Without the debt burden, Longhu's "1+2+2" synergy effect has emerged

(Text/Zhang Zhifeng Editor/Ma Yuanyuan) Facing tremendous changes in the industry, as one of the few private housing enterprises that can still lay out the future with ease, Longfor is worthy of its name as an "excellent student" in the industry.

At noon on August 18, Longfor Group announced an almost perfect answer.

Data show that in the first half of 2023, the contracted sales of enterprises will be 98.52 billion yuan, a year-on-year increase of 15%, and the sales collection rate will exceed 100%; Operating income was 62.04 billion yuan, and net profit after core equity increased by 0.6% year-on-year to 6.59 billion yuan.

What is even more valuable is that under the background of the deepening debt crisis in the industry, Longfor's financial situation in the first half of the year was further optimized, and the asset-liability ratio was 61.9%, reaching a new low in the past five years; The net debt ratio was 57.2%, and the average account period was extended again to 7.19 years.

In the face of the new situation of major changes in the supply and demand relationship in China's real estate market, Chen Xuping, chairman and CEO of Longfor Group, said at the performance meeting that Longfor will accelerate the construction of a high-quality development model, focus on the three major businesses of development, operation and service, and give full play to the synergy effect of "1+2+2" multiple waterways, so that the group's profit structure will be gradually optimized, and the proportion of non-development business profits will increase to more than half.

Annual supply of 320 billion, new market removal rate of 70%

Aiming at the living, living, working, consumption and social interaction scenarios of urban residents, Longfor focuses on three major businesses: development, operation and service, covering real estate development, commercial investment, long-term rental apartments, property management and smart construction multi-channel business.

From the current revenue composition, real estate development business is still the absolute main business, reaching 49.869 billion yuan in the first half of the year, accounting for 80.38% of the total operating income.

In terms of sales, in the first half of the year, Longfor Group's contract sales bucked the trend and increased by 15% year-on-year to 98.52 billion yuan.

In terms of sub-regions, the sales value of the Yangtze River Delta, Western China, Bohai Rim, South China and Central China accounted for 29.5%, 26.4%, 22.7%, 12.3% and 9.1% of the whole group respectively. Among them, sales in first- and second-tier cities accounted for 95%.

According to management, as of the end of June 2023, the company's sold but unsettled contract sales amounted to 246.5 billion yuan, covering an area of about 15.7 million square meters, laying the foundation for its revenue and profit growth in the coming period.

In terms of land investment, unlike the contraction strategy adopted by the vast majority of private housing enterprises, after eliminating debt concerns, Longfor still maintained a relatively large investment growth rate in the first half of the year.

According to the data, the company added 20 new sites in the first half of the year, distributed in first-tier and strong second-tier cities such as Shenzhen, Shanghai, Guangzhou, Chengdu, Hangzhou and Suzhou. The total construction area of the new land reserve is 2.57 million square meters, and the equity area is 1.84 million square meters.

As of the end of June 2023, Longhu's land reserve totaled 54.89 million square meters, with an equity area of 38.16 million square meters, and 87% of the value was concentrated in high-level cities and value areas to ensure future inventory turnover efficiency.

In addition, after the reporting period, Longfor continued to be active in the land auction market and acquired 3 land parcels with a total land area of 143,000 square meters, a planned construction area of 339,300 square meters and an equity construction area of 220,300 square meters.

Regarding the current situation of the industry, Longfor management believes that in the first half of 2023, China's economy continued to recover in the process of transformation and upgrading, although there were ups and downs, but the endogenous growth potential and development resilience, as well as the long-term good fundamentals, have not wavered. In the face of a challenging and uncertain market environment, enterprises will strengthen and accelerate the construction of a high-quality development model, focus on the three major businesses of development, operation and service, and give full play to the synergy effect of 1+2+2 waterways.

For the recovery of the real estate market in the second half of the year, Zhang Xuzhong, executive director and senior vice president of Longfor Group, judged that favorable real estate policies are frequent, and the central and local governments have expressed support for rigid and improved demand, believing that the market will change.

Operations and services contribute stable cash flow

Although the real estate development business is still the main component of the company's total operating income at this stage, with the layout of operation and service areas for many years, the gross profit of the operation and service business, which accounted for less than 20% of the total revenue in the first half of the year, has exceeded 50%.

In the eyes of the industry, this is also the main factor for Longfor to get rid of the cash flow crisis faced by most private real estate enterprises and completely bid farewell to the high-leverage, high-growth development model of the past.

Specifically, the rental income of the operating business segment excluding tax in the first half of the year was 6.33 billion yuan. Among them, commercial investment, long-term rental apartments and other income accounted for 77.0%, 19.4% and 3.6% respectively.

In terms of commercial investment, Longfor added 5 new shopping malls in the first half of the year, of which 2 are asset-light, both light and heavy, and continue to deepen the grid layout in core cities.

Benefiting from the recovery of consumption and the continuous innovation of Longfor Commerce in space layout, brand investment, marketing promotion and other aspects, the occupancy rate has steadily recovered, the same-store turnover and the average daily customer flow of the same store have increased by more than 20% compared with the same period last year, and the rental income increased by 8% year-on-year to 5.01 billion yuan.

As of the end of June 2023, Longfor Commercial has entered 32 cities across the country, with a total of 81 operating malls, a total operating construction area of 7.62 million square meters (including a total construction area of 9.8 million square meters including parking spaces), an overall occupancy rate of 95.4%, more than 6,500 cooperative brands and more than 400 strategic cooperative brands.

At the same time, Longhu long-term rental apartment brand Guanyu has not stopped developing, with a total of 119,000 listings opened, the occupancy rate of listings opened for 6 months and above has increased to 95.9%, and rental income has increased by 4% year-on-year to 1.23 billion yuan, a five-year compound growth rate of 51%.

In addition, in the first half of the year, service business and other tax-exclusive income mainly engaged in property management and smart construction amounted to RMB5.84 billion, an increase of 13.0% year-on-year. The gross margin of services and other businesses was 31.9%, an increase of 8.3 percentage points over the same period last year.

Among them, the area under management of property management reached 350 million square meters, and 81 commercial operation projects under management with an area under management of 7.62 million square meters.

Longfor Longfor Group's "smart construction" brand, Longfor Longhu Intelligent Manufacturing, has also rapidly grown into a strong competitor in the agency construction industry since its debut last year.

Up to now, Longfor Longzhi Manufacturing has obtained more than 50 construction and management projects, with a total construction area of more than 9 million square meters, of which more than 90% of the construction and management projects are distributed in core first- and second-tier cities.

As for the listing plan of Longfor Smart Life, Zhao Yi, chief financial officer of Longfor Group, said at the performance meeting that listing is only a means to promote Longfor's overall development strategy, not an end. At present, the coordinated development of various tracks of Longfor is very good, but the sentiment of the entire capital market is not stable, so it is not a good time to list, and what Longfor has to do next is to follow the trend.

There is no short-term debt service pressure, and US dollar bonds mature as soon as 2027

It is worth noting that when it comes to financial stability, which is the industry's most concerned and worried, Longfor is the most reassuring.

According to the financial report, as of the end of June 2023, the total comprehensive borrowing of Longfor Group was 207.09 billion yuan, the scale further declined, and the average borrowing cost was 4.26%, maintaining the low level of the industry.

At the same time, in order to avoid exchange risks, Longfor Group's foreign currency borrowings maintained a low proportion, with about 78.4% of its total loans denominated in RMB and 21.6% denominated in foreign currencies, of which 97% of its foreign debt has been swapped at the exchange rate, effectively resisting exchange rate losses caused by exchange rate fluctuations.

In terms of interest rates, about RMB67.84 billion of Longfor debt accrues interest at a fixed annual interest rate ranging from 3.0% to 4.8% (depending on the loan tenor), while the remaining loans bear interest at a variable interest rate. As of the end of June 2023, fixed-rate debt accounted for only 33% of total debt.

In terms of debt structure, the average loan period of enterprises was 7.19 years, which was further lengthened; the net debt ratio was 57.2%, the cash short-debt ratio was 1.96, and the asset-liability ratio excluding advance receipts was 61.9%, a new low in the past five years, and met the "three red lines" requirements for seven consecutive years.

According to the financial report, the company's cash on hand as of the end of June was 72.43 billion yuan, of which the pre-sale supervision fund was 24.23 billion yuan. Its corresponding debt due within one year was 37.04 billion yuan, accounting for only 17.9% of the total debt. The cash short-debt ratio was 1.96 times, and after excluding pre-sale regulatory funds and restricted funds, the cash short-debt ratio was still 1.27 times.

This has also made rating agencies that have generally been pessimistic about domestic real estate enterprises in recent years generally affirmed Longhu. Among them, Fitch, Moody's and S&P maintained BBB stable, Baa2 stable, and BBB-stable full investment grade ratings, respectively, while China Chengxin (AAA) and New Century (AAA) outlook were stable.

Regarding the future debt repayment arrangement, Zhao Yi made it clear that this year's debt pressure has passed, and this year the company will gradually repay the syndicated debt due early next year; At the end of this year, the company's debt due next year is about 23 billion yuan, of which 11 billion yuan is domestic bonds (including resale rights) and 12 billion yuan of development loans, and the company has sufficient resources to repay.

He said that industry crises continue to appear, the company's stress test is done every half a month, Longfor Group can survive through the cycle, because it always adheres to bottom-line thinking and lives within its means.

Specifically, to ensure an excellent debt structure, it is necessary to control the proportion of short-term debt to keep it within 10% (currently 11%), and the company is also repaying syndicated loans due next year, with about 20 billion yuan of maturing debt. In terms of US dollar bonds that have changed the color of the industry, Longfor will only have US dollar bonds due in 2027.

Zhao Yi said that if the short-term debt of about 20 billion yuan is repaid every year, the operating property loan is new, the operating cash flow is positive, and the development loan and payment collection can be smooth, no matter how long the market and cycle recover, the company is confident to cross the cycle.