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Company in focus: Can Sun Hung Kai restore investor confidence?

Hong Kong property tycoon Thomas Kwok, left, is embraced by his son Adam after being granted bail by the Court of Final Appeal in Hong Kong on July 12.   © AFP-JIJI

HONG KONG Emotions ran high when Thomas Kwok Ping-kwong walked free on bail set at 10 million Hong Kong dollars ($1.3 million) on July 12. The disgraced property tycoon was greeted by his son Adam Kwok Kai-fai, and the two hugged in front of a sea of cameras and jostling journalists.

"When you have lost something in life like freedom, you know how precious it is," said Thomas, 64. The former co-chairman of Hong Kong's flagship developer Sun Hung Kai Properties is making a final appeal against his conviction in the territory's highest-profile corruption scandal. A hearing in the case is scheduled for next year.

Outside the courtroom the upbeat Thomas, in a brown suit and red tie, gave a thumbs-up and waved to relatives and supporters. But he showed signs of weariness. His trademark black hair had turned pale gray during the roughly 18 months he had served of a five-year sentence.

Raised in one of Hong Kong's most powerful families, Thomas once led Asia's most valuable property empire. The developer has long been a bellwether for the city's property sector, but the protracted graft scandal has rekindled fears that the group's reputation might be fading amid weak corporate governance and family disputes.

Thomas stepped down as co-chairman and co-managing director at Sun Hung Kai after he was sentenced in 2014 for paying HK$8.5 million to Rafael Hui, a former chief secretary -- the territory's second-highest official -- to be the group's "eyes and ears" in government. Thomas's brother Raymond Kwok Ping-luen, who shared the top leadership position, was also arrested but later acquitted of all charges. He has since been running the group as chairman.

Thomas' resignation did little to restore the company's image. He publicly stated that he would rather learn to ride a bike and study theology than return to office while on bail. But critics suspect he can still influence the group, through acting as a consultant or appointing close relatives to the board.

His son Adam became an executive director in 2014. This past April a cousin, Christopher Kwok, the current chairman's younger son, was named executive director. Another cousin, Edward Kwok, became an alternative director to the chairman.

STILL INFLUENTIAL? "Thomas does not need to have an official position to be influential," said Joseph Fan, a professor who researches family businesses at the Chinese University of Hong Kong. "If his family members do not hate him ... he can play an important role behind the curtain."

Sun Hung Kai has distanced itself from Thomas and the scandal. A spokesperson told the Nikkei Asian Review that the former co-chairman would not play any role in the group's business operations.

"It has been made very clear all the time that Sun Hung Kai Properties had never been party to the litigation, which only involved certain individual directors of the group in their personal capacities," said the spokesperson. "To that extent, it will have no impact on the group's corporate governance."

Nonetheless, family issues have spilled over into Sun Hung Kai's boardroom in the past. Tensions surfaced in 2008 when Thomas and Raymond's eldest brother, Walter Kwok Ping-sheung, was ousted as chairman. It was said to be for a "personal reason," but according to various reports, the relationship between Walter and his two brothers soured over the years as Walter's behavior grew erratic after he was kidnapped in 1997, and as his decision-making became influenced by his mistress.

"Family governance in the [Kwok] family is weak," as it is in many Chinese business families, Fan said. "Together with a poorly designed trust, they become a deadly formula."Kwong Siu-hing, the now 88-year-old mother of the three brothers, took charge of the company before handing over the chairmanship to Thomas and Raymond three years later.

Company co-founder Kwok Tak-seng chose to pass on his effective controlling stake in the company, over 40%, to his wife and three sons in the form of a trust. His intention most likely was to coax his family members into expanding the business by closely cooperating with one another.

Observers like Fan see this form of ownership as problematic. One reason is that there is not an option for share buybacks among family members in the case of a conflict, as the trust is set up as a perpetual entity and its underlying assets are indissoluble. With all beneficiaries locked in to act in concert, any infighting can become a drag on the trust. That is what happened at Sun Hung Kai.

It seems like rivals learned a lesson from Sun Hung Kai. Li Ka-shing, Hong Kong's richest man who runs the conglomerate CK Hutchison Holdings and its real estate arm Cheung Kong Property Holdings has openly declared that he will bequeath his whole business empire to his elder son Victor Li Tzar-kuoi when he steps down. His younger son, Richard, would walk away with financial compensation.

On top of that, the mother carries significantly sway over her three son and, subsequently, over the group as a whole."If [she] passes away prematurely, it will make a resolution more difficult," Fan added.Were an unprepared younger generation to take the reins at Sun Hung Kai, that would be risky for the business, Fan said -- not to mention the unsettling impact on investors. Even though Raymond was found innocent in the graft case, he was arrested at one point in 2014, putting both co-chairmen in custody.

Still, Sun Hung Kai's business seems barely affected by its boardroom dramas. It is one of Asia's largest developers by market capitalization, which surged to $40 billion, nearly double that of Henderson Land.

OUTPERFORMING PEERS The developer has outperformed many peers even after reporting a 6.2% dip in earnings to HK$14.7 billion for the six months ended in December, following a property downturn last year.

Home prices in Hong Kong have edged up since April after falling nearly 10% from last September's peak, according to official statistics. In the first six months of this year, the overall property sales volume tumbled 40% from a year earlier amid weaker market sentiment.Rival Hang Lung Properties saw its full-year net profit dive 56% on a sharper sales decline, while New World Development posted a 44% decline in first-half earnings due to the slowing economy in mainland China.

Analysts say Sun Hung Kai's balanced portfolio -- with recurring rental revenue from commercial properties accounting for 50% of earnings -- has helped cushion market volatility. It is the owner and builder of several landmark assets on Hong Kong's skyline, including the two tallest skyscrapers, the 118-story International Commerce Centre and the 88-story International Finance Centre.

While Sun Hung Kai's mainland China operation currently contributes only about 10% of operating profit, most expect the developer to accelerate its expansion there. Following its successful transfer of the ICC and IFC model from Hong Kong to China, the company will complete a massive commercial project in Xujiahui, a prime district in central Shanghai, by year-end.

The developer has also been among the most aggressive in launching projects in Hong Kong this year. It is rolling out eight of them, including several mass residential projects in suburban areas bordering mainland China.

Some have described Sun Hung Kai's tactics as a desperate move to meet sales targets and shed inventory ahead of economic uncertainties. But Deputy Managing Director Victor Lui justified the group's approach.

"Brexit has spurred Hong Kong's property market as investors will try to hedge against risks by buying into bricks and mortar,"

Sun Hung Kai's Lui told reporters on July 19. "We can expect quite a lively property market in the second half of the year.

Sun Hung Kai's shares have gained more than 20% since the U.K. voted in late June to leave the European Union, while losing 12% over the last 12 months, slightly outperforming the benchmark Hang Seng Index.

The 118-story International Commerce Center in the Tsim Sha Tsui district of Hong Kong (Photo by Xaume Olleros/Anadolu Agency/Getty Images)

"Its share performance beat most of its property rivals in the last six months, although it is trading at a historic low price-to-earnings ratio of around 10, against the industry average of 12 to 15.

Some institutional investors might shy away from Sun Hung Kai because of its governance issues, suggested Phillip Zhong, a senior equity analyst at U.S.-based Morningstar.

Strolling out of the courtroom the other day, Thomas said that first he wanted to dine with his mother and tell her, "I have returned, Mom." Then, he would have his hair dyed."The corruption charges didn't really affect the company's performance," Zhong said. "Yet it's more an issue of confidence and how investors may ... perceive it as having more risks."

By putting his family first, perhaps Thomas, upon his return, can keep any feuds from cropping up.

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