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Longfor Properties (960 HK) Summary

Core Content

Longfor Properties (960 HK) is a Chinese real estate developer with a current share price of HKD9.77, a market capitalization of USD6.9B, and a target price of HKD11.75 (+20% upside). The stock is currently trading at a 46% discount to net asset value (NAV), with a 6x FY14F PER and 1.0x FY14F P/B.

Main Points

• 2013 Results: Underlying net profit of CNY6.2b was in line with consensus. Revenue reached CNY41.5b (+49% YoY), while GPM was slightly below expectations at 28%, but in line with company guidance (25-30%).
• Inventory: Absolute inventory level doubled HoH, though the ratio to contract sales was reasonable. Completed properties rose by 108% HoH to CNY11.0b, representing 11% of total assets.
• GPM Outlook: Management expects GPM for 2014 to remain below 30% due to inventory clearance efforts, which led to a 1-2ppt markdown in GPM forecasts for FY14 and FY15.
• Earnings Growth: Forecasted average earnings growth for FY14 and FY15 is 19.5%, slightly below the estimated sector average.
• Contract Sales: FY14F contract sales are expected to grow by 18.5% YoY to CNY57b, with a forecast of CNY59b. The company has a 2H14-heavy launch schedule.
• Geographical Exposure: The company has significant exposure in Chongqing, Beijing, Chengdu, and Hangzhou. However, some regions like Yantai, Changzhou, and Shenyang face more competition and rising inventory.
• Debt and Gearing: Net gearing ratio is healthy at 65%, with 37.6% of total debt in foreign currencies, partially hedged. Average cost of borrowing is low at 6.58%, expected to rise slightly in 2014.

Key Information

• GPM for 2013: 28% (slightly below 29% forecast and Bloomberg consensus).
• Inventory Ratio: 11% of total assets as of end-2013, compared to Poly Property's 61%.
• Contract Sales Growth: 2013 contract sales increased by 20% YoY to CNY48.1b.
• GPM for 2014: Revised down to 29.6%, below the original forecast of 32.3%.
• GPM for 2015: Revised to 31.4%, slightly above 2014.
• 2014 Contract Sales Forecast: CNY57b, with a forecast of CNY59b.
• Target Price: HKD11.75, derived from a 35% discount to NAV.
• Valuation Metrics:
  • P/E (reported): 6.5 (FY12A), 5.3 (FY13A), 5.8 (FY14E), 4.8 (FY15E), 4.1 (FY16A)
  • Core P/E: 7.6 (FY12A), 6.9 (FY13A), 5.8 (FY14E), 4.8 (FY15E), 4.1 (FY16A)
  • Core FD P/E: 7.7 (FY12A), 6.9 (FY13A), 5.8 (FY14E), 4.9 (FY15E), 4.1 (FY16A)
  • P/BV: 1.4 (FY12A), 1.2 (FY13A), 1.0 (FY14E), 0.8 (FY15E), 0.7 (FY16A)
  • Net Dividend Yield: 2.6% (FY12A), 2.9% (FY13A), 3.5% (FY14E), 4.2% (FY15E), 4.9% (FY16A)

Key Challenges in 2014

• Inventory Clearance: Management has identified inventory clearance as a major challenge, with a focus on Sunan area (Wuxi, Ningbo), Shanghai, and Qingdao.
• Margin Recovery: Expected to be slower than anticipated, with GPM likely to remain below 30% in 2014.
• Geographical Exposure: Concerns over markets with high competition and rising inventory.

Investment Recommendation

• HOLD: Despite potential upside and reasonable valuations, the stock is maintained at HOLD due to slower-than-expected margin recovery and geographical exposure concerns.

Inventory Breakdown

• End-2013 Inventory: CNY11.0b, or 11% of total assets.
• 2013 Contract Sales: CNY48.1b.
• Inventory as % of Total Assets:
  • Country Garden: 9%
  • GZ R&F: 26%
  • KWG Property: 7%
  • Longfor: 11%
  • Poly Property: 19%
  • Yuexiu Prop: 8%

Landbank Breakdown

• Top 6 Exposures by GFA:
  • Chongqing: 7.35m sq m (20.5%)
  • Chengdu: 2.39m sq m (6.7%)
  • Xian: 1.79m sq m (5.0%)
  • Yantai: 6.95m sq m (19.4%)
  • Qingdao: 1.28m sq m (3.6%)
  • Beijing: 1.33m sq m (3.7%)

Valuation Comparison

• Valuation Metrics for China Property Developers:
  • Share Price: Longfor at HKD9.77.
  • Mkt Cap (USD): Longfor at 6.9B.
  • 3M ATV (USDm): Longfor at 5.6.
  • 2013 Perf: -29%.
  • 2014 Ytd Perf: -10%.
  • Est NAV/share: 18.1.
  • Dis to NAV Est: -46%.
  • PER (x): 6.9 (FY13A), 5.8 (FY14E), 4.8 (FY15E), 4.1 (FY16A).
  • P/BV (x): 1.2 (FY13A), 1.0 (FY14E), 0.8 (FY15E), 0.7 (FY16A).
  • Div Yield: 2.9% (FY13A), 3.5% (FY14E), 4.2% (FY15E), 4.9% (FY16A).

Summary of Key Figures

Conclusion

Longfor Properties is a real estate developer with in-line results but faces challenges in inventory clearance and margin recovery. The stock trades at a 46% discount to NAV, and the company is expected to maintain a HOLD rating due to concerns over its geographical exposure and slower-than-expected margin recovery. Despite this, the company's business model is considered sustainable and more balanced compared to some peers.