LONGFOR GROUP, the vanguard of the rebound of private real estate enterprises

The recent market trends have been extremely intense, witnessing many historic moments.

The real estate sector, which used to drag down the market, has now stood up and become one of the main forces.

We have previously mentioned two state-owned real estate companies near the bottom, "Qiu Dongrong significantly increased holdings of Poly Development in the first quarter" and "Jianfa International, a growing real estate company". In times of market downturn, state-owned enterprises with relatively solid quality in the real estate sector have a bottom to fall back on, resilient performance, and limited risks.

When the market reverses and policies are relaxed, people may no longer focus on safety. In such cases, non-state-owned enterprises without backgrounds that have suffered more in the previous period may actually show stronger resilience.

One of the few private real estate companies that have consistently ranked in the top ten in sales is probably Longfor Group. Although there is also Binjiang Group, whose sales performance has entered the top ten, its main model is cooperative development with a low equity ratio. Therefore, based on equity sales amount, it has dropped out of the top 10.

After the market reversal, Longfor Group's stock price can be said to have taken the lead and soared. It has surged nearly doubled in three days. Real estate is already a pioneer in the rebound among many sectors, and Longfor is a pioneer in the real estate sector. Of course, in the intense emotions, some weaker real estate companies that are on the verge of collapse may rebound more significantly. Unless it is purely a market speculation game, it is still better to have some basic requirements for corporate quality.

I. The Few Fruits of Private Real Estate Companies

Longfor Group started in Chongqing in 1993 and entered the Beijing and Chengdu markets in 2005, embarking on a nationwide layout.

The company has now formed three main business segments: development business (real estate development), operation business (commercial investment + long-term apartment rental), and service business (property management + smart construction). Of course, the core business is still real estate development, accounting for 72% of revenue in the first half of this year, compared to 86.2% at the end of last year.

The significant decrease in the proportion of real estate business is due to the pressure on development business in the overall environment, which has declined year-on-year for two consecutive years; on the other hand, the performance of the operation business has been outstanding, with a compound growth rate of 25% in the past five years. From 2018 to 2023, the revenue proportion of operation and service business has been continuously increasing, reaching 13.8% in 2023, an increase of 7.7 percentage points compared to 2018. In the first half of 2024, the proportion further increased to 14.1%.

Let's start with the real estate development business.

The company's founder and the largest shareholder holding 43.99% of the shares, Wu Yajun, is said to have founded Longfor because of a bad experience buying a house once. She was dissatisfied everywhere and believed that if she were a developer, the houses she built would not be so poor in quality LONGFOR GROUP's first project, Garden South Court, started with the slogan "Treat You Well for a Lifetime," and was designated as a demonstration project for a "well-off community" in Chongqing. By directly establishing its reputation, LONGFOR also set the tone for pursuing quality.

Since then, LONGFOR has been known for its products, quality, and service, embodying the product concept of "Craftsman LONGFOR." Although there have been some negative voices during the high turnover era of real estate, overall, LONGFOR still has the level and strength to create high-quality projects. In 2022, LONGFOR ranked 2nd on the "China Real Estate Enterprise Product Power TOP100" list by Ke Rui for its high-quality residential experience.

However, it is clear to everyone that the real estate industry has been cooling down in recent years, and LONGFOR is not immune to this trend.

LONGFOR's sales data has been declining since 2022. In 2023, the company's total contract sales amounted to 173.5 billion yuan, a year-on-year decrease of 14%. The total sales area was 10.8 million square meters, down 17% year-on-year. The average selling price was 16,069 yuan per square meter, a 4% increase year-on-year. In the first half of 2024, the sales amount was 51.12 billion yuan, with a sales area of 3.655 million square meters, representing a decrease of 48% and 37% respectively year-on-year, and the average selling price dropped to around 14,000 yuan per square meter. According to Ke Rui's 2024 January-June total sales amount list, LONGFOR ranked 10th.

However, the downturn in the real estate market is an industry-wide issue, not a specific fault of any company.

In the face of such a challenging environment, LONGFOR mainly focuses on grasping core regions and core cities, allocating resources to key areas, and preserving core strength. Since 2020, LONGFOR has maintained a sales share of over 75% in the Yangtze River Delta, Bohai Rim, and Western regions. At the same time, it focuses on core cities, with sales in first and second-tier cities accounting for 95% in 2023. The company continues to deepen its presence in these cities, with 22 cities ranking in the top 10 in local filing rankings.

Moving on to LONGFOR's other core business, LONGFOR Commercial, as mentioned earlier, has performed well in recent years.

In 2023, the company's shopping mall sales reached 63.2 billion yuan, an increase of 49% year-on-year, with a same-store sales growth of 30%; average daily foot traffic was 2.63 million, a 32% year-on-year increase, with a same-store sales growth of 28%; rental income from shopping malls in 2023 was 10.28 billion yuan, a 9% year-on-year increase, with a rental-to-sales ratio of 16%. From 2019 to 2023, the CAGR of rental income from the company's shopping malls reached 21.3%; overall occupancy rate was 96%, up 2 percentage points from the end of 2022

By the end of 2023, Longfor Commercial had entered more than 30 cities. It has acquired a total of 141 shopping malls, of which 88 are already in operation, with a total operating area of 7.97 million square meters. In 2024, the plan is to open 14 new shopping malls, including 8 heavy-asset and 6 light-asset projects, with an expected total construction area of up to 9.51 million square meters. In terms of urban structure, the focus is still on high-energy cities, with first and second-tier cities accounting for 96.6%, and the Yangtze River Delta and Western China regions accounting for approximately 75%.

II. Survive First

It is said that the boss of Longfor once asked some big shots how to build a large enterprise, and the answer received was to simply survive, and the enterprise will naturally grow.

In recent years, the difficulties encountered by the real estate industry have been of historic proportions, but from Longfor's performance, it is indeed leading the way in stability. While the industry is generally high-turnover, high-leverage, and high-emotion, Longfor, like an old stock investor encountering a bull market, prioritizes caution.

Longfor has always adhered to a highly disciplined financial strategy. It can be seen that even before the introduction of the "three red lines" policy, Longfor was already at the green level of the "three red lines". It has now maintained this green level for 7 years. By the end of 2023, Longfor had cash on hand of 60.4 billion yuan, a cash-to-short-term debt ratio of 2.25 times, a net debt ratio of 56%, and a post-deferred revenue asset-liability ratio of 60%, reaching its lowest level in nearly six years.

Last year, amidst many real estate companies defaulting, Longfor repaid 7.2 billion Hong Kong dollars in loans ahead of schedule and fully repaid its onshore maturing corporate bonds. It then successfully issued 2.3 billion yuan in medium-term notes domestically, with coupon rates of 3.50%-3.66%, becoming one of the few private enterprises still able to issue debt in the public market.

At the same time, the average loan term of the company was further extended by 1.18 years to 7.85 years. By the end of 2026, the company has no overseas maturing bonds. The company's average borrowing cost continues to be at a low level of 4.24%. With a background as a private real estate company, its financing costs can compete with some state-owned enterprises.

In terms of debt and its own financial situation, Longfor has indeed taken survival as its core philosophy.

On the other hand, in improving its financial situation, Longfor has been shrinking its real estate business.

In 2023, the company acquired 31 plots of land, with an additional equity area of 2.66 million square meters, a year-on-year decrease of 9%. The equity land price was 25.9 billion yuan, a year-on-year decrease of 15%. The average equity unit price was 9,730 yuan/square meter, with a decrease in land cost compared to 2022. In the first half of 2024, 7 new plots of land were acquired, with an equity construction area of 367,000 square meters, an equity land price of 6.04 billion yuan, a year-on-year decrease of 81% and 66% respectively, and the equity land price increased to approximately 16,000 yuan/square meter.

Against the backdrop of a declining market, Longfor focuses on project liquidation and cash collection capabilities, and invests more cautiously.

In terms of land acquisition cities, all new plots of land from 2023 to the first half of 2024 are located in first and second-tier cities, increasing high-quality land reserves.

In 2023, Longfor's land acquisition intensity (land acquisition amount/sales amount) was 21.0%, a decrease of 2.2 percentage points from the end of 2022, the lowest value since 2016. In the first half of 2024, the land acquisition intensity continued to decrease by 3.2 percentage points to 17.4%.

Although expenses have been cautious in recent years, the company's land reserves are still relatively sufficient. As of the end of 2023, the company's total land reserves amounted to 45.39 million square meters, with an equity area of 32.36 million square meters. Based on the estimated sales area in 2022, the abundant land reserves can guarantee the company's sales for at least 3 years. Furthermore, the average cost of Longfor's land reserves continues to decrease, with the average cost of Longfor's land reserves in 2023 being 4,705 yuan/m2, a decrease of 1,032 yuan/m2 compared to 2019.

Conclusion

Overall, Longfor's operations and its own finances are relatively stable, while also possessing the ability to create and operate high-quality projects, making it a leader among private real estate enterprises.

With recent relaxation of real estate policies, the political bureau meeting pointed out the need to promote the stabilization of the real estate market, strictly control the increment of commercial housing construction, optimize the existing stock, improve quality, increase the issuance of loans for "white-listed" projects, support the revitalization of idle land stock, respond to public concerns, adjust housing purchase restrictions, lower interest rates on existing housing loans, and promptly improve land, fiscal, tax, financial, and other policies to promote the establishment of a new model for real estate development In our previous articles, we mentioned that what real estate companies most need under pessimistic expectations is not price increases, but a stable market for transactions to thrive.

Stimulated by multiple positive policies, LONGFOR GROUP's stock price naturally rose. However, the short-term surge in real estate stock prices has increased the difficulty of operations. The market will focus on whether the real estate market situation is truly improving, and whether there will be more sustained policy measures. The market's pattern will fluctuate between policy games and value regression.

As the saying goes, "Golden September, Silver October," the market in October should pay special attention to the transaction situation in the real estate sector. Marginal changes in data may have a significant impact on the market