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E-House (China) Holdings Limited (NYSE:EJ)

Q1 2014 Earnings Conference Call

May 20, 2014 08:00 ET

Executives

Caroline Duong - IR

Li-Lan Cheng - COO

Bin Laurence - CFO

Xin Zhou - Co-Chairman & CEO

Analysts

Ella Ji - Oppenheimer

Wendy Huang - Standard Chartered

Tian Hou - TH Capital

Anne Shih - Brean Capital

Operator

Hello and thank you for standing by for E-House’s First Quarter 2014 Earnings Conference Call. (Operator Instructions).

I would now turn the call over to your host for today’s conference Ms. Caroline Duong, E-House’s Investor Relation Specialist.

Caroline Duong

Thank you. Hello everyone and welcome to E-House earnings conference call for the first quarter ended March 31, 2014. To download a copy of the earnings press release or to sign up for the 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 highlights for first quarter and Ms. Bin Laurence, our CFO, will then discuss our financial results. 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 statements. 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 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 Caroline and good morning and good evening to everyone for joining us. During the first quarter of 2014 China’s real estate market showed softness in certain cities with weak transaction volumes. In spite of this tough market condition they continue in various cities for some time this year which may lead developers to offer price discount and local government in various cities to relax restricted policies to other real estate market.

Despite the relatively tough market conditions E-House’s major business segments continue to grow as a result of our solid execution, market penetration and product innovation. The growth in our real estate e-commerce revenue was particularly impressive and we believe our recently launched mobile e-commerce platform will help us continue the growth. The recent highlight for the company was the successful IPO of our Leju online-to-offline real estate services division on the New York Stock Exchange. Looking forward, we will continue to adapt to the changing market conditions and strive to maintain stable growth in our brokerage business, and continue to push for deeper market penetration and strong growth in our online-to-offline e-commerce business. Meanwhile, we will continue our efforts in new product innovation and development, including our CRIC Home Price system. We anticipate that our new business platforms announced in March, which included real estate financial services and community value-added services, will formally launch in the second half of this year.

I will now turn the call over to our CFO, Bin Laurence who will review our financial highlights for the first quarter.

Bin Laurence

Thank you Li-Lan and hello everyone. We’re pleased to see that in addition to strong revenue growth in our Leju segment, our brokerage and information consulting business continued to grow in the first quarter. Furthermore E-Health’s non-GAAP net income more than doubled on a year-over-year basis. During the first quarter our total revenues increased 40% to a 163.3 million driven mostly by revenue increases from our real estate online services and our real estate information and consulting services. Revenues from real estate online services increased 97% to 78.5 million driven by revenue growth in all three online segments particularly e-commerce.

Revenues from real estate brokerage services increased slightly from 59.4 million in the first quarter last year to 61.1 million. Primary agency revenue increases were slightly offset by a decline in secondary brokerage revenues as we further reduce our physical secondary stores compared to last year.

Revenues from real estate information consulting services increased substantially from 11.7 million to 17.8 million due to increased revenues in both information and consulting services particularly consulting related to land transactions and planning. Moving to operating and net income, non-GAAP operating income increased significantly from 0.8 million last year to 10.1 million during the first quarter of this year due mostly to profitability improvement from the Leju segment. As a result of significant improvement in operating income non-GAAP net income attribute to both to E-House shareholders was 11.9 million or $0.08 per diluted ADS an increase of a 184 million from 4.2 million or $0.03 per diluted ADS. For the same quarter of 2013.

As of March 31, 2014 the company’s cash and cash equivalent balance was 546 million, first quarter net cash used in operating activities was 16.5 million, our non-GAAP net income of 10.3 million and reduction in accounts receivables of 9.5 million were more than offset by decreases in various payables totaling 35.8 million in the first quarter. I will now provide our business outlook.

We’re happy to announce that we’re raising our fiscal 2014 revenue guidance from our previous range of 880 million to 900 million to our current outlook of 910 million to 930 million. This forecast reflects our current preliminary view which is subject to change. Now we’re happy to take any questions you may have.

Operator we’re ready for questions.

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

My question is relating to your offline agency services, I mean you achieved some moderate year-over-year growth despite the overall weakness in a market. Can you elaborate how did you outperformed in the market this quarter and also going forward can management share your outlook of the market? What are the developer thoughts in terms of the pipeline and also what is your pipeline in sell through rate in this business line? Thank you.

Li-Lan Cheng

We were able to achieve growth in our primary agency business, we are seeing overall slower transaction volume and a lower sell through rate across many cities but -- on the other hand we’re executing more projects, we have ample projects, ample volume in our pipeline. So, that more than offset the slower transaction volume. As for the rest of this year, on the one hand transaction volume is slower year-over-year. I mean 2013 was a fairly strong year. On the other hand we’re nowhere close to a depressed -- an overall depressed market. We had also this time I think compared to previous slowdowns where most of which were driven by government policies, more restricted policies but this time it's a market driven a cyclical slowdown as Chinese GDP growth is slowing down, the overall economy is showing signs of softness as well. So this is a more of a cyclical slowdown.

I think what that does is it -- developers, being market players will respond, many of them have done so they are lowering their prices, they are offering more discounts, they are driving up, they are marketing and advertising marketing efforts and at the same time also which is different from previous years. Government’s many local government’s are trying to relax some of the restricted policies. I think there is lot of things the government can do if the market shows further signs of more severe slowdown. Already if you noted in recent weeks the Central Bank it's indicating that they want to encourage more bank lending to home buyers.

Most of the real estate purchases in China are not highly leveraged. So there are many things the government can do to prevent a serious slowdown if they want to.

Ella Ji - Oppenheimer

So if I can quickly follow-up with your full year guidance what’s your expectations for your offline business? I mean you raised your full year guidance, is the upside mostly from your online? And for your offline business when you provided the guidance what type of market situation are you assuming?

Li-Lan Cheng

If you follow Leju’s earnings release you can do the simple math. Most of the upside does come from our online business if you compare Leju’s revenue guidance with E-House. So that’s where most of the upside is coming from. Now like I said we were not seeing a depressed market for the rest of the year but at least in our revenue guidance we’re taking some precautionary measure in coming up with our guidance so we’re leaving some room for market softness for our outline business.

Operator

Thank you for your question. Your next question comes from the line of Wendy Huang from Standard Chartered. Please ask your question.

Wendy Huang - Standard Chartered

First regarding your new business that you’re going to launch in the second half this year, how do you expect to monetize from the real estate financial services and also the community based value added services in the long term? And secondly regarding your -- again regarding your increase [ph] for the 27% annual growth guidance what is your macro assumption, I understand you already give some color but if you can just give some quantitative data such as your 24% to 27% annual growth is based on for example whether 5% property sales in China this year et cetera.

Xin Zhou

Regarding your first question about how we monetize from these two business platforms, we have not announced or disclosed the business models on these two platforms. So it's too early to talk about exact ways to monetize. But hopefully -- we’re actively preparing the establishment, the formal launch of these two platforms and we’re hopeful in the second half of the year, in the earlier part of the second half of the year, we hope to formally launch these platforms and by then we will be able to discuss exactly what these models are and how we generate revenue.

What we can say about these two platforms is that the business model, the revenue model, that we will end up presenting to the public will be ones that leverage on our existing resources there is data or online to offline platforms that we already launched and we will also leverage the resources and platforms of our partners and also we will be asset light. So that’s what we can say now.

Regarding your second question, the assumptions behind our revenue guidance first we want to say our guidance is based on our careful consideration of the current market conditions. It's already clear that this year’s market will not be as even hot as last year. The overall transaction volume is likely to be down compared to last year.

On the other hand nor do we think this year will see a huge dramatic drop in transaction volume and collapse of the market compared to the very active whole market last year we said at the beginning of this year we expected to see some degree of stabilization or consolidation of the market.

E-House by now is an experienced player in this industry and we have gone through in the last several years several round of fluctuations many of which driven by government policies. So we know how to adapt to the changing market conditions, how to respond, react to changing market conditions. Thank you.

Operator

Thank you for your question. Your next question comes from the line of Tian Hou from TH Capital. Please ask your question.

Tian Hou - TH Capital

I’ve a couple of questions; the number one question is related to your community services business. So if I look at your business and like Leju is much more a light asset business and even your brokerage house is exactly not that highly in terms of assets. Now you’re involving in community service. You know I can imagine because we all live in small community, so a lot of labor involvement. So I wonder it is such a different business model so I wonder how you’re going to handle that from a light asset, mainly light assets company to much more labor intensive services company? That’s number one question. Number two is related to your recent announcement about CITIC and Leju together issued Leju loan program and it's much more, it's like some house owner, can use their house as collateral to get loans for regular consumption and there is a regulation from the government and they said for such kind of a loan you can’t issue more than RMB1 million and cannot go beyond 10 years and so I wonder if there is a conflict between your loan program with CITIC and the government regulation. That’s the two questions.

Li-Lan Cheng

First of all your understanding what’s asset light and asset heavy maybe little bit different, community service maybe labor intensive but it doesn’t need to be asset intensive. If you’re thinking about us becoming property manager having a lot of people that’s not a direction where we’re thinking about taking. Obviously the new business platform will need more people, we will need to hire more people but if whatever -- I mean the service we provide is not purely just based on having more, having a bigger labor force.

Just to translate Mr. Zhou’s answer to your question, first of all Leju loan is a product developed by CITIC Bank based on their careful study of their product people, their compliance and risk control people and this whole product went through the regulatory process with the CBRC. So we merely act as a channel to promote this product among Leju and E-House’s client. So far we have not heard anything about, any potential violation of existing regulations and also the last two or three months we have worked closely with CITIC Bank with all their branches about the detailed procedures, the application process and how to promote this in many cities. So it's progressing well. We were not aware of any potential conflict with existing regulations.

Operator

Thank you for your question. Your next question comes from the line of Anne Shih from Brean Capital. Please ask your question.

Anne Shih - Brean Capital

I just wanted to ask about your information consulting services, the growth this quarter was very strong. Can you just provide more color there on the drivers for this segment for the rest of the year and it's contribution to your margin? Or is that improvement --

Li-Lan Cheng

The growth in the consulting revenue in the first quarter was mainly driven by an active market for land transactions and as a result our land transaction based consulting service saw a big increase in revenue but this is a rather cyclical business. Although we’re seeing somewhat of a slowdown in the overall transaction market and also in land transaction, we’re still hopeful that for the rest of the year there will still be reasonably active market for land transactions.

Anne Shih - Brean Capital

And a follow-up to that, then margin improvement, to the contribution to your margin improvement and 1Q, was that primarily from online or was it also related partially to information and consulting?

Bin Laurence

So you’re talking about the overall E-House margin improvement or any particular segment Anne?

Anne Shih - Brean Capital

The E-House margin improvement.

Bin Laurence

So margin improvement mainly come from our online Leju segment but we’re very pleased that in the first quarter all of our major business clients are profitable and have a reasonable margins.

Operator

Thank you for your question. Your next question comes from the line of Ella Ji from Oppenheimer. Please ask your question.

Ella Ji - Oppenheimer

Thank you for taking my follow-up questions. I want to ask regarding your use of cash. So first you have mentioned a few initiatives what’s your budget for spending this year relating to these initiatives and secondarily given that your stock has been under pressure recently due to the weak market, what’s your thoughts regarding (technical difficulty). Thank you.

Li-Lan Cheng

First of all Leju’s IPO was barely a month, you’re already aware that how we’re going to spend that. First of all E-House’s cash -- now Leju’s is publically traded so Leju’s cash E-House cannot pass. Also we are you’re suggesting about potential share buyback I want to first of all point out that a year ago, less than a year ago E-House share price was $4 so the stock market fluctuates, it's extremely volatile, we all know that. In the past we have done share buybacks, E-House paid dividend, so we were always on the lookout for shareholder value and we will do whatever what we think is appropriate but just because the consolidated share cash balance increased especially within the few months and also the share price went down within a couple of months doesn’t mean that we need to react based on such a short term events.

Ella Ji - Oppenheimer

And then relating to that can you also comment on the accounts receivables from the developers given that again weaker market performance are you seeing a slowness in accounts receivables collections?

Li-Lan Cheng

No we’re not seeing, in fact our accounts receivable didn’t went down.

Bin Laurence

Yes we actually have some improvements in accounts receivable.

Ella Ji - Oppenheimer

And then house-keeping question is, is there any intercompany consolidation when you consolidate Leju. Is there any net-off in the revenue of operating expenses?

Bin Laurence

The first quarter since Leju’s IPO actually occurred in the second quarter so there is no impact of Leju’s IPO in terms of consolidation of either revenue or net income but starting from the second quarter revenue was will still consolidate a 100% but we will have a minority stake from Leju which we will take out from E-House’s net income.

Li-Lan Cheng

Ella, if you’re thinking about intercompany net-off, yes, first of all as Bin said Leju was our wholly subsidiary and it's still consolidated subsidiary. So whatever accounting treatment we apply doesn’t change it's not affected by Leju’s IPO. Also there is virtually no revenue generated between Leju’s and E-House that needs to be cancelled out.

Operator

Thank you for your question. (Operator Instructions). Your next question comes from the line of (indiscernible). Please ask your question.

Unidentified Analyst

So about -- after the Leju IPO and the (indiscernible) stake in the company I think 52% of the stock price right now is net cash and if you achieve your 25% or so of revenue growth outlooks for 2014 you should be earning an EPS of closer to a $1. So you’re basically on an x-cash basis trading at 214p or four times, even though your revenue growth is 25% and then your EPS growth is probably close to 50%. So all of this makes your stock very cheap, four times which is pretty unheard of or accompanying with your growth profile. So I’m kind of curious what our investors, what do you think investors are not seeing with Leju [ph] effects?

Li-Lan Cheng

So I think again Leju’s IPO is a very recent event. So I would say that obviously surrounding Leju’s IPO there was a lot of investor interest, a lot of attention focus paid of Leju. So I would give it a little bit more time for both Leju and E-House shares to settle and we see -- so that we can see a clear pattern then we will have a better view of exactly what investors are thinking, what they are seeing maybe what they are not seeing. Again we’re on a first earnings call post Leju IPO following this both management’s will be starting to communicate with shareholder and investors more actively and then with time we will see what investors have to say.

Operator

Thank you for your question. (Operator Instructions).

Caroline Duong

As there is no further question I think we will conclude today’s call.

Operator

You have a next question. Your next question comes from the line of Wendy Huang from Standard Chartered. Please ask your question.

Wendy Huang - Standard Chartered

First of all I wonder if there is any data that you can share with us regarding your online penetration rate in the different tier cities for your e-commerce business?

Bin Laurence

Our e-commerce penetration in Tier 1 cities as we just announced in Leju’s call, yes Tier 1 city is 14%, Tier 2 cities 5% and Tier 3 city is roughly 5% as well.

Wendy Huang - Standard Chartered

And also I think your competitor mentioned in their result results that they are seeing pressure in terms of the commission rate, they are taken on e-commerce business that has come down from the 90 bps to 70 bps range. Are you actually feeling the same pressure for your e-commerce business at the moment?

Bin Laurence

So in terms of e-commerce first of all there is no -- we don’t have a concept of commission rates. We have a coupon values and as I think the Leju management team pointed out in the earlier call that actually coupon value overall increased in the first quarter compared to the same quarter of last year.

Wendy Huang - Standard Chartered

And what’s the current effecting tax rate on your (indiscernible) percentage of the new home sales?

Li-Lan Cheng

For Leju’s online business we don’t charge buyer at a percentage of their purchase price. The business model there is that we charge potential home buyers a service fee and that’s usually a fixed RMB amount and then with that they are entitled to a certain discounts from the properties or products they purchase. Now for a particular project you can calculate and that transacts into certain percentage of the purchase price but then there are a couple of moving parts there. To give you an example if the product, it's of easy sell, it's a half-selling project maybe for the same dollar amount the home buyer pays us as service fee they get relatively a small discount but if a project it's a hard sell and the developer needs to make strong efforts to promote they maybe willing to offer a bigger discount. So exactly what the home buyers pays us in terms of the purchase price it's not something that weakness it. So this is a slightly different concept than E-House’s offline brokerage service.

Wendy Huang - Standard Chartered

You just mentioned if you’re charging a fixed dollar amount service fees from the users, then is there any way that we can maybe calculate this -- maybe usage fixed dollar amount of the service fee, you divide it [ph] by the total transaction value that actually going through your platform together ratio.

Li-Lan Cheng

Yes I can give you very rough estimate, roughly the average coupon cost for the home buyer was about RMB10,000 for 2013 and roughly the average purchase price of all those profit involved was about a 1 million. So you’re talking about the coupon price representing roughly 1% of the purchase price. But it's a huge variation of different products across different markets.

Wendy Huang - Standard Chartered

So has this kind of ratio remain relatively stable in 2014 so far?

Li-Lan Cheng

It's only one quarter of 2014, we haven't seen a clear trend one way or the other.

Operator

Thank you for your question. (Operator Instructions). We’re now approaching the end of the conference call. I would now turn the call over to E-House’s Investor Relation Specialist, Ms. Caroline Duong for her closing remarks.

Caroline Duong

This concludes today’s call. If you’ve any follow-up questions please contact us. Thank you.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

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