Kevin Yung - Executive Vice President
Donald Zhang - Founder, Chairman and Chief Executive Officer
Harry Lu - Founder, Vice Chairman and President
Kevin Wei - Chief Financial Officer
IFM Investments Limited (CTC) Q4 2010 Earnings Conference Call March 7, 2011 8:00 AM ET
Good evening and thank you for standing by for Century 21 China Real Estate's fourth quarter and fiscal year 2010 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 would now like to turn the meeting over to your host for today's conference, Mr. Kevin Yung, Executive Vice President of Century 21 China Real Estate. Please proceed.
Thank you, everyone for joining us for Century 21 China Real Estate's fourth quarter and fiscal year 2010 earnings call.
With us today are Donald Zhang, our founder, chairman and chief executive officer, Harry Lu, our founder, vice chairman and president, and Kevin Wei, our 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 for one week on our corporate website at www.century21cn.com/english. At this point, I would like to turn the call over to Mr. Donald Zhang.
Thank you Kevin. Good day to everyone and thank you for joining us on this call.
During the fourth quarter of 2010 we saw higher than expected revenue as transaction volumes continued to recover following the decline in Q2 of last year. In 2010, the market was impacted by the tight policy environment which dampened sales. Nevertheless, we continued to strengthen our business, opening stores in targeted markets to increase market share and take advantage of the market downturn while also incubating new service offerings that offer additional revenue streams.
By the end of the fiscal year 2010, including our franchise network, we increased our store count to more than 1,500 with over 20,800 sales professionals and staff, and more than 6.7 million property listings. In the fourth quarter, transaction volumes in our key markets began to recover, especially towards the end of the quarter as the market adapted to the government’s autumn policies. However, in January and February the central and local government enacted a new round of policy initiatives in key tier-1 and tier-2 cities. These policies are intended to suppress property prices, but are noticeably harsher than the initiatives we saw over the last couple of years and have significantly decreased transaction volumes. This has been true for Beijing in particular where the impact has been most severe.
Despite the tough policy environment we remain confident that the secondary real estate market has strong potential in the long term. In the near term, however, we will take a cautious approach to network expansion as we deepen our exposure to more sheltered market segments. To date, we have made good progress in the primary and commercial markets, as well as enhancing our mortgage management business, our entrusted loan business and our property fund. Let me now turn the call over to Harry. Thank you.
Thank you Donald.
As Donald says, in the fourth quarter we saw continued recovery in demand as the market adapted to previous government measures and transaction volumes increased towards the latter part of the period. However, demand going into 2011 was been significantly affected by new property restrictions which were announced in January and February. The policies are closely linked to China’s household registration system, and make it more difficult for newcomers to the affected cities to purchase properties.
Just to give you a general overview of the new policy environment, according to the new regulations, in most cities including Shanghai and Shenzhen, residents registered in that city can own no more than two properties while residents registered elsewhere can own no more than one property. In addition, residents registered elsewhere may only buy property if they have a twelve months of consecutive, documented tax filings or social welfare in the city in which they want to buy. This effectively removes many newcomers, who are an active group, from the property purchase market.
In Beijing the regulations are harsher for residents not registered in Beijing with a requirement for five years’ of consecutive tax receipts or social welfare records. As a result of the particular severity of the measures in Beijing, the Beijing residential property market has been more strongly affected than other that of other cities. We are not in a position to predict how long this new policy environment will continue. But we believe the transaction volume will remain at a depressed level for at least two more quarters. And we will maintain a cautions approach to store expansion during this period, focusing on increasing productivity of existing stores as well as generating revenue from complimentary businesses.
As you know, we have been active in the recent push into the primary and commercial market segments, which are less subject to the restrictions. Also, the primary projects we select are outside of Beijing, and are not subject to the property restrictions in force in Beijing. As part of this initiative, we have acquired a majority stake in Beijing Shanggu, an agency focusing on primary commercial projects sales, which are also not subject to the stringent property restrictions. Shanggu has a pipeline of 2.57 million square meters GFA, of which 260,000 is currently available for sale.
In the fourth quarter we booked RMB6.6 million of revenue mainly from the sales of 45,000 square meters of primary projects and since then we have expanded our pipeline to 1.29 million square meters GFA with 340,000 square meters set to come online during 2011. We also have strong exposure to the commercial market through our existing store network. And in certain markets, such as Shenzhen, we have specialist teams of leading professionals who work exclusively on commercial property.
We expect that primary and commercial transactions will form a more significant part of our revenue in 2011. Looking to our mortgage management business - this accounted for 3.5% of net revenue in the fourth quarter. A central part of this business is our home equity loan segment which leverages our deep industry expertise and national network to create and market financial solutions that enable homeowners to raise capital.
Of the RMB6 million we earned through our mortgage management business in the fourth quarter, home equity loans accounted for one third. As part of this business segment we are building our entrusted loan offering through which we make fully secured loans to customers with property collateral. Although we are seeing the decline in transaction volumes due to government policy initiatives having an effect on our mortgage management business, it remains an important strategic segment for CTC that diversifies our offering and gives us important market insights and useful access to many different areas within the real estate ecosystem.
Finally, our first fund, which we launched in the fourth quarter to provide low LTV bridge loans to selected real estate developers, is now fully invested and based on the current performance, the fund is expected to achieve its underwriting target. We are now in the process of preparing for Fund 2 to take advantage of opportunities the current policies have generated. We will update everyone on the specifics once they become available.
In conclusion, the fourth quarter saw increasing market strength as pent up market demand began to be released. However, the harsh policies enacted by China’s government in January and February 2011 have effectively dampened demand and lowered transaction volumes. Fortunately we are well positioned to adapt to this change by diversifying our businesses in the primary and commercial segments and through our real estate finance businesses. At the same time we will continue to increase the productivity of our network to capture more market share during the downturn.
I will now hand over to Kevin Wei, our chief financial officer, for a detailed discussion of our fourth quarter financial results. Kevin?
Thank you Harry.
Now I would like to share with you our full year and fourth quarter 2010 unaudited financial results. For full year 2010, the company total consolidated net revenue was 530.8 million RMB or 80.4 million US dollars, representing a 18.6% decrease from 651.7 million RMB in 2009. Revenue from company-owned brokerage services for full year 2010 was RMB482.4 million, representing 90.9% of total net revenue, an 18.3% decrease from RMB590.2 million for 2009. The decrease was mainly attributable to the decrease in the number of sales and purchase transactions from approximately 17,900 in 2009 to around 13,000 in 2010 because of the continuing nationwide slowdown in the secondary property market transaction volumes in 2010.
We also have increased the average number of company-owned sales offices to 451 in 2010 from 248 in 2009. Because of these two factors, the average monthly net revenues per operating sales office decreased to 89,100 RMB in 2010 from approximately 198,400 RMB in 2009. Revenue from mortgage management services for full year 2010 was RMB 24.4 million, representing 4.6% of total net revenue, a 25.8% decrease from RMB 32.9 million for fiscal year 2009. This decrease was primarily due to lower mortgage loan volume brokered by the Company in 2010. We provided 3.7 billion RMB mortgages to our customers in 2010, as compared with 6.0 billion RMB in 2009.
As communicated previously, we have been diversifying our product and services offering such as home equity and entrusted loans to mitigate such decline. The percentage of revenue from advising consumers for home equity loans and fees earned from entrusted loans accounted for 35% of total mortgage service segment revenue in 2010. As of December 31, 2010, our total outstanding entrusted loans receivable was 12.7 million RMB. Revenue from franchise services for fiscal year 2010 was RMB 17 million, representing 3.2% of total net revenue, a 39.7% decrease from RMB 28.2 million for fiscal year 2009.
The decrease was primarily due to the initial franchise fees recognized in 2009 as we granted two regional sub-franchisors, while in 2010 we did not grant any new regional sub-franchisors. Commencing fourth quarter of 2010, we generated revenue from primary and commercial business units, which amounted to 7.1 million for full year of 2010. Our commission rate on these recognized revenue from the primary brokerage business was around 3.2%. We expect to continue generating significant revenue going forward mainly from primary brokerage business unit throughout 2011 as Harry mentioned previously.
On the cost side, our commissions and other agent-related costs in 2010 were 318.9 million RMB, an increase of 10.3%, from 289.1 million RMB in 2009. Total commission and other agent related costs for our company owned brokerage services represent around 60.1% of total revenue for this business segment. The increase was mainly due to the fixed salaries and benefit costs increases for the company-owned brokerage segment from 89 million RMB in 2009 to 165 million RMB in 2010 from higher sales staff headcount.
We had an average of 6,130 company owned brokerage services sales staff during the year 2010, vs. 3,430 in the year 2009. As to the variable costs, our consolidated commission expenses, as a percentage of total consolidated net revenue for the full year 2010 and 2009 were 28.9% and 30.7%, respectively, or 153.5 million RMB and 199.7 million RMB. Operating costs for fiscal year 2010 were 199.7 million RMB, an increase of 80.1 million RMB, or 67.0%, from 119.6 million RMB in 2009.
This increase was primarily due to a 50.5 million RMB year over year increase in rental stores as well as 28.5 million RMB year over year increase in store related costs such as utilities, telecom, and depreciation and amortization expenses. Total depreciation and amortization expenses in year 2010 were 22.9 million RMB. Including a share based compensation expense of 16.9 million RMB, total selling, general and administrative expenses in 2010 were 176.3 million RMB, representing 33.2% of total net revenue, an increase of 73.9% from 101.4 million RMB in 2009.
This increase was primarily due to more non-sales staff hires, higher share based compensation expenses, marketing expenses, higher professional fees incurred for legal and audit services after become a public company. Loss from operations in the year 2010 was 164.0 million RMB, compared to income from operations of 141.5 million RMB in the year 2009. Non-GAAP loss from operations in the year 2010 was 147.1 million RMB, compared to a non-GAAP income from operations of 143.3 million RMB in the year of 2009. Other income for 2010 was 9.4 million RMB, represented the tax refund from the local government to one of our operating entities located in Shanghai.
Total forex loss amounted to 12.2 million RMB for 2010 due RMB appreciation. Net loss attributable to ordinary shareholders in the year 2010 was 163.5 million RMB, compared to a net income of 54.0 million RMB attributable to ordinary shareholders in the year 2009. Non-GAAP net loss attributable to ordinary shareholders for the year 2010 was 146.6 million RMB, compared to a non-GAAP net income attributable to ordinary shareholders of 55.8 million RMB in the year 2009.
Basic and diluted net losses per ADS in the year 2010 were 3.75 RMB or 57 cents US. Non-GAAP basic and diluted net loss per ADS in the year 2010 was 3.36 RMB or 51 cents US. Net cash used in operating activities in the year 2010 was 118.5 million RMB. Net cash used in investing activities in the year 2010 was 75.3 million RMB including 48.9 million RMB in procurement of fixed assets and 20.2 million RMB for the purchase of subsidiaries.
Net cash provided by financing activities in 2010 was 510.1 million RMB, mainly from IPO net proceeds or 546.5 million RMB offset by 26.8 million used for share repurchase program throughout December 31, 2010. Regarding the Fourth Quarter 2010 Results The Company’s total consolidated net revenue in the fourth quarter of 2010 was 169.9 million RMB, representing a 22.8% sequential increase from 138.3 million RMB, and a year over year decrease of 18.3% from 208.0 million RMB.
Revenue from company-owned brokerage services was approximately 153.9 million RMB or 90.6% of total net revenue, representing a 19.3% sequential increase from 129 million RMB, and a year over year decrease of 15.6% from 182.3 million RMB. The sequential increase was mainly attributable to the increase in the average number of operating sales offices from 501 in the third quarter of 2010 to 572 in the fourth quarter of 2010, as well as the higher sales and purchase volume of 4,495 transactions for the fourth quarter of 2010 versus 3,572 transactions in the third quarter of 2010.
Our average monthly net revenues per operating sales office increased to 89,700 RMB for the fourth quarter of 2010 from 85,700 RMB for the third quarter of 2010. The year over year decrease of company-owned brokerage fourth quarter revenue was mainly due to significantly lower transaction volume in the secondary property market in tier 1 cities because of the slowdown following stringent government policies. Specifically, we completed 4,495 sales and purchase transactions for the fourth quarter of 2010 versus 4,949 transactions for the same period of 2009.
For the same reason AND with an average of 572 operating sales offices for the fourth quarter of 2010, almost doubling the average 293 offices in the same quarter of 2009, our average monthly net revenues per operating sales office for the fourth quarter of 2010 declined to 89,700 RMB from 207,300 RMB for the same period of 2009. Revenue from mortgage management services in the fourth quarter of 2010 was approximately 6 million RMB, or 3.5% of total net revenue, representing a 20% sequential increase from 5 million RMB and a year over year decrease of 42.9% from 10.5 million RMB.
These fluctuations were mainly due to the total mortgages loan volume changes for these periods as well as lower commission rates from the banks in 2010. For the fourth quarter of 2010, revenue from new products of home equity loan and entrusted loans represented approximately 43% of total mortgage management services revenue. Revenue from franchise services in the fourth quarter of 2010 was approximately 3.4 million RMB, which accounts for 2% of total net revenue, representing a 12.8% sequential decrease from 3.9 million RMB, and a year over year decrease of 77.2% from 14.9 million RMB.
The year over year decrease was primarily due to the same reasons discussed earlier for the full year results. During the fourth quarter of 2010, the Company started generating significant revenue from our primary and commercial business units, which amounted to RMB 6.6 million representing 3.9% of total quarterly revenue, mostly through selling approximately 45,000 square meter of GFA of one primary project launched in the fourth quarter and by providing consulting services on several commercial projects.
On the cost side, our commission and other agent-related costs in the fourth quarter of 2010 were 102.5 million RMB, a sequential increase of 24.4 %, from 82.4 million RMB and a year over year increase of 12.4% from 91.2 million RMB. The sequential and year over year increase was mainly due to the fixed salaries and benefit costs increases for the company-owned brokerage segment due to the increase in sales staff headcount. We had an average of 8,100 company owned brokerage services sales staff during the fourth quarter of 2010, vs. 6,300 in the third quarter of 2010 and 4,370 in the fourth quarter of 2009.
Going forward into 2011, we expect the base salary for sales staff will increase due to an industry wide base salary increase for sales agents, from previous average range of 1,100 RMB to 1,500 per month to average range of 1,500 RMB to 2,000 RMB per month. As to the variable costs, our consolidated commission expenses, as a percentage of total consolidated net revenue for the fourth quarter of 2010 was 28.2%, compared with 27.5% and 30.0% for the third quarter of 2010 and the fourth quarter of last year.
Total consolidated operating costs for the fourth quarter of 2010 were 61.5 million RMB, a quarter over quarter increase of 11.0% from 55.4 million RMB, and a year over year increase of 78.8% from 34.4 million RMB. The store growth in our company-owned brokerage services segment contributed directly to a 4.9 million RMB sequential increase and 18.3 million RMB year over year increase in rental expenses, as well as a 1.0 million RMB sequential increase and 9.5 million RMB year over year increase in store related costs such as utilities, telecom, and depreciation and amortization expenses.
Total depreciation and amortization expenses in the fourth quarter of 2010 were 7.1 million RMB. Our total SGA expenses in the fourth quarter of 2010 were 52.7 million RMB, representing a 10.0% sequential increase from 47.9 million RMB, and a year over year increase of 69.5% from 31.1 million RMB. The year over year increase was largely due to more non-sales staff hires, higher share based compensation expenses, marketing expenses, professional fees incurred as being a public company.
Loss from operations in the fourth quarter of 2010 was 46.8 million RMB, compared to a loss from operations of 47.4 million RMB in the third quarter of 2010, and an income from operations of 51.2 million RMB in the fourth quarter of 2009. Excluding share based compensation expenses; non-GAAP loss from operations in the fourth quarter of 2010 was 44.4 million RMB, compared to a non-GAAP loss from operations of 44.6 million RMB for the third quarter of 2010, and a non-GAAP income from operations of 51.8 million RMB in the fourth quarter of 2009.
Net loss attributable to ordinary shareholders in the fourth quarter of 2010 was 45.6 million RMB, compared to a net loss attributable to ordinary shareholders of 50.2 million RMB in the third quarter of 2010, and net income of 19.4 million RMB attributable to ordinary shareholders in the fourth quarter of 2009. Non-GAAP net loss attributable to ordinary shareholders for the fourth quarter of 2010 was 43.1 million RMB, compared to a non-GAAP net loss attributable to ordinary shareholders of 47.4 million RMB in the third quarter of 2010, and non-GAAP net income attributable to ordinary shareholders of 20.0 million RMB in the fourth quarter of 2009.
Basic and diluted net loss per ADS in the fourth quarter of 2010 was 1.00 RMB or 15 US cents. Excluding shared based compensation, our non-GAAP basic and diluted net loss per ADS in the fourth quarter of 2010 was 0.94 RMB, or 14 US cents.
Moving now to the balance sheet items, we had 640.6 million RMB cash and cash equivalents as of December 31, 2010, as compared to 718.6 million RMB as of September 30, 2010 and 334.6 million RMB at the year end of 2009. Our net accounts receivable balance as of December 31, 2010 was 50.6 million RMB increase from 39.1 million RMB as of September 30, 2010, mainly due to sequentially higher revenue generated from company-owned brokerage services in the fourth quarter of 2010. Our average AR turnover day is approximately 24 days for the fourth quarter of 2010.
Finally, regarding guidance for the first quarter of 2011, based on the current market conditions that we detailed earlier, we are estimating our total net revenue for the first quarter of 2011 will be in the range of 125 million to 135 million RMB. 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 your first question.