Longfor Group Holdings Limited (00960.HK): Longfor's 1H26 Results Were Mixed, with Recurring Income Set to Gradually Overtake the Development Business as the Main Driver

Overview

The report assesses Longfor Group's 1H26 results and its progress in transforming from a residential developer into a landlord and asset manager. Deterioration in development property revenue and margins nearly exhausted core profit, but shopping mall rental income continued to grow, while debt, financing costs, and expense control improved. Morgan Stanley believes recurring income will gradually become the principal growth driver, while expecting the development business to remain deeply loss-making in 2H26, with a meaningful moderation not expected until 2027.

Core views

The development property business was the main drag on 1H26 results. Group revenue was RMB 397.95 hundred million, down 32% YoY; development property revenue was RMB 260.95 hundred million, down 43% YoY, mainly due to the delivery schedule. Gross profit decreased 40% YoY to RMB 44.24 hundred million, while the overall gross margin fell from 12.6% to 11.1%. The development gross margin declined from 0.2% in 1H25 to -11.0%, also below the -6.9% recorded in 2025, reflecting pressure from inventory clearance and lower average selling prices. As a result, core net profit was only RMB 0.64 hundred million, down 95% YoY, while the core net margin fell from 2.3% to 0.2%; the report stated that core profit was broadly in line with expectations. Reported net profit was RMB 19.61 hundred million, down 39% YoY, while the interim dividend per share fell from RMB 0.07 to zero. The near-term outlook for the development business remains weak. The company expects the development business to record heavy losses in 2H26, although the magnitude of losses should moderate significantly in 2027 as the scale of revenue recognition shrinks. Saleable resources for 2H26 total approximately RMB 840 hundred million, with first-tier and second-tier cities accounting for 11% and 73%, respectively, and more than 80% comprising carried-over inventory. Based on this, Morgan Stanley believes the sell-through rate may be low and could result in a deeper loss margin. Unrecognized sales amount to RMB 838 hundred million and are expected to be delivered and recognized over the next several years; therefore, revenue and profit realization from the development business will continue to depend on delivery progress and the profitability of existing projects. Recurring income is the more resilient component identified by the report. In 1H26, shopping mall rental income increased 9% YoY to RMB 60 hundred million, benefiting from shopping mall occupancy of more than 97% and 8% YoY growth in same-store sales excluding automobiles. The company plans to open six new shopping malls in 2H26, which the report believes could drive a recovery in rental income growth. Other recurring income was RMB 77 hundred million, down 1% YoY but broadly stable overall, with the decline mainly attributable to a contraction in the rental apartment portfolio. The company maintained its guidance of RMB 100 hundred million in recurring profit by 2028, based on assumptions including an approximately 10% CAGR for the shopping mall business, a CAGR of more than 5% for property management services, an approximately 20% CAGR for construction management, and stable profit from rental housing. The asset structure indicates that the transformation is accelerating. The scale of development properties decreased 11% HoH to RMB 1,590 hundred million due to limited land acquisitions; this implies that the drag of the development business on cash flow and profitability should diminish as its scale contracts. Meanwhile, the company has 96 shopping malls in operation. Morgan Stanley views these changes as evidence of Longfor's determined shift toward a landlord and asset manager model, with recurring income expected to gradually replace the development business as the principal source of earnings. The financial structure and operating efficiency improved. Total debt decreased 4% HoH to RMB 1,470 hundred million, cash covered short-term debt by approximately 1.5 times, and accounts payable decreased 5% HoH to RMB 350 hundred million. The average financing cost decreased 15 basis points HoH to 3.36%; combined with lower total borrowings, this reduced total interest expense by 15% YoY. Operating loans rose to 69% of total borrowings, amounting to approximately RMB 1,020 hundred million. Administrative expenses decreased 10% YoY, while the investment property portfolio remained stable at RMB 2,270 hundred million, up 1% HoH, which the report believes reflects sound cost control and operating efficiency. The net gearing ratio was 52%, unchanged from 2025; the liability-to-asset ratio fell from 56% in 1H25 to 53%. Morgan Stanley's earnings model continues to indicate a prolonged adjustment period for the development business. ModelWare net profit forecasts are a loss of RMB 17.00 hundred million in 2025, a loss of RMB 26.01 hundred million in 2026, a profit of RMB 3.24 hundred million in 2027, and a profit of RMB 44.29 hundred million in 2028; corresponding earnings per share are -RMB 0.25, -RMB 0.37, RMB 0.05, and RMB 0.62, respectively. The model therefore points to a return to marginal profitability in 2027 and a significant earnings recovery in 2028, although this recovery depends on narrowing development losses and recurring income growing as planned. The target price is based on a net asset value framework. Forecast 2026 NAV per share is HK$11.34, comprising HK$9.96 per share for development properties, HK$21.86 per share for investment properties, and HK$20.48 in net debt per share. Development properties are valued using DCF with a WACC of 8.7%; investment properties are valued using capitalization rates of 6% to 9%. Morgan Stanley then applies a 35% discount to NAV based on its developer scorecard to derive a target price of HK$7.37. The scorecard covers land bank 6/10, execution 8, scale 6, growth 6, profitability 6, financing capability 8, and leverage 8; companies under its coverage typically receive discounts of 30% to 40%. Relative to the closing price of HK$6.79 on August 28, 2026, the target price implies 9% upside. The rating is Equal-weight, and the industry view is In-Line.

Analysis framework

The report first compares the actual 1H26 results with the prior-year period and expectations, then breaks down revenue and gross margins by development properties, investment properties, and property management services to identify the source of the decline in core profit. It subsequently combines saleable resources, unrecognized sales, and management guidance to assess the loss trajectory of the development business, while using shopping mall occupancy, same-store sales, new openings, and growth targets for each recurring business to evaluate transformation progress. The report also examines changes in debt, short-term debt coverage, financing costs, accounts payable, and expenses, before deriving the target price using segment NAV, DCF, capitalization rates, and a developer scorecard discount.

Methodology notes

• Valuation MethodNAV Net Asset Value Method

  Segment NAV Valuation

  The report separately estimates the value of development properties and investment properties, deducts net debt to derive forecast 2026 NAV per share of HK$11.34, and then applies a 35% discount to derive the target price.

• Valuation MethodDCF Discounted Cash Flow

  Development Property DCF Valuation

  The value of development properties is calculated by discounting future cash flows. The report uses a weighted average cost of capital of 8.7% to derive a development property value of HK$9.96 per share.

• Valuation Method

  Investment Property Capitalization Rate Valuation

  The report converts rental income from investment properties into asset value using capitalization rates of 6% to 9%, deriving an investment property value of HK$21.86 per share.

• Valuation Method

  Developer Scorecard Discount

  The report scores the company across seven dimensions—land bank, execution, scale, growth, profitability, financing, and leverage—and accordingly applies a 35% discount to NAV; the typical discount range for companies under its coverage is 30% to 40%.

• Industry/Sector Analysis FrameworkVolume-Price Breakdown

  Breakdown of Development Scale, Selling Prices, and Margins

  The report combines the decline in recognized development property scale, inventory clearance, and falling average selling prices to explain the decrease in revenue and the drop in the development gross margin to -11.0%.

• Corporate Fundamentals and Financial FrameworkOperating/Financial Leverage Analysis

  Debt and Financing Cost Analysis

  The report assesses the company's financial pressure and deleveraging progress through changes in total debt, short-term debt coverage, the share of operating loans, average financing costs, and interest expense.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Longfor Group Holdings Limited (00960.HK)

  The report believes the company is transforming from a residential developer into a landlord and asset manager model centered on shopping malls and other recurring income.

  Strengths

  Shopping mall occupancy exceeds 97%, and shopping mall rental income increased 9% YoY; total debt and financing costs declined, the share of operating loans increased, and cost control improved.

  Weaknesses

  Development property revenue decreased 43% YoY, the development gross margin fell to -11.0%, 1H26 core net profit decreased 95% YoY, and the interim dividend was reduced to zero.

  Comparison

  The report assigns an Equal-weight rating, indicating that the company's risk-adjusted total return over the next 12 to 18 months is expected to be in line with the average of Morgan Stanley's China real estate coverage universe.

  Risks

  The sell-through rate may be low in 2H26, and the development business may continue to record heavy losses; slower-than-expected recurring income growth would also weaken the transformation and earnings recovery trajectory.

Key data

• 1H26 RevenueRMB 397.95 hundred millionDown 32% YoY
• 1H26 Core Net ProfitRMB 0.64 hundred millionDown 95% YoY, broadly in line with expectations
• 1H26 Reported Net ProfitRMB 19.61 hundred millionDown 39% YoY
• Development Property RevenueRMB 260.95 hundred millionDown 43% YoY
• Development Property Gross Margin-11.0%Down 11.2 percentage points YoY; -6.9% in 2025
• Shopping Mall Rental IncomeRMB 60 hundred millionUp 9% YoY, with shopping mall occupancy exceeding 97%
• Shopping Mall Same-Store Sales Growth8%YoY growth, excluding automobiles
• Other Recurring IncomeRMB 77 hundred millionDown 1% YoY, mainly due to contraction in the rental apartment portfolio
• 2028 Recurring Profit GuidanceRMB 100 hundred millionGuidance maintained unchanged
• 2H26 Saleable ResourcesRMB 840 hundred millionFirst-tier cities account for 11%, second-tier cities for 73%, and more than 80% comprises carried-over inventory
• Unrecognized SalesRMB 838 hundred millionExpected to be delivered and recognized over the next several years
• Total DebtRMB 1,470 hundred millionDown 4% HoH
• Average Financing Cost3.36%Down 15 basis points HoH
• Operating LoansRMB 1,020 hundred million69% of total borrowings
• Development Property ScaleRMB 1,590 hundred millionDown 11% HoH
• Forecast 2026 NAV per ShareHK$11.34Valuation basis for the target price
• NAV Discount35%Determined based on the developer scorecard

Impact & implications

The report believes that contraction of the development property balance sheet will gradually reduce its drag on cash flow and profitability, while recurring businesses such as shopping malls, property management, and construction management will assume a more important earnings role. In the near term, the high proportion of carried-over inventory, uncertainty over sell-through, and further pressure on development gross margins imply that earnings may remain weak in 2H26; lower debt, declining financing costs, and expense control provide some buffer for the transformation. The model expects the company to return to marginal profitability in 2027 and achieve a significant earnings recovery in 2028, but the path depends on narrowing development losses and achieving the recurring profit target.

Risks

• Upside scenarios include stronger-than-expected contracted sales.
• Upside scenarios include higher-than-expected development business margins.
• Downside scenarios include development business margins deteriorating faster than expected.
• Downside scenarios include slower-than-expected recurring income growth.

What to watch

• Monitor the actual sell-through rate and project selling prices for the RMB 840 hundred million of saleable resources in 2H26.
• Monitor whether rental income, occupancy, and same-store sales can continue to grow after the opening of six new shopping malls in 2H26.
• Monitor the magnitude of development business losses in 2H26 and whether they can narrow significantly in 2027 as guided.
• Monitor progress toward the RMB 100 hundred million recurring profit target for 2028 and the realization of growth assumptions for each business.
• Monitor subsequent changes in total debt, short-term debt coverage, the share of operating loans, and average financing costs.