Market Calls

PUBLISHED : Monday, 18 July, 2011, 12:00am
UPDATED : Monday, 18 July, 2011, 12:00am

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Moody's issued a report last Monday flagging corporate governance concerns of 61 mainland firms. Longfor Properties (960) received seven flags, or seven areas of concern. The report contributed to a pulled share placement by Longfor of about US$500 million that was attempted on the same day of the Moody's report. Longfor's share price fell 10.5 per cent in the two days following.

Kaiser Choi (South China Research) has not changed his rating of Longfor because of the report. 'We find the company attractive,' says Choi. 'We like its valuation, and it's done pretty well in its presales [a sales target]. They have not released their June figure, but the May figure was close to the company's target.'

Choi, who initiated coverage of the firm with a buy rating in May, projects Longfor's revenue from property sales will increase 80 per cent year on year to 26.3 billion yuan (HK$31.7 billion) in the current financial year.

Dundas Deng (Guotai Junan) says Moody's seven flags had all been factored in his rating model of Longfor. For example, Moody's cites the change of chief financial officer as an area of concern despite being announced on May 26 last year. Likewise, the issuer's short listing history (another flag) is well known to the market.

Moody's also homes in on Longfor's large negative free cash flow (operating cash flow minus capital expenditure), which Deng says was negative 3.9 billion yuan in financial year 2010.

However, he expects the firm to be cash flow positive by next year and says negative cash flow is typical for a firm that is seeing rapid expansion, as Longfor is. He maintains an accumulate rating on the stock.

Kevin Gin (Yuanta) is sceptical of both the issuer and the Moody's report. He views many mainland property firms as overpriced, Longfor included.

That said, he does not see much that is helpful in the Moody's report, and notes that some of the issuers in it are claiming it contains inaccuracies. 'It's interesting that people take these reports with such fanfare,' says Jin. 'To say there are corporate governance issues is interesting, but what is more interesting is that companies are challenging the Moody's report.'

He notes that Longfor is vulnerable in that it will probably need to raise cash to pay premiums to convert land into developments. Issuing equity will be tricky given the cancelled deal, and, if it tries to raise debt, 'the fact it is in the Moody's report does not help', says Gin.

The views stated here are those of analysts, and are not stock calls by the South China Morning Post