Chinese Estates Holdings said Sunday it may cancel sales agreements for units at its luxury residential project La Scala in Macau, refunding deposits to buyers, if sites acquired for the project are seized by the government.
The potential cancellation could weigh on Chinese Estates' net profit. The revenue from La Scala was expected to be a key contributor to the bottom line in the coming two years, analysts said. The stock dipped 1% in morning trading, but closed marginally higher at 9.0 Hong Kong dollars per share.
The Hong Kong-based developer, controlled by tycoon Joseph Lau, said in a statement that it received notice from the Macau government that it was beginning the process of declaring invalid concessions the company received in 2006 for five plots of land—those to be used for the project.
"The group is currently taking legal advice on the hearing notice and intends to make a submission strongly opposing the decision proposed to be made by the Macau government," Executive Director Lam Kwong Wai said in the statement.
The Macau government said late Monday that the city's chief executive, Chui Sai On, has signed orders declaring the sale and transfer of the five plots of land to be invalid because the land was illegally acquired. Chinese Estates may still appeal the government's decision.
Chinese Estates has already invested HK$2.8 billion (US$360 million) in the project and is considering seeking compensation for possible losses, the company said. In the meantime, construction work and presales of units in the residential project have been suspended.
The La Scala project was originally slated for completion in 2014. The developer said earlier this month it has presold 304 units in La Scala, taking in HK$384 million in cash deposits.
The notice from the Macau government comes amid allegations of bribery in connection with the granting of the land concessions. In May, a Macau court ruled that it would move ahead with charges that Mr. Lau or his company offered a bribe to a former official, Ao Man-long, in connection with a government tender for the land. Mr. Lau has denied any wrongdoing.
Also in May, the city's top court found Mr. Ao, who had been serving prison time in connection with previous convictions on corruption-related charges, guilty of additional counts of bribery and money laundering. The Macau Court of Final Appeal ruled that in 2005, Mr. Ao, the city's former secretary for transport and public works, helped companies run by Mr. Lau and businessman Steven Lo to win the tender for the La Scala land, in return for a bribe of HK$20 million (US$2.6 million).
Mr. Lo has also denied wrongdoing.
Castor Pang, head of research at Core-Pacific Yamaichi International Ltd., noted that the suspension of the La Scala project would remove a major source of revenue for Chinese Estates over the next two years.
"The final outcome of the court case in Macau is still uncertain. But the company may face more obstacles in seeking loans from banks to fund other projects subsequent to this negative news," Mr. Pang said, adding that the impact on the company's share price would be limited due to inactive trading of the stock.
La Scala is Chinese Estates' only project in Macau. The company has a total six development projects in Hong Kong and mainland China under construction, which are mid to high-end commercial and residential property projects.
