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Executives

Nick Beswick - Brunswick Group; IR

Donald Zhang – Chairman and CEO

Harry Lu - Vice Chairman and President

Kevin Wei - CFO

Analysts

Ella Ji - Oppenheimer & Co.

Bart Robotti - Robotti & Co.

Ziyi Yu - CICC

IFM Investments, Ltd. (CTC) Q4 2012 Earnings Conference Call March 7, 2013 8:00 AM ET

Operator

Good evening and thank you for standing by for Century 21 China Real Estate's Fourth Quarter and Full Year 2012 Earnings Conference Call. At this time all participants are in listen-only mode. After management's prepared remarks, there will be a question-and-answer session. Today's conference call is being recorded. I will now turn the call over to your host for today, Nick Beswick.

Nick Beswick

Thank you, everyone, for joining us for Century 21 China Real Estate's fourth quarter and full year 2012 earnings conference call. With us today are Donald Zhang, Co-Founder, Chairman and Chief Executive Officer; Harry Lu, Co-Founder, Vice Chairman and President; and Kevin Wei, the Company's Chief Financial Officer.

Before we continue, please allow me to read you IFM Investment's Safe Harbor statement. Some of the statements during this conference call are forward-looking statements made under the Safe Harbor provisions of Section 21-E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations.

Potential risks and uncertainties include, but are not limited to, those outlined in our public filings with the SEC. IFM Investments Limited does not undertake any obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.

For those of you unable to listen to the entire call as this time, a recording will be available via webcast until March 14th on the Company's corporate website at www.century21cn.com/english. At this point, I would like to turn the call over to Mr. Donald Zhang.

Donald Zhang

Thank you, Nick. Good day, everyone, and thank you for joining us on today's call. Overall, while the market has shown a steady upward trend in transaction volumes and prices throughout 2012, conditions remain challenging. In spite of this we posted record fourth quarter and annual revenues as we focused on our strategy of increasing per-store efficiency, diversifying revenue streams and optimizing our brokerage network.

In the fourth quarter we also posted our third consecutive quarter of positive operating cash flow. And our Shanggu business unit had its best quarter ever. Three years after the government implemented home purchasing restrictions, we are seeing that more people are meeting the tax and the residence criteria.

And as people meet the criteria required to purchase the houses, the underlying demand in the market has manifested itself in a gradual, but clear, increase in transaction volumes. The diversified revenue streams that we have focused on in recent quarters put us in a strong position, and we will continue to focus resources in the areas where we see the best opportunities for balanced growth.

That said, the State Council's five-point measures announced last week are another signal from the government that they are determined to avoid prices increasing too quickly. It's clear that demand is still very strong, as can be seen from the increase in volumes over the last several quarters. The government's concern is not with increased sales volume, but rather speculative investments. And that is what this policy is designed to tackle.

Policy adjustments aside, while January was strong, February saw the yearly pause associated with the Chinese New Year. Although now we expect volatility in March and the near future, as a result of the new government policy reinforcement announcement, we believe we are poised to maintain the momentum we built throughout 2012 and we remain hopeful that 2013 will be a better year of the industry and for the Century 21 China Real Estate.

I would now like to turn the call over to Harry to discuss our key performance indicators for the fourth quarter and the full year of 2012.

Harry Lu

Thank you, Donald. Hello, everyone, and thanks for joining us on today's call. Overall, we are very encouraged by our performance in 2012. With transaction volumes and price showing a steady upward trend through the year, we were able to post encouraging top-line growth, and our diversified business segment all made solid contributions.

Total net revenue for the full year reached a record of RMB748 million, a full 23.7% increase from 2011. And revenues in Q4 were up 59% from the year ago period, which is a testament to our streamlined network’s ability to quickly absorb growth in market activity.

Over the last year we’ve significantly increased the efficiency of our network by focusing our resources on those neighborhoods and segments where they can generate the most revenue. This strategy is clearly beginning to bear fruit on the bottom line. We achieved positive net income in both Q2 and Q4.

Most encouraging for the past three quarters we have posted positive operating cash flows, a sign of the underlying health of our business. Operating cash flow in the fourth quarter increased to positive RMB13 million, which is an excellent achievement.

Over the last year we really proved our ability to manage our cash and bottom line effectively. There are a couple of things worth highlighting here.

First, we successfully improved per store sales efficiency through 2012. Company-owned store numbers remained relatively flat through the year. Yet we were able to quickly take advantage of a revenue upside from the improved market.

Secondly, we began exploring revenues stream that are more insulated from fluctuations in the market. The aim here is to maintain a solid top and bottom-line performance in any market conditions. And our 2012 results show we’re making good progress in doing so. For example, within our primary services business segment 58% of revenue came from selling commercial properties in Beijing, which are not subject to purchase restrictions.

Founded on our core brokerage segment, which is still the bread and butter of our business, we now have a comprehensive suite of real estate services with the flexibility, diversity and efficiency to succeed in the current market environment.

Now I would like to update you on our regular business segments.

Revenue from our Company-owned brokerage services segment remained solid in Q4, growing 45% on year-on-year basis. Secondary brokerage is still our core strength and we have managed our resources effectively to benefit from improved market conditions throughout 2012.

Underpinning our improving performance has been the progress we've made in online activities, which still generate more than 40% of sales leads for our Company-owned brokerage business.

Our Century 21 China proprietary listings site Koofang.com, which has been playing an increasing role, contributed 15% of such sales leads in Q4 2012. At present, most of the leads we’re getting through Koofang relate to secondary sales, but our aim is for there will be more interactive between our online resources and each of our business segments, and more franchisees.

A real highlight in the fourth quarter was the performance of our primary and commercial services segment. Quarterly revenue grew 174% sequentially to RMB41.8 million, representing over 18% of total revenue. The Century 21 brand has played an important role in the growth of our Shanggu business unit in recent quarters. Further, improved market conditions combined with our strong relationship with developers has provided us improved visibility with a strong pipeline of approximately two million GFA under signed contracts going into 2013.

Mortgage management services are proving to be a consistent and very profitable part of our business. And our prudent risk management of a growing consumer loans business has resulted in zero defaults so far. This is another example of a source of revenue that's more insulated from regulatory risk.

As I have said, we think our Company-owned network is about the right size at the current stage and we have made sure our streamlined resources are deployed in the right area with the flexibility to take advantage of growth whatever is arise. When either the primary or secondary market is strong, our agents are there to take advantage. This is what we mean when we talk about flexibility, and it's been the key to our ability to generate growth off of a streamlined base of stores.

In terms of our Company-owned network, the focus remains very much on organic growth, and we still see plenty of capacity for revenue upside here, even off our existing store base.

That said, in coming years we will also look to leverage our franchise network further to broaden our footprint. Our brand is one of our key strengths. And that's why we think it's important to have a broader presence out in the market. We are confident we have got the right blend of efficiency, diversification and the flexibility. And we remain cautiously optimistic going into 2013.

With that I would like to turn this call over to Kevin for a more detailed look at our financial performance for fourth quarter and the full year.

Kevin Wei

Yes. Well thank you, Harry. Now I would like to share with you our fourth quarter and full year 2012 unaudited financial results.

The Company's total consolidated net revenue in Q4 2012 was RMB226.8 million, representing a 59.4% year-over-year increase and a record high quarterly revenue in our Company’s history. The Company's total consolidated net revenue for full year 2012 also reached a record high of RMB748.1 million, an increase of 23.7% from prior year.

Revenue from Company-owned brokerage services segment continued to account for the majority of the total consolidated net revenue, at 83% for 2012. Specifically Q4 2012 revenue for this segment increased 45.2% year-over-year to approximately RMB170.8 million, and 2012 full-year revenue increased 21.5% to RMB623.9 million from 2011.

These increases were mainly due to higher volumes as we completed 4,472 and 16,836 sales and purchase transactions during the fourth quarter and full year 2012 respectively. This is versus 2,963 and 13,380 transactions in the same periods of 2011.

The average number of Company-owned sales offices in operation decreased to 318 in Q4 2012 from 406 in the same period of 2011. Our average monthly net revenue per operating sales office for Q4 2012 increased to RMB178,766 from RMB96,602 in Q4 2011.

On a full-year basis, the average number of sales offices in operation decreased to 326 in 2012 from 517 in 2011. And over the same period our average monthly net revenues per office increased 93% to RMB159,450 in 2012 from RMB82,700 in 2011. In Q4 and the full year of 2012, commission from selling new homes accounted for 28% and 27% respectively of total revenue from our Company-owned brokerage services.

Revenue from our primary and commercial services segment in Q4 2012 was approximately RMB41.8 million, representing an 18.4% of total net revenue and 180.5% year-over-year increase. For full year 2012, revenue in this segment reached a record high of RMB85.1 million, an increase of 90.4% from 2011. This segment accounted as our second largest business segment for 2012. The year-over-year increase was mainly attributable to greater GFA sales of approximately 231,300 square meters for Q4 2012, and approximately 444,300 square meters for full-year 2012.

Our acquisition of Shanggu operating unit in 2011 started to contribute meaningfully in 2012 with approximately 86% of the total primary segment GFA sold in Q4 2012, and in 90% of the primary GFA sold in 2012. Amoung total commission revenue from the primary segment in full-year 2012, 58% came from selling commercial properties including three Grade A office buildings in Beijing by Shanggu.

For 2012 the weighted average ASP for properties sold by the primary segment was RMB12,300 per square meter with a weighted average commission rate at around 1.42% from developers. For the full year 2012 the primary and commercial service segment achieved 6.4% net income margin before allocation and any headquarters expenses.

In addition, we have deferred approximately RMB17.6 million net revenue for Shanggu unit as of December 31, 2012, related -- relating to certain commercial properties sold which were not yet eligible for commercial mortgages requirements according to the PRC banking regulations.

Revenues for our mortgage management services segment were RMB7.2 million in Q4 2012, representing a 24% year-over-year increase, and RMB25.7 million in fiscal year 2012, a 12.2% increase from 2011. The year-over-year increase in Q4 was mainly due to the increase in the total volume of traditional home mortgage loans brokered from RMB409 million in Q4 2011 to RMB763 million in Q4 2012.

The annual year-over-year increase was primarily due to an increase in revenues from mortgage credit loans. The percentage of revenue from advising consumers for home equity loans plus service fees and interest earned from the mortgage credit loans accounted for 59% of total mortgage service segment revenue in 2012. This compares to 54% in 2011. For full year 2012 our mortgage management services segment achieved 23.8% net income margin.

Revenue from our franchise service segment in Q4 2012 was approximately RMB7 million, representing a 70.7% year-over-year increase. Franchise segment revenue for the full year 2012 was approximately RMB13.4 million, a 43% decrease from 2011.

The annual year-over-year decrease was primarily due to the initial franchise fees recognized in 2011 with two new regional sub- franchisor s compared with one new regional sub-franchisors in the city of Urumqi in 2012, and a decrease in royalty revenues paid by some regional sub-franchisors in 2012 as a result of their poor performance.

On the cost side our commission and other agent-related costs in Q4 2012 were RMB134.6 million, representing a 35.3% year-over-year increase and RMB455.3 million in full year of 2012, a 6.2% increase from 2011. This increase was mainly due to the variable costs.

Our total commission expenses as a percentage of total consolidated revenue for Q4 2012 increased to 34.7% compared to -- compared with 27% for Q4 2011. On a full-year basis, total commission expenses as a percent of total consolidated revenue increased to 32.9% from 27.6% in 2011.

Also, fixed salary and benefit costs for sales staff decreased RMB5.1 million in Q4 2012 from Q4 2011, and the decrease, RMB52.8 million in 2012 from 2011. These reductions were mainly attributable to sales staff reductions in our Company-owned brokerage segment, and average sales staff number declined to 5,470 in Q4 from 6,700 in the year ago period, and to 5,360 for the full year of 2012 as compared to 8,150 in the full-year 2011.

Total consolidated operating costs for Q4 of 2012 were RMB43.9 million, representing a 35.5% year-over-year decrease. Total consolidated operating costs for the full year 2012 were RMB175.3 million, also a 40.9% decrease from 2011.

We incurred approximately RMB0.5 million in write-off charges related to the sales office closures in Q4 as compared to RMB11.4 million in Q4 2011. We incurred RMB6.5 million in write-off charges related to the sales office closures in the full year of 2012 as compared to RMB34.3 million in 2011.

Excluding expenses related to sales office closures, total operating costs were also reduced by RMB13.2 million in Q4 2012 from the same period of last year of 2011, and a decrease by RMB93.6 million between the full year 2011 and the full year 2012. This was mainly due to the decrease in rental costs and the store-related costs resulting from the lower average number of sales offices in the Company-owned brokerage network in 2012. Total depreciation and amortization expenses were RMB6.5 million in Q4 and RMB28.2 million for the full year of 2012.

Our total SG&A expenses in Q4 2012 were RMB44.5 million, representing a 17.1% year-over-year decrease and –RMB177.5 million for the full-year 2012, which represents an 18.6% decrease from 2011. The quarterly decrease was attributable to a decrease in professional fees, and the annual decrease was largely due to the decrease in marketing expenses, as well as a decrease in non-sales payroll as a result of fewer non-sales staff hired throughout our business segments.

We achieved a net income in Q4 2012 of RMB2.1 million, compared to a net loss of RMB80.1 million in Q4 2011. Net loss for the full year of 2012 was RMB50.1 million as compared to a net loss of RMB340.4 million in 2011.

Excluding share-based compensation expenses, goodwill impairment losses and a net change in the fair value of contingent consideration, non-GAAP net loss attributable to IFM Investments Limited for Q4 2012 was RMB1.1 million, compared to a non-GAAP net loss of RMB73.4 million in Q4 of 2011 and RMB51.3 million for full year of 2012 as compared to RMB328.4 million in 2011.

On the balance sheet side we had RMB191 million in cash as of December 31, 2012, as compared to RMB187.5 million as of September 30, 2012. Including RMB35.2 million of short-term loan receivables outstanding as of December 31, 2012, we would have a RMB226.2 million or a $36.3 million equivalents in cash and cash equivalents. As mentioned earlier, we have achieved a positive operating cash flow for the last three quarters consecutively, including RMB13.1 million in Q4 of 2012.

For full year of 2012 net cash used in operating activities of RMB31.7 million is a significant decline from RMB315 million used in operating activities in 2011. The year-over-year decrease was mainly due to the significantly less operating loss incurred for the full year 2012 as a result of our management's execution of the overall restructuring strategy in 2012. Cash used in investing activities for fiscal year 2012 was RMB5.2 million.

Our net accounts receivable balance as of December 31, 2012 was RMB176.3 million. An increasefrom RMB144.6 million as of September 30, 2012. This increase is mainly due to increased commissions revenue of new home sales which have a longer receivable cycle from developers. Our average AR turnover days was approximately 71 days for the fourth quarter and the 72 days for the full year of 2012.

Now regarding the guidance for the first quarter of 2013, based on the current market conditions we highlighted earlier, we are estimating our total net revenue for the first quarter of 2013 will be in the range of RMB195 million to RMB205 million. This forecast reflects our current and preliminary view, which is subject to change.

Now this concludes our prepared remarks. Operator, we're now ready for questions.

Question-and-Answer Session

Operator

Thank you very much, sir. The question-and-answer session of this conference call will start in a moment. (Operator Instructions). Your first question comes from Ella Ji of Oppenheimer. Please ask your question.

Ella Ji - Oppenheimer & Co.

Thank you. Good evening, Donald, Harry and Kevin, and congratulations on a very strong quarter. Hi. So my first question is with regarding to the market situation now. And since last Friday we have a new five point measurement details announced. It is reported that the transactions, real estate transaction centers are all packed. So could you share with us what you are seeing at your offices? And also could you break down between the situation from of primary versus secondary home purchases?

Harry Lu

Okay. It didn't happen after this announcement because we are in a kind of a strange situation here. First, government have already announced a five-point policy, but people are still waiting for the detailed regulation, because our municipal government level still don't know what to do with this new policy.

So people are trying -- the buyers or sellers are trying to catch this window to get the real estate transaction done without paying this extra capital income. That's what we see what's happening in the market.

So we can see quite an increase of traffic to our office. We see more buyers, more sellers keen to get this deal done. So we are expecting in the month of March, overall China are going to see more transaction volume happens in secondary, but the primary is a little bit different.

I think the primary market is still the relatively the same. We still see that the property can move that can be sold in this situation, but not as a secondary market have this dramatic change at this moment, but we did see some developer really want to take advantage of this momentum. Some developers even are willing to offer a little bit good price, trying to move out their inventory. That's what we see in Beijing and Shanghai.

Ella Ji - Oppenheimer & Co.

Okay, great. So just regarding the primary market, so the developers do want to liquidate the inventories in such a consideration, rather than hold on to their inventories. Is that right?

Harry Lu

Yes. We kind of expect that beginning in May. Maybe some developers will hold back to themselves, but again that it seems it didn't happen. Still developers are pretty active on trying to move out their products. That's what we are seeing here.

Ella Ji - Oppenheimer & Co.

Okay, okay, great. And then I just wondered if you have heard anything. We are having the National People's Congress right now. Have you heard anything regarding the details, execution details, especially regarding this 20% capital gains tax? It has been discussed that this is really harsh and can negatively affect normal peoples purchase or upgrade needs. So have you heard any updates regarding the details?

Harry Lu

Not yet at this moment, but we did see municipal government talk about that. Nobody started to implement this at this moment, they are kind of waiting for central government's direction, but the tone I think probably compared with the very beginning that they kind of have tuned down on a little bit, and say this is a complicated issue that there might be some technical difficulties on implementing of this issue, talking about how to decide what's the purchase price and what kind of home should be waived of this capital income tax and things like that.

Look at that deal. This probably actually came out on year 2006. At very beginning they really wanted to impose this 20% capital income, but because of technical difficulties so they kind of pulled back and instead they imposed this 1% to 3% tax over the homes sales revenue they got, but the same difficulties still exist.

So our people are trying to look at this and developers to see what they want to do, what kind of deduction they are going to give this to municipal government about how to implement this policy. That probably will take some time, especially for municipal government to implement this policy.

So people are -- that's the reason why people are expecting in the month of March, probably is a month a lot of people will try to catch up this opportunity to take advantage of this window to get a deal done without paying that capital gain, probably will take some time. Even after the central government give this detail regulation, still need some time for municipal government to implement that.

Ella Ji - Oppenheimer & Co.

Okay. Thank you. That's very helpful. And then since you have also mentioned that March will be a tremendous month, and just given that your current guidance, 1Q guidance reflects between 47% to 56% of year-over-year growth, I just wonder if you think this guidance may be a little bit conservative to you, because I think that January and February combined secondary volume was up over 200% already. So yes, I just wonder if 1Q guidance may be a little bit conservative.

Harry Lu

I think the reason for that is, although we have enjoyed a relatively good January, but the February was pretty slow before this policy came out. We see that the market picked up after this spring festival, but actually it's slower than we expected, but obviously that after this policy people are coming back.

And so right now you see that the traffic is coming back. Relatively it's a pretty strong momentum, but you do have to kind of prepare for let's say the detailed regulation come out as in the day of 25. Probably the market will end up with five days of basically no deal or no transaction happen.

So we really want to make sure we kind of have some expectation on that part. So we also expect after the detailed regulation came out, probably it will take the market three to six months to digest this at the new cost over this transaction, so we'll probably need three months or to six months to digest all this.

Ella Ji - Oppenheimer & Co.

Sure, sure, okay, all right, great. And then my next question is with regards to your network expansion or network plan for 2013. Yes, could you elaborate if you want to grow your network and for example how many stores in Beijing and Shanghai respectively?

Harry Lu

Now obviously when we have the better performance on the same-store level, we are going to add a few, add some stores, but basically we want to carefully watch our cash position. We want to use whatever positive cash flow generated from operations to expand our stores, but given current situation here, probably we are going to take one or two months to carefully study the market before we make a decision on that part. So we are not expecting a big move in one or two months recently because we need some time to see, to make sure we have a better visibility on the market.

Ella Ji - Oppenheimer & Co.

All right, great. And then if I heard it right, excuse me, I think the commission rate for -- I think you mentioned a 1.42% of commission rate. Is that for the primary sales?

Kevin Wei

Yes. That's from our primary segment.

Ella Ji - Oppenheimer & Co.

Okay. Primary segment, got it. So think and this is a little bit lower than in the past. You were able to achieve around the 2%. Could you comment on this commission rate trend?

Kevin Wei

Sure. Actually just to clarify, our primary new home sales through our Company-owned store, the growth in network commission for those are still at 2% for Q4, and that was for the average of 2012.

So the 1.42% is for our primary segment business such as Shanggu. So they also had a quite a bit of let's say lower commission project from this venture project in Northern China as well. So the weighted average was brought down to on an annual basis of about 1.42%.

And the threshold properties, as I mentioned earlier, three Grade A office buildings, they actually enjoyed the higher commission rate for those projects, and also I mentioned there was about 17 million revenue that was deferred. And if this revenue were combined together with our 2012 revenue, the commission rate would be higher, more towards the 1.7%.

Ella Ji - Oppenheimer & Co.

1.7%, okay. And then I noticed that you have a very high minority interest in this quarter. Is this derived from Shanggu business?

Kevin Wei

Yes. Shanggu minority shareholder owns 45%. And we have 55% right now.

Ella Ji - Oppenheimer & Co.

Okay. And I think you also mentioned that Shanggu is doing great, any thoughts of what maybe probably increase your ownership in Shanggu?

Kevin Wei

Yes. And we have a general agreement with them over a little bit longer period of time. And there is intent, if you will, that we will acquire more effectively to have a majority control of up to 90% in the future years.

Ella Ji - Oppenheimer & Co.

Okay, all right. And just lastly, could you comment on the operating expenses trend in 2013? Assuming that 2013 will be a better year than 2012, how shall we think about the total operating costs for this year?

Kevin Wei

I think for the most part our operating cost will still stay relatively consistent with 2012, i.e. most of our Company-owned store brokerage business costs are fixed costs for the people's salary. So we have given the per store metrics already.

So the only thing that may be a little bit different going forward is we may add a few more headcounts in terms of the sales agent per our sales office. And the fixed cost for rental and other store-related cost, we expect to be staying fairly similar to 2012, unless we over the a little bit longer period of time whenever we have a rental lease renewal then we may have to face a little bit higher increases in terms of rental expenses, fortunately that we do not have our rental lease due in the same month. So that will also be spread out in the future years gradually.

Ella Ji - Oppenheimer & Co.

All right. So you don't expect the rental expenses to have a significant increase?

Kevin Wei

Year-over-year, yes, we are not seeing a big increase per store level, but over a little bit longer period of time we should expect rental continue to increase gradually.

Ella Ji - Oppenheimer & Co.

Right. If like let's say if you are in your rent lease now, how much growth are you seeing now?

Kevin Wei

In tier one cities, obviously in Beijing and Shanghai sometimes it's double digit, could be as high as 15% or more, sometimes even higher, but those tend to be in a three-year lease. So we size some of the leases a little bit longer before. Now this increase, like I said before, we are not going to renew our offices in one month or one quarter. So that's spread out in the future, 36 months if you will.

Ella Ji - Oppenheimer & Co.

Okay. All right that's all my questions. Thank you.

Kevin Wei

Thank you, Ella.

Harry Lu

Thanks.

Operator

Thank you, very much. (Operator Instructions). Your next question comes from Bob Robotti from Robotti & Company. Please ask your question.

Bart Robotti - Robotti & Co.

Hi. First of all, it sure sounds like you have done a really stellar job in the last year in terms of getting into new businesses, diversifying the revenue streams, doing a lot of different things that clearly has significantly improved the position of the Company, so congratulations on that. One of the things that you did say in response to previous question was that you are looking at adding some stores, but that you are going to be very judicious about that because you want to protect your cash balance.

I guess last year of course you did talk about potentially having a strategic arrangement in raising some capital. Could you talk about how that might fit into plans, and it sure would seem as if access to capital potentially would accelerate some opportunities. So is that something that you are still considering? How does that enter into the growth opportunities in front of you?

Harry Lu

I think at this moment it's the later part of the year 2012 -- we kind of generated a positive cash flow, and then going into 2013 if the market is as we expect to be a little bit better market than last year, so we should be able to generate enough cash flow at this moment to support our relatively conservative growth, but obviously with the current market development we probably want to be more cautious of our expansion. So at this moment we don't have any financing plan at this stage, not at this moment.

Bart Robotti - Robotti & Co.

Could you actually --

Harry Lu

Yes.

Bart Robotti - Robotti & Co.

Could you actually talk about the growth plans and the uncertainty? And even three weeks ago, I guess last year's announcement by the government clearly creates a lot of uncertainty, what's going to happen, how is it going to impact things? So obviously that's going to cause you to slow down and evaluate kind of what's -- where things are going.

Would you have had a different attitude even like as you say three weeks ago or a month ago about what you would have planned for 2013, given it looked as if the market had improved, you significantly changed and added all these additional revenue sources. You mentioned potentially adding some people selectively. I imagine that's been tempered given the uncertainty. So did the recent government announcement really kind of change how you were thinking about '13?

Harry Lu

I think that whatever that the have on this impact on the market from this policy side, it is still a relatively short-term impact to our business. In very short-term, so like the month of March, we are probably going to see more transaction volume to generate in public and enjoy a better month for the month of March. And then right after a detailed regulation come out, you probably are going two or three months or a little, maybe even more, a little bit more time of a very slow market, but even with that we don't think that we kind of have a fundamental impact on the secondary market, because at the end of the day this is like a 10% actual cost to our customer.

And if the market if I understand this split the five to five, so it's only like a 5% actual cost for residential market. In the market what we see in major cities of Beijing or Shanghai, obviously this will probably take only three to six months to fully digest this. So we don't see this like a long-term impact, but just a relatively short-term impact. And after that probably we have got -- we have to move on, push forward whatever plan we have for this year, and probably just slow down for a couple, two, three months, a quarter or so something like that.

Bart Robotti - Robotti & Co.

And then could I jump back to the question then about potentially raising capital for the strategic investment? Do I -- it sounds as if what your basic -- because clearly having more capital today would you give you flexibility to potentially be more aggressive in growing the business, but what it seemed as if you are saying was the consideration of that a year ago was really predicated on a defensive move that cost and losses were potentially causing issues. And you were considering it more to keep the business viable.

And now clearly the Company has turned a corner because you have reduced costs, is you have generated new revenue streams. You now are generating cash flow. You do have cash. And so all of that would seem as if you are clearly not at -- there may have been more tenuousness when you were considering that investment. Is that what drove you to consider the investment, and today there is no need for that because you are kind of past any kind of issue and you are in a position to clearly be viable and then have a [survivalage]?

Harry Lu

I think well we don’t want to say we are not going to do any like a fund raising in the future to support our future growth. Definitely that's a possibility there, but currently we don't have a plan for that because we are confident that we can generate enough cash flow to support our growth. And we don't really want to outgrow our human resources. And that's what we try to focus on. And given what we are doing, here I think we should be able to kind of implement our business plan at this stage.

Bart Robotti - Robotti & Co.

And then lastly, could you -- one of the things that you have been very successful at it sounds like is getting into this commercial market. And what are the prospects for that and what do you think the future holds? Was that -- did you get fortunate and got a couple of transactions, or are you thinking you really have just started in that and there's potentially a lot more opportunities?

Harry Lu

But I think that because we do have some special team. They are specialized in dealing with the commercial properties. So obviously it's not the pure luck. We have been working on that for like roughly three years from now. We have been announcing. We have already committed this very good and solid pipeline for quite a period of time.

So right now is finally this pipeline became a driver of our revenue. And I think that reflect almost like two years of our efforts working on this commercial business unit. And they are keeping generating more pipeline at this moment, so we are pretty confident for this business unit that they are going to steadily grow their business.

Bart Robotti - Robotti & Co.

Great. Thank you.

Harry Lu

Thank you.

Bart Robotti - Robotti & Co.

Congratulations again.

Harry Lu

Thank you.

Operator

Thank you very much. Your next question comes from Ziyi Yu from CICC. Please ask your question.

Harry Lu

Hello.

Ziyi Yu - CICC

Hello, hello? Hi, can you hear me?

Harry Lu

Yes.

Ziyi Yu - CICC

Oh I'm on then. This is (inaudible) from CICC. Congratulations on your performance in 2012. I have one more question. The new policies announced next -- last week requires more regulations on brokers. So what do you think the possible regulations might be, and how do you evaluate them on the Company's business?

Harry Lu

And the regulation from their part we don't see any like a detailed regulation coming at this moment because right now the government are really working on the licensing in major cities like Beijing, Shanghai. All need a very strict licensing requirement.

And the about the commission rate and basically the common practice are very much regulated. So we don't see any a big change on their part in major cities of Beijing and Shanghai, but in some smaller city, yes, because in the past they don't require very serious type of license requirement as major cities, like Beijing or Shanghai. So probably they need to catch up a little bit, but other than that we don't expect any major change or something is going to change the way we handle business here. We don't expect that.

Ziyi Yu - CICC

But we hear that the government is unhappy about some of the brokers levy] wrong pricing to the market. So do you think this new regulations would be taken upon this issue.

Harry Lu

And what about you are sending the wrong signals to the market --

Unidentified Company Representative

On price.

Harry Lu

-- and on price?

Ziyi Yu - CICC

Yes, clearly the wrong pricing signals to the market, for example listing higher prices than the average or than the actual prices.

Harry Lu

Okay. I think in that part you see basically it's not only government, but also companies tried to push forward to that direction. For example, our Company in Shanghai as a pilot project or pilot city, we announced we have this is like a real pricing event and campaigns.

We announced that if any customer picks on any listing price (on our own listing website) which is not true, he can call us and we can pay cash for doing that. So we really want to change the way we handle business in that direction, but another thing that it's very hard for government to control that because sometimes homeowners can changed their mind on the old asking price provided.

You really never know. Saying that they asked for three millions first, and whe n we have some customer come to sign the contact, they changes their mind and asked for 3.3 million. So for this part it's always a lot of hassle, so not easy for government to regulate that.

Ziyi Yu - CICC

Okay. I understand. Thank you very much. That will be very helpful.

Harry Lu

Thank you.

Operator

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

Kevin Wei

Very well. Thank you, everybody, for joining us on the call today. We are looking forward to speaking with everyone again soon. Have a good day and have a good night. Thank you.

Operator

Thank you very much. Ladies and gentlemen that does conclude our call for today. Thank you for participating. You may now disconnect.

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