From development to operation, Longfor's operating profit accounted for 60%

Image source@Longfor performance conference

On March 22, Longfor Group released its 2023 annual performance report. For Longfor, there are three key elements in order to pass through the industry cycle in the future: first, to maintain positive operating cash flow and rely on the main business to maintain self-"hematopoietic" ability; second, the scale of interest-bearing liabilities has steadily declined, which is to actively rely on positive operating cash flow to reduce debt, rather than relying on passive sales of assets or passive reduction of cash in hand to reduce debt; third, the steady growth of operating income and profits.

It can be seen that low leverage, low cost, strong operation and positive cash flow are becoming the transformation direction of Longfor Group.

1. The overall revenue and profit both declined, but the operating business income and profit increased steadily

During the reporting period, Longfor's operating income was 180.74 billion yuan, a year-on-year decrease of 27.87%. Among them, the operating income of development business was 155.86 billion yuan, down 31.3% year-on-year, and the revenue of operation and service business was 24.88 billion yuan, up 5.7% year-on-year. Specifically, the operating income was approximately RMB12.94 billion (approximately RMB13.88 billion including tax), representing a year-on-year increase of 8.9%, with a gross profit margin of 75.9%, and the service revenue was approximately RMB11.94 billion (including tax, approximately RMB12.65 billion), representing a year-on-year increase of 2.4%, and the gross profit margin was 31.0%, an increase of 2% over the previous year.

In the same period, Longfor's net profit attributable to the parent company was 12.85 billion yuan, and the net profit attributable to the parent company after excluding the impact of fair value changes was 11.35 billion yuan, both of which decreased by nearly 50%. The gross profit was 30.58 billion yuan, and the gross profit margin was 16.9%. Core profit after tax margin was 8.7% and core profit after equity was 6.3%. Among them, the operation and service business accounted for more than 60% of the net profit of core equity, which is also the first time that Longfor's annual operating profit accounted for more than half.

Regarding the decline in profits, Longfor said, "In recent years, the real estate market has undergone a deep adjustment, which has affected the performance of enterprises. The volume of the real estate market has declined, and the price of new homes has also adjusted. For developers, projects acquired at the high point in 2020 and 2021 have entered the sales stage in the past two years, and the volume and price performance have been affected, which is also the main reason for the decline in Longfor's profit in 2023. With the recovery of the gross profit margin of the development business and the high gross profit of the operating business and the service business, it is believed that the overall profit of Longfor Group will usher in a stable recovery. ”

At the beginning of 2023, Longfor restructured its business channels and formed a pattern of coordinated development of the three major sectors of development, operation and service.

(1) Development business: focus on first- and second-tier high-energy cities

According to the financial report data, the development business fell by 31.3% year-on-year due to the overall impact of the industry, with a turnover of 155.86 billion yuan during the period, a total construction area of 10.708 million square meters of delivered properties, and a gross profit margin of 11.0% for the settlement of the development business.

Longfor said that there are two main reasons for the decline in the development business: first, the transaction volume of the entire new housing market has fallen from 1.4 billion square meters in 2016-2021 to 900 million to 1 billion square meters, so for most developers, the sales scale is about 30% or even higher than the previous high point in 2021, and the second is that in the past few years, especially last year, there have been some adjustments in new home prices. For developers, if the land is acquired at the high point in 2020 and 2021, and the land is sold and settled in 2022 and 2023, the profit will be affected somewhat.

In terms of property sales, in 2023, Longfor's contracted sales will be RMB173.49 billion, with a total sales floor area of 10.796 million square meters, a sales unit price of RMB16,070 per square meter, and a sales collection rate of more than 100%. In addition, Longfor's sold but unsettled contracted sales amounted to 173.4 billion yuan, covering an area of about 12.6 million square meters, laying a solid foundation for Longfor's sustainable and stable development in the future. In terms of regions, the Yangtze River Delta, Bohai Rim, Western China, South China and Central China accounted for 28.9%, 21.8%, 28.4%, 11.8% and 9.1% of the Group's total sales respectively. Among them, sales in first- and second-tier cities accounted for 95%.

In terms of land acquisition, in 2023, Longfor will acquire a total of 31 plots of land in 17 key cities including Shenzhen, Shanghai, Guangzhou, Chengdu, Hangzhou, and Suzhou, with a total construction area of 3.68 million square meters of new land reserves, a total value of more than 77 billion yuan, and an average premium rate of 8%. From 2024 to the present, Longfor has taken two pieces of residential land in Xi'an and Foshan respectively, both of which were acquired at the reserve price. As of the end of 2023, Longfor Group has a land bank of 45.39 million square meters and an equity area of 32.36 million square meters, of which nearly 80% is located in first- and second-tier high-energy cities.

As for the strategy of developing business in 2024, Longfor said that in 2024, Longfor will still strictly adhere to the investment scale, select the best of the best, and will "determine expenditure by sales", and take the initiative to grasp the investment rhythm. In terms of city selection, we will focus on first- and second-tier high-energy cities, and will also pay close attention to policy and market changes. In the main projects, we will maintain the advantage of product strength, stabilize the selling price, and quickly liquidate and realize the liquidation.

(2) Operating business: profit contribution accounts for 60%, and it is a new force that will drive profit growth in the future

Compared with the traditional real estate development business, Longfor pointed out that the operating business is an important weight for Longfor to pass through the cycle. The sustained and healthy development of the operating business has become an important engine for Longfor's profits to stabilize and return to growth.

Longfor's operating business mainly has four major sectors: commercial investment, long-term rental apartments and industrial cities, property management, and smart construction.

Specifically, in 2023, Longfor's commercial rental income will be 10.28 billion yuan, a year-on-year increase of 9%, a year-on-year increase of 49% in turnover, a year-on-year increase of 32% in average daily passenger flow, and an overall occupancy rate of 96.2%. During the year, 12 new shopping malls were operated, of which 7 were asset-light operations, and the grid layout in core cities continued to be deepened.

By the end of 2023, Longfor has 88 commercial malls, and will open 14 new shopping malls in 2024, including 8 asset-heavy and 6 asset-light, which means that by 2024, Longfor will open more than 100 commercial projects.

In the face of the growth of the number of shopping malls, Longfor has made arrangements in advance, firstly, for the newly opened projects, Longfor has clearly carried out product grading, according to the grading of each project, and differentiated creation of one store and one policy, aiming to meet the shopping needs of different customers. Second, Longfor began to renovate some of its existing projects last year, with the intention of improving the performance of existing projects.

In terms of long-term rental apartments and industrial cities, Longfor ranked second in the industry with 123,000 opened rooms, and its rental income reached RMB2.93 billion in 2023, a year-on-year increase of 13% and a five-year compound growth rate of 25%. Through intensive cultivation of products and services, the occupancy rate of properties that have been open for more than 6 months has increased to 96.4%, and the occupancy rate at the end of the period is 95.5%, leading the industry in terms of profitability.

The third major segment is the service business, which is mainly composed of the asset-light property management "Longfor Zhichuang Life" and the smart construction brand "Longfor Longzhizao". In 2023, the revenue from service business and other excluding tax was RMB11.94 billion, an increase of 2.4% over the previous year, and the gross profit margin of service business and other businesses was 31.0%, an increase of 2.0% from the previous year.

According to the data, Longfor Property has an area of 360 million square meters under management, with an income of 10.2 billion yuan and a gross profit margin of 30.6%, of which 76% of the revenue comes from basic property management, 17% from community value-added, and 6% from non-owner value-added.

Since the launch of the brand in 2022, Longfor Longzhi has obtained a total of 90 agency construction projects, with a total construction area of more than 16 million square meters, and its comprehensive strength has ranked among the forefront of the agency construction industry. In 2023, Longfor Longzhi will achieve an operating income of 1.97 billion yuan.

Longfor said that the operating profit contribution accounted for 60%, which not only became the ballast stone for Longfor to maintain the profit scale during the industry adjustment period, but also a new force to drive profit growth in the future.

According to the data of the China Index, since 2023, the revenue and profit structure of some of the top 100 real estate companies have changed, and the proportion of non-development business has increased. On the one hand, non-development businesses such as the holding business and service business of typical real estate enterprises contributed higher revenues and profits. On the other hand, the holding business and service business improve the overall liquidity of the enterprise with its stable cash flow. The China Index Research Institute pointed out that it is an inevitable trend for domestic real estate companies to transform from developers to service providers. In addition to the real estate development business, it should actively transform and upgrade around the track of agent construction and comprehensive operation services.

2. Reduce the scale of liabilities in an orderly manner and drive development with positive cash flow

Longfor's management said at the results meeting, "Orderly reduction of debt scale and positive cash flow to drive development are the ideas of Longfor's transformation and development in the future." ”

(1) Operating cash flow was positive for the first time

In 2023, Longfor's overall operating cash flow will be positive for the first time, with a total net inflow of 3.5 billion yuan. Longfor explained that on the one hand, the company emphasizes quality collection, centralized capital and overall management, and on the other hand, the company flexibly adjusts investment and start-up, while improving efficiency and reducing fees, and dynamically matching income and expenditure to ensure that various businesses continue to enhance hematopoietic capacity.

(2) Actively reduce the scale of interest-bearing liabilities, and the debt structure continues to improve

As of the end of 2023, the scale of interest-bearing liabilities was 192.65 billion yuan, down 7.4% year-on-year, or 15.4 billion yuan.

Longfor's debt structure continued to improve: the average borrowing cost remained at 4.24%, maintaining the lowest level in the industry, the average borrowing period continued to lengthen to 7.85 years, and by the end of 2023, the proportion of Longfor's foreign currency debt further decreased to 17.7%, of which 100% of the external debt had been hedged by swaps to fully avoid the risk of exchange rate fluctuations, and the proportion of bank financing in Longfor's total loans reached 77%.

As of the end of 2023, Longfor Group's debt due within one year was 26.84 billion yuan, accounting for 13.9% of the total debt, and the cash on hand was 60.42 billion yuan, with a cash short-term debt ratio of 1.36 times after excluding pre-sale regulatory funds and restricted funds.

Longfor pointed out that the balance of debt due in 2024 is 14.7 billion yuan, accounting for less than 8%, of which 6 billion yuan of domestic bonds are mainly distributed in May, July, August and December, and the company has made orderly repayment arrangements, of which 1.5 billion yuan of debt in May has been saved. At the same time, domestic bonds due in 2025 and some syndicates will be gradually repaid or repurchased in 2024, and the scale of short-term debt will be controlled within a safe range by the end of the year. Previously, from 2022 to 2023, Longfor has repaid its debts in advance many times, releasing a positive signal for the development of the industry. (Details: Longfor early debt repayment)

As for off-balance sheet debt, Longfor said that some off-balance sheet projects are only development loans, and as of the end of 2023, the overall cash balance of off-balance sheet projects is about 13 billion yuan, and the balance of liabilities is about 10 billion yuan, and off-balance sheet projects are in a net cash state. If the off-balance sheet simulation calculation is added to the balance sheet, the company's net gearing ratio will fall from approximately 55.9% to approximately 46%.

For the next financing plan, Longfor said that first, it will continue to deepen the management of property loans, and there are currently about 110 commercial properties, about 70 of which have been used for financing, and about 40 of which can be used for follow-up financing. As of the end of 2023, the company's operating property financing was about 47.4 billion yuan, with an average financing cost as low as 3.65%, and a net increase of 17.4 billion yuan in operating property loans for the whole year. Operating property loans provide Longfor with a long-term and low-cost financing channel. Second, in terms of the open market, Longfor's China Bond Enhancement Bond issuance scale is 5.8 billion yuan, and the company will issue 2.3 billion yuan of bonds in 2023, and will continue to actively communicate in the future and issue them in an orderly manner as needed. Third, the company's overseas debt will be further reduced, and interest rates will be steadily lowered in the future: the earliest maturity of US dollar bonds will be in 2027, and overseas syndicated loans will be repaid early every year, but some syndicates will also be renewed. (This article was first published in Titanium Media APP, author|Wang Jian, editor|Liu Yangxue)

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