20131101-Maybank_KERPL-Longfor_Properties_Near_Inflection_Point_of_Margin+Sales_Hike_11页_338kb

Longfor Properties Summary

Core Content

Longfor Properties is a Chinese real estate developer based in Beijing, originally founded in Chongqing by Wu Yajin and Cai Kui in 1994. As of December 2012, it had an attributable landbank of $35.82 million square meters and operates across a broad geographic footprint. The company offers a diverse range of real estate products, including high-rise residential, townhouses, office, retail, and SOHO units.

Key Financial Information

• Ticker: 960 HK
• Shares Issued (m): 5,441.3
• Market Cap (USD): 8.9
• 3-mth Avg Daily Turnover (USDm): 8.0
• HSI: 23,206.37
• Free Float (%): 28.1

Major Shareholders

• Wu Yajun: 43.2%
• Cai Kui: 28.7%

Performance Overview

• 52-week High/Low: HKD16.10 / HKD10.58
• 1-mth Absolute Return: 3%
• 3-mth Absolute Return: 7%
• 6-mth Absolute Return: -2%
• 1-yr Absolute Return: -8%
• YTD Absolute Return: -17%
• 1-mth Relative Return: 1%
• 3-mth Relative Return: 1%
• 6-mth Relative Return: -5%
• 1-yr Relative Return: -15%
• YTD Relative Return: -19%

Key Points and Analysis

• Rating Change: The rating was upgraded from SELL to HOLD.

• Target Price: Raised to HKD12.33 (up from 11.75).

• Reasons for Upgrade:

  1. Improvement in Contract Sales ASP: In 9M13, Longfor's contract sales ASP was CNY11,578/sq m, up 24% YoY, indicating a potential margin recovery due to more city-centric projects.
  2. New Start GFA: In 2H13, Longfor had approximately 2.4 million sq m of new start GFA, with a shift towards urban projects and a reduction in old suburban ones.
  3. Human Resources Transition: The transition phase of management restructuring and staff attrition is expected to be completed by next year, with the company's strong culture remaining a key strength.

• Valuation and Metrics:

  • Discount to NAV: The stock trades at a 28% discount to its NAV of HKD17.61.
  • 2014 PER: 7.3x
  • 2014 P/B: 1.3x
  • Net Gearing (Dec 2013): Expected to remain at 60-65%, similar to June 2013.

• Contract Sales and Earnings Growth:

  • 2014 Contract Sales: Expected to increase by 15-20%, which is lower than peers like Shimao and GZ R&F.
  • Underlying Net Profit (2013F): CNY6,148 million
  • Underlying EPS (2013F): CNY1.13
  • Underlying EPS (2014F): CNY1.36
  • Underlying EPS (2015F): CNY1.64

• Balance Sheet and Liquidity:

  • Short-term Debt: Only 16% of total debt as of June 2013.
  • Cash Collection Ratio: Over 90%.
  • Cash & Bank Balances (FYE Dec): Expected to be CNY16,742 million in 2013, increasing to CNY21,499 million by 2015.

Risks

• Faster-than-expected GPM Recovery: Could lead to better performance than forecasted.
• Macro and Policy Factors: A more favorable macroeconomic environment or reduced policy concerns could increase investor appetite for property stocks.
• Global Economic Conditions: A more conducive global backdrop could affect the company's performance.
• Stake Disposal Concerns: The potential disposal of a stake by Cai Kui could be a concern.

Outlook and Conclusion

• Turnaround in Margins: Expected to kick in over 1H14, with GPM rising to 32.3% in 2014 and 33.0% in 2015.
• Moderate Growth: Longfor's strategy is for moderate and stable growth, not lumpy.
• Neutral Rating: The company is rated HOLD due to its relatively lower growth expectations compared to peers and fair valuation.

Summary Table

FYE Dec (CNY m)	2011A	2012A	2013F	2014F	2015F
Revenue	24,150	27,974	42,511	46,678	54,761
Est Underlying Net Profit	4,503	5,395	6,148	7,380	8,946
Est Underlying EPS (CNY)	0.87	1.03	1.13	1.36	1.64
BPS	4.26	5.71	6.43	7.56	8.94
DPS	0.18	0.20	0.23	0.27	0.33
Net Gearing (%)	43.0	47.9	61.2	61.5	51.9
GPM (%)	40.4	40.0	29.2	32.3	33.0
Est Underlying New Margin	-	19.3	14.5	15.8	16.3

Additional Insights

• Project Performance: Projects like Hangzhou Cuijiang Land and Shanghai Ziducheng (Fantastic Garden) have shown strong sales and demand.
• Market Position: Longfor has a strong brand in Western China but faces competition in Northern and Southern China.
• Policy Outlook: The Third Plenary Session is expected to introduce market-oriented reforms, which may improve the long-term stability of the property market.

Figures and Charts

• Figure 1: Longfor's Cuijiang Land in Hangzhou
• Figure 2: Longfor's Fantastic Garden in Shanghai
• Figure 3: Exterior of Fantastic Garden
• Figure 4: Showflat of Fantastic Garden
• Figure 5: Contract sales and ASP for China developers
• Figure 6: Saleable resources by regions in 2H2013
• Figure 7: Saleable resources by type in 2H2013
• Figure 8: Net gearing change for Dec 2013 vs. June 2013
• Figure 9: Forward PER Chart
• Figure 10: Forward P/B Chart
• Figure 11: Company guidance on net gearing for Dec 2013 vs. June 2013
• Figure 12: China property valuation table

Conclusion

Longfor Properties is being upgraded to HOLD due to potential margin recovery, improved sales ASP, and a stable growth strategy. However, the company's growth profile is not as attractive as some peers, and its valuation is considered fair. The stock is expected to perform moderately in the coming year, with a focus on urban projects and a healthy balance sheet.