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Document Summary: Weekly Macro Monitor and Longfor Properties Analysis (24 March 2014)

Core Content Overview

This document provides a comprehensive market analysis and company-specific insights for Longfor Properties (960.HK), along with broader macroeconomic outlook and financial market data.

Main Macro Trends

RMB Depreciation and Fund Flow

• The RMB depreciation has accelerated after the PBoC widened the daily trading band from 1% to 2%.
• Recent economic data has shown weaker-than-expected performance, contributing to downward pressure on the RMB.
• The more hawkish stance of the US Fed has increased market concerns about an earlier-than-expected interest rate hike in Q1 2015.
• Fund flow to China has slowed in February, and the pressure of fund outflow is expected to intensify in March.
• The PBoC has been withdrawing liquidity from the interbank market, which could lead to tighter monetary conditions if fund outflow continues.
• This may prompt the PBoC to consider a required reserve ratio (RRR) cut to support the real economy.

FX Market Movements

• The RMB fell to its lowest level in one year, with USD/RMB reaching 6.23.
• The RMB onshore forward premium dropped significantly, indicating weaker demand for the currency.
• The RMB NDF premium also showed a decline, reflecting market expectations of further depreciation.
• Global and regional FX rates showed mixed movements, with some currencies appreciating and others depreciating against the USD.

Economic Indicators

• The HSBC China manufacturing PMI is expected to rebound in March due to the end of the Chinese New Year effect.
• However, the strength of the broader economy remains uncertain due to lack of additional stimulus measures.
• Economic data for January and February was disappointing, raising concerns about growth prospects.

Longfor Properties Performance (2013 and 2014 Outlook)

2013 Financial Highlights

• Total Revenue: Rmb41.5bn, slightly below the 2013 consensus of Rmb43.6bn.
• Gross Margin (Pre-LAT): Decreased to 27.8% from 40.1%, in line with market expectations.
• Net Gearing: Increased to 57.9%, reflecting higher debt levels.
• Interest Rate: Slightly decreased to 6.58%.
• Contracted Sales: Targeted Rmb57bn for 2014, up 18% YoY.
• Saleable Resources: Total value of Rmb97bn, with Rmb60bn from new resources, indicating a 59% sell-through rate for 2014.

Key Performance Metrics

• Contracted Sales: Achieved Rmb48.1bn in 2013, up 20% YoY.
• GFA Sold: Increased to 4.13m sqm from 2.51m sqm in 2012.
• ASP (Average Selling Price): Rose to Rmb11,293psm from Rmb9,601psm in 2012.
• Core Net Profit: Rmb5,801m in 2013, up 10% YoY, but below the consensus of Rmb6,107m.
• Final Dividend: Rmb0.23 per share, up 14% YoY, with a 22% dividend payout ratio.

Strategic Development

• Longfor's strategy focuses on "Broaden Regional Framework, Close to City Center, Control the Size of Project" to optimize landbank structure.
• The company has expanded its operations to 15 prefecture cities by the end of 2013.
• The share of urban projects in its landbank increased from 28% in 2012 to 42% in 2013.
• The proportion of projects with GFA less than 500k sqm rose from 50% to 71%.

Landbank and Development Plans

• As of 31 Dec 2013, Longfor had an attributable landbank of about 35.8m sqm.
• The company plans to launch 2 projects in each of Beijing, Shanghai, and Hangzhou from 2014 to 2017.
• It has 11 commercial projects in operation and plans to add 4 more in 2014.
• By the end of 2013, the company had 6 projects under construction with a total GFA of 765k sqm.

2014 Financial Outlook

• Cash Inflow: Expected to be Rmb50.8bn from contracted sales and rental.
• Cash Outflow: Includes Rmb16bn for land premium, Rmb25bn for construction cost, and Rmb14.1bn for SG&A, interest, and tax.
• Expected Cashflow: Negative Rmb4.3bn in 2014, leading to a further increase in net gearing.

Valuation and Peer Comparison

• 2015F/2016F PE: Trading at 5.9x/4.8x, higher than the sector average.
• 2014F/2015F PB: Trading at 1.0x/0.9x, lower than the sector average.
• Dividend Yield: 3.5% in 2014, 4.2% in 2015.
• ROE (Return on Equity): 18.5% in 2014, 19.2% in 2015.
• Peer Comparison: Longfor's PE and PB are relatively low compared to its peers, suggesting potential undervaluation or lower growth expectations.

Key Information and Analysis

• The RMB depreciation is driven by weak economic performance, reduced PBoC intervention, and expectations of an earlier Fed rate hike.
• Longfor's performance in 2013 was largely in line with expectations, with a focus on expanding its landbank and increasing contracted sales.
• The company's gross margin declined due to pre-sold projects with low margins, but it is expected to recover in 2014.
• Longfor's strategic focus on urban centers and smaller projects is aimed at improving asset turnover and profitability.
• The company faces challenges in maintaining positive cashflow and managing rising net gearing.
• The market sentiment for Longfor is mixed, with its valuation lower than the sector average, but its growth strategy and regional expansion remain strong.

Conclusion

The document highlights the ongoing depreciation of the RMB due to weak economic data and Fed policy, while also providing a detailed outlook for Longfor Properties. Despite a decline in gross margin, the company has maintained a steady growth trajectory in 2013 and is planning further expansion in 2014. The overall macroeconomic environment is characterized by tighter liquidity and increased capital outflow, which may impact both the RMB and the performance of Chinese companies like Longfor.