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Last week, Longfor Group, China’s second-largest privately-owned real estate developer, revealed a slight 0.6% increase in core profit during the first half of the year. The company expressed its commitment to enhancing profitability and achieving positive cash flow in the current year. Despite this, Longfor’s shares experienced a 3.8% decline, in contrast to a 2.1% drop in the Hang Seng Mainland Properties Index.
This decline followed Longfor’s report of a 35% decrease in revenue compared to the previous year, along with a 2-percentage-point rise in its net gearing ratio to reach 57%.Excluding fair value adjustments, the core profit increased to 6.6 billion yuan (equivalent to $904.73 million).
The focus is on China’s real estate market due to a series of property developers failing to meet their debt commitments since mid-2021. This has led to incomplete housing projects, significant drops in sales, and a loss of investor trust, dealing a blow to the world’s second-largest economy.
Longfor, headquartered in Beijing, was among the developers that participated in a meeting with key regulators this month. The company stated that it sensed support from high-level policymakers in addressing their reasonable financing requirements and it anticipates the potential for a “shift” in the market dynamics upon the introduction of new policies.
Speaking at the conference, Longfor Chairman Chen Xuping expressed the company’s ambition to elevate the contribution of its investment and property services divisions to over 50% of its current profitability, which currently stands at 20%.
The company indicated that It won’t acquire additional debt subject to interest charges. The real estate developer intends to settle the remaining balance of a HK$8 billion shared loan, due in January, by the conclusion of this year. Following this repayment, the company’s offshore debt will be nearly eliminated.
JP Morgan mentioned in a communication that Longfor’s financial position remains strong; however, the decrease in revenue and profit margin turned out to be more severe than anticipated. Additionally, the developer experienced a significant reduction in short-term debt to 1.2 units, although the ratio aligns with that of most state-owned counterparts, as per the communication.
When inquired about the possibility of an initial public offering (IPO) for its services division, CFO Zhao Yi mentioned that there’s no rush, given the current unfavourable sentiment in the capital market towards the real estate industry.
Additionally, the company is making preparations for forthcoming onshore real estate investment trust (REITs) issuances. This involves the sale of residential units in mixed-use developments and the enhancement of returns.
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