• FY18 core PATMI jumped 31.5%
• Final DPS of RMB0.69/share
• Targeting RMB220b in contracted sales

FY18 Core PATMI Growth of 31.5% Met Our Expectations

Longfor Group (960 HK) reported a sturdy set of FY18 results. Revenue jumped 60.7% to RMB115,798m, and this exceeded our forecast by 9.0%. Gross profit grew 61.8% to RMB39,529m, thus translating into a gross profit margin (GPM) of 34.1% (FY17: 33.9%). GPM for its Property Development and Property Management & Others segments rose 0.5 ppt and 2.0 ppt to 33.2% and 24.5%, respectively, but dipped 7.7 ppt for its Investment Property division.

The drag came largely from its Champion Apartments segment (long-term rental apartment), which is still in a ramp-up phase (FY18 occupancy of 50.1%). We expect breakeven to be achieved in FY20 or FY21. Longfor’s FY18 PATMI accelerated 28.9% to RMB16,237m.

Excluding one-off effects such as fair valuation gains, core PATMI surged 31.5% to RMB12,850m, meeting our expectations as this formed 100.7% of our full-year forecast. Management declared a final dividend of RMB0.69/share. Including an interim DPS of RMB0.30, total FY18 DPS works out to RMB0.99, or a dividend yield of 4.7% (based on closing price of HK$25.15).

Conservative Contracted Sales Guidance of RMB220b for FY19

In FY18, Longfor achieved contracted sales of RMB200.6b (+28.5%) on the back of 12.36m of GFA sold. This translates into an ASP of RMB16,229 psm. Based on an average unit land cost of RMB5,218 psm, Longfor has attained a healthy land cost to ASP ratio of 32.2%.

Looking ahead, Longfor has guided for contracted sales of RMB220b for FY19 (saleable resources of RMB350b), which would imply growth of ~10%. We see this as a conservative target, and expect management to beat its guidance. We like the fact that Longfor has managed to deliver robust growth without over-stretching its balance sheet, implying prudent capital management.

As at end-FY18, its net gearing ratio stood at 52.9%, which is healthy vis-à-vis its peers. Funding cost is also relatively low at 4.55%. Longfor intends to keep its net gearing ratio below the 60% mark for FY19.

Furthermore, it also has a high quality land bank, in our view, with 91% of the estimated total sales value in high-tier cities. Rolling forward our valuations to 9x FY19 core EPS (raised by 4.4%) and incorporating a lower RMB to HKD assumption, we derive a higher fair value of HK$29.53

Source: OCBC Research - 26 Mar 2019