• Proposed spin-off of its property management services platform
• Several positives from the proposed spin-off
• Do not rule out possibility of distribution in specie of new listco shares as special dividend to shareholders

Proposing to spin off its property management services and commercial operational services platform – Longfor Group (960 HK) announced on 7 Jan 2022 that it was proposing to spin off and separately list the shares of its wholly-owned subsidiary Longfor Intelligent Living Limited (LIL) on the Main Board of the Hong Kong Stock Exchange. Longfor intends to keep at least a 50% interest in LIL post-listing. LIL a leading intelligent lifestyle and space service provider of property management and commercial operations in China, and its services mainly comprises i) residential and other non-commercial property management services, and ii) commercial operational and property management services.

Positives from a spin-off – The rationale of a spin-off includes i) having the benefits of being an independently listed group which will allow it to be more focused on driving growth and business
transformation with better operational efficiencies and financial transparency, ii) allowing Longfor to
unlock value in LIL, but still being able to enjoy the benefits of the future growth of LIL given that it
intends to retain at least a 50% stake, and iii) potentially having an easier and wider access to the capital markets as a separate listed company.

Unlocking value for shareholders; potential special dividends? – LIL’s GFA under management of its
residential and other non-commercial properties and GFA under management of commercial properties increased 38.8% and 38.1% to 212.5m sqm and 24.3m sqm, respectively, as at 30 Sep 2021, versus 153.1m sqm and 17.6m sqm, as at 31 Dec 2020. LIL’s revenue and gross profit grew 81.2% and 82.2% YoY to RMB7.8b and RMB2.1b, respectively, and translated to a gross profit margin of 27.6%. 9M21 net profit jumped 68.4% YoY to RMB1.1b. We are overall positive on this proposed transaction given that it will unlock value for Longfor’s shareholders, and also do not rule out the possibility of a distribution in specie of LIL shares to its shareholders. On hindsight though, we opine that Longfor would have been able to fetch a higher valuation had it tried the spin off back in 2020 when sector multiples were much higher than today. Furthermore, Longfor’s management could also have waited for the property management
services sector’s valuation to stabilise first before pursuing a spin-off. We maintain our fair value estimate of HKD48.76 for now and reiterate Longfor as one of our top picks within the Chinese property sector.

ESG Updates

ESG rating was upgraded in Oct 2021. Its rating was previously upgraded in Aug 2020. This highlights the
continued progress which Longfor is making on the ESG front. The most recent upgrade was driven by
Longfor’s increasing focus on managing its corporate governance risks. It has programmes to encourage ethical conduct among employees, while executive pay appears to be aligned with shareholder interests. Longfor has also made efforts to reduce its environmental footprint, such as rainwater recycling and the adoption of smart building features which includes the remote monitoring of energy consumption. BUY. (Research Team)