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E-House (China) Holdings Limited (EJ)

Q4 2012 Earnings Call

March 12, 2013 7:30 AM ET

Executives

Michelle Yuan – Director, IR

Li-Lan Cheng – COO

Bin Laurence – CFO

Xin Zhou – CEO

Analysts

Jinsong Du – Credit Suisse

Ella Ji – Oppenheimer

Jack Yeung – TH Capital

Operator

Hello and thank you for standing by for E-House 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 Q&A session. Today’s conference call is being recorded. If you have any objections, you may disconnect at this time.

I would now like to turn the meeting over to your host for today’s conference, Ms. Michelle Yuan, E-House Director of Investor Relations.

Michelle Yuan

Hello, everyone, and welcome to E-House fourth quarter and full-year 2012 earnings conference call.

Today, we are going to give you an update on our financial results for the fourth quarter and full year ended December 31, 2012. If you need a copy of the earnings press release or if you would like to sign up for our investor distribution list, please go to the IR section of our website at www.ehousechina.com.

Leading the call today is Mr. Li-Lan Cheng, our COO, who will review some highlights for the fourth quarter and full year of 2012. Ms. Bin Laurence, our CFO, will then discuss the financial results in more detail. We will then open the call to questions, at which time, our Co-Chairman and CEO, Mr. Xin Zhou will be available.

Before we continue, please allow me to read you E-House’s Safe Harbor statement. Some of the statements during this conference call are forward-looking statements made under the Safe Harbor provisions of Section 21E 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.

You are encouraged to review the forward-looking statements section of our Annual Report on Form 20-F filed with the SEC for additional information concerning factors that could cause those differences. E-House 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.

Our earnings press release and this call include discussions of unaudited GAAP financial information as well as some unaudited non-GAAP financial measures. Our press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures. Please take note that unless otherwise stated, all figures mentioned during this conference call are in U.S. dollars.

I will now turn the call over to E-House COO, Mr. Li-Lan Cheng. Mr. Cheng, please go ahead.

Li-Lan Cheng

Thank you, Michelle, and thank you, everyone for joining us on the call today. We delivered strong revenue growth during the fourth quarter, driven primarily by our primary agency business. For our online advertising business, our e-commerce revenues continued to increase rapidly and make key contributions to overall online revenue growth. In addition, we continued to be innovative with respect to our product and service offerings. During the fourth quarter, we launched a trial version of a web-based property valuation tool and completed the development of our commercial real estate and construction material databases, which we believe should contribute to the growth of our real estate information revenues in the coming years.

We expect that our first quarter performance will be far better than the same period of last year, judging from transaction and advertising volumes year-to-date. Although the government recently issued new tightening policies in an effort to cool down the real estate market, we believe the main purposes of these policies are to suppress investment activities and keep housing prices from rising too rapidly. We have learned from previous cycles how best to tailor our operations to take advantage of a fluctuating real estate market and will timely adjust our operations, if necessary, after local governments issue detailed implementation rules.

I will now turn the call to our CFO, Ms. Bin Laurence, who will review our financial highlights for the fourth quarter and full-year 2012.

Bin Laurence

Thank you, Li-Lan. Good morning or good evening, everyone. We keep much better operating income in the fourth quarter with a 30% increase in revenue and relatively flat SG&A compared to the same quarter of last year. As a result, operating margin improved significantly year-on-year continuing the trend that started in the third quarter of 2012.

In 2013, we will continue with our cost control measures and further align employee compensation with our overall net profit. We’re confident we will further improve our profitability in 2013.

Now, let me walk you through our financial results in more detail. I will first go through our fourth quarter results. Total revenues were $152.6 million for the fourth quarter of 2012, an increase of 30% from $117.4 million for the same quarter of 2011, primarily driven by our real estate brokerage services and real estate online services.

Revenues from real estate brokerage services were $74.9 million, an increase of 53% from $48.9 million for the same quarter of 2011. Real estate brokerage services include primary real estate agency services and secondary real estate brokerage services. Revenues from primary real estate agency services were $70.4 million, an increase of 55% from $45.5 million for the same quarter of 2011, driven by a 53% increase in the total GFA of new properties sold and a 52% increase in the total transaction value of new properties sold.

Revenues from secondary real estate brokerage services were $4.5 million, an increase of 32% from $3.4 million for the same quarter of 2011, mainly due to increases in real estate sales transaction volume in the fourth quarter.

Revenues from real estate online services were $56 million, an increase of 22% from $45.8 million for the same quarter of 2011, mainly due to growth in e-commerce revenues.

Revenues from real estate information and consulting services were $13.4 million, a decrease of 11% compared to $15.1 million for the same quarter of 2011. The decrease was due to a decline in consulting services revenue from new property developments, partially offset by an increase in revenues from information services.

Revenues from other services were $8.3 million, compared to $7.6 million for the same quarter of 2011. Our other services include offline real estate advertising services, promotional events services and real estate fund management services.

Cost of revenues was $60.3 million, an increase of 11% from $54.4 million for the same quarter of 2011, mainly due to higher staff related expenses associated with increased revenues from primary real estate agency services. SG&A expenses were $95.3 million, relatively flat compared to $96 million in the same quarter of 2011.

Loss from operations was $2.6 million, compared to loss of $32.5 million for the same quarter of 2011. Non-GAAP income from operations was $9.5 million compared to non-GAAP loss from operations of $18.1 million for the same quarter of 2011. Net loss was $5.4 million compared to net loss of $32 million for the same quarter of 2011.

Non-GAAP net income was $5.8 million compared to non-GAAP net loss of $18.5 million for the same quarter of 2011. Net loss attributable to E-House shareholders was $1.7 million or $0.01 loss per diluted ADS, compared to net loss attributable to E-House shareholders of $27.9 million or $0.36 loss per diluted ADS for the same quarter of 2011.

Non-GAAP net income attributable to E-House shareholders was $9.5 million, or $0.08 per diluted ADS, compared to non-GAAP net loss attributable to E-House shareholders of $18.4 million or $0.23 loss per diluted ADS for the same quarter of 2011.

And now for our full-year results, our total revenues were $462.4 million for the full-year 2012, an increase of 15% from $401.6 million for 2011, driven mostly by primary real estate agency services and real estate online services.

Revenues from real estate brokerage services were $208.3 million, an increase of 18% from $176.4 million for the same period of 2011. Revenues from primary real estate agency services were $192.7 million, an increase of 22% from $158.2 million for 2011, mainly due to a 27% increase in the total GFA of new properties sold and a 20% increase in the total transaction value of new properties sold.

Revenues from secondary real estate brokerage services were $15.6 million, a decrease of 14% from $18.2 million for 2011, mainly due to the closure of a number of stores in 2011 and 2012 in order to optimize the company’s store network. As of December 31, 2012 we had a total of 61 secondary real estate brokerage stores in four cities in China, compared to 92 stores as of December 31, 2011 and 68 stores as of September 30, 2012.

Revenues from real estate online services were $169.7 million, an increase of 24% from $136.5 million for the same period of 2011, due to revenue growth in existing online advertising, particularly growth in e-commerce revenues.

Revenues from real estate information and consulting services were $54.5 million, a decrease of 12% from $61.8 million for the same period of 2011. The year-on-year decrease was mainly due to a reduction in land transaction-related consulting fees, as well as a reduction in other consulting revenues from property developments due to the relatively weak real estate market in the first half of the year, partially offset by an increase in revenues from information services.

Revenues from other services were $29.9 million, an increase of 11% from $26.9 million for the same period of 2011, mainly due to the expansion of promotional event services in 2012.

Cost of revenues was $203.2 million, an increase of 25% from $163 million for 2011, mainly due to higher salary expenses for additional sales staff and higher commissions associated with increased revenue of primary real estate agency services, as well as additional expenses associated with the amortization of capitalized fees paid for Baidu’s Brand Link product, which we started to offer in August of 2011.

SG&A expenses were $336.9 million, an increase of 18% from $286.7 million for 2011, due to increased staff-related expenses, higher online marketing expenses and higher bad debt provision compared to 2011.

Loss from operations was $71.1 million, compared to loss from operations of $459.7 million, which included a $417.8 million goodwill impairment charge for 2011. Non-GAAP loss from operations was $12.5 million, compared to non-GAAP net income from operations of $12.3 million for 2011.

Net loss was $71.1 million, compared to net loss of $465 million, which included a $417.8 million goodwill impairment charge for 2011. Non-GAAP net loss for full year of 2012 was $15.7 million, compared to non-GAAP net income of $5.1 million in 2011.

Net loss attributable to E-House shareholders was $57 million or $0.54 loss per diluted ADS, compared to net loss attributable to E-House shareholders of $270.4 million or $3.39 loss per diluted ADS for 2011. Non-GAAP net loss attributable to E-House shareholders for the full-year 2012 was $8.4 million or $0.08 loss per diluted ADS, compared to non-GAAP net loss attributable to E-House shareholders of $9.1 million or $0.11 loss per diluted ADS for 2011.

Moving on to our cash position and cash flow. As of December 31, 2012 our cash and cash equivalents balance was $210.8 million. Fourth quarter 2012 net cash generated from operating activities was $52 million. Net cash used in investing activities was $7.7 million, mainly comprised of $5.5 million for purchasing of property and equipment and $2.4 million for investment in affiliates. Net cash proceeds from financing activities was $1.4 million.

Now, let me give you our forecast for 2012. We estimate that our revenues for 2013 will be approximately $550 million, an increase of approximately 19% from $462.4 million in 2012. This forecast reflects our current and preliminary view, which is subject to change.

Lastly, I’m pleased to announce that our Board has authorized and approved a payment of a cash dividend of $0.15 per ordinary shares or $0.15 per ADS. The cash dividends will be payable on or about May 30, 2013 to shareholders of record as of the close of business on April 10, 2013. Dividends to be paid to the ADS holders will be subject to the terms of the depository agreement, including the fees and expenses payable thereunder.

Operator, we are now ready to take questions.

Question-and-Answer Session

Operator

Thank you very much. (Operator Instructions) Thank you. Your first question comes from Jinsong Du from Credit Suisse. Please ask your question.

Jinsong Du – Credit Suisse

Hi, Xin Zhou, Li-Lan, Bin, Michelle. Thanks for taking the question. Just like to understand the rationale behind the guidance for 2013 revenue. Could you split that down into your expectations for the – the brokerage business, the online, and the offline other business had the detailed breakdown in individual segments if you can, and rationale behind that especially given the recent policy announcement? And also your fourth quarter operating – non-GAAP operating margin actually had a jump of 9% quarter-over-quarter comparing to the third quarter of 2012. So could you let us know the main reason behind that for the decline on a sequential basis versus last quarter? Thank you.

Xin Zhou

(Interpreted). First of all, the forecast we’re giving for 2013 is based on the good base up to the merger of CRIC and E-House in April of 2012. The forecast for 2013 is based on a few factors, one of which was mentioned by our COO, Li-Lan, just now, which shows our first quarter 2013 performance is going to be far better than the first quarter of 2012. And then secondly, we are factoring some potential market risks in view of the latest tightening real estate policies. And as a result, a combination of a significant first quarter increase versus a relatively conservative next three-quarter forecast gives us a combined revenue guidance of approximately 20%.

This forecast also reflected on our cost control measures taking place, starting from 2012, which is relatively conservative expansion in staff.

So in terms of breakdown for the main divisions within our company for 2013, roughly primary and online services will grow slightly around 20% and CRIC will increase somewhere around 15% to 18%.

Xin Zhou

Okay.

Bin Laurence

Okay. Go ahead.

Xin Zhou

(Interpreted). Yeah. I’m going to answer your second question versus in terms of a margin job in the fourth quarter. It’s mainly driven by two elements. One is first quarter we normally have a higher marketing – year-end marketing expenses and secondly it’s also driven by our year-end bonuses. So sequentially it’s not a surprise that margin showed some decline. However, if you look at year-over-year results, our margin increased very significantly.

Jinsong Du – Credit Suisse

Okay. Thank you. I’ll go back to the queue.

Operator

Thank you very much. Your next question comes from Ella Ji of Oppenheimer. Please ask your question.

Ella Ji – Oppenheimer

Good morning. Thank you for taking my questions. So first of all, could you give us some details with regards to the market performance after the price announcements on March 1? I’m especially interested in the price trend at both primary and the secondary market.

Xin Zhou

(Interpreted). Recently, everybody is trying to interpret the impact from the government’s new tightening policy. Indeed the policies carry lots of uncertainties at current time. First, on March 1, the five-point guidelines issued by the government was relatively mild and they were mostly reiteration of previously announced policies.

And later on, when the government – when the central government issued a more detailed tightening policy based on the five points policy first issued, it created quite a stir in the market, the center of which was the 20% property gains tax which seems to apply to both the first primary home residence, as well as those two housing related transactions.

Later on, the government came out with a follow-up change which basically said that they want to protect the first-time homebuyers as well as those two underlying housing demands.

In the last 10 days or so after the detailed policies were issued, we’ve seen significant volume increases for the secondary transactions. In the big cities the volume increased, reached to three times to five times of normal volumes. In addition, primary real estate transaction volume also increased slightly, and price – with slight price increase for a primary resident transaction as well. Therefore, we so far have not seen a significant change for primary real estate market from the policy’s reaction.

Everybody is now anticipating the detailed local government implementation rules, which are anticipated to come out shortly. Based on our experience and current knowledge, we believe that those rules will more or less still protect the first-time homebuyers as well as those with improvement needs for housing.

As a result, translating into real estate transaction volumes, first quarter we’ll see increased volume and second quarter, if the local government implementation rules turn out to be protective with regard to first-time homebuyer as well as improvement housing needs, then we would expect that the real estate market would not be a see a decline starting from the second quarter. Instead, it will likely run by its normal course as we previously expected.

In addition, what’s good about this new round of government price – housing price target is that, instead of expecting price to go down, they now require the housing price to be tight to the GDP and income growth, which means that they will allow for some price increases.

Xin Zhou

Okay.

Ella Ji – Oppenheimer

Thank you, that’s very helpful. I also want to ask about the revenue at your consulting and information services segment, which still delivered a year-over-year decline in 4Q, despite the market is bit strength. So could you talk about that and what’s your expectation for 2013?

Xin Zhou

(Interpreted). To answer your question, although the real estate market did warm up in the fourth quarter for last year, the major investments and land transactions started to increase in the first quarter of this year and that’s why for the whole year our consulting revenues still see – saw a decline, partially offset by the increases in our information business.

For 2013, with the completion of our construction material database and commercial real estate database, as well as our web-based secondary home valuation tool, we believe that our information revenue will see a – we’ll see a continued increase in 2013. In addition due to increased activities in land transaction in the first quarter and housing – real estate investments, we believe that we will see some small increase in our consulting revenue as well.

Worth mentioning is that when we launched the new construction material database and commercial real estate database, there is a wrapping up process. Therefore, you will see more increased information business revenues in the second half of the year.

Xin Zhou

Okay.

Ella Ji – Oppenheimer

Congratulations on the strong quarter.

Bin Laurence

(Foreign Language).

Operator

Thank you very much. Your next question comes from Jack Yeung of TH Capital. Please ask your question.

Jack Yeung – TH Capital

Hello.

Bin Laurence

Hi.

Xin Zhou

Hi.

Li-Lan Cheng

Hi.

Jack Yeung – TH Capital

Hello. I have a question about the current policies also. I want to ask, do you see any significant change due to the policy of the value – of the value-added sales tax, especially for the secondary real estate and the first real estate? Okay.

Xin Zhou

(Interpreted). This 20% property gains tax was first mentioned in – pushed out in 2006. At that time, there were according to that policy, the property gains tax can be calculated according to two ways. One is if the original value of the property could be estimated and known then you have a 20% property gain based on that value, or if you have 1% of total transaction value based on current transaction values. And on top of that, at that point according to the 2006 policy, first-time homebuyers with more than five years of holding period is exempted from this property tax. This time, however, when the government announced this 20% property gains tax, at the beginning it was very generalized, which caused a stir to the market.

Right now, the markets are – the market is basically anticipating details mainly on two points for clarification. First one is, whether primary residents for self usage which – with the holding period of more than five years, would still be exempted from this 20% property gains tax. Our current estimate is that, it’s likely to be the case. And if that’s indeed the case, we believe that the largest sort of uncertainty or the largest danger to the market is likely sort of reduced.

The second point where the market is waiting for clarification is how the properties would be valued, whether the valuation would include home improvements and also whether property – I mean mortgage expenses would be deducted, et cetera.

As to the impact for both the primary and secondary markets, we believe that currently there is some rush to complete transactions in the secondary market. And as a result, after the detailed implementation rules come out, we believe that this secondary market is likely to go down.

Some people said, potentially some secondary market homebuyers would turn to primary real estate market instead, because of the 20% property gains tax. Whether that would indeed turn out to be true is yet to be seen.

Xin Zhou

Okay.

Bin Laurence

Thank you.

Jack Yeung – TH Capital

Thank you. I have a follow-up question about the e-commerce. Can you give us more color on the percentage of revenue it could be in 2013?

Xin Zhou

(Interpreted). Yeah. Okay, I’ll answer that question. In the fourth quarter, the e-commerce transaction income accounted for roughly 20% of total online revenues. In 2013, we expect that percentage to increase more.

Ever since we launched the e-commerce platform in April of 2012, we think that results oriented advertising has been widely accepted by real estate developers. As a result, we believe that in 2013 in a year that starts to ramp-up further, we would see increased revenue contributions from e-commerce transactions, which going forward will account for a significant contribution to our overall growth.

Jack Yeung – TH Capital

Okay. Thank you.

Operator

Thank you very much. You have a follow-up question from Jinsong Du from Credit Suisse. Please ask the question.

Jinsong Du – Credit Suisse

Hi. (Foreign Language).

Xin Zhou

(Foreign Language).

Jinsong Du – Credit Suisse

(Foreign Language).

Xin Zhou

(Foreign Language).

Jinsong Du – Credit Suisse

(Foreign Language).

Li-Lan Cheng

(Foreign Language).

Jinsong Du – Credit Suisse

(Foreign Language).

Li-Lan Cheng

(Foreign Language).

Jinsong Du – Credit Suisse

Okay. (Foreign Language).

Li-Lan Cheng

The question was – on national scale the Chinese government is pushing a one-touch reform, which is to change or to move from the business tax regime to a value-added tax regime. Previously the business tax regime was prevalent among many service industry companies and value-added tax is mostly applied for manufacturing. And the question was whether this shift in the tax regime will have any impact or not?

And my answer was this shift is still being gradually phased in by different locations and by different industries. And so far, for E-House business only our consulting segment has been converted from business tax to value-added tax and also for our online advertising industry segment in a select cities. For agency business this has not been applied.

In theory, this move could have a small negative impact on us, because the business tax is 5% and the value-added tax is 6%. But the government, the tax bureau has so far given assurance that when this happens, they will cut the total tax burden at no more than what we’ve paid before. So in the end, when this shift is widely applied, exactly what the impact is on us is still unclear.

Jinsong Du – Credit Suisse

All right. Thank you.

Xin Zhou

Okay.

Operator

Thank you very much. (Operator Instructions) All right. As we are now approaching the end of the conference, I would now turn the call over to E-House Director of Investor Relations, Ms. Michelle Yuan, for her closing remarks.

Michelle Yuan

This concludes today’s call. If you have any follow-up questions, please let us know. Thank you.

Operator

Thank you very much. Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

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