Longfor Joins Friends With Spinoff, IPO for Property Administration Arm


Key takeaways:

  • Longfor has utilized to listing its property administration arm in Hong Kong, following within the footsteps of a lot of its friends
  • The unit, Longfor Clever Residing, made a number of acquisitions earlier than submitting for the IPO, making it China’s ninth largest participant based mostly on space below administration

Molly Wen

Property builders have been spinning off their actual property administration items for a number of years now, in search of to lift money and higher differentiate the 2 kinds of enterprise. One exception has been Longfor Group (0960.HK), a top-10 developer that insisted it had no such plans. However instances have modified, and now the corporate is following its friends by making use of to individually listing its property administration operations in Hong Kong.

On Jan. 7, the corporate launched a brand new model referred to as Longfor Clever Residing Ltd., which integrated its good companies and enterprise operations. That very same day, the brand new firm filed an IPO application with the Hong Kong Inventory Trade.

Longfor Clever Residing had round 250 million sq. meters of property and 1,512 initiatives below administration by Dec. 28, some 80% of that in first- and second-tier cities, based on the prospectus.

When it comes to nationwide rank, Nation Backyard Companies (6098.HK), Vanke Service and A-Residing Good Metropolis Companies(3319.HK) all had 500 million sq. meters of property below administration in 2021. Longfor Clever Residing squeaked into the highest 10 with a ninth-place rating, based on actual property info supplier CRIC Analysis.

The quantity of property below administration is straight linked to a administration firm’s core earnings, and thus to a big extent can decide its valuation. With that in thoughts, many corporations have resorted to M&A proper earlier than their IPOs to increase their scale, and Longfor Clever Residing is not any exception.

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Money crunch

Beijing launched into a strict marketing campaign to deleverage China’s real-estate sector final 12 months, making it tougher for corporations to entry financing for brand new initiatives and to pay again short-term debt. In that surroundings, many spun off their property administration arms to lift fast money. Longfor Clever Residing had largely steered away from the acquisitions that a lot of its friends had been making, however then all of a sudden shifted and went by itself procuring spree.

Final March, it bought the property administration enterprise of Yida China (3639.HK) for 1.27 billion yuan ($200 million). It acquired Kailin Property Administration based mostly in Henan province in August, and swallowed a part of the property administration companies of Wharf Holdings (0004.HK) in September. In that course of, the corporate’s portfolio of co-managed property initiatives leaped 74.9% to 696 from 398 on the finish of 2020, its prospectus confirmed.

These offers haven’t solely expanded the corporate’s scope, but in addition diminished its dependence on its guardian. Within the first 9 months of 2021, revenues from property related to the Longfor Group and its associates totaled 2.33 billion yuan, accounting for under 30% of Longfor Clever Residing’s whole. The remaining 70% got here from its enterprise with different builders.

However large spending on acquisitions has weighed on the corporate’s gross revenue margins, which had been 29.2%, 25.8% and 27.6%, respectively, within the first 9 months of 2019, 2020 and 2021 – a comparatively low stage when put next with its friends. Based on the newest knowledge, it now fees a mean of three.44 yuan per sq. meter monthly for administration companies for Longfor Group and its associates. That was properly above the two.39 yuan per sq. meter monthly it was charging for different builders.

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We must always level out that whereas M&A presents growth alternatives, it additionally poses dangers for property managers. Northeast Securities believes that corporations like Sichuan Languang Justbon Companies Group and Color Life Companies Group (1778.HK) have seen slowing income development lately regardless of speedy growth, partly as the results of the low high quality of recent initiatives don’t match properly with their unique portfolios. Firms additionally face threat if property homeowners terminate contracts or if upkeep prices rise too rapidly.

Social watchdogs

Property managers have performed a key position in defending public safety and enabling neighborhood operations in the course of the Covid-19 pandemic, which additionally introduced alternatives for rolling out new value-added neighborhood companies. The sector was rewarded with greater market valuations consequently, which reached document highs in 2020. Reflecting that, shares within the Grasp Seng Property Service and Administration Index had been greater than 60 instances at their peaks.

However the group went right into a tailspin within the second half of final 12 months after Beijing launched its newest insurance policies to manage the market. By the top of final 12 months, the typical P/E ratio for the sector had dropped to simply 17.5 instances, fairly low by historic requirements. However that common belies large divergences amongst corporations. Massive ones tended to safe greater valuations, whereas smaller ones or ones with restricted development potential bought hit essentially the most.

Citic Securities identified that essentially the most comparable firm for Longfor Clever Residing is China Sources Mixc Way of life Companies (1209.HK), since most of their properties and procuring malls below administration are concentrated in first- and second-tier cities, and each try to coordinate their property administration and shopping center operations.

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Longfor Clever Residing has but to announce its IPO pricing and valuation. However buyers can get some thought utilizing P/E ratios of its friends, together with China Sources Mixc Way of life Companies, which has a comparatively excessive P/E ratio of 57 instances, and Nation Backyard Companies and Poly Property Companies (6049.HK), which have decrease ratios of 32 and 36 instances.

The prospectus reveals a internet revenue of 1.13 billion yuan for the corporate within the first three quarters of final 12 months, translating to round 1.5 billion yuan on an annualized foundation. Utilizing a mean P/E ratio of round 40 instances for the three above-mentioned corporations yields a market worth of round HK$73.2 billion ($9.4 billion) for Longfor Clever Residing.

Not like a few of its friends, Longfor Clever Residing’s guardian is in good monetary form, and thus isn’t below strain to lift giant sums to replenish its coffers. Given its flexibility and the sturdy place of its guardian, its valuation might even exceed expectation because it turns into one of many few property administration corporations to make a brand new itemizing within the short-term.