Longfor Group Earnings Report Analysis: Significant Potential in the Long-term Rental Apartment Market

       “If we continue moving forward, Longfor (in its long-term rental apartment business) has the potential to achieve complete leadership,” said Shao Mingxiao, Executive Director and CEO of Longfor Group.

　　On August 26, Longfor Group (00960.HK) held its 2019 interim results briefing in Hong Kong. The interim results showed that in the first half of 2019, Longfor Group achieved contracted sales of 105.62 billion yuan, up 8.8% year-on-year; revenue of 38.57 billion yuan, up 42.2% year-on-year. Among them, property investment business revenue was 2.58 billion yuan (excluding tax rental income), up 39.2% year-on-year. Notably, over the past three years, the composition of Longfor Group’s property investment has changed, consisting mainly of three parts: shopping malls, CO-LIV (long-term rental apartments), and other income. Among these, CO-LIV, since being identified as a core business in 2017, has shown steady annual growth in revenue. Specifically, in the first half of 2019, Longfor’s CO-LIV generated 430 million yuan in revenue; for the full year of 2018, CO-LIV revenue was 425 million yuan; in 2017, this figure was only 38 million yuan.

　　It is quite rare and commendable for long-term rental apartment revenue to contribute significantly and show steady improvement in an industry currently undergoing a shakeout. Being able to do what others cannot is the best testament to a company’s operational capability.

　　“Don’t listen to the sound of leaves and hail beating against trees, why not walk and whistle in the rain? The piercing spring wind sobers me up, slightly cold, but the slanting sun on the mountain greets me,” at the beginning of the briefing, Longfor Group quoted Su Shi’s poem about encountering rain to express its calm and composed mindset in the face of external changes. This also applies to the current development of the long-term rental apartment business. No matter how turbulent the outside world is, we remain steadfast. As Shao Mingxiao said at the earnings briefing, “For Longfor, we are very determined—CO-LIV remains our strategic business.”

　　Approaching the Top

　　Regarding Longfor’s long-term rental apartment business, Shao Mingxiao commented at the earnings briefing, “Currently in this field, I can say that Longfor is basically close to the top.” According to the “2019 China Long-term Rental Apartment Scale Ranking – First Half” released by CRIC, whether in terms of expansion scale or operational scale, Longfor CO-LIV ranks second in the long-term rental apartment industry, only behind Vanke’s泊寓 (Vanke Apartments).

　　Shao Mingxiao stated that as of June 2019, Longfor CO-LIV had more than 60,000 rooms in operation, with cumulative rental income of 430 million yuan in the first half of the year, and the overall operation is very healthy. “If we continue moving forward, Longfor has the potential to achieve complete leadership.”

　　The long-term rental apartment sector is currently a key battleground for forward-looking real estate developers. CRIC pointed out that from an industry perspective, as the main force in the long-term rental apartment field, after several years of development, nearly half of China’s top 50 real estate companies have now entered the long-term rental apartment market.

　　The willingness of real estate companies to invest in long-term rental apartments is supported by favorable policies. As early as 2015, the State Council issued the “Guiding Opinions on Accelerating the Development of Life Service Industries and Promoting Upgrades in Consumption Structure,” which mentioned “actively developing short-term rental apartments, long-term rental apartments, and other segmented services to meet the consumption needs of the general public.” Since then, top-level policy designs such as “rental and purchase parallel development” and “housing is for living, not for speculation” have continuously brought benefits to the long-term rental apartment sector.

　　Behind the rise of long-term rental apartments as a hot investment area, the massive demand for rentals is also a major pillar. A report by Beike Zufang (Beike Rentals) showed that in 2018, among China’s 1.39 billion population, nearly 200 million were renters. Targeting this demand and riding the wave of favorable policies, in 2016, Longfor Group began venturing into the long-term rental apartment market, launching the “CO-LIV” brand. Longfor’s 2016 annual report showed that as one of its new businesses, CO-LIV, which caters to quality rental and lifestyle services for young customers, had been launched in cities such as Beijing, Shanghai, Chengdu, and Chongqing, and would gradually become an important part of the company’s brand.

　　In March 2017, Longfor Group officially designated four core business areas: residential development, commercial operations, long-term rental apartments, and property services. As one of the core businesses, Longfor CO-LIV began to truly take shape. On March 12, 2017, CO-LIV made its first debut in Chengdu, with the Jinnan Tianjie and Shidai Tianjie stores opening successively; four days later, CO-LIV expanded into Chongqing, with the Yuanzhu store marking the beginning of its national rollout. In September 2017, CO-LIV successfully entered Beijing, making its first foray into a first-tier city; in October, it expanded to Shenzhen, Shanghai, and Guangzhou, achieving full coverage of China’s four first-tier cities.

　　According to statistics from Tongce Research Institute, as of April 2019, CO-LIV had expanded to key first- and second-tier cities across North China, East China, South China, Southwest China, and Central China, including Beijing, Shanghai, Hangzhou, Wuhan, and Shenzhen.

　　Firmly Moving Forward

　　Longfor is a company that moves resolutely once a strategy is set, but as an emerging industry, the long-term rental apartment sector is not an easy “bone” to crack.

　　Shao Mingxiao stated at the briefing that long-term rental apartments remain a core business for Longfor. However, this year, the industry has indeed undergone some changes. The long-term rental apartment business is actually a highly operation- and marketing-intensive sector, placing high demands on the team. At the same time, the market is vast, targeting a broad customer base, and the future growth potential is considerable, but it is also very challenging to execute well.

　　Tongce Asset Management analysis pointed out that among the 10 developers involved in long-term rental apartments—Vanke, Longfor, CIFI, Landsea, Jingrui, Gemdale, Country Garden, Sino-Ocean, China Merchants Shekou, and Zhongjun—only Longfor, Landsea, and China Merchants Shekou disclosed long-term rental apartment rental income in their 2018 annual reports, amounting to 430 million yuan, 130 million yuan, and 89.08 million yuan, respectively.

　　In 2018, long-term rental apartment brands such as GOWO Apartments, Color Apartments, Yujian Apartments, Haozu Haozhu, Ai Apartments, Youzu Ke, Kaixin Asia, and Dingjia Apartments all experienced funding chain issues. In early August this year, Lejia Apartments, which claimed to have 50,000 units nationwide, collapsed under the strain of a money-burning subsidy model, becoming one of the cautionary tales of the long-term rental apartment industry.

　　The collapse of long-term rental apartment operators is mostly related to funding chain issues, but Longfor has an advantage in this regard. “Because we firmly follow our own pace, and Longfor’s financing costs are relatively low, we will continue to pursue this business,” said Shao Mingxiao.

　　Overall, Longfor Group currently has an average borrowing cost of 4.56%. The group’s solid financial position enables CO-LIV to secure low-cost financing. In July this year, Longfor announced the issuance of the first tranche of its 2019 Special Corporate Bond for Housing Leasing, with a size of 2 billion yuan, including five-year bonds with a coupon rate of just 3.9%. In December 2017, Longfor Group successfully obtained approval for China’s first public housing leasing special bond worth 5 billion yuan, which was fully issued by August 2018, further expanding its financing channels. Additionally, Longfor Group has jointly established long-term rental apartment investment platforms with Singapore’s Government Investment Corporation and Canada Pension Plan Investment Board, both aimed at investing in long-term rental apartment projects in China’s first-tier and core second-tier cities.

　　Having financial support is not enough—the next challenge is how to operate long-term rental apartments. Shao Mingxiao believes that the focus of the (long-term rental apartment) sector in the future will definitely be on quality. Given the industry position we’ve reached, we need to strengthen everything—from site selection and operations, to the entire team and users, as well as the underlying DT and IT systems—to boost occupancy rates.

　　From a branding perspective, it is understood that Longfor CO-LIV primarily targets young white-collar workers aged 20-35. The “2018 CO-LIV Tenant Survey Report” shows that post-90s are the main tenant group, accounting for as much as 64% of tenants, including both post-90s and post-95s. Additionally, 3% of post-00s have also joined the ranks of CO-LIV renters.

　　To meet the diverse needs of various customer groups, CO-LIV has also launched three major product lines—Walnut, Pinecone, and Beanbean—to target different niche markets, offering products with varying hardware and service ratios tailored for expatriate professionals, youth communities, and corporate clients.

　　From an operational model perspective, Longfor CO-LIV adopts a combined approach of “light, medium, and heavy” asset models, namely projects with leases under 10 years, those over 10 years, and self-owned or high-quality property acquisitions. Among these, light and medium asset projects are expected to achieve a gross margin of around 35% upon maturity.

　　Currently, many of CO-LIV’s first projects in various cities are light and medium asset ventures, such as the Jiuxianqiao store in Beijing and the High-Tech Park store in Xiamen. CRIC Real Estate Research analysis points out that as the main method of early deployment, the light and medium asset model focuses primarily on the output and management of pure branding and operations, allowing for faster project acquisition compared to other models. With full authorization from the group, decisions can be made within a week, and the cycle from land acquisition to opening is maintained at around 130 days. Through the light and medium asset approach, CO-LIV can quickly accelerate its rollout, expand the market, gain market share, and thereby increase its scale and brand influence.

　　According to Shao Mingxiao, as more TOD (Transit-Oriented Development) projects integrating CO-LIV gradually open and operate, the ecological resources available to CO-LIV will become increasingly abundant, better serving the young renter demographic.

　　CO-LIV’s revenue figures reflect its market recognition. Annual report data shows that cumulative revenue for the full year of 2018 was 420 million yuan, while the six-month cumulative revenue as of June 2019 had already reached 430 million yuan.

　　“In the medium to long term, the long-term rental apartment business should still be a profitable venture. We expect CO-LIV to break even or achieve slight profits next year, and to turn a profit starting the year after,” said Shao Mingxiao.

　　As Longfor Group approaches its tenth anniversary since listing, Wu Yajun, Chairwoman of Longfor Group, said, “No story is a good story.” What are Longfor’s plans for the next decade? “The core is to follow China’s urban development path—urbanization and re-urbanization are growth opportunities; in addition, consumption upgrades and service upgrades are also opportunities. Over the next ten years, Longfor will focus on these three opportunities and strategies,” said Wu Yajun.

　　Clearly, the long-term rental apartment market has great potential.