Sun Hung Kai Loses $4.9 Billion as Kwoks Arrested

Sun Hung Kai Properties Chairmen Thomas Kwok and Raymond Kwok
Raymond Kwok, joint chairman of Sun Hung Kai Properties Ltd., left, and Thomas Kwok, joint chairman, talk after the company's annual general meeting in Hong Kong, China, on Thursday, Dec. 8, 2011. Photographer: Jerome Favre/Bloomberg

Sun Hung Kai Properties Ltd. plunged the most in 14 years and lost $4.9 billion of market value after anti-graft investigators arrested the billionaire brothers who run Hong Kong’s biggest developer.

Co-chairmen Thomas and Raymond Kwok were detained by the Independent Commission Against Corruption, Sun Hung Kai said late yesterday. Rafael Hui, a former No. 2 official in the government, was also arrested, according to a person with knowledge of the matter who asked not to be identified because of the ongoing probe.

The arrests mark one of the highest-level investigations in the ICAC’s 38-year history and come four days after a Hong Kong leadership election in which close ties between government and business emerged as a key campaign theme. Current Chief Executive Donald Tsang is being probed separately by the ICAC for accepting trips on the yachts and planes of tycoons.

“This will no doubt further strengthen the impression among the public that there is a collusion between business and government,” said Shiu Lik-king, a lecturer of public policy at the Chinese University of Hong Kong. “Politics is all about perception. Once the public think you’ve done it, it won’t matter even if you’re not convicted at the end.”

Sun Hung Kai plunged 13 percent, the most since January 1998, to close at HK$96.50 in Hong Kong after a suspension yesterday. The stock has dropped 17 percent since the company said March 19 Executive Director Thomas Chan Kui-Yuen was arrested by the ICAC.

Stocks, Bonds

Citigroup Inc. and Barclays Plc cut their ratings on the developer’s stock, while Goldman Sachs Group Inc. suspended the rating.

“Investor short-term concern on corporate governance is unavoidable,” Oscar Choi and Ken Yeung, analysts at Citigroup, wrote in a note to clients today. Citigroup said it downgraded the shares citing it expects the difference between the market value and the value of the developer’s assets to widen following the news of the arrests.

Sun Hung Kai’s $500 million of 4.5 percent bonds due February 2022 dropped to 95.6 cents on the dollar to yield 5.07 percent, as of 10:07 a.m. in Hong Kong, according to BNP Paribas SA prices. That’s the lowest price since the bonds were sold on Feb. 6. The company has the equivalent of $10.6 billion of bonds and loan facilities outstanding, according to data compiled by Bloomberg.

Standard & Poor’s lowered the outlook on the developer’s A+ credit rating to negative, saying that ICAC’s probe “may weaken the stability of its management and reputation of the company.” S&P said it aimed to resolve the “CreditWatch negative” in the next three months. Moody’s Investors Service is assessing whether the incident has any impact on Sun Hung Kai’s rating, said Sydney-based spokesman Hector Lim.

Eight People Arrested

Thomas and Raymond Kwok, and Hui were released by the ICAC late yesterday, Radio Television Hong Kong reported today. Thomas and Raymond were detained in connection with a probe into offenses suspected to have been committed under the Prevention of Bribery Ordinance, the company said. They will keep running the developer, and the arrests won’t affect the normal business operations, Sun Hung Kai said.

Hui, 64, who was chief secretary from 2005 to 2007, resigned as an independent director of AIA Group Ltd. “to attend to other commitments,” the insurance company said in a statement yesterday. In his more than three decades in government, Hui served as secretary for financial services and set up the city’s public pension fund before being appointed as the city’s No. 2 official.

The ICAC said it arrested two executives and a former senior government official for suspected corruption, without identifying anybody. Five other people were arrested earlier for their alleged role in the case, it said yesterday.

Family Business

Raymond Kwok was shown entering the ICAC headquarters in footage broadcasted by Cable TV yesterday. Margaret Ng, a spokeswoman for Sun Hung Kai, declined to comment, as did Alan Tse, a spokesman for the ICAC.

Sun Hung Kai has been run by Thomas Kwok, 59, and Raymond Kwok, 58, since the ouster as chairman in 2008 of their elder brother Walter. Walter is still a non-executive director of the company.

Walter Kwok 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. Their ages are cited in the company’s latest annual report.

Hong Kong Election

The two Kwok brothers and their mother lost almost $2 billion on paper today, according to data compiled by Bloomberg. The shares, a 42.9 percent stake in Sun Hung Kai, are in a family trust held by HSBC Holdings Plc and are worth $13.9 billion.

Sun Hung Kai built and runs the 118-floor International Commerce Centre, which at 484 meters (1,588 feet) is Hong Kong’s tallest building, as well as the International Finance Centre complexes in Hong Kong and Shanghai.

In the election for the city’s next chief executive, candidate and former chief secretary Henry Tang lost public support after admitting knowledge of a basement built without planning permission under a luxury home his wife owns. Thousands of people took to the streets in early March to demand that Chief Executive Tsang quit after it emerged he had taken trips on yachts and planes of his tycoon friends.

Chief Executive-elect Leung Chun-ying, chosen by a panel of 1,193 on March 25, has promised measures to close the wealth gap and reduce home prices. Savills Plc said the price of an apartment in Hong Kong is almost two times higher than in London, which placed second on the property broker’s list of most expensive places to buy a home.

1970s Corruption

The ICAC was formed in 1974 after protests erupted in the city when a chief police superintendent fled while under investigation for possessing HK$4.3 million of assets. The officer, Peter Godber, was extradited from England in 1975, and was sent to jail for four years for conspiracy and accepting bribes, according to the commission’s website.

The agency also uncovered corruption among senior officials in the city’s legal department and the government property agency since its formation. It prosecuted 275 people last year, with 235 convicted according to its website.

Chan, an executive director for Sun Hung Kai since 1987, was arrested by the ICAC, the company said in a March 19 statement. Chan, 65, according to the developer’s annual report, is responsible for land acquisitions and project planning.

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