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Limit to political business model prompts New World to diversify

A Chow Tai Fook store in Causeway Bay, Hong Kong

HONG KONG -- Major Hong Kong conglomerate New World Development group faces a bumpy ride as it attempts to diversify amid a toughening business environment.

Jewelry retail and property development, which form the New World group's main business, have fallen into slump in the face of China's economic slowdown, revealing the limits of a business model based on close ties with the Communist Party elite.

In a bid to turn the situation around, the New World group has launched new businesses, such as aircraft leasing and the development of a casino resort in Australia.

"Ring designs are outdated. I like Tiffany better," said one shopper in her mid-twenties at a downtown Hong Kong store operated by Chow Tai Fook Jewellery Group, one of the group's core companies.

Chow Tai Fook operates more than 2,300 jewelry stores, predominantly in mainland China. Gold products, which are bought as investments just as much as for gifts, form a large portion of its product lineup. But while the brand is trusted by elderly consumers, it is being shunned by young people.

The company said on Tuesday that its net profit fell 46% in the year ended in March to a six-year low. Henry Cheng Kar-shun, who heads the New World group as chairman and executive director, noted a plunge in the ratio of high-priced products to Chow Tai Fook's sales.

The fall in earnings has been put down to a frugality campaign launched by Chinese President Xi Jinping in 2012. But a product lineup which has failed to lure young people with money to spend is also to blame.

A more pressing concern, however, is New World Development, the property developer reportedly behind the majority of the conglomerate's earnings. The company is forecast to incur a large fall in net profit in the business year ending in June in light of a year-on-year decline of more than 40% in the first half of the year.

The poor results are mainly attributed to the weak real estate market in mainland China. Hong Kong-based developers have also increasingly lost out to mainland competitors in recent bidding for public land in the territory, a local realty industry official said.

The New World group was founded by Cheng Kar-shun's father Cheng Yu-tung. Yu-tung originally joined Chow Tai Fook as a laborer, before rising through the ranks and eventually forging the company into a major jewelry business.

Yu-tung founded New World Development as a property developer in 1970 and built it into a major Hong Kong conglomerate. The group is owned by Chow Tai Fook (Holding), but is often referred to as New World Development.

The family is now intent on finding new seeds of growth.

The group began leasing aircraft through its infrastructure unit NWS Holdings, which invested in an Irish company in 2015 and formed a joint investment company with major U.S. aircraft leasing company Aviation Capital Group in March this year.

The Irish company plans to spend $1 billion every year to procure a large number of aircraft for lease to major airlines as well as low-cost carriers.

The new business will generate cash on a long-term basis and become an important earnings source for the New World group, said NWS executive director Brian Cheng Chi-ming, Kar-shun's second son.

The group has also won the right to develop a casino-centered resort in Brisbane and plans to carry out the project jointly with a group of companies, including a leading local casino operator, at an estimated cost of 2 billion Australian dollars ($1.49 billion).

Another Hong Kong-based conglomerate, CK Hutchison Holdings, led by Li Ka-shing, is also looking to diversify operations through mergers and acquisitions for infrastructure projects in Europe.

Mainland China is a key market for conglomerates in Hong Kong, where they have achieved considerable growth. However, recent moves point to a realization that they cannot rely forever on the mainland market.

The New World group's diversification has only just begun and it will be a while before the group sees a return on its investment, said Alan Jin, an analyst at Mizuho Securities Asia.

Large-scale investment in a completely new field carries inherent risks. Markets are paying close attention to how quickly the group can turn a profit from its new ventures while utilizing its existing assets.

Limited growth model

Cheng Kar-shun is a Standing Committee member of the Chinese People's Political Consultative Conference, a political advisory body in China, and is a renowned pro-China business leader. His personal networks in China and Hong Kong are credited with the growth of the New World group.

But pulling political strings appears to be a business model that has reached its limit.

Nothing highlights the changing times more than a redevelopment project at a Hong Kong tourist site containing statues of local celebrities such as Bruce Lee. The project, proposed by New World and readily accepted by authorities last year, sparked protests from citizens denouncing it as a plan fueled by nothing more than patronage.

The Hong Kong government later announced it would review the plan. Much of the ill-feeling was put down to Cheng's strong support for Leung Chun-ying, the unpopular Chief Executive of Hong Kong.

The territory's economy has grown strong though a murky combination of politics and business, but its citizens are now demanding more transparency and fairness.

Cheng Kar-shun is 69 years old and his first son, Adrian Cheng Chi-kong, is due to succeed him. It appears the new leader will be have to rely on his own management ability instead of personal connections.

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