(Bloomberg) -- For years, Adrian Cheng had all the trappings of a third-generation scion preparing to lead one of Hong Kong’s wealthiest clans into a new era. He infused his property projects with art, burnished Tsim Sha Tsui’s waterfront as a cultural district and invested in digital tokens. 

This month, his heir-apparent status at the $26 billion family empire was thrown into doubt after his father Henry Cheng said the conglomerate is still looking for a successor. 

“I’m still observing but I think it’s not so easy to identify such a person,” he said in a television interview, adding that the family has a wide range of operations and qualified “members can be in charge of each business sector. If there’s no family member suitable, we can hire from the outside.”

The revelation from Hong Kong’s third-richest man raised eyebrows in a city all-too familiar with succession battles that often erupt into public view and occasionally wind up in court. Former casino baron Stanley Ho and property tycoon Lo Ying Shek are just two examples.

Henry’s comments could mean that he hopes to have each family member lead a particular segment, but not necessarily pick one leader for the entire businesses, said Winnie Peng, director of the Roger King Center for Asian Family Business and Family Office at Hong Kong University of Science and Technology. She added that it’s often a process of evolving from a family business to a business family. 

“When families are planning for succession, there could be potential sibling rivalry,” Peng said. “This is something that they have to be really careful about.” But if the family members are harmonious and share the same values, then this problem can be avoided, she said.

Adding to the intrigue, Henry’s close associates didn’t share details of the interview on the family-backed HOY TV with his children before it aired, people familiar with the matter said, requesting not to be named because the matter is private. Adrian was aware of the interview and its contents before it was broadcast, a spokesperson said, without providing further details. 

Read more: A Hong Kong Property Billionaire’s Big Family Dilemma: Shuli Ren

It had been widely expected that Adrian, a 44-year-old graduate of Harvard University, would take over leadership of the family empire from his father. 

Adrian is currently chief executive officer of New World Development Co., the family’s flagship property business; Sonia Cheng, Henry’s 43-year-old daughter, manages the Rosewood hotel and Chow Tai Fook Jewellery Group Ltd.; and Henry, 76, controls Chow Tai Fook Enterprises Ltd., the Chengs’ unlisted family investment vehicle, with other relatives. Chow Tai Fook Enterprises holds major stakes in the clan’s main businesses, controlling New World and the Rosewood. 

As recently as 2020, Adrian’s representatives were distributing a bio that described him as “the heir to New World Development and Chow Tai Fook Enterprises, and the third generation leader of the $20.7 billion empire.” Sonia identified herself as chief executive officer of Rosewood around the same period.

When asked about her father’s remarks during an earnings briefing, Sonia — also a Harvard grad — said her role at the jeweler provides a clear division of work within the company, and all family members work together for the benefit of the firm. Conroy Cheng, Sonia’s cousin and vice chairman of the jeweler, said “there’s no such thing” when asked about the possibility of family infighting. New World declined to comment. Chow Tai Fook Enterprises didn’t respond to a request for comment.

The patriarch’s words matter in a succession process that may soon get under way, especially in a society that traditionally favors the eldest son. 

Henry took over the business from his father Cheng Yu-tung, who built the conglomerate spanning shopping malls, casinos, hotels, and jewelry stores across Hong Kong and mainland China. The group’s holdings are among the signature properties in Hong Kong, from the New World Tower to the Victoria Dockside complex. 

The sprawling empire has generated a fortune for Henry, whose net worth is almost $21 billion, according to the Bloomberg Billionaires Index. 

Under Adrian, New World has expanded aggressively in China and is working on two of the biggest retail developments in Hong Kong, including a $2.6 billion mall-office complex next to the airport. 

The strategy has come at a cost for New World, driving its debt load higher just as interest rates are soaring. The company’s net debt to equity was 94% at the end of June, according to Bloomberg Intelligence. That compares with 42% at rival Henderson Land Development Co., and Sun Hung Kai Properties Ltd.’s 18%.

“New World’s leverage is particularly high so there are more concerns for the company,” said Patrick Wong, an analyst at Bloomberg Intelligence. “When the market sentiment is not good” companies like New World are especially vulnerable, he said.

New World’s stock has tumbled 47% this year to a 20-year low, compared with a 14% drop in the benchmark Hang Seng Index. The developer’s $1.3 billion perpetual bonds sold in 2019 traded at just 51 cents on the dollar. 

That’s even after the Cheng family investment vehicle stepped in to alleviate the builder’s debt burden. Chow Tai Fook Enterprises Ltd. recently bought the majority shares of NWS Holdings Ltd., a subsidiary, generating $2.8 billion for New World. 

China’s property meltdown represents another headwind for New World — and for Adrian. Its contracted sales from homes in the mainland accounted for almost two-thirds of total sales in the 12 months through June. By contrast, billionaire Li Ka-shing’s CK Asset Holdings Ltd. has trimmed its revenue from mainland China to just 11%. 

“Weathering the challenging macro business environment is very important for both New World and Adrian Cheng,” said Vincent Lam, chief investment officer at Hong Kong-based VL Asset Management. “If he can resolve the difficulties, it will solidify his position and future as a business leader.”

Adrian’s Gambit

Adrian has certainly been on the move, modernizing his retail empire at a time when traditional malls are under siege. His vision includes building his flagship K11 malls into premium destinations with art and culture. He’s bringing Louis Vuitton’s first ever fashion show to Hong Kong this month, and introduced Asia’s largest MoMA design store.

His crown jewel K11 MUSEA’s foot traffic increased 67% in this first-half and mall sales increased 84%, the company said.

Adrian’s logic is that the future of retail isn’t just about selling goods, it’s about the experience, especially for the deep-pocketed consumers he’s chasing. The company’s top clients who spend more than HK$300,000 a year contributed HK$1.1 billion to sales last fiscal year, and tripled consumption from pre-pandemic levels, according to a spokesperson. 

And to underscore his legitimacy beyond overseeing money from friends and family, Adrian’s private investment arm, C Capital, raised more than $250 million for its Private Equity Fund III to back emerging consumer and technology firms. 

New World is also selling assets to raise cash and is cutting debt, making deleveraging the priority, Chief Financial Officer Edward Lau said in an interview. 

The company plans to dispose of HK$6 billion in non-core assets in the fiscal year through June, after selling HK$38 billion in the last three years. It also will seek joint ventures to develop its 15 million square feet of land in Hong Kong’s Northern Metropolis to lower costs, while some plots could also be up for sale. It announced plans on Nov. 23 to spend as much as $600 million to buy back seven of its dollar bonds. 

“When there’s volatility in the market, whether it’s related to our company or not, we will buy more,” Lau said.

Read more: New World May Only Slightly Cut Debt Cost on Bond Buyback: React

Still, all the challenges facing Adrian are adding heft to his father’s comments about succession in a family where multiple siblings play active roles. 

Sonia sits atop both the hotel business and a publicly traded jewelry unit that has a market value three times higher than New World. 

Their brothers Brian and Christopher serve as executive directors of the family’s infrastructure arm NWS Holdings. Brian also sits on the board of New World. They also have two half-brothers. Henry’s nephew-in-law, Patrick Tsang, serves as chief executive officer of Chow Tai Fook Enterprises.

“I think it’s actually very encouraging to siblings other than simply Adrian Cheng,” Peng said, referring to Henry’s comments. “They would feel better that the father is quite inclusive to try to encourage them to join the family” business, she said. 

--With assistance from Vinicy Chan, Alice Huang and Venus Feng.

(Updates bond trading and adds comments from Peng from sixth paragraph.)

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