Nick Beswick – Brunswick Group, IR
Donald Zhang – Chairman and CEO
Harry Lu – Vice Chairman and President
Steve Ye – CFO
Ella Ji – Oppenheimer
IFM Investments Limited (CTC) Q3 2013 Earnings Conference Call November 14, 2013 8:00 AM ET
Good evening and thank you for standing by for Century 21 China Real Estate's Third Quarter 2013 Earnings Conference Call. At this time all participants are in a 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.
Thank you, everyone, for joining us for Century 21 China Real Estate's third quarter 2013 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 Steve Ye, the company's Chief Financial Officer.
Before we continue, please allow me to read you IFM Investments' 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. 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 at this time, a recording will be available via webcast until November 21 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.
Thank you. Hello everyone and thank you for joining today's call. We saw encouraging signs in the third quarter that the real estate market in China is regaining stability and normality. Transaction volumes showed a gradual upward trend through the quarter as the regulatory environment remained relatively consistent across major cities.
With the implementation of new tax regulations happening in April, the market had largely returned to an even keel by the third quarter. This is why we saw this gradual uptick in transactions throughout the quarter rather than a huge spike in volumes bookended by a lull, as we've seen previously.
Our company's performance did not fully reflect the gradual improvement in the macro environment in Q3. As Harry will explain in more detail, our top line was impacted by significant delays to our primary pipeline as well as the continued streamlining of our network.
Neither of these will be long-term issues, and we expect improved growth in our business going forward, especially from the beginning of 2014 onwards.
We don't anticipate any dramatic changes to the macro environment in the near future. There is no doubt that a lack of supply, rather than excessive speculation, has been the main cause of sharp price increases in recent years. We're confident the demand-supply balance will improve in the long term, and as a consequence we're expecting a more predictable market over the next several quarters.
While China's real estate market is still a long way from what you'd call normality, the situation is improving and our strategy of streamlining our store network and focusing on per-store profitability should allow us to benefit from this.
Before I pass the call on to Harry, I'd like to welcome Steve Ye to today's call. We announced on Monday that Steve has been appointed our new permanent CFO, and we're very excited to be able to add such an experienced new member to Century 21 China's management team. Before joining us, Steve served as CFO of Tiger Media and before that Solar Entertech. He was also finance director at Suntech.
I'd like to take this opportunity to thank Lulu Li, who did a fantastic job as interim CFO in the run-up to Steve's appointment.
Now, over to Harry for a more detailed look at our performance in the third quarter. Thank you.
Thank you, Donald, and thanks everyone for joining us today. While the market shows some encouraging signs in the third quarter, our owned performance was somewhat disappointing. Revenue came in at just under RMB203 million, which was some way below the bottom end of our guidance.
There were a couple of reasons for this. Firstly, much of the primary pipeline we expected to be realized in Q3 was delayed, meaning we won't be able to recognize that revenue until Q4 and in some cases later than that. This was essentially an administrative issue between the buyers and developers, and while it's unfortunate, it doesn't change the fact that we have a very strong primary pipeline for the next several quarters.
The second factor was the continued optimization of our network. This intensified in the third quarter as we reduced our store count on average by 20 stores to concentrate our resources in our best-performing stores and neighborhoods. This had some impact on our revenue due to the lower store count.
In the third quarter we started to take that one step further. We're condensing the geographical spread of our stores within the cities in which we operate. And in the fourth quarter, we will continue to optimize our geographical layout.
At the end of October, our store count had been trimmed down to around 270. To give you an idea of the effect this will have, if you were to map out our store network in each individual city in a couple of quarters' time, you'd see a narrower spread of stores, but you'd also see a greater concentration of our stores in our strongest neighborhoods.
Ultimately, we believe this strategy will have a positive impact on per-store efficiency and profitability. And with transactions now really showing a sign of returning to normal levels, we think now is the optimal time to make this adjustment.
Now let's take a look at the performance of our various business segments. Revenue from our company-owned brokerage segment had a slight increase from Q2, which reflected the overall transaction levels through the quarter. Per-store efficiency increased around 15% from Q2, and we're confident overall profitability in this segment will improve as we continue to optimize our network.
As mentioned, our primary and commercial services segment declined from Q2, with revenue falling almost 50% sequentially. As I've said, this was the result of delays in Shanggu's primary pipeline. That revenue is expected to increase in the next quarter or so, and we're still very happy with the sales performance of this segment.
Alongside this, our mortgage management segment continued its steady growth in the quarter, with revenue increasing around 4% sequentially and about 18% year on year.
Revenues from our Franchise services increased 32.1% sequentially this quarter, contributing 1.8% of total revenues. As we continue to optimize our company-owned network, franchise stores will play an important role in filling in where we feel we need to boost our brand presence.
Overall, while the third quarter came in somewhat below our expectations, we are very confident that we have the right strategy in place. We will allocate our resources in the most efficient way possible in key geographies to benefit as the market continues to recover, and as we further optimize it over the next couple of quarters, we expect an improvement in revenue and profitability.
Alongside this, our primary business is still very strong, and we expect it will continue to be a key revenue contributor. With the worst of the market instability behind us, we're looking forward to a solid finish to 2013 and a marked improvement in our performance from next year onwards.
I'll now pass the call over to Steve Ye, our new CFO, for a closer look at our financials for Q3. Steve?
Thank you, Harry. Now I would like to share with you our third quarter 2013 unaudited financial results. Please note all following stated monetary amounts are in RMB unless otherwise noted.
Revenue from company-owned brokerage services was RMB167.5 million in the third quarter of 2013, representing a 7.2% sequential increase, and a 1.8% year-over-year increase, contributing 83% of total net revenue.
The sequential increase was mainly due to higher sales and purchase transaction volumes completed in Q3 2013 following the improvement in our company-owned sales offices in the Beijing and Shanghai real estate markets.
The year-over-year increase primarily resulted from increased weighted average selling price per square meter of secondary-homes sold. Specifically, we completed about 3,970 sales & purchase transactions during the third quarter, versus about 3,700 transactions in Q2 2013, and about 4,420 transactions in Q3 2012. Among the sales and purchase transactions in Q3 2013, secondary-home sales transactions accounted for 87%, compared to 86% in Q2 2013, and 83% during the same quarter of 2012.
The weighted ASP of secondary-homes in Q3 2013 was about 28,000 per square meter, compared to about 26,000 per square meter in Q2 2013, and about 24,000 per square meter during the same quarter of 2012.
The average number of sales offices in operation decreased to 302 in Q3 2013 from 322 in Q2 2013, and 320 in Q3 2012. Our average monthly net revenues per operating sales office increased to about 185,000 in Q3 2013, representing a 14.9% increase from about 161,000 in Q2 2013, and a 7.6% increase from 172,000 in Q3 2012.
Revenue from our primary and commercial business segment in Q3 2013 was RMB22 million, contributing about 10.8% of total net revenue, representing a 49.8% sequential decrease and a 42.9% year-over-year increase. The sequential decrease was mainly due to lower gross floor area of new properties sold, which resulted from some primary projects delays and revenue recognition delays.
As of the end of Q3 2013, delayed recognition of commission from contract sales totaled 45 million, of which 15 million was related to Q3. This represented commission earned based on developers' contract sales, pending future revenue recognition under US GAAP when all criteria are met. We sold approximately 94,700 square meters GFA in Q3 2013, vs. 69,920 square meters in the previous quarter.
The year-over-year increase was mainly a result of a higher weighted ASP per square meter and a higher weighted average commission rate. Weighted ASP for the third quarter was about 12,700 vs. 9,400 in Q3 2012.
The weighted average commission rate from developers for the third quarter is around 1.84%, vs. 1.46% in Q3 2012. Revenue from mortgage management services in Q3 2013 was RMB9.7 million, representing a 4.3% sequential increase, an 18.3% year-over-year increase, and 5% of total net revenue. The sequential increase was mainly due to higher revenues from 200 mortgage credit loans we provided, and was partially offset by the decrease in revenues from home equity loans we brokered.
The year-over-year increase also resulted from an increase in revenues from mortgage credit loans. We referred RMB830 million in traditional home mortgage loans and RMB205 million in home equity loans to banks in Q3 2013. This compares with RMB768 million in traditional home mortgage loans and RMB243 million in home equity loans in Q2 2013, and RMB774 million in traditional home mortgage loans and RMB234 million in home equity loans in Q3 2012.
Revenue from advising consumers on home equity loans, plus service fees and interest earned from consumer credit loans accounted for 68% of our total mortgage services segment revenue in the third quarter of 2013. For the third quarter of 2013, our mortgage management services segment continued to be profitable before allocation of any headquarters expenses.
Revenue from franchise services in the third quarter of 2013 was approximately RMB3.7 million, representing a 32.1% sequential increase, a 48.0% year-over-year increase, and 2% of total net revenue. The sequential increase and year-over-year increase were primarily a result of the increase in franchise fees recognized in the third quarter of 2013.
On the cost side, our commission and other agent-related costs in the third quarter of 2013 were RMB129 million, representing a 9.7% sequential decrease and a 10.3% year-over-year increase, and equivalent to 63.6% of total net revenue in the quarter. The sequential decrease was primarily due to a decrease in commission expenses as a result of lower revenues from primary and commercial services.
Specifically, commission costs decreased by RMB11.9 million from Q2 2013, as a direct result of lower revenue generated from our primary and commercial services segment. The 2013 year-over-year increase was mainly attributable to an overall increase of RMB11.4 million in fixed salaries and benefit costs from Q3 2012 due to increases in the number of sales professionals.
We employed an average of 6,150 sales staff in our company-owned brokerage segment in Q3 2013, as compared to 6,550 in Q2 2013 and 5,410 in Q3 2012.
Total consolidated operating costs for the third quarter of 2013 were RMB45.7 million, representing a 3.8% sequential decrease, and a 12.0% year-over-year increase.
Excluding expenses related to sales office closures, total operating costs decreased by RMB3.8 million sequentially and increased by RMB3.4 million year over year. The sequential decrease was primarily due to the decrease in third-party commission costs incurred in our primary and commercial services segment associated with the lower primary revenue.
The year-over-year increase was mainly due to increased rental costs resulting from the higher average rental rate in our company-owned brokerage network, as well as third-party commission costs incurred in our primary and commercial services segment.
Total SG&A expenses in the third quarter of 2013 were RMB53.1 million, representing a 1.5% sequential decrease and a 9.7% year-over-year increase. The year-over-year increase was primarily due to an increase in marketing expenses and payroll expenses for non-sales staff.
Our marketing expenses increased by RMB4.6 million year over year. Non-sales payroll increased by RMB4.2 million year over year as a result of increased headcount.
Net loss attributable to IFM Investments Limited in Q3 2013 was RMB18 million, compared to net loss attributable to IFM Investments Limited of RMB33 million in Q2 2013 and net loss attributable to IFM Investments Limited of RMB7.1 million in Q3 2012.
On the balance sheet, we had RMB157.8 million in cash as of September 30, 2013. If we include RMB32.6 million of net short-term loan receivables balance outstanding as of September 30, 2013, we would have had RMB190.4 million or $31.1 million equivalent in cash and cash equivalents, a decrease of 3.0% from June 30, 2013.
Our net accounts receivable balance as of September 30, 2013 was 180.1 million, a decrease of 28.8 million from 208.9 million as of June 30, 2013. Our average AR turnover day was approximately 88 days for the third quarter of 2013.
Now for our guidance for the third quarter. Based on the current market conditions that we detailed earlier, we are estimating our total net revenue for the fourth quarter of 2013 will be in the range of RMB210 million to RMB220 million. This forecast reflects our current and preliminary view, which is subject to change.
This concludes our prepared remarks. Operator, we are now ready for questions. Please begin with the first question.
(Operator Instructions). Your first question comes from the line of Ella Ji from Oppenheimer.
Ella Ji – Oppenheimer
My first question is related to the market situation. As you know, Beijing, Shanghai and Shenzhen, all announced some new policies recently. I wonder if you can comment on the market demand after the new policy announcement. Thank you.
I think Beijing is the first city to come up with the so called new policy. But luckily most of the policy actually is towards the primary market or land supply. So really have a very minor impact on secondary market transaction itself.
The only thing probably that will bring impact on the market-- for the market in Beijing probably is because the central government meeting, some buyer have to hold their purses for a while and wait for -- to see what's the more clear signal on the market.
But other than that, generally speaking, Beijing market is relatively stable and you will see the transaction volume actually is coming back step by step and after the dip in the month of April.
But on the other hand, for the city of Shanghai and Shenzhen, the new policy asks people who purchase second home have to put down more than 70% down payment, so it have had some impact on market, especially in the city of Shenzhen, where more buyers are using mortgages.
So you will see the policy relatively have more or severe impact in Shenzhen compared with the city of Shanghai. So generally speaking, Beijing is fine. Shanghai has some impact but not that bad and then Shenzhen relatively a strong impact compared with the other two cities.
Does that answer your question, Ella?
Ella Ji – Oppenheimer
Yes, that's very helpful. I wonder you can also comment on the current mortgage environment, with sort of the some tightening of liquidity on the market recently, I don't know if you are actually in the same situation, when banks issue mortgages, are they becoming -- is it becoming harder to get a mortgage?
Yes, indeed. Actually in all those three cities, we have seen really taking a bit longer time for the mortgage applicants to get his loan approved.
But then luckily, still -- loans are still available in all those major cities, Beijing, Shanghai, and Shenzhen. So typically at the beginning of the year, only take you two weeks or so to get the approval done, and now you have to wait for one month, even one and half month.
But there is still -- basically you can still get a mortgage, that's a good thing. The only thing that's changed in the city of Shanghai and Shenzhen, if you are buying more than one home, you will basically have to put down 70% of down payment to get this loan, which makes it very tough for some of the purchasers.
Ella Ji – Oppenheimer
And then I also want to ask about this delayed revenue -- delayed projects within your primary services segment. Can you give us some details in terms of -- why it is -- they are being delayed, and how much should we expect to be realized in 4Q and how much in 1Q 2014? And at this point, are there any other uncertainties relating to this matter? Thank you.
Okay. So actually it's a two kinds of delay. One is the project itself, because of some reasons developer decides to hold on to the project to delay the launch. That's one kind of delay.
Another one is some of the projects we’ve already made the sales. We have signed contracts with the developers, but because some documents or certificates are not ready, so we are not able to recognize it according to our internal policy or to recognize in the US GAAP revenue.
So for those part, we are pretty sure they will be recognized within six months or so and it's around RMB10 million relates to Q4, we are expecting those revenues can be recognized within Q4. The total number for that is around RMB45 million, the rest of them probably will be recognized in Q1 next year, or some of them may be in Q2 next yearbut this are deals we have done, so it's already provided, and the contracts already signed.
Ella Ji – Oppenheimer
I just want to clarify -- for the first situation, you said that developers decided to delay but -- decided to delay the sales of the projects -- I just want to clarify if you have also already provided your services for the first project?
For unrecognized revenues, service is already provided but for those projects being delayed, meaning -- developers for some reason have postponed their project launch for two or three months, in some case, they operate in Beijing and they just cannot get the sales permit for some reasons.
Maybe they are asking for too high a price and the government doesn't like it, so that they cannot get the approval, or cannot get the sales permit in time. And some other projects, because the project itself, they feel they are not ready, so they decide to hold on the project for other two or three months.
Basically it's a delay like this, not the project being pulled off or something like that. So the pipeline is still good, but because in the some ways they have been postponed for quite a while.
Ella Ji – Oppenheimer
Got it. And the RMB45 million, it does not include those delayed projects, only the one that you have provided services but there is pending documents to be able to recognize?
Ella Ji – Oppenheimer
Okay, great. And then my next question is relating to your network -- sales office network. I think last quarter we actually saw some expansion of your network, but this quarter you sort of narrowed your network again. Can you tell us what took this change in strategic direction?
Okay, so actually it has been our strategy for a while, that you want to focus to growth of business in certain area, which we already have better market share.
So even for the last quarter, you see, we are kind of shutting down some office which probably -- single or smaller number of very spread out office, and then we are adding more office to the existing neighborhood which we are very strong at.
So at the same time we kind of shut down some offices by adding some more offices. It is an effort that we want to condense or concentrate in some areas we already being relatively strong. We want to increase our market share there.
We realize by doing this, we really can cut our loss and increase our per store profitability, and which is good for our profitability and can make sure we have a more stable consistent value from these areas.
Really, at this stage in market, we need a market leader to generate higher per store performance and to get very consistent revenue from the same customer base. So we try not to lose our focus to spread out our office in too many space, we want to focus on certain state and not necessarily mean in the long run we are going to lower our office count.
Once we step up, we are ready to stop adding more office again and try to make sure we increase our market share, we increase stores as well, but not in a very spread out way.
Ella Ji – Oppenheimer
Okay, got it. That it is very helpful. And then I want to ask you with regards to your online practices. Can you share with us, just for example, how much of your sales leads is now coming from the internet and what is the company's plan to, let's say -- is there any plan to put on more online or internet sales efforts?
Okay, actually the percentage of our lead generated from internet has been very consistent, it's always been around 50% right now. And more importantly, among those 50%, more than 10% of which is actually generated from our own website.
And now the return on investment from our website actually is already higher than what percentage of our money we are putting for a company like SouFun or Anjuke. Actually returns on investment are better for us to put our money in our own website or we purchase some advertising space from, like Baidu, actually turned out to yield better performance for us. So 50% from internet and 10% from our own website.
Ella Ji – Oppenheimer
Great. And can you talk about, for example, if this trend goes on, do you think that there are opportunities for you to maybe lower the average sales people at your sales office locations given that there are lot of sales leads coming from the internet?
Actually what we see is the exact opposite. What we see in the whole industry, people are adding more sales people to the same store, so people are -- we feel this is a better business model to have more agents working in the same one single spot. Although you generate all these from the internet, but they still need your agents to show people the properties and to have the agents to close the deal.
So we realize for the same spot or space location, you will have more agents that tend to have a higher per agent profitability. And so internet becomes a very important tool but not 100%. Internet is just a tool, actually it can attract people but it really needs agents for you to secure the listing.
And listing is a key nowadays for this market right now, because for average listing, you actually have four to five potential buyers. So it's that being very consistent, it's a listing market strategy for major cities like Beijing and Shanghai. So we believe that people, or agents still are the key for this industry, Ella.
Ella Ji – Oppenheimer
Okay. Okay, great. And then lastly, I want to ask you about your operating expenses. I wonder if there are any rooms for you to further cost control initiatives, or do you think your current cost structure has already been quite efficient?
Ella, this is Steve. Good morning. Even so I just on-boarded for a few days, I saw there is a continuous effort to streamline our operation and we are working on some trends for cost reductions for the next year. So we do see some cost we can trim and you should be able to see some reductions -- on the cost side in the next two quarters.
Ella Ji – Oppenheimer
Do you mind sharing with us some details, for example, what areas that you think you can do some cost reductions?
One area we talked about is like group procurements. So we can merge all the procurement of functions in the group, and at the same time we are looking at all the different vendors, providing different service. It is all adding up penny by penny.
Ella Ji – Oppenheimer
Okay, got it. Okay, thank you, everyone. That is all my questions.
Thank you, Ella.
(Operator Instructions). There is no further question at this time. And we are now approaching to the end of the conference call. I will now turn the call over to the CFO of Century 21 China Real Estate, Mr. Steve Ye, for his closing remarks.
Well, thank you everyone for joining us for our earnings call today. We look forward to speaking to everyone again soon. Good day.
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