• 1H18 core profit +31.4% YoY
• 50% bump in interim DPS
• Contracted sales to gather momentum

Robust Growth in 1H18 Core Earnings

Longfor Group (960 HK; formerly known as Longfor Properties Co. Ltd) reported a sturdy set of 1H18 results which met our expectations. Core PATMI jumped 31.4% YoY to RMB3,733m on the back of a 45.9% surge in revenue to RMB27,121m. The former constituted 29.2% of our FY18 forecast (1H17 core PATMI formed 29.1% of FY17 core PATMI). An interim dividend of RMB0.30/share was declared, representing a significant 50% increase YoY.

Reiterated Full-year Contracted Sales Guidance of RMB200b

Contracted sales grew by a modest 4.8% YoY to RMB97.1b for 1H18. However, this was partly due to expected launches in 2016 being pushed back to 1H17, while timing of launches is expected to be more backend loaded for FY18.

Indeed, we have already seen its contracted sales for Jul surging 65.8% YoY to RMB17.2b (7M18 +11.0% YoY). Hence, Longfor has reiterated its full-year contracted sales guidance of RMB200b (FY17: RMB156.1b).

This is supported by its abundant saleable resources of RMB200b in 2H18. Its land acquisition strategy remains unchanged, with continued focus on Tier-1 and leading Tier-2 cities.

Key attributes for consideration would include level of urbanisation, accessibility to high-speed rail transport networks, population mobility and inventory level. Since Jan this year, Longfor has expanded its footprint to seven new cities (five in 1H18).

Its portfolio now comprises 40 cities. Of the 53 newly acquired land parcels (42 in 1H18), nearly 90% are situated in Tier-1 and Tier-2 cities. The average land acquisition cost was ~RMB5,100 psm.

Balance Sheet Still Healthy

Due to its land acquisition drive, Longfor’s net gearing ratio increased from 48% (as at endFY17) to 55%. 9% and 13% of its debt is denominated in USD and HKD, respectively. Despite tighter financing conditions, Longfor’s average cost of borrowing remained stable at 4.5%.

Furthermore, management alluded that its future recurring income streams would hit ~RMB7b-8b, which would provide a buffer to its interest payments. This would be underpinned by its growing shopping malls, rental apartments and property management businesses.

Given a more risk-off market sentiment, we lower our valuation P/E target peg from 10x to 9x and corresponding cut our fair value from HK$29.08 to HK$26.17.

Source: OCBC Research - 23 Aug 2018