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Longfor Properties (960 HK) Longfor Pr Operties China Financials 11 April 2016 Longfor Properties (960 HK) Longfor Pr operties Target price: HKD13.29 Share price (8 Apr): HKD11.24 | Up/downside: +18.2% Initiation: ahead of the pack in strategy Reaping the rewards of its early return to China’s upper-tier cities Cynthia Chan (852) 2773 8243 Profitability and sales growth sustained in difficult environment [email protected] Initiating with Buy (1) rating and 12-month target price of HKD13.29 Investment case: We initiate coverage of Longfor Properties, a Beijing- Share price performance based company engaged in property development and investment in 24 (HKD) (%) cities in China, with a Buy (1) call. We see Longfor as well placed to reap 15 130 the benefits of its early return to the upper-tier cities, chiefly through the 13 120 11 110 reasonable cost of land it acquired in these cities. 10 100 8 90 In the face of housing oversupply in lower-tier cities, Longfor returned to Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 China’s upper-tier cities before many of its peers, and we believe it remains Long Prop (LHS) Relative to HSI (RHS) ahead in terms of strategy. In our view, it has proven its sales execution ability in its 9 core cities (including Beijing, Shanghai, Chongqing, Chengdu, 12-month range 8.53-14.30 Hangzhou) in the past few years, which should enable sustained stable Market cap (USDbn) 8.43 contract sales growth of 13.9% YoY in 2016 (to CNY62.1bn) and 12.1% 3m avg daily turnover (USDm) 5.89 YoY in 2017 (to CNY69.6bn). Moreover, Longfor acquired land in its core Shares outstanding (m) 5,821 Major shareholder Madam Wu Yajun (44.2%) cities at a reasonable cost before other developers returned, which should support steady margins. Financial summary (CNY) Year to 31 Dec 16E 17E 18E Due to Longfor’s robust investment property pipeline, we forecast 39.6% Revenue (m) 55,701 60,445 67,212 YoY growth in rental income in 2016 (to CNY1,976m), following a 61.5% Operating profit (m) 12,861 13,827 15,473 Net profit (m) 8,079 9,050 10,006 YoY rise in 2015. Our forecasts call for rental income growth of 32.6% YoY Core EPS (fully-diluted) 1.378 1.544 1.707 in 2017 and 22.6% YoY in 2018, and by 2018 Longfor’s rental income EPS change (%) 16.3 12.0 10.6 should fully cover interest expenses. Daiwa vs Cons. EPS (%) (1.7) (0.9) 2.8 PER (x) 6.8 6.1 5.5 Dividend yield (%) 4.4 5.0 5.5 Separately, we believe the company has shown sound financial DPS 0.416 0.466 0.516 management skills (in recent years). As a result of its stable net gearing PBR (x) 0.9 0.8 0.7 (below 60%), well-managed debt structure, and declining average EV/EBITDA (x) 7.7 7.4 7.0 ROE (%) 13.9 14.2 14.2 borrowing cost, Longfor has been assigned favourable credit ratings by Source: FactSet, Daiwa forecasts credit rating agencies. Also, with 50% of its foreign currency debt hedged, CNY depreciation should have a minimal impact on Longfor’s earnings, in our view. Catalysts: Among the possible share-price catalysts that we see are: 1) strong home sales in cities to which Longfor has large exposure, and 2) increased market interest in quality non-SOE developers that can achieve sustained growth and profitability, especially after the release of 2015 results by China developers. Valuation: Our 12-month target price of HKD13.29 is set at a 30% discount to our forecast end-2016 NAV of HKD18.98, and translates into PERs of 8.0x for 2016E and 7.2x for 2017E. Risks: The key risks to our call include: 1) a further deterioration in China’s economy weighing on housing demand, 2) more property tightening measures imposed in upper-tier cities, and 3) intense competition for quality land plots in upper-tier cities. See important disclosures, including any required research certifications, beginning on page 42 Longfor Properties (960 HK): 11 April 2016 Table of contents Strategically speaking, ahead of its peers ............................................................. 6 Returned to upper-tier cities before many of its peers ........................................................6 Landbank optimisation done at reasonable cost .................................................11 Land acquisitions have slowed in recent years ................................................................11 Rapidly growing recurring income ........................................................................17 4.8m sq m of investment properties .................................................................................17 Sound financial management .................................................................................20 Well-managed gearing, debt structure and borrowing costs .............................................20 Stable earnings growth ...........................................................................................23 Earnings outlook ..............................................................................................................23 Valuation ..................................................................................................................26 Initiating with a Buy (1) call and TP of HKD13.29 .............................................................26 Risks .........................................................................................................................30 Appendix I: company background .........................................................................31 Mid-range to high-end property developer .......................................................................31 Appendix II: residential market in Longfor’s core cities ......................................36 Appendix III: housing inventory situation in Longfor’s core cities .....................38 2 Longfor Properties (960 HK): 11 April 2016 How do we justify our view? Growth outlook Valuation Earnings revisions Growth outlook Longfor: contract sales Longfor recorded contract sales of CNY54.5bn in 2015, a ('000 sqm) (CNY/sqm) 10,000 18,000 rise of 11.2% YoY. We forecast contract sales of 14,771 13,510 CNY62.1bn (up 13.9% YoY) in 2016 and CNY69.6bn (up 8,000 12,854 11,645 12.1% YoY) in 2017. We believe the company is on track to 11,293 10,803 9,601 12,000 deliver steady sales growth given its focus on 10 core 6,000 4,540 4,599 4,715 cities, where property markets showed decent growth in 4,180 4,261 4,243 4,000 3,286 terms of home sales and prices in 2010-15 and housing 6,000 demand-supply dynamics are more balanced (than in 2,000 lower-tier cities). 0 0 2011 2012 2013 2014 2015 2016E 2017E Contracted GFA Contracted ASP (RHS) Source: Longfor, Daiwa forecasts Valuation Longfor: discount to NAV Longfor shares are trading at a 40.8% discount to our end- (%) 2016 NAV forecast, below their 2010-15 mean discount of (10) 37.5%. Compared with large-cap peers, which are trading at 42.8% discount to NAV, on our forecasts, Longfor’s NAV (20) valuation does not seem expensive. We believe Longfor +1SD -29.0% merits a premium valuation, based on its early return to the (30) upper-tier cities, land acquisitions in upper-tier cities at (40) Mean -37.5% reasonable costs, ability to maintain growth and profitability, rapidly growing investment property portfolio, (50) -1SD -46.0% and prudent financial management. In our view, these qualities are unusual among China developers, especially (60) 2010 2011 2012 2013 2014 2015 2016 non-SOEs. Source: Bloomberg, Daiwa Longfor: revisions to Bloomberg consensus EPS forecasts Earnings revisions Our 2016-17 earnings forecasts are 1-2% below those of (CNY) the Bloomberg consensus on our lower revenue and gross 2.4 margin forecasts. But our 2018E EPS is 3% above 2.2 consensus, largely because we expect higher revenue 2.0 from more recognised projects that year (our revenue 1.8 forecast is 3% above consensus). 1.6 1.4 1.2 1.0 0.8 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 2016E consensus EPS 2017E consensus EPS Source: Bloomberg, Daiwa 3 Longfor Properties (960 HK): 11 April 2016 Financial summary Key assumptions Year to 31 Dec 2011 2012 2013 2014 2015 2016E 2017E 2018E Recognized GFA ('000 sqm) 1,678 2,512 4,131 4,512 4,851 4,731 4,577 4,676 Recognized ASP (CNY/sqm) 13,930 10,727 9,738 10,925 9,275 11,120 12,366 13,398 Contracted GFA ('000 sqm) 3,286 4,180 4,261 4,540 4,243 4,599 4,715 4,784 Contracted ASP (CNY/sqm) 11,645 9,601 11,293 10,803 12,854 13,510 14,771 15,850 Contract sales (CNY m) 38,268 40,130 48,123 49,046 54,540 62,141 69,643 75,832 Profit and loss (CNYm) Year to 31 Dec 2011 2012 2013 2014 2015 2016E 2017E 2018E Property development 23,376 26,946 40,224 49,289 44,993 52,609 56,597 62,648 Property investment 402 483 635 876 1,415 1,976 2,620 3,212 Other Revenue 315 463 652 826 1,015 1,116 1,228 1,351 Total Revenue 24,093 27,893 41,510 50,991 47,423 55,701 60,445 67,212 Other income 28 43 338 174 215 249 273 301 COGS (14,324) (16,710) (29,972) (37,475) (34,408) (40,359) (43,930) (48,746) SG&A (1,352) (1,561) (1,972) (2,363) (2,453) (2,729) (2,962) (3,293) Other op.expenses 0 0 0 0 0 0 0 0 Operating profit 8,445 9,665 9,904 11,327 10,777 12,861 13,827 15,473 Net-interest inc./(exp.) (62) 92 77 123 195 225 244 265 Assoc/forex/extraord./others 3,061 1,545 3,238 2,177 2,966 123 121 130 Pre-tax profit 11,444 11,302 13,219 13,627 13,938 13,209 14,192 15,868 Tax (4,524) (4,436) (4,583) (4,876) (4,574) (4,641) (4,819) (5,366) Min. int./pref. div./others (593) (564) (599) (397) (376) (489) (323) (496) Net profit (reported) 6,328 6,301 8,037 8,354 8,988 8,079 9,050 10,006 Net profit (adjusted) 4,500 5,400 6,210 6,610 6,947 8,079 9,050 10,006 EPS (reported)(CNY)
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