Longfor Earnings: Fair Value Cut by 34% on Dimmer Property Sales Prospects; Shares Underpriced

Longfor reported weak 2023 results, with core net profit down by around 50% year on year, but in line with its prior profit warning. Its CNY 173.4 billion in contracted sales for 2023 missed our forecast due to subdued buying activities in China in the second half. As we expect a slow recovery in home demand, we lower our 2023-27 revenue CAGR forecast to 2.8% from 5.8%. In addition, Longfor’s 2023 operating margin fell significantly by 530 basis points amid falling home prices, and we lower our midcycle margin forecast to 14.0% from 14.7%. We also raise our cost of debt assumption to 8.5% from 7.5%, given Longfor’s elevated funding cost, resulting in a higher weighted average cost of capital at 10.4%. Consequently, we cut our fair value estimate to HKD 14.50 per share from HKD 22.00. Positively, we think Longfor’s investment property operation and service businesses will likely see more resilient earnings growth, and the repayment of all offshore bonds due by end-2026 may ease investors’ concerns. Although Longfor’s shares remain undervalued, we prefer state-owned developers such as China Overseas Land & Investment, given their stronger brand recognition and healthier balance sheets.