Longfor’s 1H24 revenue declined by 24.5% YoY to RMB46.9bn, in line with our estimation. Property development (DP) revenue declined by 32.3% YoY while investment property (IP) and property service revenues grew by 4.3% YoY and 11.1% YoY, respectively. Despite that DP gross margin narrowed from 1H23’s 14.3% to 1H24’s 7.4%, overall gross margin only narrowed by 1.8ppts to 20.6%, thanks to recurring revenue contribution increasing from 1H23’s 19.6% to 1H24’s 28.0%. SG&A as % of revenue increased by 0.2ppt YoY due to less revenue booking. The lower gross margin and higher SG&A as % of revenue was partially off-set by lower LAT, and core profit declined by 27.9% YoY to RMB4.8bn, in line with our estimation. Recurring business contributed 80%+ of the core net profit. Net gearing improved by 0.5ppt to 56.7%, and management laid out clear roadmap to further reduce off- shore and open market debts. We cut our 2024-26E core EPS by 3.2- 5.0%, respectively, considering slower property market recovery, and trim our TP by 5.3%. We like Longfor’s solid financial position and strong recurring income, maintain BUY rating.
Key Factors for Rating
Recurring income from operation and service increased by 8% YoY, contributing 28% of total revenue, up from 20% in 1H23. Operation and service gross profit accounted for 74% of total in 1H24, while in terms of net profit it accounted for over 80%. Rental income from shopping malls grew 6% YoY (SSSG: 0.4%), with retail sales up 12% (SSSG: 5%). Retail sales growth was mainly driven by 16% growth in foot traffic (SSSG: 5%), with flat ticket size under economic challenge. Management guided for 10-20% growth in coming years, supported by both new openings and AEI, with 10 shopping malls planned to be opened in both 2H24 and 2025. Net profit from operation and service segments is expected to reach RMB8bn in 2024E and RMB10bn in 2025E which covers over 90% of our 2025E net profit.
Financial position remains healthy with net gearing improving 0.5ppt to 56.7% and adjusted liability to asset ratio improving by 3ppts to 59%. Leveraging its IPs, Longfor significantly increased its operating loan balances from end-2023’s RMB47.4bn to 1H24’s RMB69.3bn, and expects to further increase to over RMB87bn by end-2025E. As a comparison, Longfor’s total debt amounted to RMB187.4bn by end-1H24. By replacing other debt with operating loans, Longfor further decreased average finance cost by 1ppt to 4.16% in 1H24, and average debt maturity from 1H23’s 7.19 years to 1H24’s 9.19 years. Longfor is also on track to repay its off-shore and open market debts.
Key Risks for Rating
Property market recovery may be slower than expected
Valuation
The stock currently trades at 0.3x 2024E P/B, 5.2x 2024E P/E and 57.9% discount to our estimated NAV at HK$20.16/share. We see such valuation as undemanding, given Longfor’s solid financial position and strong recurring income.
Property Development Segment
Longfor’s contracted sales declined by 46.8% YoY to RMB58.6bn in 1H24, outperforming most private peers. The company carried out limited landbanking in 1H24, purchasing 7 new projects in Beijing, Shanghai, Suzhou, Hangzhou, Foshan, Xi’an and Chengdu, with total GFA amounting to 597k sqm and attributable cost at RMB5.2bn. The company targets to achieve at least RMB100bn annual contracted sales in the coming years, with a key focus on reducing existing inventory.