Whitelist developer supported by regulators
- We expect Longfor’s FY23F earnings to disappoint the market, with net profit down c.40% yoy dragged by low ASP and high land costs.
- We are not overly concerned about its liquidity position due to its low gearing and refinancing capabilities as a whitelist developer supported by regulators.
- In addition, Longfor has repaid some of its offshore debt and has no offshore debt due until 2027F.
- Reiterate Add with a lower TP of HK$16.0 (from HK$19.0) due to lower GPM and sales assumptions.
Longfor is our top pick among private developers.
2023F contracted sales could be 15% short of our original estimate In 11M23, Longfor’s sales came in at Rmb162bn (-11% yoy), some 15% below our forecast due to homebuyers’ cautious view of the property market, as a result of slower economic growth in China, declining household income, and negative newsflow surrounding developers. Given the persistent weak sector sentiment, we think Dec 2023 sales could have weakened further. Overall, we forecast its FY23F contracted sales falling 14% yoy to Rmb174bn, the second consecutive year of decline. For 2024F and 2025F, we expect its contracted sales to rebound 4% and 10%, respectively, largely due to the lower base.
Likely record-low GPM for 2023F
We think the ASP for Longfor’s residential project sales in 2023F was c.10-15% below its expectations. Meanwhile, land costs for project sales in 2023F were relatively high, as many of these projects were acquired in 1H22 or before, when the China property market was faring relatively better. As such, we estimate GPM for projects sales in 2023F to be only in the high single-digits or low teens. We estimate that 2023F blended GPM contracted by 6.6% pts to 14.6%, the lowest since listing, with a GPM of 75% for investment properties and 25% for property management. We expect its blended GPM for 2024F and 2025F to improve modestly to about 18%, still well below the 25-40% it achieved in 2006-2021.
A whitelist developer and no offshore debt due until 2027F
Despite its weak profit outlook over FY23-25F, we expect Longfor’s financials to remain sound. Specifically, we expect its net gearing to stay at a healthy level of 56% in FY23F. Longfor also does not have any offshore debt due until 2027F. We think Longfor should have sufficient liquidity to repay its onshore debt on maturity over the next 6-12 months, given that it is one of the “whitelist” developers recognised by regulators and banks as one they will continue to provide liquidity support, as recently illustrated by its issuance of a 3- year medium term note of Rmb1.2bn on 12 Dec 2023 at a low cost of 3.66%.
Reiterate Add with a lower TP of HK$16.0
We lower our FY23-25F EPS by 36-40% for slower sales growth. We cut NAV by 16% for lower GPM and sales assumptions, resulting in a lower NAV-based TP of HK$16.0. We nevertheless reiterate our Add rating for the stock’s undemanding valuation (45% upside). Key downside risks: more developers defaulting and continued weak sales ahead. Rerating catalysts: unexpected massive policy loosening from regulators to save the sector.