Sun Hung Kai Arrests Reveal H.K. Builders’ Succession Risks

The arrest of the billionaire brothers who run Sun Hung Kai Properties Ltd. (16) by Hong Kong’s anti-corruption body may highlight succession risks at the city’s largest family controlled developers.

The Independent Commission Against Corruption on March 29 detained and later released Thomas and Raymond Kwok on suspected bribery charges. The two took over last year the chairmanship of the city’s biggest developer by value from their mother, who had ousted elder brother Walter Kwok as chairman in a 2008 boardroom struggle. No charges have been laid in the ICAC probe.

The investigation raises the prospect that the chairman of Sun Hung Kai may change for a third time in almost four years, adding to concerns about the continuity of top management at Hong Kong developers such as Henderson Land Development Co. (12), run by their patriarch octogenarians. Even after Sun Hung Kai lost $4.9 billion of market value on March 30, six of the 10 wealthiest individuals in Hong Kong control listed developers with a combined market capitalization of $102 billion.

“The lack of succession planning is a problem among some of the big developers here,” said Billy Mak, professor of finance and decision sciences at Hong Kong Baptist University. “While daily operation won’t be affected when the person at the helm is incapacitated, when it comes to major decisions of the company, it often needs to involve members of the controlling shareholding family. That’s the downside of keeping a tight control.”

Shares Fall

Thomas and Raymond Kwok and mother Kwong Siu-hing have $13.6 billion from a 42.9 percent stake in the company, according to market data compiled by Bloomberg. They and Walter Kwok, who remains a non-executive director, are the four family members on Sun Hung Kai’s 16-member board of directors listed on the company’s website.

Sun Hung Kai’s shares fell 2.2 percent to HK$94.40 at the 4 p.m. close in Hong Kong, the most among the seven-member Hang Seng Property Index. New World Development Co. (17), the builder controlled by billionaire Cheng Yu-tung that is not included in the index, fell 3.8 percent to HK$8.98.

Walter Kwok became chairman in 1990 after the death of his father, Kwok Tak Seng, who co-founded the company in 1963.

The arrest of Thomas, 59, and Raymond, 58, raised the possibility that Walter may return to helm the company that built Hong Kong’s tallest skyscraper. Walter Kwok, 60, was ousted from the family trust that controls the world’s second- biggest real estate company in 2010.

‘Power Struggle’

“It is widely believed that the power struggle among the Kwok brothers has not yet finished,” Raymond Ngai, a Hong Kong- based analyst at Bank of America Corp.’s Merrill Lynch unit, wrote in a March 30 note to clients. “If Thomas and Raymond are found guilty, Walter Kwok may regain control of the company, we believe.”

Sun Hung Kai fell 13 percent, the most since January 1998, on March 30. The stock was downgraded by at least four banks and brokerages including Citigroup Inc. and Barclays Plc, and its A+ debt rating was placed on negative credit watch by Standard & Poor’s, which said the management’s stability and reputation may be weakened by the arrests.

“The arrests will not have any immediate impact on Sun Hung Kai’s daily operations because it is a well-established company,” S&P’s Hong Kong analysts Bei Fu and Frank Lu said in the report on March 30. “But the magnitude and scope of the ICAC investigation remains uncertain.”

ICAC Arrest

Sun Hung Kai said on March 19 that Executive Director Thomas Chan Kui-Yuen was arrested by the ICAC as part of an investigation into alleged bribery.

Thomas and Raymond Kwok were detained in connection with a probe into offenses suspected to have been committed under the Prevention of Bribery Ordinance, the company said in a March 29 statement. Former Hong Kong government Chief Secretary Rafael Hui, who was a consultant to the company, was also detained, according to a person with knowledge of the matter who asked not to be identified because of the ongoing probe. The ICAC hasn’t issued updates on its investigation as of March 31.

Hui’s arrest was an isolated case, the Sunday Morning Post edition of the South China Morning Post quoted Raymond Tam, secretary for constitutional and mainland affairs, as saying. The newspaper also said no one has been charged in the probe.

Corporate Governance

Margaret Ng, a spokeswoman at Sun Hung Kai, said yesterday on behalf of the company’s executives that she didn’t have further comments or updates. Hui couldn’t be reached after a call to the phone number listed under that name in PCCW Ltd.’s directory and calls to various listings for Hong Kong’s chief secretary office went unanswered after business hours.

Walter applied to the High Court in 2008 to prevent the board from removing him from office, alleging that his brothers opposed his inquiries into impropriety in the way the company awarded construction contracts, and other corporate governance issues.

“We’re concerned along with all other shareholders,” said Hugh Young, who helps manage $70 billion in Asian equities at Aberdeen Asset Management Asia Ltd., which owns shares in Sun Hung Kai and other Hong Kong developers. “Governance is something we do worry about. Traditionally, we’ve been pretty comfortable with Sun Hung Kai despite all the internal family issues. So is something like this disturbing? Of course it is.”

Thomas and Raymond Kwok have returned to running the developer, and the arrests won’t affect the normal business operations, Sun Hung Kai said in the March 29 statement.

Valuation Gap

Walter Kwok declined to be interviewed for this article, according to Lucy Chan, an outside spokeswoman he has hired.

Sun Hung Kai, Henderson Land, Cheung Kong (Holdings) Ltd. (1), Hang Lung Properties Ltd. and Sino Land Co., which are among Hong Kong’s biggest developers in the Hang Seng Property Index, all are controlled by founding families.

The family ownership structure of Hong Kong developers adds a 5 percent to 30 percent difference between their market value and their assets, according to Andrew Lawrence, an analyst at Barclays Capital Research.

“Investors are likely to consider that a wider net asset value discount should now be applied to the stocks,” said Hong Kong-based Lawrence in a report on March 30. “We suspect that the development will add further negative sentiments to other stocks in the sector.” The Hang Seng Property Index (HSP) fell 5 percent on March 30, the most since November.

Li Ka-shing

Lee Shau-kee, Hong Kong’s second-richest man who remains an executive chairman of Henderson Land at 84, has never spoken publicly about succession planning of his company, which also has investment in infrastructure and utilities. His two sons Peter and Martin Lee are vice-chairmen of the company. Lee co- founded Sun Hung Kai with Kwok Tak Seng and holds the title of vice chairman as a non-executive director, according to the developer’s website.

Li Ka-shing, the 83-year-old chairman of Cheung Kong and Hong Kong’s richest man, said at his companies’ March 29 earnings announcement that he has no plans to retire and is “very healthy.” Forbes Magazine reported last month that Li said in an interview he has “confidence the company would operate as smoothly as normal” under his son Victor Li, who is vice-chairman and managing director of Cheung Kong.

Ronnie Chan, who has been chairman of Hang Lung since his father and company founder Chan Tseng-shi died 20 years ago, is 62, while Robert Ng, head of Sino Land and also son of the company’s late founder, is 59. Neither have talked about plans for retirement.

Land Reserves

Sun Hung Kai has land reserves of 46.7 million square feet in Hong Kong, and 85 million square feet in China, as of the end of 2011. Cheung Kong, the city’s second-biggest builder, added almost 13 million square feet of land in 2011, the company said in its annual earnings report without giving a total figure.

“In property companies, management can come and go,” said Aberdeen Asset’s Young. “One of the good things about property companies is that provided they’re sitting on the land, if they stop their development in the next year it does affect them of course, but at least they still have the land. Providing their balance sheet is not absolutely terrible, you can sit on the land, do nothing and make money.”

To contact the reporter on this story: Kelvin Wong in Hong Kong at kwong40@bloomberg.net

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net

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