will continue to do so after the sale.
The conglomerate will still charge an annual management service fee from the US business.
The sale is consistent with Swire Pacific’s focus on Greater China and South-east Asia, the company said.
Profit at Swire Pacific, one of the city’s largest developers and owner of Cathay Pacific Airways, took a hit from strict pandemic measures.
In New World’s first-half earnings, the property firm saw underlying profit fall 14 per cent to HK$3.36 billion due to Covid-19 disruptions.
Recovery has been slow since Hong Kong reopened at the start of 2023.
Commercial real estate is suffering from a lack of tenants.
The overall grade A vacancy rate was almost 15 per cent in April, more than three times the level in 2019, data from Colliers International Group shows.
Hong Kong’s residential market is showing fresh signs of weakness after a short-lived rebound in the first quarter.
Home prices may end the year unchanged from the start of 2023, suggesting a 7 per cent drop, Citigroup said in May.
A gauge of second-hand property prices is down 13 per cent from its record in 2021.
Tourism – a big driver of retail sales – remains lacklustre.
Visitor numbers from mainland China were just 54 per cent of 2019 levels in April, according to the Hong Kong Tourism Board.
At the same time, higher borrowing costs are making it more expensive for companies to service their debts.
New World, founded by the late billionaire Cheng Yu-Tung, is one of the most indebted Hong Kong developers among its larger peers, with a net debt-to-shareholder-equity ratio of about 47 per cent.
The company’s net gearing would decrease to around 42 per cent after the deal.
Other conglomerates may follow the moves by New World and Swire, Forsyth Barr’s Mr Chen said, adding that smaller property developers with low valuations may also consider privatisation amid weak market sentiment.
Swire Pacific’s planned sale also reflects the company’s priority on building up its Asian business. In 2022, the company agreed to buy Coca-Cola Company’s bottling operations in Vietnam and Cambodia for about HK$1 billion, marking its first foray into the South-east Asian beverage market.
The group’s management said on a call that it will retain its Coca-Cola franchises in China, which contributes about half of its revenue from the beverage business, Hong Kong, Taiwan, Cambodia and Vietnam, Goldman Sachs Group analysts including Mr Simon Cheung wrote in a note on Thursday.
Net proceeds from the asset sale will mostly be used to expand the conglomerate’s core property and beverage businesses, as well as investing in healthcare in China and South-east Asia, said Citigroup analysts, including Mr George Choi.
Swire Pacific, one of the last remaining British trading houses in Hong Kong, has been increasingly looking at China for growth. In 2022, it committed US$15 billion over the following decade to develop its property and healthcare businesses in the country. BLOOMBERG
