1H24 results preview: Recurring income to save the day

We estimate Longfor's 1H24 revenue to decline by around 25% YoY, due to lower contracted sales amid market correction. We estimate development gross margin to narrow to 5-10% in 1H24 from 14.7% in 1H23. Thanks to more contribution from recurring income estimated to be at c.30% of total revenue, up from 20% in 1H23, overall gross margin is expected to maintain at higher teens in 1H24, compared to 22.4% in 1H23. As such, we estimate 1H24 net income to decline by close to 30%. We cut our 2024-26E EPS by 11.8-14.7%, respectively, given slower contracted sales and lower development margin, and trimmed our TP by 11.1%. We like Longfor's strong recurring income and its relatively strong balance sheet. Maintain BUY rating on the stock.

Key Factors for Rating

Longfor's 1H24 contracted sales declined by 48.1% YoY to RMB51.1bn. This was considerably better than the average of 60% for the private developers we track, which was impressive considering Longfor's contracted sales grew 14.8% YoY in 1H23. Given lower base in 2H24, we expect YoY decline rate to narrow.

Longfor is managing its debt repayment schedule in an orderly manner. For 2024, the company has no off-shore debt maturing, and RMB11.7bn on-shore corporate bond maturing among which RMB8.7bn is already repaid. For 2025, two syndicated loans amounting HK$9.45bn and HK$9bn will mature in January and December, respectively, with the former already being repaid by HK$1.6bn and is on schedule to be fully repaid by end-2024. There will be another RMB14bn on-shore corporate bonds maturing 2025, which the company plans to repurchase on secondary market in advance. For 2026, there will be RMB5- 6bn corporate bond, and HK$3bn syndicated loans maturing. For 2027, there will be less than RMB2bn worth of off-shore bond, and HK$3bn syndicated loans maturing. Longfor seeks to maintain ST-debt at around 15% of total debt.

While overall retail has been under pressure in 1H24, Longfor's shopping malls were relatively resilient being mid-tier ones with an emphasis on experiential consumption. We estimate retail sales to grow by 13% in 1H24 (SSSG: 6%), and estimate rental income to grow by slightly higher than 10% (SSSG: 5%). Combing property services, we estimate recurring income to account for c.30% of total revenue in 1H24, up from 1H23's 20%, helping Longfor to maintain gross margin to higher teens despite of single digit development gross margin.

Key Risks for Rating

Property market recovery may be slower than expected.

Valuation

We trimmed our estimated NAV by 11.1% to HK$21.29/share given lower development margin and slower contracted sales. The stock currently trades at 0.4x 2024E P/E, and 52.8% discount to our estimated NAV, which we think is undemanding given Longfor's strong recurring income and relatively strong balance sheet.