LONGFOR GROUP(960.HK)：CONFIDENCE IN FINANCIAL SAFETY BOOSTED HOLD ON FAIR VALUATION-格隆汇

机构：中银国际
研究员：Gurney LIU/Maggie CAI

Longfor’s 2024 revenue declined by 29.5% YoY to RMB127.5bn, 9.1% below our estimation. Recurring revenue grew 7.4% YoY to RMB26.7bn, with contribution to total revenue up 7.2ppts to 21.0%, further improving revenue mix. Thanks to stable gross margin of recurring businesses, overall gross margin was relatively stable, down only by 0.9ppt to 16.0%, beating our estimation by 0.9ppt, despite development gross margin narrowed by 4.9ppts to 6.1%. As a result, recurring businesses contributed 70% of total gross profit in 2024 (2023: 44%). Gross profit was only 3.6% below our estimation, but core net profit at RMB6.97bn was 12.0% below our estimation (down 38.6% YoY), due to: firstly, SG&A as % of revenue was 0.9ppt higher than our estimation as a result of less development revenue recognition; secondly, tax expenses were 65.4% higher than we expected, as 2023 had RMB427m more reverse in LAT overprovision. We cut our 2025- 26E core EPS by 24.8-25.3%, respectively, based on more conservative revenue booking and gross margin assumptions. Longfor continues to generate ample positive OCF, and management laid out clear roadmap to settle debts maturing in 2025, further increasing our confidence in Longfor’s financial safety. Considering factors listed above, we cut our TP by 8.5% to HK$9.99, downgrade to HOLD on fair valuation.
Key Factors for Rating
Management laid out a very clear roadmap for Longfor to settle its debts maturing in 2025, further boosting our confidence in its financial safety. The company repaid RMB6.5bn of domestic bonds in 1Q25, leaving RMB3.6bn domestic bonds maturing in July and August, RMB3.5bn CBICL backed bonds maturing in August and November, and RMB8.5bn syndicated loan maturing by end-2025, adding total need for refinancing to c.RMB22bn in 2025. On the other hand, OCF in 2024 amounted to positive RMB6.4bn, and is expected to increase to RMB20bn in 2025. Compared to 2024, the company budgets to spend RMB6- 7bn less land premium, and expects RMB10bn less construction capex with decreased GFA under construction. SG&A and interest expenses are also expected to be c.RMB3bn less. On top on this, Longfor plans to further increase RMB10bn of commercial property loans in 2025 (2024: RMB30bn). By end-2025, bond as % of total debt will be further reduced from 2024’s 17% to 10%, while operational property loan’s percentage will further increase from 2024’s 47% to 69%, pointing to a healthy debt structure.
Key Risks for Rating
Property market recovery may take longer than expected.
Valuation
We cut our estimated NAV by 15% to HK$14.27/share, mainly due to lower gross margin assumptions. We narrowed our target discount to NAV from 35% to 30% as our confidence in Longfor’s cash flow management has further increased. The stock currently trades at 27.5% discount to NAV, and 0.4x 2025E P/B, which we think is fair considering Longfor’s strong recurring income, and solid cash flow management capabilities, but also considering some SOEs with similar qualities are trading at similar P/B.
Solid Growth in Recurring Business
Recurring businesses have become the main profit contributors for Longfor, generating 21.0% of its 2024 revenue (up from 13.8% in 2023), and 70% of total gross margin (up from 44% in 2023). Total revenue from recurring business grew 7% to RMB26.7bn. Revenue from rental income grew 4.5% YoY to RMB13.5bn, with gross margin maintaining at 75.0% (2023: 75.9%). Retail sales of shopping malls increased by 16% YoY (SSSG: 7%), significantly beating the nationwide growth of 3.5%. Occupancy rate for shopping malls improved from 96% at end-2023 to 97% at end-2024. 11 shopping malls were newly opened during 2024, among which 7 were heavy asset ones and 4 were light asset ones. 11 more are planned to open in 2025, among which 8 are heavy asset ones and 3 are light asset ones, pointing to faster rental income growth in 2025 than 2024, given more heavy asset shopping malls opening in this year. For 2025, management is confident to deliver 10-15% revenue growth form the combined recurring businesses.