Fitch downgrades Longfor to BB- amid continued sales decline

Fitch Ratings downgraded Chinese homebuilder Longfor Group Holdings to 'BB-' from 'BB' with a Negative outlook, citing a substantial 31% year-over-year drop in property sales to CNY29 billion in the first five months of 2025 and projected declines of 30% in 2025 and 20% in 2026. This sales underperformance, exacerbated by reduced land acquisitions, is pressuring cash flow, creating a CNY9 billion deficit against CNY19 billion in unsecured debt maturities in 2025, which Longfor plans to address with CNY10 billion in new investment property-backed loans. While its CNY200 billion investment property portfolio provides stable recurring income and debt maturities ease significantly post-2025, the negative outlook reflects persistent liquidity and sales challenges.

Analysis

Fitch Ratings has downgraded Longfor Group Holdings to 'BB-' with a Negative outlook, reflecting a significant deterioration in its operational and financial profile. The core driver for the downgrade is a severe contraction in property sales, which fell 31% year-over-year to CNY29 billion in the first five months of 2025, with Fitch projecting further declines of 30% in 2025 and 20% in 2026. This underperformance is attributed to a strategic focus on deleveraging that has curtailed land acquisitions, resulting in an aging project portfolio that is less competitive than those of state-owned peers. The immediate concern is a near-term liquidity squeeze, as Longfor faces CNY19 billion in unsecured debt maturities in 2025 against a forecasted operating cash flow of only CNY10 billion. The company intends to bridge this gap by securing an additional CNY10 billion in loans backed by its investment properties. Counterbalancing these weaknesses are Longfor's stable non-development businesses, with rental and service income growing 2.5% and 2.4% respectively, and its substantial CNY200 billion investment property portfolio, which provides recurring cash flow and supports funding access. While debt maturity pressures are expected to become manageable post-2025, the Negative outlook underscores the critical challenge of stabilizing sales and navigating the immediate liquidity hurdles.

Key Decisions for Investors

• Investors should closely monitor the company's ability to secure the planned CNY10 billion in new financing, as this is critical to navigating the CNY19 billion in debt maturities and avoiding a liquidity crisis in 2025.
• Upcoming monthly contracted sales data should be treated as a key performance indicator; a stabilization or reversal of the current 31% year-over-year decline is necessary for any potential revision of the Negative outlook.
• Consider the significant valuation discount that may be applied due to near-term risks against the long-term value of the CNY200 billion investment property portfolio, which provides a key source of collateral and recurring income.
• Given Longfor's underperformance relative to state-owned peers, investors should evaluate its risk-return profile against these competitors, who have maintained more resilient sales through more active land acquisition strategies.