Key points of investment
The sales scale is stable in the top 10 in the industry. In 2023, the company's sales concentration increased. In 2023, Longhu Group achieved full-caliber contract sales of RMB 173.5 billion, a year-on-year decrease of 13.9%, and ranked 9th in the industry. The total floor area of full-caliber sales was 10.8 million square meters, a year-on-year decrease of 17.3%. The unit sales price was RMB 16070 per square meter, up 4% year on year. Structurally, Longhu Group's core Tier 1 and 2 cities account for 95% of sales. Among them, Chengdu, Xi'an, Beijing, Hefei and Suzhou are Longhu's top 5 cities contributing to sales in 2023, with a total amount of 65.5 billion yuan, accounting for 38% of total sales. The 15 largest cities in 2022 and 2023 account for 65% and 70% of sales, respectively, and market concentration has increased.
Tier 1 and 2 soil storage accounted for 72%. Land costs were optimized, and total inventory volume was reduced. By the end of 2023, the company's total land reserves were 45.39 million square meters, a decrease of 22% over the previous year. The average cost of land reserves was 4,705 yuan/square meter, down 9.9% year on year, accounting for 29.3% of the average sales price in 2023. Since 2021, the company's inventory has been rapidly eliminated, and land acquisition costs have been gradually optimized, which will help improve future gross margin over a long period of time. Judging from the distribution of land storage, Tier 1 and 2 cities account for 72% of the total land storage area (77% of goods value). Yantai, Chongqing, and Chengdu are the three largest cities for the company's land storage. Among them, Xi'an increased slightly over the same period last year in 2023.
The development business dragged down gross margin. Operating profit in 2023 contributed more than 60%. In 2023, the company achieved operating income of 1807 billion yuan, down 27.9% year on year; net profit to mother was 12.9 billion yuan, down 47.3% year on year; gross profit margin was 16.9%, down 4.3 pct year on year; core profit margin after tax was 8.7%, down 3.6 pct year on year. Judging from the reasons for the decline in gross margin, the company's overall gross margin was dragged down by the decline in gross margin of the development business. The development business was mainly affected by the downturn in the real estate industry, with gross margin falling from 32.1% in 2019 to 11% in 2023. The gross margin performance of the operating business and service business was excellent, and continued to be high and stable. Furthermore, with the decline in revenue and profit margins from the development business and the steady increase in revenue and profit margins from the operating business and service business, the share of the company's operating profit increased rapidly. In 2023, the company's operating profit accounted for more than 60%, which has become the main source of the company's profit.
Shopping malls are the core of the operating business, contributing to continuous stable cash flow. Operating business revenue in 2023 was 12.94 billion yuan, up 9% year on year, and the 5-year CAGR was 25.9%; gross margin was 75.9%, which remained high and stable for many years, and the company's operating business continued to contribute rich and stable cash flow to the company. In terms of specific business, the company's operating business is mainly divided into two lines: shopping malls and long-term rental apartments: ① The shopping mall business is the core of the company's operations. The company's commercial plaza has achieved a national layout with “Tianjie” as the main brand. By the end of 2023, the company had acquired 141 shopping malls in more than 30 cities, including 88 operating operators and 53 shopping malls under construction and to be opened, with sufficient reserves in existing shopping malls. In 2023, the company's revenue from managing shopping malls was 10.3 billion yuan, and the 5-year CAGR reached 21%, and shopping mall business revenue grew steadily; ② Guanyu has laid out more than 30 high-ranking cities across the country, with a cumulative total of 123,000 rooms and a occupancy rate of 95.5%. The scale of opened properties and brand influence are in the top 2 in the industry.
Financing remains smooth, and operating property loans bring financing advantages
The company's financing remained smooth in 2023. The main new financing included: 1) operating property loans: financing amount of $17.4 billion, financing cost 3.65%; 2) medium-term notes: 2 medium-term notes issued, with a total financing amount of $2.3 billion, with a total financing cost of 3.5-3.66%; 3) Overseas syndicated loans: additional 5-year loans of HK$3.1 billion.
In 2023, the company's average borrowing interest rate was 4.24%, up 0.1 pct year on year; the average loan period was 7.85 years, an increase of 1.18 years over the previous year. By the end of 2023, the company's operating property loan balance was 47.4 billion yuan. The loan period was no more than 15 years, and the financing cost was less than 4%, accounting for 25% of the interest-bearing debt at the end of the year. It has become one of the main financing methods of the Longhu Group.
On January 24, 2024, the Central Bank and the General Financial Supervisory Authority issued a document to further liberalize the use of operating property loans and increase the asset collateral ratio. The company has a large holding operator market and is a direct beneficiary, and its financing advantages are prominent compared to traditional housing enterprises. We believe that the financing cost of operating property loans is similar to the financing cost of domestic debt issuance, but it has the characteristics of a longer period of time and more flexible methods. In the future, with the opening and operation of more shopping malls, the company's financing advantages are expected to be further demonstrated, helping the company extend its billing period and reduce financing costs while maintaining smooth financing.
The long-term value of the sustainable cash business has strengthened, and operating assets have the potential to appreciate. The book value of Longhu Group's investment real estate (commercial and apartment for operation and rental) in 2023 was 1998 billion yuan. We took into account the future rental income generated by the company's entry into the market in new shopping malls, and used the DCF model to reassess the value of owned properties. Since the core advantage of holding properties operated by the company is the ability to generate stable cash flow during the operating period, we believe the DCF valuation method can be used. The molecular side of the DCF model is driven by the company's profitability, and growth in free cash flow (revenue or profit margin improvement) drives the increase in DCF's valuation; the denominator side is driven by interest rates, and the interest rate cut environment drives a decline in risk-free returns, which in turn drives a reduction in capital costs and boosts DCF's valuation increase. We believe that the commercial management business of housing enterprises can generate stable returns, and the DCF valuation center continues to rise under the trend of interest rate cuts, bringing valuation premiums to housing enterprises.
Profit forecasting and valuation
We used the DCF method to estimate the value of Longhu Group's operating assets. The estimated result was 245.6 billion yuan. Compared with the book value of the company's investment real estate (commercial and condominiums for operation and lease) of 1998 billion yuan in 2023, the corresponding equity value added was about 39.9 billion yuan. Furthermore, according to our estimates, the value added of development business equity is about 34.1 billion yuan. We estimate that Longhu Group's NAV value is approximately 33.39 yuan per share, a 65% discount compared to the closing price on June 3. We believe that Longhu Group has strong development and operation capabilities, and there is plenty of room for asset value revaluation under the trend of interest rate cuts. We expect the company's 2024 EPS to be 1.92 yuan, maintaining a “buy” rating.
Risk warning
The policy was introduced less quickly than expected; sales volume and price fixes fell short of expectations.