CDL saga: Will peace hold? It’s time for a comprehensive strategic review

[SINGAPORE] Shareholders of City Developments Ltd (CDL) probably heaved a huge sigh of relief over the announcement late on Wednesday (Mar 12) that Kwek Leng Beng had dropped his lawsuit against his son Sherman Kwek and six other members of the CDL board.

CDL’s share price rallied immediately following this announcement. However, are the group’s troubles over?

Shareholders might wonder if the father-son duo can work harmoniously after their high-profile spat. More crucially, CDL’s board of directors should urgently launch a strategic review to improve the group’s performance.

According to Wednesday’s announcement, Kwek Leng Beng and Sherman Kwek will continue as executive chairman and group chief executive officer, respectively. Also, all the current directors, including Jennifer Duong Young and Wong Su-Yen, remain on the board.

The announcement appears to bring closure to an ugly saga at the property and hotel group. Kwek Leng Beng wanted to remove Sherman Kwek as CEO citing governance issues. Sherman Kwek and the majority of the board countered that they were concerned over the conduct of Dr Catherine Wu who has a “long relationship with the chairman”.

Dr Wu was an adviser to the board of CDL’s Millennium & Copthorne Hotels (M&C). Late on Mar 4, Kwek Leng Beng said that she resigned from being an “unpaid independent adviser” with immediate effect. 

Uncertainties persist

Doubtless, concerns will linger over whether the father-son peace can endure. Might the chairman and CEO be wary of each other and constantly clash over issues such as key personnel appointments, capital expenditure, investments and divestments, governance and so forth?

Perhaps, CDL’s top management may be bogged down with trying to read the tea leaves on the chairman-CEO relationship and gingerly working around these two bosses.

Then there is the question of whether Dr Wu, who said she first met Kwek Leng Beng in 1992, may try staging a comeback of sorts in the CDL group. 

In the background, other Kwek/Quek family members who hold substantial stakes at Hong Leong Investment Holdings (HLIH) might wonder if the father-son duo is best placed to lead CDL. HLIH holds a direct and deemed interest of about 49.3 per cent in CDL.

Might key players at HLIH such as Kwek Leng Beng’s cousins, Malaysian tycoon Quek Leng Chan, who is chairman of GuocoLand , and Kwek Leng Kee of Hong Leong Holdings, hope to see leadership changes at CDL?

The Kwek Leng Beng-Sherman Kwek conflict has wreaked much damage on CDL. Top talent may hesitate to join the group given concerns over the father-son relationship. Such concerns might also cloud how counterparties view entering joint ventures or doing major deals with CDL. 

In addition, winning over the confidence of equity investors will be tough as the recent saga has raised doubts on the quality of CDL’s corporate governance.

Strategic review

Eighty-four-year-old Kwek Leng Beng, who joined CDL’s board in 1969, is spot on to say CDL has to “restore investor confidence”.

CDL’s board should immediately announce a comprehensive strategic review that includes five key areas.

1. Improve financial performance. In recent years, CDL has made serious missteps, including the Sincere Property debacle that led to a S$1.9 billion loss in 2020. Meanwhile, the group has not been aggressive in seizing opportunities in areas such as data centres and modern logistics facilities.

CDL posted a net profit of S$201 million for 2024, down 37 per cent from a year earlier. The board should identify what is a sustainable net profit target over the next few years and the road map to getting there. For example, the group may need to find new growth engines, scale up some existing businesses and exit certain businesses.

2. Work the balance sheet harder. Based on net profit of S$201 million and shareholders’ equity as at end-2024 of S$9.1 billion, return on equity (ROE) is just over 2 per cent – hardly enticing to investors.

Like many property groups, CDL is asset heavy. It needs to set out clear targets and timelines for driving higher ROE, as well as action plans to achieve the targets. It could recycle capital more aggressively, bring in more capital partners for various investment properties, and so forth.

3. Examine the ownership structure. CDL trades at well below book value. Based on its share price of S$5.09 on Mar 13, CDL traded at a discount of 50 per cent to end-2024 net asset value (NAV) per share of S$10.17, and a discount of 74 per cent to the revalued NAV per share of S$19.86 if fair value gains of investment properties and revaluation surpluses of the hotel portfolio were included.

Should the property development business be split from the investment property and hotel ownership business? What businesses should be listed? Should investment properties and hotels largely be owned by listed trusts? 

4. Study the hotel business’ positioning. CDL has a geographically diverse portfolio of more than 150 hotels – the bulk of which are under wholly owned subsidiary M&C.  

M&C owns, manages and operates hotels. Perhaps, it should de-emphasise owning hotels so as to help improve CDL’s ROE. Also, M&C’s competitiveness as a hotel operator needs to be examined. Its scale pales compared with a group such as Accor, which operates hospitality properties in several thousand locations and multiple brands in many hospitality segments.

5. Look at leadership succession. Kwek Leng Beng has been CDL’s executive chairman since 1995. When should he leave the position notwithstanding his many contributions over the years?  

Moreover, a review should explore whether CDL ought to have professionals who are non-Kwek/Quek family members helming the executive management.

Hopefully, the dust has settled on the father-son spat at CDL. Meanwhile, the hard slog to regain investor confidence begins. Work should start with a comprehensive strategic review that asks difficult questions, and draws up concrete and ambitious targets for the business.    

(The writer owns shares in CDL)