Longfor Group - FY24 results in line; balance sheet remains well managed
- FY24 results in line with profit warning; balance sheet remains well managed due to stringent cashflow control
- Recurring businesses expected to deliver resilient growth of >10% in FY25F, but recognition of development losses will likely drag P&L, resulting in another year of earnings decline
- Cut FY25-26F earnings by 32-39% to reflect weaker development revenue and margin assumptions
- Investors may gradually regain interest as concerns on balance sheet health fade; maintain BUY at HKD11.70/sh
Stringent cashflow management. Longfor’s presales -42% y/y to Rmb101.1bn in FY24 amid a tough physical market. Nevertheless, OCF remained positive at Rmb6.4bn due to the company’s stringent control over cash outflows during the year (-Rmb50bn y/y, comprising -Rmb15bn in supply chain ABS, -Rmb10bn construction cost, -Rmb10bn in land costs with the balance from tax and FX). Looking into 2025, Longfor expects to save another c.Rmb20bn of cash outflow y/y alongside 10%-15% growth in recurring business NPI. The company expects OCF can stage a solid pickup to >Rmb20bn. Dividend payout is expected to remain unchanged at 30%.
Solid balance sheet management; debt optimisation plan to be completed by end-25. Net gearing saw a decent improvement of 4.2ppt to 51.7% with total debt -8% y/y, in part led by disciplined land acquisition during the year (attributable land premium -80% y/y to Rmb5.2bn with total land bank -27% y/y to 33.12mn sqm). Longfor was also able to secure c.Rmb30bn in incremental funding through operating asset loans. Free cash (excl. presales escrow account)/ST debt softened y/y but remained largely unchanged h/h at 1.03x (vs. Dec 23: 1.36x or Jun 24: 1.01x).
Looking into 2025, Longfor intends to further deleverage and optimise its debt portfolio. The company said it aims to further reduce its outstanding debt by Rmb30bn to c.Rmb140bn by end-25 and extend its overall debt duration further (from 10.27 years as at Dec 24) by replacing bonds due with more operating asset loans (c.Rmb10bn increment and Rmb5bn from LTV lifts). The company believes their debt optimisation process can be completed by end-25.
Cautiously optimistic on the property market. Longfor plans to launch c.Rmb170bn in saleable resources in 2025 (-15% y/y), 60% of which is inventory brought forward and 40% comprising new launches, 83% of which are located in Tier 1-2 cities. Assuming a similar sell-through rate vs. FY24, this will translate to an annual presales scale of c.Rmb90bn. Longfor acknowledged recent signs of stabilisation seen in Tier 1 and core Tier 2 cities, and indicated that the company will, on the premise of ensuring debt repayment certainty, assess and pursue land acquisition opportunities wherever appropriate.
Resilient growth outlook for its recurring businesses… Recurring income contribution represented >20% of Longfor’s total revenue in 2024 or >100% of its FY24 core profit (recurring businesses C2-C5 combined recorded c.Rmb8bn in core profit). Looking into 2025, management remains confident of C2-C5’s growth outlook and guided for the businesses to collectively record 10%-15% revenue growth alongside stable profit margins. In the long run, Longfor targets a c.50% revenue contribution from its recurring business by 2028.
…to be overshadowed by development near-term losses. Gross unbooked sales declined 26% y/y to Rmb128.2bn (c.80% consolidated interest) as of Dec 24 with an average GPM of 0-5% (vs. c.6% in FY24). Management believes the company’s P&L may be dragged by their gradual recognition of development losses in FY25-26. 2025 will remain profitable with support from its robust recurring businesses but will likely continue to decline y/y, with 2026 expected to be the year of stabilisation and a turning point.
Asset spin-off unlikely in the near term. Longfor indicated they have no intention to spin-off their property management arm, stating that the business’s asset-light nature does not require external funding and the action would dilute earnings and compartmentalise their cashflows from the group. As for their asset-heavy businesses, Longfor currently prefers to opt for value-unlocking via operating asset loans, as this offers more immediate and freely deployable cash proceeds for the company. Management indicated they will keep an eye on the latest developments on C-REITs and do not rule out the possibility of utilising it as an asset exit channel in the medium term.
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