Leju Q2 2014: E-Commerce Driving Near-Term Growth

Aug.21.14 | About: Leju Holdings (LEJU)

Summary

LEJU reported 2Q14 with revenue beat and in-line EPS.

Ecommerce once again drove top line growth (+159% y/y) thanks to its coupon strategy.

Attractive at 20x fwd PE. Expect volatility given relation to the uncertain property market.

Leju (NYSE:LEJU) reported 2Q14 results with ecommerce being the primary driver of the top and bottom line beat. Net revenue of $117m (+63% y/y) beat consensus by 5% and non-GAAP earnings of $20.5m (+78% y/y) was largely in-line. Potential homebuyers lined up for discount coupons and drove +159% y/y ecommerce revenue growth. On the other hand, online advertising and revenue from listing services continue to experience the ongoing weakness from the soft property market in both the new and the secondary homes. Nonetheless, the company maintains its FY14E guidance of $500-520m (+49%-55% y/y) as ecommerce is likely to continue to drive the near-term growth as buyers purchase coupons to for an eventual redemption once there is stabilization in the property market.

Power coupons

The top line growth was mainly driven by ecommerce revenue (+159% y/y) as home buyers lined up to purchase discount coupons from the property developers. According to management a total of 50k coupons were purchased during the quarter, +127% y/y, with most of them coming from lower tier cities as LEJU expands its business relationship with more property developers. As a result, average selling price per coupon declined given the lower property value in those cities. At the end of the quarter, LEJU expanded its presence to 58 cities around the country vs. 49 in Q1, and this figure could reach 70 cities by year-end as management remains focused on expanding the number of developers. The company also looks to leverage Weibo's (NASDAQ:WB) and Wechat's large user base to promote information and content for the developers and hopefully maintain its current pace of revenue growth.

Weak online advertising and secondary market

Consistent with China's soft property market, online advertising revenue grew +11% y/y as advertisers cut back their spending on new home and home furnishing channels. I expect the online advertising services to decelerate in the second half of the year in that the property market is unlikely to see a near-term rebound. In addition, LEJU's main focus is to deal with property developers to build its ecommerce platform, so it is unrealistic to expect the company to growth both segments simultaneously. That said, since ecommerce is LEJU's core revenue driver, I expect the company to continue to focus on ecommerce in the near-term, which will likely to result in slower online advertising segment. Finally, the -15% decline in listing services revenue highlights the weak sentiments within the secondary housing market that is facing inventory surplus challenges.

Given the soft property market, LEJU did not see the need to aggressively push its listings services on third party sites such as Sina (NASDAQ:SINA) and Baidu (NASDAQ:BIDU) and this has resulted in a 15ppt y/y gross margin expansion to 90% in the quarter. Management expects its gross margin to remain stable compared with last year.

To conclude, overall a solid quarter for LEJU with an attractive 20x forward P/E multiple given the near-term growth profile. However, the concerns over China's property market will continue to create some volatility on the stock but long-term fundamental seems to remain intact for now.

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