New World Development: Noncore Business Disposal Strategically Positive, but Valuation Lowered

We view New World Development’s, or NWD’s, proposed privatization of its subsidiary NWS, which mainly engages in toll roads, construction and insurance businesses as positive but we do lower our fair value estimate following a review of our key real estate earnings assumptions. NWD’s parent company Chow Tai Fook plans to acquire all NWS shares held by NWD at a 14.5% premium, leading to a total consideration of around HKD 21.8 billion. With the proceeds, NWD intends to distribute an HKD 1.60 per share special dividend, repay debt and shore up cash flow needs. Overall, we think the transaction benefits NWD’s shareholders the most, as the special dividend will likely lift NWD’s dividend yield to over 15% from 8% previously. That said, after taking a fresh look at key assumptions, we trim our fair value estimate to HKD 21 from HKD 45 due to downward revision on margin forecast and potential impact from NWS’ divestment. Following our adjustment, we think NWD’s shares are fairly valued.