20160411-大和证券-龙湖地产-00960.HK-Initiation__ahead_of_the_pack_in_strategy_43页_976kb_976kb

Longfor Properties (960 HK) Summary

Core Content

Longfor Properties is a property developer based in Beijing with operations in 24 cities across China, focusing on mixed-use residential and commercial projects. The company is being initiated with a Buy (1) rating and a 12-month target price of HKD13.29, which is set at a 30% discount to its forecasted end-2016 Net Asset Value (NAV) of HKD18.98. The current share price is HKD11.24, showing an 18.2% increase from the previous day.

Main Points

• Strategic Advantage: Longfor returned to upper-tier cities before many of its peers, positioning itself to benefit from the strong demand and growth in these markets.
• Core Cities: Longfor has focused on 10 core cities including Beijing, Shanghai, Guangzhou, Shenzhen, Chongqing, Chengdu, Hangzhou, Xiamen, Nanjing, and Suzhou. These cities have shown strong growth in home sales and prices, even amid purchase restrictions.
• Sales Performance: The company has demonstrated sustained contract sales growth, with 13.9% YoY increase in 2016 to CNY62.1bn and 12.1% YoY increase in 2017 to CNY69.6bn.
• Land Acquisition: Longfor acquired land in its core cities at a reasonable cost, supporting its steady margins and long-term growth.
• Investment Portfolio: The company has a growing investment property portfolio, with 4.8m sq m of investment properties, expected to deliver 39.6% YoY rental income growth in 2016 and 32.6% YoY growth in 2017.
• Financial Strength: Longfor has maintained a net gearing below 60%, a well-managed debt structure, and a declining average borrowing cost, resulting in favorable credit ratings. 50% of its foreign currency debt is hedged, minimizing the impact of CNY depreciation on earnings.
• Valuation: The current share price is trading at a 40.8% discount to NAV, which is considered favorable compared to large-cap peers. The company's PERs are 8.0x for 2016E and 7.2x for 2017E, indicating strong earnings potential.
• Earnings Outlook: Longfor's earnings are expected to grow steadily, with core EPS forecasted at 1.378 for 2016E, 1.544 for 2017E, and 1.707 for 2018E.
• Risks: The key risks include economic downturn, tightening property regulations, and intense competition for quality land in upper-tier cities.

Key Information

Share Price and Performance

• Share Price (8 Apr): HKD11.24
• 12-month range: 8.53-14.30
• Market Cap: USD8.43bn
• 3m Avg Daily Turnover: USD5.89m
• Shares Outstanding: 5,821m
• Major Shareholder: Wu Yajun (44.2%)

Financial Summary (CNY)

Financial Summary (Key Ratios)

Landbank and Core Cities

• Core Cities Account for 47% of Total Landbank: As of end-2015, Longfor had 16.5m sq m of landbank in its 9 core cities, which accounted for 47% of its total landbank.
• Landbank Growth: The proportion of landbank in core cities increased from 57% in 2013 to 89% in 2015.
• Core Cities Contribution to Sales: Sales in core cities are expected to increase to 73% of total sales in 2016 and 74% in 2017, up from 68% in 2011.

Market Share

• Core Cities Market Share: Longfor has steadily increased its market share in core cities since 2012, with notable shares in Chongqing, Hangzhou, and Xiamen in 2015.

Catalysts

• Strong Home Sales in Core Cities: Continued demand and price growth in core cities.
• Interest in Quality Non-SOE Developers: Increasing market interest in non-state-owned enterprises (non-SOEs) that can sustain growth and profitability.

Risks

• Economic Downturn: A further decline in China's economy may affect housing demand.
• Property Tightening Measures: Increased regulatory pressure in upper-tier cities.
• Land Competition: Intense competition for quality land in upper-tier cities.

Conclusion

Longfor Properties is positioned well due to its early return to upper-tier cities, strong sales execution, and prudent financial management. The company's focus on core cities with healthy demand-supply dynamics and its growing investment property portfolio make it an attractive investment opportunity. Despite the risks, the company's valuation and growth outlook support a Buy recommendation.