POA Positioning for Recovery – Meeting takeaways
Salient point in management presentation
- Maintaining c.10% earnings growth target for FY22, with potential shortfall from development business to potentially be offset by a 25-30% growth in rental income and a robust 50%+ growth in property management
- Impact from rental concessions to be manageable with Longfor planning to offer rent relief on a case-by-case basis, with total rental concession planned to range at Rmb100-200m.
- Awaiting a turn in market sentiment for its property management IPO Longfor has already obtained all necessary approval from the HKEx for listing and is awaiting a turn in overall market sentiment to officially launch its IPO procedures.
Three key questions
1. How impactful has COVID-19 resurgence been on Longfor’s shopping mall operations? Will there be rental concessions offered to tenants?
Both retail sales and foot traffic for Longfor’s shopping mall have unavoidably been affected by COVID-19 lockdown measures and fell >10% y-o-y in 5M22. The slowdown was expectedly more evident for malls located in Beijing and Shanghai. Contribution of turnover rent as % of rental income also fell from the original c.30% down to c.10%. Having said that, improvements have started to show with sales and footfall return to c.70% of pre-COVID-19 levels by end-May as lockdown measures ease. As such, Longfor believe more recovery will be seen in 2H22, and performance shortfall from 1H22 can be offset by a potential rebound in 2H. On other note, the company’s mall opening schedule was unaffected, with 3 of the 15 malls scheduled for opening having been launched at pretty much full occupancy in 5M22.
In terms of rental concessions, Longfor did offer rental concessions that amounted to c.Rmb500m back in 2020, but the company takes the view that situation back then was more severe than what was faced this year. Admittedly, malls in Shanghai and Beijing has been hard hit, but lockdown measures in other cities and regions were in fact less impactful. The company will adopt a case-by-case approach in the negotiation of rental concession, and they have currently budgeted for a potential rental concession that may total at c.Rmb100-200m.
Having combined the impacts from these factors, Longfor believes they can still achieve 25-30% growth in rental income for 2022.
2. Latest timeline for the listing of its property management arm? Any plans to monetise its rental housing segment via C-REITs?
Longfor has already obtained all relevant approvals required for the listing of its property management arm, and the company is merely waiting for a better timing to launch the deal to achieve a better valuation. Operationally, they believe the property management arm remains sound for listing despite disruptions from the COVID-19 outbreak, with the entity expected to record >50% growth in earnings.
In terms of the potential monetization of its rental housing business, Longfor is still familiarizing itself with the C-REIT structure and their main focus remains in the operational quality of their assets. Longfor is only of the handful few that can record a profit in this business, with it posted c.Rmb140m profit from this segment in 2021. The company expects more profit contributions can be derived from the rental housing business in 2022.
3.Sales performance so far, discounts offered and outlook for the full year of 2022
The company did see some market sentiment shortfall since the start of the year and has been in constant communication with regulatory authorities, whom of which are also facing pressure from the property market downturn and thus are increasingly relaxing their house restriction policies. Sales performance across city tiers have been divergent, with the company witnessing decent sell-through rates of 70-80% in core Tier 1-2 cities despite a relatively weak overall physical market. In May, the company recorded c.20% m-o-m growth in presales, and so far sentiment do appear to have improved so far into June with Longfor recorded c.10% y-o-y growth in subscription sales during the Dragon Boat Festival weekend. The company do expect another month of m-o-m improvement in presales for June.
In terms price discounts, Longfor did not engage in severe price cuts like some of its other peers did, as the company has stuck to its strategy to strike a balance between scale and profitability. This can be seen with the company’s relatively stable presales ASP that ranged in between Rmb16-17k/sm. The company did do some promotional campaigns during festive periods (e.g. Labour Holiday, Dragon Boat Festival weekend) along with some of its new project launches, but only in the single-digit levels.
For the full year of 2022, the company has Rmb400bn+ of saleable resources for launch, and takes the view that the physical market as well as its own presales performance should see decent improvement in 2H22 as impact from supportive policies start to show and market sentiment to return.