Longfor: Initiating With HKD 22 Fair Value Estimate; Recurring Income Buffers Weak Property Sales

We initiate Longfor Group Holdings with a no-moat rating and fair value estimate of HKD 22 per share, which lands in Morningstar 4-star territory and implies a 0.5 times price/book ratio. Despite being a privately owned China real estate developer, Longfor should survive the current market downturn by developing quality residential projects in wealthy cities, in our view. While we expect Longfor to outperform most privately owned peers on the top line and operating cash flow for the long term, its short-run earnings may lag state-owned developers like China Overseas Land & Investment, which have better-positioned residential projects. Nonetheless, we believe Longfor’s flagship commercial complex Paradise Walk, coupled with rental apartments, should fuel recurring income growth to offset property market swings. We also foresee Longfor’s gross margin to improve to 22.1% in 2027 from 21.2% in 2022, thanks to a housing demand rebound and a favorable mix shift to investment property and service businesses. Our valuation implies a modest underpricing for Longfor, as we believe that its recurring revenue growth and profitability pickup have not been fully priced in.