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IFM Investments Ltd. (NYSE:CTC)

Q3 2012 Earnings Call

November 16, 2012 7:30 AM ET

Executives

Harry Lu – Co-founder, Vice Chairman and President

Kevin Wei – CFO

Analysts

Ella Ji – Oppenheimer

Joshua Hwang – Goldman Sachs

[Presentation session will be updated shortly]

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Ella Ji from Oppenheimer. Please ask your question.

Ella Ji – Oppenheimer

Hi good evening, Donald, Harry and Kevin. Thank you for taking my questions. I just have a question. It’s regarding your 4Q guidance. So from the market data, we see that in October, actually there was a slight decline in terms of market transaction comparing to September and August, but your 4Q guidance it’s showing a sequential increase from 3Q’s revenue. So can you talk about that, what gives you the confidence that you can achieve quarter-over-quarter improvement?

Harry Lu

Okay, Ella, it’s Harry. Thank you for your questions. I think whatever report on the transaction record, actually there is around 15 days of lag time between what’s happening in the market and then what’s being record. So that’s the reason why when you compare with this quarter’s transaction volume with the last quarter, probably you can see the market data, actually market transaction volume is increased.

But we see a slower little bit slow transaction in the revenue in our performance is because of the real market what we see is actually a market dropped a little bit. But at the same time, when you see the October transaction volume report in record, this is very slow one. The October is the month where you have a big vacation, national holiday. Basically people went out on from business for a quite long time but right after that vacation, what we’re seeing is a market, that managed to re-gathering the momentum in a very effective way.

So we do see buyers are coming back, and that is a indicator give us confidence on the Q4. So we kind of like expecting a little bit better transaction volume compared with the last Q on the coming quarter. That’s the reason why we’re going to have little bit better performance next quarter.

Ella Ji – Oppenheimer

Okay, thank you. That’s very helpful. And then, my next question is regarding the competitive landscape, have you seen any changes on the market from your competitors? And if we assume that current market situation will just continue into 2013, do you expect there will be any big changes in terms of competitive landscape?

Harry Lu

Okay, thank you. I think we don’t see any major change on the secondary market industry landscape, not much happening in that part, but we do see a big shift is that as a whole for secondary brokerage industry actually gaining market share from primary agency business, that’s a record – look at it I guess one or two years ago, and there was just only very, very few secondary brokers dealing with the new home sale but nowadays specially it has become a market practice for developer to deal with the secondary brokerage (inaudible).

So basically the secondary brokerage industry are kind of gaining market share from primary agency, that’s a big shift we’re observing right now.

Ella Ji – Oppenheimer

Okay. And then just regarding your own company’s performance, if we also just assume that 2013 will have about the same level of market transactions as 2012, I know it’s a little bit early but can you just talk about what growth do you expect for 2013 and also do you think you can make profit in 2013?

Harry Lu

Early part we’re going to comment on the market, because most of our people here are leaving probably in ‘012 and ‘013 we’re going to have a better visibility for this industry, so probably people are expecting some recovery on transaction volume in the secondary – especially in the secondary market and that’s something industry are expecting.

Kevin Wei

Well Ella, if there is anything I can add – this is Kevin. Anything I can add is we just disclosed for example our third quarter our average monthly net revenues was about RMB171,000 per sales office and we talk about that we want to explore other product and services, for example in the certain rental market. So we’re looking for incremental revenue opportunities in the next year even if the sales purchase volume will remain less, consistent with this year level.

So that’s where our future profitability rooms will come from in our view of course and we will try continue to grab as much market share as we can in terms of both the sales per transactions or rental – traditional rental transaction as well as maybe the new incremental revenue that we can generate in the new products and services. And as I mentioned with the RMB171,000 per sales office, that’s 320 offices in the quarter, that division is profitable before any allocation of headquarter costs.

So if we can increase that to the RMB200,000 for example then it certainly add more opportunities for us to become more profitable.

Ella Ji – Oppenheimer

Okay, thank you. And then another question is regarding your commission rate, if I heard it right that your current quarter’s commission rate is 1.5%, it’s a decline from 2.3% last quarter, so can you also explain this?

Kevin Wei

Sure. This is just for the primary and commercial segment division for us. And then so the total revenue declined a little bit as well. So this is the same reason as far as the commission rate from the developers declined from 2.4% to 1.5% mainly because the second quarter of this year, we recorded some incentive commission that we earned, in certain real estate project that it’s a – there is a requirement of a certain volume target, as soon as we reach that target then we can earn and such record revenue.

So in the third quarter, we have not reached maybe certain year-end target yet so we are looking for may be to achieve those in the next quarter or two then we expect – we hopefully we can earn more in terms of higher commissions on an average basis from the developers.

Ella Ji – Oppenheimer

I see. So the 1.5% is the base commissions?

Kevin Wei

Well it’s the actual realized average commission of all the primary agency projects that we sold during the third quarter of this year.

Ella Ji – Oppenheimer

And it probably didn’t have much incentive commissions, right?

Kevin Wei

Yes.

Ella Ji – Oppenheimer

Okay.

Kevin Wei

This quarter does not have any incentive commissions.

Ella Ji – Oppenheimer

Yes.

Kevin Wei

Yes.

Ella Ji – Oppenheimer

Okay, got it. And then can you also talk about your franchise networks expansion, so you mentioned that there is a strong pipeline for franchise, so when shall we expect to see like a big addition of franchisees, is it going to happen this year or probably next year?

Harry Lu

We think we’re going to add individual franchisees office number from now the later quarter, the last quarter, this quarter but the regional sales is kind of we’re tucking on some big company sales with some CD franchise contract. So either going to enter them in later this year or next year, we do have some potential clients, who have strong interest that we are working at.

Ella Ji – Oppenheimer

Okay, great. That’s all my questions. Thank you.

Harry Lu

Thank you.

Kevin Wei

Thank you, Ella.

Operator

Your next question comes from the line of Joshua Hwang from Goldman Sachs. Please ask your question.

Joshua Hwang – Goldman Sachs

Hi Kevin and Harry, how are you?

Kevin Wei

Hi, how are you, Josh?

Joshua Hwang – Goldman Sachs

Nice to hear from you. I have two questions, the first is, could you give us your cash flow for the third quarter, your cash flow from operations investing and financing?

Kevin Wei

Yes, the cash flow from operating is RMB1 million positive and then from the investing, so called investing activities, it’s about RMB9 million net impact. Mainly it’s from our mortgage credit loan, for GAAP purpose we had it classified as an investment activity because it has loan. So that’s the main part of our cash flow for the third quarter.

Joshua Hwang – Goldman Sachs

Okay. And I saw that your cash is mainly flat from Q2 so your – the record cash flow from financing is just for short-term loan?

Kevin Wei

It’s actually – this is also much more accounting kind of a classification, it basically changes in the restricted customer deposit of about RMB3 million. If you look at our balance sheet, we have a line basically called restricted cash and most of these are consumers’ cash and that declined quarter-over-quarter that becomes a cash flow kind of item.

Joshua Hwang – Goldman Sachs

Okay. And that restricted cash is from when – is that a deposit that customers pay?

Kevin Wei

Yes. In their noble sales purchase transaction, yes.

Joshua Hwang – Goldman Sachs

Okay, perfect. My second question is I saw that your stores declined from 327 stores to 320 in Q3, do you have a target number or is 320 around where you plan to keep it?

Kevin Wei

I think for the near-term basically, we’re just planning on organic growth i.e. as Harry mentioned maybe certain communities or areas that our sales performance are outstanding or doing strong that we will certainly allow more store to be added and then in contrary, certain areas that the store performance has been consistently below the expectation that we also would tend to have a natural nutrition to close those. So we don’t have any specific target of the sales offices right now, much more of a profit driven methods.

Joshua Hwang – Goldman Sachs

Okay, very helpful. That’s all for me. Thank you.

Kevin Wei

Great, thanks Joshua.

Harry Lu

Thank you.

Operator

We are now approaching the end of the conference call. I’ll now turn the call over to the CFO of Century 21 China Real Estate, Mr. Kevin Wei for his closing remarks.

Kevin Wei

Great, well thanks everyone for participating in our call tonight and we’re looking forward to speaking with you in the near future. Thank you.

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