Longfor's 2023 revenue declined by 27.9% YoY to RMB180.7bn, 8.9% below our estimation. Development property (DP) revenue declined 31.3% YoY, lower than our estimation, while investment property (IP) revenue grew 8.9% YoY, better than our estimation. Gross margin narrowed by 4.2ppts YoY to 16.9%, 1.6ppts below our estimation; therefore, gross profit declined by 42.3% YoY, 17% below our estimation. Selling and marketing expenses only declined by 1.4% YoY and were 24.5% higher than our estimation. As such, core net profit declined by 49.6% YoY to RMB11.35bn, 24.6% below our estimation. Core EPS was 25.8% and 27.6% below BOCI and market estimations. Longfor announced a final dividend of RMB0.23/share, making the total 2023 dividend at RMB0.55/share, and maintaining 32% payout ratio. We cut our 2024-25E core EPS by 33.9% and 49.1%, respectively considering slower contracted sales and lower margin, and cut our TP by 31% to HK$14.37. We like Longfor's increased contribution from recurring income, positive operating cash flow and stronger financial positions, and maintain BUY rating for the stock.
Key Factors for Rating
Longfor's contracted sales amounted to RMB173.5bn in 2023, representing 13.9% YoY decline, which is one of the smallest declines among all private developers. Cash collection exceeded 100%. Total saleable resources in 2023 amounted to RMB310bn, indicating 56% sell-through rate. For 2024, Longfor has already planned RMB240bn saleable resources without new projects. Considering more saleable resources is likely to be added with new projects, we estimate 10% YoY decline on contracted sales in 2024 to RMB156bn.
Longfor generated positive operating cash flow in 2023, and lowered its net gearing by 2.1ppts to 55.9%. Adjusted liability to asset ratio was also further down from 2022's 65% to 60%, and cash to short-term debt ratio remained at above 2x. Remaining bond maturing in 2024 amounts to RMB6bn, all on-shore. Repayment fund is already ready for the RMB1.5bn maturing in May. Longfor's stress test shows that with 15% decrease in 2024 contracted sales, the company would still have the safety margin to generate RMB10bn positive operating cash flow after spending RMB20bn on the land market.
Key Risks for Rating
Property market recovery may be slower than expected.
Valuation
To factor in slower contracted sales and lower margin, we cut our estimated NAV by 31% to HK$23.95/share, and maintain our target discount to NAV at 40%. The stock currently trades at 0.4x 2024E P/B, 55.7% discount to NAV and 6.1% 2024E dividend yield. We see such valuation as undemanding, given Longfor's strong financial position, positive operating cash flow, and stable recurring income growth.