One of Hong Kong’s four richest dynasties is preparing for a leadership transition that may test the adage that family fortunes don’t last beyond three generations.
Adrian Cheng, the Harvard-educated heir apparent of New World Development Co. and Chow Tai Fook Jewellery Group Ltd., is in focus after his 69-year-old father, Henry, recently went on leave because of an unspecified illness. The companies declined to comment on media reports that the senior Cheng had a stroke.
Chow Tai Fook Jewellery Group is larger that Tiffany & Co
When the 36-year-old scion ultimately takes over from his father, he will be in charge of a conglomerate that controls one of the city’s biggest property developers, runs the Carlyle Hotel in New York City and operates a chain of jewelry stores that generates about 80 percent more revenue than Tiffany & Co. globally. Today, the family controls four listed companies with a total market value of more than $25 billion, as well as some that are closely held.
Yet challenges abound for Cheng. If he were to take over now, he would be facing declining margins in the family’s main property-development business and slumping demand for high-end jewelry. He’d also face the challenges of retaining decades of connections his elders built up and rebuilding investor trust after past family missteps raised concerns about corporate governance.
Adrian Cheng already juggles more than a dozen titles
“He needs to prove himself,” said Joseph P.H. Fan, a professor at the Chinese University of Hong Kong who has researched family-run businesses for two decades. “He doesn’t need to be a know-it-all in business operations because the professional teams will do it for him, but he needs to prove he’s capable of bringing everyone together.”
Despite his youth, the grandson of the late magnate Cheng Yu-tung has been groomed for years and already juggles more than a dozen titles, including vice chairman of New World Development and executive director at Chow Tai Fook.
The Cheng clan isn’t alone in preparing for succession, which is increasingly looming large at some of the biggest businesses in Hong Kong, where the landscape is dominated by a handful of tycoons.
That’s as those moguls, many of whom were Chinese refugees who fled Japanese invaders in the 1940s, approach retirement age. Henderson Land Development Co.’s billionaire chairman Lee Shau Kee turned 89 last month, an anniversary that Hong Kong’s richest man, CK Hutchison Holdings Ltd.’s Li Ka-shing, will hit in July.
As to the Cheng family’s next leader, below are some of the biggest challenges he faces:
1. Property, Jewelry Downturns
Hong Kong may boast the world’s most-expensive housing market, but that’s not necessarily benefiting New World. Higher land costs are likely to squeeze developers’ profit margins, according to JPMorgan Chase & Co. The brokerage estimates projects using land bought last year will probably yield margins of 22 percent when they are completed, versus returns of 32 percent on real estate bought in 2011.
To cope with the tougher environment in Hong Kong, New World in recent years has been looking to increase its proportion of property in China’s first-tier cities by disposing of projects in smaller cities — a move that Macquarie Group Ltd. analyst Raymond Liu in December applauded as likely to “unlock value.”
At Chow Tai Fook, profits have fallen for two and a half years to their lowest levels since 2011 as an anti-corruption drive in China sapped demand for luxury products and as tourism in Hong Kong waned. In December, retail sales in the city dropped for their 22nd straight month, dragged down by a slump in demand for jewelry, watches and valuable gifts.
Though Cheng declined to comment for this story, he said in an interview last year that he would step up Chow Tai Fook’s focus on attracting millennials by introducing more fashionable jewelry designs and pushing his brands globally.
“In the next 10 years, Chinese brands, Chinese originality, Chinese creativity will be part of the world’s realm,” Cheng said in November. “People will be going back and talking about what’s cool in China, instead of what’s cool in the U.S.”
Cheng, who is an art enthusiast and has a bachelor’s degree from Harvard University, has opened shopping centers merged with galleries and a mall targeting children.
2. Dwindling Connections
At his grandfather’s funeral last year, pallbearers included current and former heads of Hong Kong and Macau, as well as the only two people in the city richer than the deceased: Li Ka-shing and Lee Shau Kee.
The proceeding helped illustrate how connected his grandfather was. For Adrian Cheng to succeed, it will be crucial for him to retain relationships within the family and stakeholders because “Hong Kong has barely known this guy,” said Chinese University’s Fan. Family firms lose almost 60 percent of their value each time leadership is transferred from one generation to the next, as they fail to pass on intangible assets such as relationships and trust, according to Fan.
3. Corporate Governance
Shares of the Cheng family’s New World Development have, on average, traded at 45 percent of the company’s book value in the past five years, the worst performer based on that measure in Hong Kong’s benchmark Hang Seng Index, according to data compiled by Bloomberg.
Behind the discount are governance concerns. When Henry Cheng first took over the family business in the late ’80s, he kicked off a series of acquisitions, including the purchase of the Ramada hotel chain and Wing On (Holdings) Ltd. That drove up the family empire’s debts so high that the founder stepped back in and sold some assets.
Though past stumbles have soured investors’ perceptions about the group, the younger Cheng is in a position to reverse those perceptions, according to Raymond Cheng, Hong Kong-based analyst at CIMB Securities Ltd., who isn’t related to the family behind New World.
“Even if Henry were to take a long leave, I don’t see a problem elevating Adrian’s role,” the analyst said. “It wouldn’t be bad news for him to fully take over.”