20180823-兴业金融证券-龙湖集团-00960.HK-Our_Favourite_Long-Term_Call_14页_644kb

Longfor Group Holdings Summary

Core Content and Key Highlights

• Company Overview: Longfor Group Holdings is a Chinese property developer established in Chongqing in 1993, with a presence in 36 cities across Western China, the Yangtze River Delta, the Bohai Rim, and Southern and Central China. It operates in property development, investment, and management, with notable brands such as Paradise Walk and Starry Street. The company was listed on the HKEx in 2009.

• Investment Recommendation: The report recommends BUY for Longfor Group Holdings, with a new target price of HKD26.70, representing a 19% upside from the current price of HKD22.40. This recommendation is based on a 25% discount to the end-FY18F ENAV of HKD35.60.

• Financial Performance:

  • 1H18 Core Earnings: Reached CNY3.7bn, a +31.2% YoY increase, exceeding expectations.
  • Gross Profit Margin (GPM): Stronger than expected at 37.1%.
  • Net Profit Margin (NPM): Improved to 13.8%.
  • Net Gearing: Remained stable at 54.6%.
  • Interim Dividend: Announced at CNY0.30/share, a +50% YoY increase.

• Sales Outlook:

  • Contracted sales are expected to be skewed towards 2H this year, in line with historical 70% or higher sell-through rates.
  • The company is projected to comfortably beat the CNY200bn sales target for FY18, with a +28% YoY increase.

• Investment Property Growth:

  • The investment property business is scaling quickly, with 3/10/14 new malls planned to open in 2H18F, FY19F, and FY20F, respectively.
  • By 2020, Longfor should have 53 malls in operation (from 29 in 2018), driving rental income growth at a 36.8% CAGR over FY17-20F.
  • Rental income is expected to cover 76% of gross interest expenses in FY17, with potential for this to increase in the next 1-2 years, enhancing defensiveness of the balance sheet and reinforcing its IG credit rating.

• Rental Apartment Business:

  • The rental apartment business model is showing positive signs, with average occupancy rates of 90% for properties operating for six months or more.
  • Management estimates that once the properties mature, GPM should stabilize around 35%, and NPM around 12-15%.

• Key Risks:

  • A slowdown in property sales in Tier-1 and Tier-2 markets could pose a downside risk to the investment call.

Financial Forecast and Valuation

• Valuation Basis: The target price is based on a 25% discount to the end-FY18F ENAV of HKD35.60.

• ENAV Breakdown (end-FY18F):

  • Landbank and properties under development: HKD184,938m (HKD31.7/share), accounting for 89% of total.
  • Investment properties: HKD90,710m (HKD15.5/share), accounting for 44% of total.
  • Net debt: HKD67,598m (HKD11.6/share), accounting for -32% of total.
  • Total ENAV: HKD208,051m (HKD35.6/share).

Peer Comparison

Summary

Longfor Group Holdings continues to be a strong recommendation for long-term investors due to its high earnings quality, strong financial position, and positive outlook in property development. The company's investment property business is growing rapidly, with rental income expected to grow at a 36.8% CAGR over the next few years, potentially covering gross interest expenses and reinforcing its IG credit rating.

The 1H18 results showed core earnings of CNY3.7bn, a +31.2% YoY increase, with GPM and NPM both stronger than expected. The contracted sales outlook remains positive, with a strong expectation of meeting or exceeding FY18 sales targets.

Despite the downside risk of a slowdown in Tier-1 and Tier-2 markets, the buy recommendation is maintained, with a target price of HKD26.70. The dividend yield is projected to increase to 5.8% by FY20F, and the recurring net profit is expected to grow at a 36.5% CAGR.

In terms of valuation, the ENAV is expected to be HKD35.60 by the end of FY18, with the target price based on a 25% discount to this value. The company's financial metrics are favorable compared to its peers, with a higher P/E ratio, lower net debt to equity, and stronger return on equity.

Longfor Group Holdings is positioned to benefit from sustainable growth in property sales and rental income, and its business model is gaining traction, especially in the rental apartment sector, where occupancy rates are high and profitability is expected to stabilize.

The financial model is updated, and the recurring net profit is expected to grow significantly over the next few years, reinforcing the company's financial strength and long-term investment potential.