May 27, 2012 / 8:43 PM / in 6 years

Hong Kong graft probe takes toll on Sun Hung Kai investors

HONG KONG (Reuters) - More than $7 billion has been wiped off the market value of Sun Hung Kai Properties (0016.HK) since the billionaire Kwok brothers who run the Asia’s biggest developer were arrested in a corruption investigation in late-March, sapping shareholder confidence in the Hong Kong conglomerate.

The company logo of Sun Hung Kai Properties is seen outside its headquarters in Hong Kong May 4, 2012. REUTERS/Tyrone Siu

Five Sun Hung Kai-connected men arrested in the investigation are expected to appear at Hong Kong’s anti-corruption agency later on Monday, according to sources involved in the case.

Shareholders say the company has lacked transparency and clarity over the probe.

“The longer it goes on, the longer it drags on the stock, and potentially wears on the business itself,” said Tim Gibson, head of property equities in Asia for Henderson Global Investors, a mutual fund that manages $800 million in Asia real estate stocks, including Sun Hung Kai. “It’s a distraction we could do without.”

Hong Kong’s highest-profile graft scandal has seen the arrests of Thomas and Raymond Kwok, the joint chairmen of Sun Hung Kai Properties, which owns the International Commerce Centre (ICC), the city’s tallest building and home to Morgan Stanley, Deutsche Bank and the Ritz Carlton. Their estranged brother Walter was arrested earlier this month, widening a probe that has also netted Thomas Chan, the board member in charge of land purchases, and Rafael Hui, Hong Kong’s chief secretary from 2005 to 2007 and a friend of the Kwoks since childhood [ID:nL3E8ET6FM].

The scandal has gripped the former British colony and raised questions about the close ties between the clubby tycoon-dominated economy and the government.

The Independent Commission Against Corruption (ICAC), which is leading the investigation, has not laid any charges. It may extend bail on Monday, charge those arrested or let them go with an option to re-arrest them at a later date.

Sun Hung Kai, which counts Hong Kong telecom, bus and waste management units as part of its empire, was worth $37 billion before news of the March 29 arrests. The stock lost $5 billion the next day and has continued to lose steam, sinking to a 7-month closing low on May 18.

The three Kwok brothers have said they have done nothing wrong, and Thomas and Raymond insist it’s business as usual at the family conglomerate. They have declined further comment, citing the investigation.

“GROSSLY INADEQUATE” DISCLOSURE

As the largest component of the FTSE EPRA/NAREIT Developed Asia index .FTENA3, Sun Hung Kai is a must-have for mutual funds tracked against that much-followed benchmark.

Sun Hung Kai Properties joint Chairmen and Managing Directors Thomas Kwok (R) and Raymond Kwok speak to reporters in Hong Kong in this April 3, 2012 file photo. REUTERS/Tyrone Siu/Files

The investigation overhang presents a tricky situation.

Investors are unsure whether now is a good time to buy a stock that has shed a fifth of its value, or whether they should sell a company whose top executives are ensnared in a messy scandal that may play out over several years. The Kwoks are preparing for a 7-year legal fight, according to one source familiar with their planning, who did not want to be identified.

One mutual fund investor said disclosure from Sun Hung Kai and investigators had been “grossly inadequate”, adding the company had done little other than set up an internal committee to handle the investigation.

“Their actions to date haven’t given minority shareholders a lot of comfort that they are dealing with it as seriously and aggressively as they could if it wasn’t the family,” said the investor, who did not want to be named.

Analysts’ ratings on Sun Hung Kai stock have all been negative since the arrests of the firm’s co-chiefs. ‘Strong Buy’ and ‘Buy’ recommendations have dropped to 8 from 18 two months ago, and the number of ‘Strong Sell’ and ‘Sell’ notices has more than doubled to 5. ‘Hold’ ratings have jumped to 10 from 4.

Sun Hung Kai’s net income is forecast to more than halve in the year to end-June, to HK$21.13 billion, according to a mean estimate on Thomson Reuters StarMine. Full-year results are due in September.

Like most of Hong Kong’s powerful property companies, Sun Hung Kai remains very much a family concern, raising the stakes if the Kwoks are unable to continue their duties.

Shareholders should sell Sun Hung Kai stock into any short-term strength, CLSA Asia-Pacific Markets advised in a trading note this month. The broker has an ‘underperform’ rating on the stock. Other landlords such as Wharf Holdings (0004.HK), Hang Lung Properties (0101.HK), Hongkong Land (HKLD.SI) and Swire Properties (1972.HK) stand to benefit if shareholders lose faith in Sun Hung Kai, mutual fund investors said.

The company remains Asia’s biggest property developer - but only just. Rival Cheung Kong (Holdings) (0001.HK) is valued at $28 billion, and Australia’s Westfield Group WDC.AX at $21 billion. Globally, Sun Hung Kai trails only U.S. shopping mall developer Simon Property Group (SPG.N) by market value.

    Alfred Lau, property analyst at Bocom International, was unsettled by the last arrest, of Walter Kwok.

    “I was quite surprised,” Lau said. “That might raise more concern on the case, whether it will be on a bigger scale or not.”

    Editing by Anne Marie Roantree, Michael Flaherty and Ian Geoghegan

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