Conference call takeaway: Cruising steadily along uncertainties
- Policy risks should have peaked in Oct-Nov 21, with more supportive measures on the way
- Physical market is expected to shrink from c.Rmb18tn in 2021 gradually to a sustainable c.Rmb15tn market size over the mid-to-long term
- Confident in posting 15-20% core earnings growth in 2021 and target to maintain double-digit growth in the years ahead
- One of our sector top picks for its strong balance sheet and superior growth prospect
What’s new
We recently hosted a company update conference call with Longfor. Key takeaways of the call are as below:
Policy risk should have peaked, more support should be on the way. The company believes policy risks in the sector should have peaked in Oct-Nov 21 and they are seeing encouraging signs for polices to turn more supportive going forward. Longfor expects the physical market sentiment will start to see more meaningful recovery after March, as it will still take time for the market to digest and transmit impact of favorable policies to the physical market. In relation to market rumours on the potential relaxation over presale proceeds control, Longfor believes the relaxation, if it holds true, will be rolled out in a controllable manner. The magnitude of the relaxation will likely be different from city to city subject to individual situations. Overall speaking, some liquidity-tight developers may be given some space to take a quick breather if the relaxation materialises.
Size of the physical market should have peaked out, market leaders to enjoy market share gains. Longfor expects the property market size should have peaked at c.Rmb18tn in 2021 and will likely subject to downward pressure then on. Having said that, the company still see resilient and robust demand from homebuyers, and this should support a sustainable c.Rmb15tn market size going forward in the mid-to-long term. The market is currently undergoing consolidation, and developers that can survive and remain in the market would be financially healthier than before. Market leaders will continue to gain market shares.
Maintaining a proactive stance on land acquisitions. Longfor acquired 122 land parcels in 2021 (32 from M&A and 90 from public market) with attributable land premium of Rmb86.2bn and attributable GFA of 12.4m sm. The company had been relatively conservative in 1H21 as the land market was very hot, but they have started to pick up their pace in land banking since 2H21 as the land market showed more signs of calmness and with land opportunities yielding c.20-25% GPM. In terms of potential land acquisition via the M&A channel, Longfor will only consider project-level opportunities from currently distressed developers in order to minimize potential risks of hidden debts. Having said that, the company actually prefer to acquire land via the public market instead as they see more attractive opportunities in this channel.
Confident in achieving 15-20% core earnings growth in 2021. Longfor achieved Rmb290bn presale in 2021, up 7.2% y-o-y but 6.4% short of their original Rmb310bn presales target. ASP was flat at Rmb16,975/sm and the company expect it to remain stable in the coming years. Despite uncertainties and difficulties for the sector in 2H21, Longfor remains confident in achieving its original targets and reiterated their intention to post c.15-20% core earnings growth in FY21, with the metric to maintain double-digit growth in the next few years. Profitability remains as their top priority rather than pure scale expansions.
Sector top pick for its superior growth prospect. Longfor is among one of our current sector top picks for its solid balance and abundant saleable sources that would underpin presales outperformance in 2022.