27 Apr 2018 Securities Analysis

Longfor (960 HK) Rmb15bn recurrent income plan by 2020

 Slow sales growth in 1Q18 due to the limited saleable resources. Hold (Maintain) Contracted sales amount grew by 2% to Rmb44.0bn and contracted sales area stayed flat at 2.82mn sqm in 1Q18. The Company explained that the slower sales growth was attributable by the limited resources after the robust sales in Target Price HK$21.68 2017. It will accelerate construction pace in order to obtain pre-sales permits (Previous TP HK$20.91) this year. Rmb200bn contracted sales target is maintained. Longfor schedules Up/downside -7.7% to have Rmb300bn saleable resources in 2018, of which 27% are in first tier cities and 70% are in second tier ones. About 50 new projects and 47 new Current Price HK$23.50 phases of existing projects will be launched this year. These will boost the sales growth. Samson Man, CFA  Leading rental apartment operator. By end-17, Longfor operated 15,120 Tel：(852) 3900 0853 rental apartments in 14 cities. It plans to open 50,000 rooms in 2018. Email：[email protected] Equity Research Occupancy rates for apartments with operation more than 3 months and 6 months were 67% and 92% by end-17, respectively. Rental income for rental apartment was Rmb40.18mn in 2017. Majority of these rental apartments are Huang Chengyu targeted to 25-35-year-old people with average monthly rental of Rmb2,000- Tel：(852) 3761 8773 6,000. Longfor aims to build a 200,000-room rental apartment portfolio and Email：[email protected] make Rmb3bn income by 2020. About 84% of apartments are asset light model while remained 16% are self-owned. The Company had already invested China Property Rmb2bn in rental apartment business. It reveals that yield to cost for

apartments less than 2 years of operation is about 1-3% but is expected to raise Mkt. Cap. (HK$mn) 139,032 to 5-6% in 3-4 years of operation. In addition, Longfor has recently issued first Avg. 3mths t/o (HK$mn) 145 tranche of 5-year Rmb3bn Rental Apartments Special Bonds with 5.6% coupon 52W High/Low (HK$) 27.7/12.68 rate in Mar 2018 that helps the Company explore rental apartment business. Total Issued Shares (mn) 5,915.5  Property management business also expands. By end-17, Longfor provided Source: Bloomberg

property management services to 1.73mn household in 705 property projects. Shareholding Structure Total contracted GFA amounted to 208mn sqm. Revenue from property Wu Yajun 43.8% management services increased by 39.7% to Rmb2.0bn in 2017. Longfor had Cai Kui 26.3% commenced to serve third party properties since 2017. About 75% of managed Peter Woo 6.0% GFA are from non-. It expects revenue from property Free float 56.2% management services will reach Rmb6bn by 2020. Source: HKEX

 Aims to have Rmb15bn recurrent income in 2020. Rental income from Share performance shopping malls increased from Rmb1.91bn in 2016 to Rmb2.53bn in 2017. Absolute Relative Longfor plans to have more than 47 shopping malls under operation by 2020, 1-mth -1.7% 2.4% compared with 26 now. So the Company looks for rental income from shopping 3-mth -3.0% 4.4% malls reaching Rmb6bn by 2020. In conclusion, Longfor targets to have 6-mth 22.4% 14.3% Rmb15bn recurrent income contributed by rental income from shopping malls Source: Bloomberg and rental apartments as well as property management fees. But we are skeptical to rental apartments’ performance as this business is in infancy stage. 12-mth price performance We keep our forecast unchanged but lift TP from HK$20.91 to HK$21.68 due to HK$ change of Rmb assumption from HK$1/Rmb0.84 to HK$1/Rmb0.81. Maintain 30.0 HOLD. 25.0 Earnings summary 20.0 (YE Dec 31) FY16A FY17A FY18E FY19E FY20E 15.0

Turnover (Rmb mn) 54,799 72,075 96,679 113,370 132,063 10.0 Net profit (Rmb mn) 9,153 12,599 12,885 14,973 17,049 EPS (Rmb) 1.573 2.170 2.178 2.532 2.882 5.0 EPS CHG (%) 1.9 37.9 0.4 16.2 13.8 0.0 PE (x) 12.1 8.8 8.7 7.5 6.6 Apr 17 Jun 17 Aug 17 Oct 17 Dec 17 Feb 18 Apr 18

PB (x) 1.8 1.6 1.4 1.3 1.2 Source: Bloomberg Yield (%) 2.4 4.0 4.5 5.3 6.1 ROE (%) 14.8 17.9 16.2 17.0 17.5 Net gearing (%) 53.9 47.7 53.6 55.3 57.9 Auditor: Deloitte Touche Tohmatsu

Source: Company, CMBIS estimates www.longfor.com

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27 Apr 2018

Figure 1: Occupancy rates for Champion apartments

100% 92% 90% 80% 70% 67% 60% 50% 40% 30% 20% 10% 0% Operating >3m Operating >6m

Source: Company

Figure 2: Land bank as at Dec 2017

Source: Company

Figure 3: Investment Property Portfolio as at Dec 2017* Paradise Walk Starry Street MOCO ('000 sqm GFA*) Total # of main projects Metropolitan Community Hosehold&Lifestyle Opened 791 100 29 920 12 407 0 0 407 4 366 6 0 372 3 Xi'an 0 108 0 108 2 Hangzhou 309 0 0 309 2 269 0 0 269 2 Suzhou 197 0 0 197 1 Subtotal 2,339 214 29 2,582 26

Under developemnt Shanghai 114 27 0 141 2 Beijing 101 0 0 101 1 Hangzhou 105 0 0 105 2 119 0 0 119 1 Nanjing 480 0 0 480 4 Hefei 98 0 0 98 1 Chengdu 411 0 0 411 3 Subtotal 1,428 27 0 1,455 14

Total 3,767 241 29 4,037 40 *1. Champion rental apartments excluded 2. Parking lot excluded Source: Company, CMBIS

27 Apr 2018

Figure 4: Rental income of malls Figure 5: Malls leasable GFA

(Rmb bn) (mn sqm) 3.0 3.0 2.53 2.582 2.5 2.5

1.91 1.938 2.0 2.0

1.42 1.486 1.5 1.5

1.0 1.0

0.5 0.5

0.0 0.0 2015 2016 2017 2015 2016 2017

Source: Company Source: Company

Figure 6: End-2018 NAV estimation NAV/share (RMB m) (HK$ m) (HK$) % of NAV Remark Properties under development 146,408 180,751 30.56 99% WACC of 8.1% Investment property 49,345 60,920 10.30 33% Cap rate of 6-8% IP under development 5,515 6,809 1.15 4% WACC of 8.1% Gross Amount 201,268 248,480 42.00 136% Net debt (52,852) (65,250) (11.03) -36% Dec 2018 NAV 148,416 183,230 30.97 100% Source: CMBIS estimates

27 Apr 2018

Financial statements Income statement YE Dec 31 (Rmb mn) FY16A FY17A FY18E FY19E FY20E Revenue 54,799 72,075 96,679 113,370 132,063 Property development 51,441 67,462 90,720 106,400 123,240 Property investment 1,913 2,593 3,434 3,941 5,188 Property management 1,445 2,019 2,524 3,029 3,635 Cost of sales (38,864) (47,639) (66,366) (77,946) (91,788) Gross profit 15,935 24,436 30,313 35,424 40,275

Selling expense (1,428) (1,797) (2,224) (2,608) (3,037) Admin expense (2,022) (3,267) (3,480) (3,968) (4,358) Other income and gains 72 848 186 175 164 EBIT 12,557 20,219 24,795 29,024 33,043

Finance costs (53) (45) (75) (77) (83) Associates 1,434 1,868 522 680 800 Exceptional 2,018 4,511 - - - Pre-tax profit 15,956 26,554 25,243 29,627 33,760

Profits tax (6,021) (10,075) (11,607) (13,603) (15,262) Minority interests (782) (3,880) (750) (1,050) (1,450) Net profit 9,153 12,599 12,885 14,973 17,049

Core profit 7,765 9,770 12,885 14,973 17,049 Source: Company, CMBIS estimates

Balance sheet YE Dec 31 (Rmb mn) FY16A FY17A FY18E FY19E FY20E Non-current assets 86,342 129,096 142,780 145,020 159,250 Fixed asset 29,546 43,914 45,880 40,920 44,450 Associated companies 4,323 13,193 14,500 16,500 18,000 Investment properties 49,031 68,095 78,500 83,500 92,400 Intangible assets - - - - - Other non-current assets 3,442 3,894 3,900 4,100 4,400

Current assets 138,139 233,668 242,900 268,784 296,702 Cash 17,355 26,761 25,600 23,934 22,802 Account receivable 10,324 14,184 14,800 15,400 16,200 Amount due from 6,103 26,061 20,500 21,200 21,200 Inventory 100,512 163,000 178,000 204,000 232,000 Other 3,845 3,663 4,000 4,250 4,500

Current liabilities 91,462 177,494 205,380 220,140 245,520 Trade and other payables 66,726 125,430 156,000 168,000 191,200 Current income tax liabilities 12,940 15,211 13,580 12,520 12,520 Borrowings 5,333 5,589 6,000 6,420 6,800 Amount due to 6,464 31,264 29,800 33,200 35,000 Other - - - - -

Non-current liabilities 58,253 79,091 79,660 84,275 91,275 Borrowings 52,539 71,816 73,500 78,000 85,000 Deferred taxation 5,498 6,618 5,800 5,900 5,900 Other long-term liabilities 216 658 360 375 375

Minority Interest 13,350 35,612 21,200 21,500 21,500

Total net assets 61,416 70,567 79,440 87,889 97,657

Shareholders' equity 61,765 70,567 79,440 87,889 97,657 Source: Company, CMBIS estimates

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Cash flow summary YE Dec 31 (Rmb mn) FY16A FY17A FY18E FY19E FY20E EBIT 12,557 20,219 24,795 29,024 33,043 Depreciation and amortization 46 29 69 79 84 Change in working capital 14,222 16,225 (13,830) (24,600) (26,600) Income tax paid (3,919) (7,147) (14,056) (14,563) (15,262) Others 9,767 42,021 12,068 13,098 15,030 Net cash from operating activities 32,673 71,347 9,046 3,038 6,295

Capex (40,330) (88,897) (10,491) (5,119) (9,014) Associated companies 1,530 (8,672) 2,790 700 300 Other (1,317) (13,335) - - - Net cash from investing activities (40,117) (110,904) (7,702) (4,419) (8,714)

Equity raised (526) 277 - - - Change of Debts 4,380 17,565 2,096 4,920 7,380 Dividend paid (2,083) (2,739) (4,602) (5,205) (6,093) Others 5,012 33,839 - - - Net cash from financing activities 6,782 48,941 (2,506) (285) 1,287

Net change in cash (662) 9,384 (1,161) (1,666) (1,132) Cash at the beginning of the year 17,920 17,258 26,642 25,481 23,815 Exchange difference - - - - - Cash at the end of the year 17,258 26,642 25,481 23,815 22,683 Pledged cash 97 119 119 119 119 Cash at balance sheet 17,355 26,761 25,600 23,934 22,802 Source: Company, CMBIS estimates

Key ratios YE Dec 31 FY16A FY17A FY18E FY19E FY20E Sales mix (%) Property development 93.9 93.6 93.8 93.9 93.3 Property investment 3.5 3.6 3.6 3.5 3.9 Property management 2.6 2.8 2.6 2.7 2.8 Total 100.0 100.0 100.0 100.0 100.0

Growth rate (%) Revenue 15.6 31.5 34.1 17.3 16.5 Gross profit 22.4 53.3 24.1 16.9 13.7 EBIT 15.6 61.0 22.6 17.1 13.8 Net profit 1.8 37.6 2.3 16.2 13.9

Profit & loss ratios (%) Gross margin 29.1 33.9 31.4 31.2 30.5 Pre-tax margin 29.1 36.8 26.1 26.1 25.6 Net margin 16.7 17.5 13.3 13.2 12.9 Core net margin 14.2 13.6 13.3 13.2 12.9 Effective tax rate 37.7 37.9 46.0 45.9 45.2

Balance sheet ratios Current ratio (x) 1.5 1.3 1.2 1.2 1.2 Debtors turnover days 34.4 35.9 27.9 24.8 22.4 Creditors turnover days 561.9 736.1 773.9 758.6 714.2 Inventory turnover days 857.2 1,009.5 937.7 894.4 866.9 Net debt / total equity ratio (%) 53.9 47.7 53.6 55.3 57.9

Returns (%) ROE 15.7 19.0 17.2 17.9 18.4 ROA 4.5 4.3 3.4 3.7 3.9

Per share EPS (Rmb) 1.573 2.170 2.178 2.532 2.882 DPS (Rmb) 0.466 0.758 0.850 1.000 1.160 BVPS (Rmb) 10.6 12.0 13.4 14.9 16.5 Source: Company, CMBIS estimates

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Disclosures & Disclaimers

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CMBIS Ratings BUY : Stock with potential return of over 15% over next 12 months HOLD : Stock with potential return of +15% to -10% over next 12 months SELL : Stock with potential loss of over 10% over next 12 months NOT RATED : Stock is not rated by CMBIS

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