20230320-招银国际-龙湖集团-00960.HK-Transition_leaving_growth_muted_10页_1mb

Longfor (960 HK) Summary

Core Content and Key Insights

Longfor, a real estate developer, is experiencing a muted growth trajectory due to strategic shifts and market conditions. The firm is transitioning from a traditional development model to a more asset-light approach, which is affecting its revenue and profit outlook.

Main Points

• Strategic Shift: Longfor is shifting focus to safety, which is causing it to lag behind SOE peers in 2023E.
• Sales Outlook: The effective land bank is limited to 22.5mn sqm, excluding sold but unbooked GFA. This is expected to lead to a -3% YoY sales decline in 2023E, resulting in a revenue booking of -14% YoY.
• Rental Growth: The transition to an asset-light mall model is expected to slow rental income growth from 30% CAGR to 15-25% in 2023-25E.
• Profit Decline: Core net profit is projected to decline by 9% YoY in 2023E due to the above factors.
• Dividend Policy: The dividend payout ratio was cut to 30% in 2022, and management expects a 30% payout ratio in the future.
• Valuation: The target price was cut to HKD24.9/share, and the company is currently trading at 0.8x PB, which is still a premium over SOE peers like COLI (0.5x PB).
• Market Conditions: The property market remains weak, with a low sell-through rate and limited land acquisition plans for 2023E.

Key Financial Highlights

Land Bank and Sales

• Longfor's land bank is primarily in the ring Bohai region and western region, with Yantai being a major contributor.
• The effective land bank is only 22.5mn sqm, excluding sold but unbooked GFA, leading to a limited sales outlook.
• Management has not increased total debts for land acquisition, which limits sales upside.
• Yantai has 7.5mn sqm of land that has been hard to sell since 2015, contributing to a 19% share of total attributable land banks.

Mall Business Transition

• In 2022, 3 out of 15 mall openings were via an asset-light model.
• This number is expected to double to 6 in 2023E, or 55% of total mall openings.
• This transition is expected to slow rental income growth from 30% CAGR to 15-25% in 2023-25E.
• The earnings contribution from IP may slow down in the medium term, potentially reducing the probability of C2-C5 contributing 50% of core earnings in five years.

Earnings Outlook

• Revenue is expected to decline by 10% YoY to RMB226bn in 2023E.
• Gross profit margin is projected to remain stable at 21%.
• Core net profit is expected to decline by 10% YoY due to top-line pressure.

Valuation and Investment

• The target price was cut to HKD24.9/share, based on a NAV model with a 65% discount.
• This target price corresponds to a 6.3x 2023E PE and 0.9x PB.
• The company is currently trading at 5.5x 2023E PE and 0.8x PB, which is still a premium over SOE peers like COLI (0.5x PB).
• Upside Catalysts: Sales beat, PM spin-off.
• Downside Catalysts: Placement.

Shareholding and Performance

• Charm Talent Intl Ltd holds 43.0% of shares.
• Junson Development holds 22.0% of shares.
• The stock has underperformed in the past 12 months, with a -22.2% absolute return and -25.3% relative to the market.

Strategic Guidance

• Management expects a steady core earnings growth but acknowledges challenges in 2023E.
• Sales are expected to be around RMB195bn, with a 65% sell-through rate.
• The firm is focusing on high-tier cities and expects policy support at a city level.
• US rate hike has been hedged at 98%, and the firm is targeting a lower USD debt portion (18% in 2023E).
• No plans for placement due to lack of investor confidence.
• C-REITs are not the key beneficiary, but there may be scope extension to include service apartments and shopping malls.
• PM spin-off is not the right time now.

Financial Summary

• Income Statement: Revenue and net profit are expected to decline in 2023E, with core net profit down 10% YoY.
• Balance Sheet: Total assets are projected to grow, with total equity and liabilities also increasing.
• Cash Flow: Net cash from operations is expected to increase in 2023E, while net cash from investing and financing activities may fluctuate.

Conclusion

Longfor is facing a period of muted growth due to strategic shifts and market conditions. The transition to an asset-light model is affecting rental growth, and the limited effective land bank is putting sales under pressure. The firm is currently trading at a premium compared to SOE peers, and the downgrade to Hold reflects the cautious outlook for its future performance.