Fitch Ratings has revised the Outlook on Chinese homebuilder Longfor Group Holdings Limited to Stable from Negative, and affirmed its Long-Term Foreign-Currency Issuer Default Rating (IDR), senior unsecured rating and the ratings on its outstanding senior notes at 'BBB'.
The Stable Outlook reflects Longfor's strengthened banking access, supported by government policies and its large unencumbered investment-property (IP) portfolio. Fitch believes Longfor's financial flexibility remains strong despite the continuous disruption in capital-market access for the Chinese property sector.
We also believe Longfor's contracted sales can continue to outperform that of private developer peers, considering its focus on Tier 1 and 2 cities as well as homebuyers' confidence in the company. Longfor's ratings are also supported by its stable IP and property-management businesses.
Key Rating Drivers
Strong Bank Funding Access: Fitch believes Longfor's access to bank financing has strengthened, benefitting from policies that support the funding access of selected private property developers. Longfor's onshore bank loan balance increased by CNY22 billion in 2022 to CNY112 billion, and we understand it has secured additional onshore bank loans in 2023, including operational loans at its IPs. Longfor's IP portfolio was valued at CNY188 billion at end-2022, including an unencumbered portion of CNY109 billion.
Capital-market access remains difficult, but Longfor expects a stable gross debt balance in 2023. Repayment of HKD15 billion in syndicated loans due in January 2024 will be offset by an increase in onshore bank loans as well as potential offshore loan refinancing.
Stabilisation in Sales: Longfor's attributable contracted sales rose 34% yoy in 5M23 to CNY54 billion, in line with that of most state-owned peers and significantly outperforming that of many private developers. However, China's property sales growth has moderated in recent months. We believe Longfor's monthly sales are likely to be stable in the near term, leading to a 6% yoy increase in attributable contracted sales to CNY135 billion in 2023, supported by over CNY200 billion in attributable saleable resources to be launched during the year, with over 90% in Tier 1 and 2 cities.
Sufficient Land Bank: We estimate Longfor has close to three years of saleable land bank, with over 80% in Tier 1 and 2 cities. We believe this provides the company with the flexibility to reduce land acquisitions in the near term to support debt reduction.
Longfor acquired 17 land plots in 5M23 for CNY14.6 billion in attributable land premiums. We forecast land acquisitions in 2023 will remain relatively low at CNY31 billion (2022: CNY30 billion), or 25% of sales proceeds, to generate positive operating cash flow. However, a prolonged period of reducing land acquisitions may affect its long-term business profile.
Steady Leverage: Longfor's leverage, measured by net debt, including supply-chain asset-backed securities (ABS)/net property assets, increased slightly to 42% by end-2022 from 40% at end-2021, as the company recorded negative free cash flow due to a sharp decline in sales. We forecast leverage to drop to 39% in 2023 on stabilising contracted sales and the controlled land acquisition strategy. Funding access that is stronger than we expect may lead to higher land acquisition spending and slower deleveraging.
Derivation Summary
Longfor's rating is supported by its strong market position as a top-10 developer in China, as well as its large IP portfolio, which generates recurring income. The size of its IP assets is comparable with that of China Resources Land Ltd (CR Land, BBB+/Stable), and is larger than that of Poly Developments and Holdings Group Co., Ltd. (BBB+/Stable, Standalone Credit Profile: bbb). Its leverage is high compared with that of CR Land, but is similar to that of Poly.
Longfor's investment-grade peers are all state-owned developers with very strong funding access. Longfor has also demonstrated strong access to bank funding, despite being a privately owned developer, which supports its ratings.
Key Assumptions
Fitch's Key Assumptions within Our Rating Case for the Issuer
Attributable contracted sales to rise by 6% in 2023 and remain stable thereafter
Rental income to rise by 22% in 2023 and 16% in 2024
Land acquisition at 25% of contracted sales proceeds in 2023 and 35% in 2024
Construction costs at 30% of contracted sales proceeds in 2023-2024
Gross profit margin on property development of 18% in 2023 and 19% in 2024
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:
Fitch does not envisage positive rating action within the next 12-18 months, unless there is sustained improvement in its contracted sales and capital-market access.
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:
Sustained decline in contracted sales
Weakening of bank funding access
Net debt/net property assets sustained above 45%
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Adequate Liquidity: Longfor had CNY53.9 billion of available cash (excluding regulated pre-sales funds) as of end-2022, which is sufficient to address CNY10.8 billion of onshore bank loans, CNY9.8 billion of onshore bonds due in 2023 and the remaining supply-chain ABS. Longfor's liquidity is also supported by its strong access to onshore bank funding and its ability to generate operating cash flow.
Issuer Profile
Longfor is a top-10 property developer in China, with nationwide exposure, focusing on Tier 1 and 2 cities. It recorded CNY127 billion in attributable contracted sales in 2022. The company owns a large IP portfolio valued at CNY188 billion at end-2022, which comprises shopping malls and rental housing in western China, Beijing and Shanghai.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
LONGFOR GROUP HOLDINGS LIMITED 
