Given that property price correction in 2024 has been larger than we previously expected, we lowered our 2024E development margin from 8% to c.5%. As such, we estimate the property development segment will incur slight loss in 2024. On the other hand, we estimate non- development recurring revenue to post double-digit growth from c.RMB7bn in 2023 to c.RMB8bn in 2024E. Given the estimated loss on development segment, we cut our 2024E core EPS by 20.2%. Our TP is cut by 10% to HK$10.91 considering both lower margin and recent positive development in property market. Longfor continues to enjoy one of the best fundamentals among private developers, with recurring profit contributing to most of its profit, and considerably lower financial risk thanks to the ability to issue operational property loans. As such, we maintain BUY rating on the stock.
　　Key Factors for Rating
　　Longfor’s 2024 contracted sales amounted to RMB101bn, down 42% YoY, which is relatively small compared to most private names. Such number was obtained with c.51% sell-through rate on RMB200bn saleable resources. We estimate that saleable resources for 2025 should be at least RMB160bn, or more if market improves. Applying similar sell-through rate, 2025 contracted sales should amount to RMB80-100bn.
　　After repaying two bonds totaling RMB4bn in January, there is c.RMB6bn outstanding bond maturing in 2025. Besides that, a syndicated loan amounting to HK$9.2bn is due in December 2025. On the cash inflow side, management expects to obtain net addition of RMB10bn operational property loans; we estimate that more than RMB5bn operating cash flow can be generated in 2025. As such, we see that Longfor’s debt serving duty in 2025 is covered. Looking ahead, less than RMB10bn debt will mature in 2026.
　　We estimate that retail sales for shopping malls grew over 10% YoY in 2024, (5% SSSG), with 4Q posting c.14% YoY growth (8% SSSG). We estimate overall non-development profit to post double-digit growth from c.RMB7bn in 2023 to c.RMB8bn in 2024E.
　　Key Risks for Rating
　　Property market may recover slower than expected.
　　Valuation
　　We cut our estimated NAV by 16.7% to HK$16.79, factoring in lower gross margin. At the same time, our target discount to NAV is narrowed from 40% to 35%, considering recent positive development in the property market, and clearer debt serving visibility as we discussed above. The stock currently trades at 0.4x 2024E P/B, and 41.1% discount to our estimated NAV. We think such valuation is undemanding considering Longfor’s strong recurring income and visible debt serving roadmap.