Below is the transcript of a CNBC interview with Adrian Cheng, CEO and Executive Vice Chairman, New World Development. The interview will play out in CNBC's latest episode of Managing Asia on 01 May 2020, 5.30PM SG/HK (in APAC). If you choose to use anything, please attribute to CNBC and Christine Tan.
Christine Tan (CT): Adrian, these are extraordinary times right now. From where you sit, how does a COVID-19 situation look to you in Hong Kong?
Adrian Cheng (AC): At this point, I think it's challenging times. As corporates, we have a very important role to play in the society. Basically, New World Group's vision is to promote the idea of creating shared value. Currently I think Hong Kong is doing better now but we still have a long way to go. Hopefully, what we need to do as a corporate is to deliver value to shareholders, but most importantly, also to stakeholders as well, by creating shared value and social value. Also connecting businesses with social progress and also the well-being of our customers. So, for example, last year in October, New World Group donated around three million square feet of agricultural land to Hong Kong government and, also to many NGOs. We are trying to create a community and promote social mobility by helping out with the public housing problem in Hong Kong. We are working with an NGO called Light Be in building transitional public housing for grassroot communities and low-income families. The most important thing is actually creating communities for low-income families such as building kids' facilities, attracting a lot of local entrepreneurs to open little stores in order to increase employment as well. So, this is what we think as a corporate, it needs to be responsible for. During this situation, we should play a very important role.
CT: Getting back to the coronavirus Adrian, you have about 50,000 employees working for you in Hong Kong and China. Any of them infected with COVID-19? What were some of the steps you took to isolate the problem?
AC: We are very lucky that we only had a few employees that had the COVID-19. What happened was because safety for our staff is the most important. So, what we did was, basically, we not only isolated the patient, but most importantly, it was quarantining and sanitizing the entire floor and the entire building to make sure that the entire space was safe for other staff. Of course, quarantining is something that was more important. New World Group was actually the first corporate to set up the anti-epidemic fund to support Hong Kong's COVID 19 situation. We were also the first corporate to stop all our construction sites for two weeks in order to quarantine and sanitize our construction sites. We were also the first corporate to have an employment roster, basically a Team A and Team B roster, so that we were able to isolate some of the staffs to minimize the risk of the workspace of being infected with the coronavirus. We were also the first corporate to have production lines to manufacture masks. So, we have now four production lines that will be in production at the end of April, early May - producing around 200,000 masks per day and around 7,000,000 masks per month. Also, we have created a new concept called a mask dispenser. It's like a mask vending machine where we are trying to ensure a very safe and hygienic channel to get the masks to the needy, basically those who need the masks most like medical workers or low-income families.
CT: Why get into the actual mask production?
AC: This is part of our vision in creating shared value. So, instead of just donating masks and sourcing masks, we think that it would be a long-term problem for Hong Kong in the undersupply of masks. Using our resources - we are basically a property developer- we can use our construction arm. We can also use our experiences in building hospitals, so those expertise help in creating a production line that's able to make medical surgical masks. So, using our shared resources, we're able to actually more deeply solve the problem of undersupplied masks.
CT: Is production underway? Who is going to be the first to use your first batch of masks?
AC: So, we have eight NGOs that we have worked with for the past 10 years. Those NGOs will be our first alliance-collaborators who will be able to get the masks and help us to also put our mask-dispensing machines in their centres and distribute the masks through the vending machines to 40,000 people who are in need.
CT: I understand you're also spending something like $1.2 million to develop a special nano-diamonds technology to produce a mask with a special coating to kill off viruses. Are you really using actual diamonds? won't this make your masks more expensive?
AC: It's not actual diamonds. It's a nano technology that was supposed to apply on jewellery. We are now in preliminary research and see whether this patent can be applied on to our masks. From the jewellery side, it's able to fend off and block off virus and bacteria. It's very bacteriostatic. Now, we're in preliminary research to see whether we can also create a 2.0 mask in the second half and the later stage of the mass production.
CT: So, with this new special coating, what you're saying essentially is that these masks can be reused for some time?
AC: Yes, it's very sustainable. You can upcycle and recycle the mask, so it is reusable which is part of our sustainability vision for New World Group as well.
CT: So, by the end of this year, we could see your special nano-diamonds mask being on the market?
AC: Hopefully, yes.
CT: Adrian, your hotels and your retail malls are staying open during this time?
AC: Yes. They're all open during this time. Every one of our staff are allocated with masks. We distributed masks for all of our staff so that they will also be working and during working hours, they will be safe. So, we have to measure the temperature, measure the body temperature, making sure that the customers are also safe as well. So, we can avoid having any risk in getting the COVID-19 both for our staff and our customers.
CT: Is it business as usual? How's the retail traffic? Are you seeing a lower spend when it comes to consumer spending?
AC: In Hong Kong, not only do we have a policy for social distancing, a lot of the bars are also closed,
F&Bs are shut down. We also have this policy of not allowing gatherings of more than four people. So, people didn't go out much in March. But then, we're seeing a very sharp rebound in April this month when we see the number of virus cases going down. We think that it's improving a lot and we are seeing a very big V-shaped rebound in April, especially in retail sales as well. Hospitality-wise, New World Group owns 17 projects across Asia. We own the Hong Kong Rosewood hotel, we own the Beijing Rosewood hotel, the Grand Hyatt hotels in Hong Kong. Hospitality was badly hit during February and March, and currently, it's still quite difficult. But our forecast is that hopefully, it will have a recovery in the third quarter and the fourth quarter.
CT: Your latest museum retail complex, I'm talking about your baby, your K11 Musea at Victoria Dockside in Hong Kong. You had to launch it without much fanfare earlier last year because of the protests, were you disappointed?
AC: Not really, because we had spent 10 years creating the entire Victoria Dockside. The Victoria Dockside is the new cultural district in Hong Kong and a cultural landmark that my vision was trying to create for the past 10 years. Inside the Victoria Dockside, we have the Rosewood Hong Kong, the K11 Artus luxury apartments, the K11 office which is our K11 Atelier and the K11 Musea. The K11 Musea, the word Musea means "muse by the sea". So, we are here to celebrate culture. We're here to celebrate art, design and creativity. So, it's not just a physical space, it's basically a celebration of content. It's a celebration of software. It's incubation platform. It's like a Silicon Valley of culture where we're incubating many designers, artists and all participating in the entire K11 Musea project. For example, last year, we hosted the Cannes Film Festival celebrating cinema tech. We have a Van Cleef Jewelry school for us in Asia. We have Cordon Bleu cooking classes. We're here to celebrate content software and also knowledge capital. So, it's not a typical shopping mall. So, as a result, people come. It's very sticky. And during different times, people were still coming because they were here to learn. We had cultural classes that was on-stop every day, online and offline. Our sales were actually going up in November and also December as well, especially in December. We actually were peaking a lot in December until the coronavirus came to Hong Kong, which gave us a bit of a setback in February and March. But now, we are having a very big rebound in April when the number of virus cases are reduced in Hong Kong. So, I'm very happy and very confident that the entire concept and vision will continue to thrive.
CT: Still, when you think of the amount of work that you've put in, the years that you spent and the investment you've made building up K11 Musea in Hong Kong at Victoria Dockside, don't you wish you had launched it at a better time?
AC: Well, I think we're always looking at long term. Before this, it was the New World Centre. My grandfather and my father built it in 1978. This is a three-generation legacy project, and I'm looking at the future. We're enriching consumer daily lives through power of creativity, culture for the next 10 years, 20 years, 30 years. So, for me, it's really looking at a much longer span instead of just one year. I have confidence that this year, next year and the future, it will be flourishing, and I'm very happy with it.
CT: When you look at your earnings, your overall performance, your overall business was impacted by the social unrest. New World Development posted a 27 percent drop in underlying profit in the first half of the year ended December. Did you ever imagine the scale of disruption that you will be experiencing in your entire business portfolio because of the social unrest?
AC: I was never expecting that. Of course, it was very hard to really predict. What we're seeing is another new paradigm shift coming up, especially during the virus situation. I'll give an example. Like during the past, the past 2-3 months, China property sales were able to get around RMB 5 billion in contracted sales. The entire consumer habit actually totally changed. The consumer before was looking at very mass products, upper mass products, very simple two-bedrooms or one-bedroom products. But the past two or three months, especially during the virus situation, the customers suddenly made a very strong paradigm shift - their consumer taste was looking at things like: they want to feel well. They want properties that feel safe. They want the properties that are closer to nature. So, for products that have higher landscape ratio, for products that are closer to nature, for example, our golf resorts, villas and low-rise apartments, that are in Foshan near Guangdong Province, we've sold RMB 1.2 billion in just a month. They want property management service now.
I've never heard of properties in China really demanding high-quality property management services and now high-quality property management services are in demand. They are willing to pay a premium in order to have a lifestyle, to feel that they're well.
CT: So, that's over in China. When you see the sort of property demand for your projects, China was actually the first into the crisis. Do you firmly believe gauging from the property demand that you're seeing on your projects that China will be the first to recover from the crisis?
AC: I think China is recovering from the property side. I do think that we're seeing that especially in the first-tier cities, the Greater Bay Area, China property markets still have a lot of high demand. I think there are less speculations and if there's any relaxation in policies for real estate, there will be a very strong surge in the price and also demand for the properties in the next three or four months. What we need to do now as a corporate is to really adopt this change. And we need to adopt it very fast. When we were badly hit during the past two or three months, during challenging times, we had to make all our retail sales online. Our sales channel had to convert to livestreaming. We had to use our digital app - our digital WeChat public account in order to sell our e-commerce. We had to create our new home delivery services. So, for corporates, we need to adopt that very quickly. But China properties, I do think that it will recover sooner. For Hong Kong property sales, there's still a lot of high demand for mass residential properties. The only product that will be badly hit will be offices.
I think first grade offices in Hong Kong will be very badly hit even in the next one or two years. Not just rental relief, but I think when they renew rent, they have to readjust the entire rent down 10 to 20 percent. But I think from retail point of view, I think there'll be a lot of consolidation. There will be a lot of market share grab. If your customers are more local V.I.P.s like K11 Musea where 90 percent of our V.I.P.s is local, we're able to better weather the storm and be more resilient.
CT: What does all this mean for your earnings in the second half of the year then? Are you likely to do better?
AC: (Laughs) Hopefully. We always hope for the best.
CT: Hong Kong is in the throes of a recession right now and unemployment is rising. There are concerns that this could further erode housing demand in the Territory. How much more do you think this pandemic will weigh on the Hong Kong property market? Where do you see prices?
AC: I think the residential products will be very resilient, especially in the mass and upper mass segment. And the reason why is that there's still a shortage of supply of those categories of housing in Hong Kong. There are people still doing newlyweds, people are still getting married. So, there's still a lot of hard demand in the mass and upper mass housing. I think people will be much more sensitive to the pricing. There will be a certain discount. But if the property is in a very good location, if it is very good quality, I think there will still be very good demand. But of course, if the economy is going down, people will be much more cautious in picking the right products for it. So, I think for smaller property companies or projects that are not in good locations, I think those will be quite tough. But for properties that are of much higher quality with good branding, good property management services, for example, like New World, we're also providing medical services, healthcare services in our properties as well - the more you have added value, the more you have value creation towards your product, I think there will be much higher demand.
CT: But when you compare housing prices to the last crisis, the Hong Kong experience and that was in SARS 2003, house prices dropped in Hong Kong by as much as 30 percent. Are you expecting a similar fall in house prices in Hong Kong or will the impact be much worse before it gets better?
AC: I think for residential price - last year, there was already probably a 10 to 15 percent discount in the property price last year already. This year, depending on the virus situation and the economy, I think it will be quite flat or maybe a 5 percent drop. But overall, I think Hong Kong residential prices is still fairly resilient. And then I feel that there is a recovery in probably the third or fourth quarter and they will be going back up in the price.
CT: So, in terms of your revenue contribution, China will now be bigger than Hong Kong in the next two to three years?
AC: In the next two or three years, China's gross contracted of sales will be a little bit more than Hong Kong, but Hong Kong will still be very strong because we are launching a very big project in Sha Tin, which has around 3,100 units. So that will contribute a lot to our contracted sales. So, from a contracted sales proportion, it will be probably 60 percent from contracted sales in China and 40 percent from Hong Kong. But from the bottom line, China in the future – in the next five years -- will probably surpass Hong Kong. But in the next few years, Hong Kong is still very, very competitive.
CT: You're steering New World Development through one of the company's toughest times since the SARS crisis. Any lessons you can draw from your father or your grandfather on how to lead the company during a crisis?
AC: During a crisis, the most important thing is two things: one, we can talk about risk management, crisis management – but what's important is the idea of a flagging system. We need all staff to flag the truth to you because we are always in our offices. We're always working from home. We don't know what's really happening in the frontline. Flagging system is very important. They need a direct flagging system through our enterprise software to understand what's going on on the ground, so that we can actually react very quickly. So, it's a very, very important prevention tool. Secondly, when you have any time, it's always good to be on the ground, always wanting to know what's actually happening on the ground. So, we call it the frontline obsession. You have to be very obsessed with the frontline. So, understand the pulse of what's really happening. That's what I've learned a lot from my grandfather and my father. So, you have to roll your sleeves, don't working from your office or from your home but try to be on the ground and understand what is really happening.
CT: Adrian, you're 40 years old, Harvard-trained, spent a few years as an investment banker before joining the family business. Then you founded a K11 brand in 2008, now steering the company through this really challenging period. How will you lead your employees? How will you lead the company?
AC: First, we need morale, right. The entire staff in New World Group needs to have very strong morale. We are one team. We can weather this storm. The boat is still sailing. We'll be very transparent with all the questions that our staff want to ask. There will be a lot of frustration. We need to always be engaging with our staff. Luckily, our staff are very entrepreneurial. So, we promote this entrepreneurial intrapreneurship. Secondly, most importantly, we need to engage them and tell them that we will provide as much resources as we can to give to our staff. The third thing is we want to protect them. We want to give them a very safe working environment, whether it's at home or in the office as well. These three things are very important, and the message has to be very punchy, very direct, very transparent, asking our department heads to trickle down all the messages so that we make sure that everyone, even people on the sales staff, in shopping malls, in hotels or our service staff will understand what our strategy is.
CT: During these tough times, a lot of people will also be worried about their jobs, what sort of message are you sending them? Are their jobs safe?
AC: Yes, we are one team, and at this point, we are trying to hold together as a team. So, we are trying to tell them that we are not really letting anyone go or firing anyone because of the business setback. Our morale now is very, very good, so our retail sales rebounded in April. We're seeing that our hotel staff are also very, very happy and also because through creating shared value, creating social value, our morale for our staff is also getting higher as well. For example, we just announced that we're going to host all the medical staff – for quarantine or for rest in one of our hotels called the Penta Hotel in Hong Kong and that created a lot of morale amongst our staff because what we're doing is not just making profits. What we're doing is really helping the society, really helping the situation, this crisis by creating shared value, by using our resources in helping the medical workers.
CT: And finally, Adrian, as the third generation leading the family business, if your grandfather is alive today, do you think he would have been proud?
AC: I think... I think he will be.
CT: Adrian, thank you so much for talking to me on Managing Asia.
AC: Thank you.
END
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