HONG KONG (Reuters) - The two billionaire Kwok brothers who run Sun Hung Kai Properties (>> Sun Hung Kai Propert) and three other men arrested in a bribery scandal involving Asia's biggest developer renewed their bail on Monday as Hong Kong's highest-profile graft investigation saps shareholder confidence in the conglomerate.
Thomas and Raymond Kwok, co-chairmen of Sun Hung Kai, which owns the International Commerce Centre (ICC), the city's tallest building, appeared briefly at the Independent Commission Against Corruption's (ICAC) headquarters.
Their estranged brother Walter, Rafael Hui, a former head of Hong Kong's civil service, and Thomas Chan, the company's board member in charge of land purchases, also spent several minutes at the agency. Two sources, who did not want to be identified, said all five renewed bail and were due to return to the ICAC in early July.
All five arrived and left separately, under siege from camera crews and photographers.
More than $7 billion has been wiped off Sun Hung Kai's market value since Thomas and Raymond were arrested in late March. Walter was arrested this month, widening a scandal that has raised questions about close ties between the former British colony's clubby tycoon-dominated economy and the government.
Mutual funds say inadequate disclosure by both the company and the ICAC has left them frustrated, with Asia's biggest property stock trading amid a lack of information about the investigation. They say there is a reputational risk to the company despite the lack of any charges in the case.
"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 fund manager that runs $800 million in Asia real estate stocks, including Sun Hung Kai. "It's a distraction we could do without."
The Kwoks have said they have done nothing wrong, and Thomas and Raymond insist it's business as usual at the family-run conglomerate. "Clearly it isn't," said one mutual fund investor, who did not want to be named.
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 shares closed up 0.5 percent on Monday, in line with the benchmark Hang Seng index <.HSI>.
"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.
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.
The 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," the investor said.
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. Sources close to Thomas and Raymond say they have prepared a succession plan.
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 (>> Wharf Holdings), Hang Lung Properties (>> Hang Lung Properties), Hongkong Land (>> Hongkong Land) and Swire Properties (>> Swire Properties) 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) (>> Cheung Kong) is valued at $28 billion, and Australia's Westfield Group (>> Westfield Group) at $21 billion. Globally, Sun Hung Kai trails only U.S. shopping mall developer Simon Property Group (>> Simon Property Group, Inc) by market value.
(Additional reporting by Twinnie Siu, Tyrone Siu and Venus Wu; Editing by Ian Geoghegan)
By Alex Frew McMillan