Longfor(0960.HK):Defensive quality

Manage cost, manage cashflow, grow recurrent income

Rental income, an income stream that Longfor had been carefully buildingup, was the key growth driver of 1H15, contributing to a YoY revenuegrowth and supporting a HoH increase in gross margin. The company’sdecision to keep foreign currency debt low and hedged – which at only30% of total debt is one of the lowest among peers – proves a veryprudent strategy. Cashflow was carefully managed by limiting landacquisition in a hot land market and the guided FY15 cashflow mismatchwill halve from FY14. Add stable inventory, and well managed costs, wesee Longfor as having one of the most defensive qualities among peers.

BUY maintained to a revised target price of HK$13.60, from HK$14.30.

Stabilizing development margin

Longfor’s 1H15 underlying net profit at RMB2,233mn was up 5% YoY, on theback of: 1) a 5.3% YoY increase in revenue driven by a 75% increase inrental income, driven by contribution from four new malls and increasedcontribution from recently completed malls; 2) the rental income growthoffset flattish property development income (up just 3% YoY) with bookedASP of RMB9,536psm down 21% from the RMB11,996psm of 1H14 onincreased GFA booked of 1.65mn sf up 30% YoY; and 3) gross developmentmargin declined, to 22.1% from 25.7%, but stabilized HoH from the 22% of2H14. The company has secured 30% of our FY15 earnings forecast (1H14:32%). No interim dividend was declared, same as previous years.

Well managed cost and inventories

Cost management continues to improve: SG&A drops to just 5.8% of revenuefrom 7% of 1H14. Land acquisition slowed with the company having acquiredonly 0.79mn sqm of land (centre location with AV of RMb8,000psm) vs1.92mn sqm (also centre location AV of RMB7,380psm) in 1H14. Completedunsold properties remain well managed with hardly any uptick, atRMB10,536mn vs RMB10,266mn Dec 14.

Conservative cashflow management

There is a small uptick in net debt, by RMB3.7bn, which results in net gearinggoing to 64.9% (restricted cash offset against debt) from the 60.6% of Dec14. Management’s guidance for a conservative land acquisition pace in FY14suggests cash in/outflow mismatch for FY15 will narrow to c. RMB3bn fromthe c. RMB6bn of FY14.