The company's recent situation
The company has risen 50% since its April 19 low. We continue to be optimistic about Longhu Group as a scarce “development+hold” target. It is hoped that through a high degree of self-discipline and active action, it will preserve high-quality assets and polish its ability in the downstream cycle, and unlock the valuation reshaping brought about by the superior model after the fundamentals of the industry are repaired. We believe that there is still room for the company's current reasonable market value, and it is recommended to focus on dips layout opportunities.
reviews
The model is superior, and it is expected that the valuation will be reshaped if it passes smoothly through the cycle. In 2023, its recurring revenue reached 24.9 billion yuan, accounting for 14% of total revenue (average of only 7% in the industry) and over 60% of core profit. We believe that its recurring revenue is expected to grow by double digits in the short to medium term, and that its recurring core profit continues to account for more than half; on this basis, if sales of new homes recover steadily, the company is expected to maintain its current sales volume with high-quality land storage (about 400 billion yuan of unsold value as of the end of last year, about 80% in Tier 1 and 2 cities), supporting overall core profit to remain roughly the same as last year (11.35 billion yuan). Even if it is conservatively given 12x/4x P/E for its recurrent/housing development business, the current reasonable market value still has 16% room to rise.
Acting proactively, visibility across the cycle continues to accumulate:
1) The advance peak is cut, and the pressure on public debt to be paid during the year is manageable. The company has made early payments to overseas syndicate groups (HK$15.3 billion) and CMBS ($4.6 billion) due this year, and completed the resale of the “21 Longhu 03” bonds ($1.5 billion) on May 17. Up to now, there are only 4.5 billion yuan of open bonds awaiting payment during the year.
2) Moderate position replenishment with high turnover, development business continues to contribute to repayment. The company's land acquisition intensity in January-April was 24%, and the equity land price was 5.4 billion yuan. The new projects are all in ultra-high/high-energy cities, and have a small scale with high turnover (the total construction area of the new single project is in the small range of 20,000 to 90,000 square meters. We expect the land acquisition to open for about 4-5 months, and the removal rate will maintain 60-70%), and the combined sales value of the stock projects at the beginning of the year is 240 billion yuan, which is expected to quickly supplement their cash flow within the year.
3) The non-housing business is growing steadily. The company announced that in January-April, it achieved a total recurring revenue of 8.59 billion yuan, an increase of 10.3% over the previous year. We expect that the company's operation and service business will continue to function as a stabilizer, protect the implementation of performance during the short-term adjustment phase of the new housing market, and promote transformation, upgrading and valuation reshaping in the medium to long term.
Policy catalysis helps restore resilience in the face of improved mood. Since the end of April, there have been frequent supply and demand support policies. We believe that it is beneficial to boost the physical market. At least Tier 1 and 2 cities will see a steady turning point in volume and price within 6-12 months, and the company is expected to take the lead in getting back on track in the industry restoration process with high-quality soil storage; in particular, storage may provide housing enterprises with a more direct and effective cash flow support mechanism, and Longhu is expected to benefit. We have observed that it has risen 50% since its low on April 19 (compared to 52%/195%/43% increases in early 2022, the end of the year, and mid-2023), which suggests that attention to possible subsequent consolidation brings layout opportunities.
Profit forecasting and valuation
Maintaining profit forecasts and outperforming industry ratings, taking into account the company's positive debt repayment schedule, which is expected to benefit from recent favorable policies and improved investor risk appetite, we raised the target price by 24% to HK$15.8 based on the 12x/4x 2024P/E of the company's recurrent/housing development business (up space 16%, corresponding to the 2024/25 P/E is 8.4/8.2 x, respectively). The company traded at 7.2/7.1x 2024/25 P/E.
risks
Policy implementation fell short of expectations; housing price adjustments were deeper than expected.