Tuesday, August 21, 2018

Company Report China Merchants Securities (HK) Co., Ltd.

Hong Kong Equity Research

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Longfor Properties (960 HK) Beat the market with low risk

■ Longfor’s 1H18 results beat market expectation with core profit

+31% YoY, DPS +50% YoY, and flat average finance cost

■ We expect contracted sales growth to accelerate to >60% in

2H18, with the low base in 2H17

■ Stay with quality names amid uncertainties. Current valuation of

31% disc to NAV, 6.8x P/E, 5-7% dividend yield remains attractive.

Reiterate BUY

Earnings/DPS beat; finance cost flat; decent growth Longfor’s core profit grew by 31% YoY to RMB3.7bn in 1H18, beat market expectation of +25% YoY. 1H DPS rose 50% YoY to RMB0.3, outweighed core profit growth and surprised the market positively. Under the backdrop of credit tightening, Longfor maintained its net gearing at 55% and average finance cost at 4.5% in 1H18. Management is confident on 2018E sales target of RMB200bn, implying a decent growth of 28%.

Expect contracted sales to grow at >60% in 2H18E Management explained the relatively low growth in contracted sales in 1H18 (+5% YoY) was due to the high base in 1H17, which oversold the saleable resources in 2H17. With the low base in 2H17, we expect contracted sales growth to accelerate to >60% in 2H18E (Jul 18: +66% YoY). Unrecognised sales grew 53% YoY to RMB206bn (ASP: RMB16k/sqm) at Jun, covering over 70% of our 2H18-2019E revenue forecast, which guaranteed the gross margin of over 30% in 2018-19E, in our view.

Reiterate BUY; TP HK$28 on 10% discount to NAV While the macroeconomic uncertainty remains and policy tightening continues, we recommend investors to stay with the quality names with strong financials and decent growth. Even after today’s rally, Longfor is trading at an attractive valuation of 31% discount to NAV, 6.8x 2019E P/E, 5-7% 2018-20E dividend yield. We reiterate our BUY rating on Longfor with TP unchanged at HK$28, based on 10% discount to NAV.

Financials

RMB mn 2016 2017 2018E 2019E 2020E

Revenue 54,799 72,075 97,080 127,537 165,537

Growth (%) 16% 32% 35% 31% 30%

Core profit 7,760 9,770 12,480 15,852 19,596

Growth (%) 10% 26% 28% 27% 24%

Core EPS (RMB) 1.33 1.65 2.10 2.67 3.30

vs consensus (%) - - -1% 0% 3%

DPS (RMB) 0.47 0.76 0.84 1.07 1.32

P/E (x) 18.6 14.9 11.7 9.2 7.5

ROE (%) 13% 15% 17% 19% 21%

Sources: Company data, CMS (HK) estimates

Siu Fung LUNG

+852 31896176

siufunglung@cmschina.com.hk

WHAT’S NEW

1H18 results update

BUY

Previous

BUY

Price HK$21.25

12-month Target Price (Potential up/downside)

HK$28.0 (+32%)

Previous HK$28.0

Price Performance

Source: Bigdata

% 1m 6m 12m

960 HK (0.2) (13.4) 11.3 HSI (2.2) (10.6) 2.0

Sector: Property

Hang Seng Index 27598

HSCEI 10632

Key Data

52-week range (HK$) 17.32-27.7

Market cap (HK$ mn) 119793

Avg. daily volume (mn) 5.84

BVPS (HK$) 11.9

Shareholding Structure WU Yajun 43.97%

Cai Kui 26.32%

No. of shares outstanding (mn) 5930 Free float 29.88%

Sources: HKEx, Bloomberg

Related Research 1. China Property - Policy is good for health (NEUTRAL)

2018/08/08

-10

0

10

20

30

40

50

Aug/17 Dec/17 Apr/18 Jul/18

(%) 960 HSI

Tuesday, August 21, 2018

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Focus charts Figure 1: We expect contracted sales to grow at >60% in 2H18E

Figure 2: Core profit grew by 31% in 1H18, beat market expectation

Sources: Company data, CMS (HK) Sources: Bloomberg, CMS (HK)

Figure 3: Gross margin remained high in 1H18 Figure 4: Net gearing rose to 54.6% in Jun 18 on

faster land banking

Sources: Company data, CMS (HK) Sources: Bloomberg, CMS (HK)

Figure 5: Longfor is trading at 31% discount to NAV Figure 6: Longfor is trading at 6.8x 2019E P/E

Sources: Company data, CMS (HK) Sources: Bloomberg, CMS (HK)

0

5,000

10,000

15,000

20,000

25,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2017 2018 2H18EContracted sales (RMB mn)

7,039 7,760 9,770

3,730 9% 10%

26% 31%

0%

6%

12%

18%

24%

30%

36%

0

2,000

4,000

6,000

8,000

10,000

12,000

2015 2016 2017 1H18

Core profit(RMB mn) YoY(%)

26.5% 27.4% 29.1%

33.9%

37.1%

0%

5%

10%

15%

20%

25%

30%

35%

40%

2014 2015 2016 2017 1H18

Gross margin(%)

57.1%

54.6% 53.9%

47.7%

54.6%

42%

44%

46%

48%

50%

52%

54%

56%

58%

2014 2015 2016 2017 1H18

Net gearing(%)

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

2010 2011 2012 2013 2014 2015 2016 2017 2018

Discount to NAV Mean +1SD -1SD

3

4

5

6

7

8

9

10

11

12

13

2011 2012 2013 2014 2015 2016 2017 2018

Forward 12mo P/E Mean +1SD -1SD

Tuesday, August 21, 2018

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Longfor’s 1H18 results analysis

Figure 7:Longfor 1H18 results analysis

RMB mn 1H17 1H18 YoY chg

Revenue 18,594 27,121 46%

Cost of sales -11,801 -17,051 44%

Gross profit 6,793 10,070 48%

Selling and marketing expenses -519 -871 68%

Administrative expenses -905 -1,778 96%

Total other income 1,007 1,238 23%

Operating income 6,376 8,659 36%

Finance costs -22 -42 91%

Share of results of JCEs -72 450 -729%

Profit before taxation 6,282 9,067 44%

Total income tax -2,959 -4,074 38%

Profit after tax 3,323 4,993 50%

Minority interests -483 -1,263 161%

Core profit 2,840 3,730 31%

One-off items 1,565 1,700 9%

Reported profit 4,405 5,430 23%

Ratio

ppts

Gross margin 36.5% 37.1% 0.6%

SG&A as % of revenue 7.7% 9.8% 2.1%

Core margin 15.3% 13.8% -1.5%

Dec 17 Jun 18

Net gearing 47.7% 54.6% 6.9%

Sources: Company data, CMS (HK)

Figure 8: NAV breakdown

RMB bn RMB/share

Property development 150 25.3

Investment properties and others 61 10.3

Gross Asset Value (GAV) 211 35.6

Net debt 53 (8.9)

Net Asset Value (NAV) 158 26.7

Net Asset Value (NAV) – HK$ 31.0

Target discount to NAV – % 10%

Target price (TP) – HK$ 28.0

Sources: Company data, CMS (HK)

Tuesday, August 21, 2018

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Figure 9: Peers comparison Disc Disc

Share Mkt to to Net

Price TP Cap NAV NAV Mkt NAV Upside P/E (x) P/B (x) Yield (%) gearing

Company Ticker (HK$) (HK$) Rating (US$ m) (HK$) (%) (%) (%) 2017 2018E 2019E 2018E 2019E 2018E 2019E 2017

Vanke 2202 HK 25.90 36.0 Buy 38.5 40 35 44 39 8.7 6.9 5.7 1.6 1.3 5.2 6.3 9

Country Garden 2007 HK 12.32 13.0 Neutral 34.0 15 19 46 6 10.3 7.1 5.5 1.8 1.5 5.4 6.9 57

Evergrande 3333 HK 28.40 29.0 Buy 47.5 36 21 23 2 8.2 6.7 6.0 2.1 1.6 - - 184

COLI 688 HK 24.10 32.0 Buy 33.9 35 31 40 33 7.7 6.3 5.2 0.8 0.7 4.4 5.4 28

Sunac 1918 HK 25.35 36.0 Buy 14.3 45 44 59 42 21.4 8.3 4.9 1.8 1.4 3.0 5.1 257

Longfor 960 HK 21.25 28.0 Buy 16.2 31 31 45 32 11.0 8.7 6.8 1.4 1.2 4.6 5.9 48

CR Land 1109 HK 28.55 - NR 25.4 - - 36 - 9.0 6.9 5.9 1.1 0.9 5.8 6.8 43

Shimao Prop 813 HK 22.65 - NR 9.7 - - 39 - 9.6 7.2 5.7 1.0 0.9 5.4 6.9 61

Logan 3380 HK 9.86 - NR 6.9 - - 47 - 10.3 6.7 4.9 1.7 1.3 6.2 8.4 51

Guangzhou R&F 2777 HK 15.12 - NR 6.2 - - 58 - 5.6 4.1 3.3 0.6 0.6 9.6 11.5 189

Agile 3383 HK 12.00 - NR 6.0 - - 53 - 6.7 5.5 4.4 0.9 0.8 8.3 10.3 94

Jinmao 817 HK 3.41 - NR 5.0 - - 59 - 8.1 6.6 5.1 0.9 0.8 6.2 7.7 69

CIFI 884 HK 4.79 - NR 4.8 - - 55 - 7.2 5.7 4.4 1.2 1.0 6.4 8.2 49

Sino-Ocean 3377 HK 4.27 - NR 4.2 - - 63 - 6.9 5.6 4.6 0.5 0.5 7.7 9.3 66

Future Land 1030 HK 6.25 - NR 4.7 - - 60 - 9.9 6.4 4.6 1.8 1.3 5.0 7.1 117

KWG 1813 HK 8.92 - NR 3.6 - - 57 - 6.8 5.3 4.0 0.8 0.7 6.7 8.7 72

SZI 604 HK 2.62 - NR 2.8 - - 60 - 4.4 5.8 5.1 0.4 0.4 8.1 9.1 22

Greentown 3900 HK 8.41 - NR 2.3 - - 57 - 9.5 7.4 6.6 0.5 0.5 2.7 2.9 59

Yuzhou 1628 HK 4.02 - NR 2.2 - - 64 - 5.0 3.8 2.9 0.8 0.7 9.3 12.0 69

Times 1233 HK 9.48 - NR 2.2 - - 56 - 5.7 4.4 3.4 0.8 0.7 6.7 8.6 68

Aoyuan 3883 HK 5.90 - NR 2.0 - - 52 - 7.2 5.9 4.2 1.1 0.9 5.7 8.0 65

Ronshine 3301 HK 9.61 - NR 2.0 - - 62 - - 4.4 2.9 1.0 0.8 4.0 6.1 165

China SCE 1966 HK 3.36 - NR 1.6 - - 65 - 5.4 4.3 3.3 0.8 0.6 7.3 9.4 81

Poly 119 HK 3.11 - NR 1.5 - - 62 - 7.4 3.6 3.6 0.3 0.3 8.0 7.9 72

CCRE 832 HK 3.35 - NR 1.2 - - 60 - 8.8 6.4 4.4 0.8 0.7 4.3 6.4 50

Big 6 184.4 30 43 26 11.2 7.3 5.7 1.6 1.3 4.5 5.9 97

Small-mid cap 94.4 56 7.4 5.6 4.4 0.9 0.8 6.5 8.2 77

Overall 278.8 53 8.4 6.0 4.7 1.1 0.9 6.1 7.7 82

Note: All information of non-rated stocks are sourced from Bloomberg; Sources: Bloomberg, Company data, CMS(HK); Share price as of 21 Aug 2018

Tuesday, August 21, 2018

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Financial Summary Profit & Loss Statement Financial Ratios

RMB mn 2016 2017 2018E 2019E 2020E 2016 2017 2018E 2019E 2020E

Revenues 54,799 72,075 97,080 127,537 165,537 YoY growth rate

Cost of sales -38,864 -47,639 -67,077 -89,564 -118,241 Revenue 15.6% 31.5% 34.7% 31.4% 29.8%

Gross profit 15,935 24,436 30,004 37,973 47,296 Gross profit 22.4% 53.3% 22.8% 26.6% 24.6%

Selling expenses -1,428 -1,797 -2,815 -3,571 -4,635 Core profit 9.6% 26.7% 27.7% 27.0% 23.6%

Administrative expenses -2,022 -3,267 -3,883 -5,101 -6,621 Core EPS 9.8% 25.8% 26.3% 26.5% 23.6%

Other operating income 264 795 770 828 897 DPS 30.5% 62.7% 11.5% 26.5% 23.6%

Operating profit 12,749 20,167 24,076 30,129 36,936 Profitability

Financial costs -53 -45 -87 -96 -99 Gross margin 29.1% 33.9% 30.9% 29.8% 28.6%

JV and associates 1,434 1,868 2,616 3,662 4,760 Core margin 14.1% 13.6% 12.9% 12.4% 11.8%

Others 0 0 0 0 0 ROE 13.2% 14.8% 16.8% 19.1% 21.0%

PBT 14,130 21,989 26,604 33,695 41,597 Liquidity

Taxes -5,635 -8,831 -10,058 -13,371 -16,635 Average borrowing cost 4.9% 4.5% 5.0% 5.3% 5.3%

Profit after tax 8,495 13,158 16,545 20,324 24,962 Net debt to equity 53.9% 47.7% 46.2% 45.2% 45.2%

MI and Perpetuals -782 -3,388 -4,065 -4,472 -5,366 Current debt to cash 31% 21% 23% 26% 32%

Core profit 7,713 9,770 12,480 15,852 19,596 FX debt to total debt 15% 19% 19% 19% 19%

FV changes 1,984 3,732 0 0 0 Operating efficiency

One-offs 0 0 0 0 0 Asset turnover 0.3 0.2 0.2 0.3 0.3

Net profit 9,153 12,599 12,480 15,852 19,596 Inventory turnover 0.7 0.6 0.6 0.6 0.7

Balance Sheet AR turnover 0.9 0.8 0.7 0.7 0.7

RMB mn 2016 2017 2018E 2019E 2020E Per share

Current assets 138,489 233,668 292,084 352,914 407,018 Core EPS (RMB) 1.33 1.67 2.11 2.67 3.30

Cash & equivalents 17,258 26,642 27,251 26,509 23,372 DPS (RMB) 0.47 0.76 0.84 1.07 1.32

Trade receivables 10,324 14,184 16,311 18,758 21,571 Valuation ratios

Inventories 100,512 163,000 218,313 277,035 331,019 Discount to NAV (%) -31%

Other current assets 10,394 29,843 30,209 30,612 31,055 P/E 13.7 10.9 8.7 6.8 5.5

Non-current assets 86,342 129,096 131,390 134,584 138,239 P/B 1.7 1.5 1.4 1.2 1.1

Investment property 49,031 68,095 68,095 68,095 68,095 Dividend yield (%) 2.5% 3.8% 4.6% 5.9% 7.2%

PP&E 29,745 44,777 45,482 46,886 48,526 Dividend payout (%) 35.0% 40.2% 40.0% 40.0% 40.0%

JV and associates 4,323 13,193 14,783 16,572 18,587 Cashflow Statement

Other non-current assets 3,243 3,031 3,031 3,031 3,031 RMB mn 2016 2017 2018E 2019E 2020E

Total assets 224,830 362,764 423,474 487,498 545,257 CF from operating activities 32,673 71,347 1,577 1,348 334

Current liabilities 91,462 177,494 226,450 275,633 315,719 Core profit 7,760 9,770 12,480 15,852 19,596

Bank loans 5,333 5,589 6,189 6,789 7,389 D&A 46 29 34 41 50

Trade payables 66,726 125,430 169,124 212,545 246,314 Working capital changes 23,424 58,938 -13,747 -17,748 -23,030

Other liquid liabilities 19,404 46,475 51,137 56,299 62,016 Finance costs -2,678 -3,065 87 96 99

Long-term liabilities 58,253 79,091 82,157 86,145 90,451 Tax -3,919 -7,147 -8,647 -10,952 -13,521

Loans 52,539 71,816 74,216 76,616 79,016 Others 8,040 12,822 11,369 14,060 17,139

Others 5,714 7,275 7,941 9,529 11,435 CF from investing activities -40,117 -110,904 315 315 315

Total liabilities 149,715 256,585 308,607 361,778 406,169 Capital expenditure -37,674 -85,095 0 0 0

Issued capital 508 514 514 514 514 Other investments -2,442 -25,809 315 315 315

Reserves 61,256 70,052 77,521 87,032 98,790 CF from financing activities 6,782 48,941 -1,283 -2,406 -3,786

Shareholders' Equity 61,765 70,567 78,035 87,547 99,304 Net borrowings 4,380 17,565 3,000 3,000 3,000

MI and Perpetuals 13,350 35,612 36,832 38,173 39,783 Share issuance 53 546 0 0 0

Total equity 75,115 106,179 114,867 125,720 139,087 Dividends -2,083 -2,739 -4,283 -5,406 -6,786

BVPS (RMB) 10.6 11.9 13.2 14.8 16.7 Others 4,432 33,570 0 0 0

NAV (HK$) 31.0 Net cash flow -662 9,384 609 -742 -3,137

Sources: Company data, CMS (HK) estimates

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Investment Ratings

Industry Rating Definition

OVERWEIGHT Expect sector to outperform the market over the next 12 months

NEUTRAL Expect sector to perform in-line with the market over the next 12 months

UNDERWEIGHT Expect sector to underperform the market over the next 12 months

Company Rating Definition

BUY Expect stock to generate 10%+ return over the next 12 months

NEUTRAL Expect stock to generate +10% to -10% over the next 12 months

SELL Expect stock to generate loss of 10%+ over the next 12 months

Analyst Disclosure

The analysts primarily responsible for the preparation of all or part of the research report contained herein hereby certify that: (i) the views expressed in this research report accurately reflect the

personal views of each such analyst about the subject securities and issuers; and (ii) no part of the analyst’s compensation was, is, or will be directly or indirectly, related to the specific

recommendations or views expressed in this research report.

Regulatory Disclosure

Please refer to the important disclosures on our website http://www.newone.com.hk/cmshk/en/disclosure.html or http://www.cmschina.com.hk/Research/Disclosure.

Disclaimer

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