IFM Investments' CEO Discusses Q1 2011 Results - Earnings Conference Call

May.16.11 | About: IFM Investments (CTC)

IFM Investments Limited (NYSE:CTC)

Q1 2011 Earnings Call Transcript

May 16, 2011, 8:00 am ET


Donald Zhang - Chairman & CEO

Harry Lu - Vice Chairman & President

Kevin Wei - CFO

Kevin Yung - EVP


Liping Cai - William Blair & Company

Ella Ji – Oppenheimer & Company


Good evening, and thank you for standing by for the Century 21 China Real Estate first quarter 2011 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 would now like to turn the meeting over to your host for today's conference call, Mr. Kevin Yung, Executive Vice President of Century 21 China Real Estate. Please proceed.

Kevin Yung

Thank you, everyone, for joining us for Century 21 China Real Estate's first quarter 2011 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 Investment Safe Harbor statement. Some of the statements during this conference call are forward-looking statements made under the Safe Harbor provision of Section 21-E 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 Investment 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

At this point, I would like to turn the call over to Mr. Donald Zhang.

Donald Zhang

Thank you, Kevin. Good day to everyone and I thank you for joining us on this call.

During the first quarter of 2011, the tightened policy environment for the property sales continued to dampen the transaction volume in both the primary and the secondary markets. Combined with the normal first quarter seasonality, sales were well below the normalized level across the country. But particularly in Beijing, where restrictions are tightest.

Since the first quarter this year, new home buyers not registered as the legal Beijing residents have to provide five years of continuous tax records in order to buy a home in the city. This means that a lot of potential buyers are forced out of the market, which in turn depress sales.

Though house prices have stayed stable at a very low sales volume, we do not expect these regulations to be loosened within the next two quarters, at least as the government continues its effort to contain inflation and control the housing prices.

We believe that the underlying demand in the market continues to build, and we are confident in the prospect for strong growth in the medium to long term. However, given the instability in the market it's, therefore, more important than ever for us to focus on solidifying our leading position in the key neighborhoods, while improving operational efficiency across our store network and growing revenues from our business unit.

We believe that the strength of our global recognized brand, our extensive network, and our experienced team ensure we are much better placed than our peers to adapt to these challenging market conditions. But going forward, our strategy must be cautious and adaptful, investing for growth where appropriate, but managing cost wherever necessary.

Now let me turn the call over to Harry who will provide some more update on our business for the last quarter. Thank you.

Harry Lu

Thank you, Donald. As Donald mentioned, the recent government restriction on sales continued to have a significant impact on the property market, particularly in Beijing. But we are seeing some signs of stability on transaction volume in the rest of the country as the market adapts to policy environment.

In Shanghai, for example, where policy restrictions are not as severe, sales volumes have seen some stabilization. Century 21 China Real Estate is the market leader in that city, and over the last quarter, we have enhanced that the position. This is an excellent achievement and speaks to the quality of our staff and the strength of our brand and network.

It also puts us in a very good position to take advantage when the market recover further. However, since we do not expect any significant change in the regulatory environment over the next few quarters, we are taking active measure to build out the area of our business where we see most promise; while optimizing cost efficiency across our network.

Let me first outline some of our programs in growing other business line beyond our secondary business; most notable, our increased primary and commercial real estate interest. Our dedicated primary and commercial business unit enjoyed a healthy growth in Q1, and now contributes 5% of overall revenue. In absolute terms, this is still relatively small, but we believe that in the second half of this year, the contribution from this unit will be increasingly meaningful.

This unit has recently kicked off two new projects. One is a primary residential project with a GFA of 930,000 square meters. The other is a commercial project of 40,000 square meters. In addition, our acquisition of Beijing Shanggu, which we announced last quarter, should be completed in the near term, and the work complements our success in this segment.

The agency primarily focus on the commercial projects which have not been impacted by regulatory restriction. It has 2.5 million square meters gross floor area of primary commercial projects, and approximately 270,000 of this is target to come on the market by the end of this year.

Along with this, we are very encouraged by the opportunities we see for our Company-owned brokerage stores unit to get more involved in the primary and commercial sectors.

Our network of stores is of course our great asset and we are working on some very exciting models for how we can put this to use and integrate more primary residential and commercial transactions. In terms of a primary, for example, with volume well below normal, we are seeing some developers engage us to support their sales.

In Beijing, we are currently involving in a number of primary projects through our secondary store network, and are confident that we can add to this pipeline in coming months.

In terms of commercial sales through secondary network, we are encouraged by the excellent models our team in Shenzhen has built. In that city, we have hired a mature commercial property sales team and empower them to sell through our existing store network. The results have been very impressive and we feel that this is a model we can duplicate with success in other cities.

And finally, looking at the mortgage management side of business. This continued to be a steady, reliable and profitable performance for us, despite the challenging environment for home sales. We are confident that we can grow this business as market improves so we will continue to build our offer here.

The secondary segment remains our core business, however, given current depressed market environment, we are very conscious of need to be vigilant on cost, particularly after a year in which we have seen significant upward pressure on salaries and rental costs. We expect to see both these trends leveling out in the coming quarters.

But, at the same time, we are actively taking steps to optimize our cost base. To that end, we have temporarily closed a small number of stores in those locations that are experiencing weak demands. As of the second week of May, we have temporarily closed 26 underperforming stores, 22 of them in Beijing.

This cautious strategy allows us to optimize our network productivity by trimming costs in underperforming regions. While diverting staff to key neighborhoods where the market is performing better.

We feel that, given the current volatility, it's important to respond sensibly and flexibility to market conditions and to monitor developments closely.

So we will re-evaluate the effect of this temporary closure and whether other temporary or permanent closures are necessary across our network in the coming weeks and months to ensure that our network is operating at optimal productivity. At the same time, we will take a cautious approach to expansion.

With a focus on improving overall efficiency, we will add a small number of stores in the areas of particular promise. There are some opportunities for growing market share in the current environment, both in the major cities and beyond. And we will invest strategically where appropriate. In Beijing, for example, despite the closures I mentioned above, we added a net of 15 stores in Q1.

For the remainder of this year, however, we intend to be vigilant on costs, taking action to reduce our overheads where necessary, while remaining cautious on expansion. We will continue to focus on channeling our resource to areas of our business, like primary and commercial sectors, which are showing the best potential, while optimizing costs in tougher markets, particularly the secondary market in Beijing.

I will now turn it over to Kevin Wei, our CFO, for a detailed discussion on the first quarter financial performance.

Kevin Wei

Thank you, Harry. Now I'd like to share with you our first quarter 2011 unaudited financial results.

For the first quarter 2011, the Company's total consolidated net revenue was RMB137.3 million, representing a 19.2% sequential decrease from RMB169.9 million and a year-over-year increase of 29.3% from RMB106.2 million.

Revenue from Company-owned brokerage services was approximately RMB119.4 million or 87% of total net revenue, representing a 22.4% sequential decrease from RMB153.9 million and a year-over-year increase of 28% from RMB93.3 million.

The sequential decrease was mainly attributable to significantly lower transaction volume in the secondary property market in Tier 1 cities because of a traditionally slower first quarter due to Chinese New Year, as well as the more stringent government policies restricting home purchases.

Specifically, we have completed 3,275 sales and purchase transactions for the first quarter 2011 versus 4,495 sales and purchase transactions in the fourth quarter of 2010, a 27% decline.

To offset the decline in sales and purchase transactions, we have significantly increased our rental transaction volume for the first quarter 2011 to 6,300 from 4,800 in the fourth quarter of 2010, with total rental commission revenue accounting for around 16% of the total commission revenue.

The average number of operating sales offices for the first quarter 2011 increased to 607 from 572 in the fourth quarter of 2010. Our average monthly net revenue per operating sales office decreased to RMB66,000 for the first quarter of this year from RMB89,700.

The year-over-year increase in revenues from Company-owned brokerage services was mainly due to higher sales and purchase transaction volumes of 3,275 transactions for the first quarter of this year, versus 2,330 transactions for the same quarter of 2010, a 40% increase, which in turn, was due to the expansion in the numbers of stores in our network over the past year.

However, because we have almost doubled the number of stores from an average of 316 offices in the first quarter of 2010 to an average of 607 operating sales offices in the first quarter of this year, our average monthly net revenue per operating sales office for the first quarter 2011 declined to RMB66,000 from RMB98,600 for the same period of 2010.

During the first quarter 2011, the Company has continued to generate revenues from our primary and commercial business units, which has amounted to approximately RMB7 million, representing 5% of total quarterly revenue for the Company and a 6% sequential increase from the fourth quarter of last year.

The majority was generated by the sales of approximately 31,400 square meters GFA of new homes and the consultant fees earned on advising developers on some new commercial real estate projects. The average commission rate for the first quarter 2011 was approximately 5%.

As Harry had mentioned earlier, it is our Company strategy to continue strengthening our primary project pipelines, both through the integration of newly acquired Beijing Shanggu and a continued increase in GFA sold through the existing primary and commercial units for the remaining three quarters of this year.

Based on the current pipeline, we anticipate a significant increase in primary and commercial brokerage revenue for the second half of this year.

Revenue for mortgage management services in the first quarter 2011 was approximately RMB6.5 million or 4.7% of total net revenue, representing an 8.3% sequential increase from RMB6 million and a year-over-year decrease of 17.7% from RMB7.9 million.

The sequential increase was mainly due to higher revenue of new products of home equity loans and entrusted loans, which now represent approximately 42% of total net revenue from mortgage management services for the first quarter of 2011.

The year-over-year decline was mainly due to a decline in total volume of mortgages from RMB1.6 billion in the first quarter 2010 to RMB900 million in the first quarter of 2011, as well as a decrease in commission received from the banks. Given the current low volume in mortgages, we will continue to focus on growing our home equity-related products.

Revenue from franchise services in the first quarter 2011 was approximately RMB4.2 million, which accounts for 3% of total net revenue. This represents a 23.5% sequential increase from RMB3.4 million and a year-over-year decrease of 16% from RMB5 million.

The sequential increase was due to the acquisition of our Chengdu franchise region, which increased royalty fees for the quarter. The year-over-year decrease was primarily due to a decrease in the royalty revenue received from some regional sub-franchisors in the first quarter of 2011.

As announced in recent months, we have terminated four regional sub-franchisors between December 2010 and May 2011, as their performance was not satisfactory. In the meantime, we have signed one new regional sub-franchisor in Xuzhou in the same period, and continue to develop some new regional sub-franchisor opportunities.

On the cost side, our commissions and other agent-related costs in the first quarter 2011 was RMB100.2 million, a sequential decrease of 2.2% from RMB102.5 million and a year-over-year increase of 64.5% of RMB60.9 million. The year-over-year increase was mainly due to the increase in the fixed salary and benefit costs in the Company-owned brokerage segment, as a result in increasing the headcount of the sales staff.

We had an average of 8,400 Company-owned brokerage sales staff during the first quarter 2011 versus 4,300 in the first quarter of 2010 and 8,100 in the fourth quarter of 2010.

As to the variable costs, our consolidated commission expenses, as a percent of total consolidated net revenue for the first quarter 2011, was 27.9% compared with 28.2% and 30.9% for the fourth quarter and the first quarter of last year.

Total consolidated operating costs for the first quarter of 2011 were RMB69.7 million, a quarter-over-quarter increase of 13.3% from RMB61.5 million and a year-over-year increase of 89.9% from RMB36.7 million.

Growth in the number of stores in our Company-owned brokerage services segment contributed directly to a RMB3.8 million sequential increase and a RMB19.1 million year-over-year increase in rental expenses, as well as RMB4.2 million sequential increase and a RMB13.2 million year-over-year increase in store-related costs, such as utility, telecom, depreciation, amortization expenses.

Total depreciation and amortization expenses in the first quarter 2011 were RMB7.8 million.

Our total SG&A expenses in the first quarter 2011 were RMB54.9 million, representing a 4.2% sequential increase from RMB52.7 million and a year-over-year increase of 53.4% from RMB35.8 million. The year-over-year increase was largely due to an increase in non-sales staff hires, as well as higher marketing expenses and general corporate expenses.

Loss from operations in the first quarter of 2011 was RMB87.5 million compared to a loss from operations of RMB46.8 million in the fourth quarter of 2010 and RMB27.1 million in the first quarter of 2010.

Excluding share-based compensation expenses, non-GAAP loss from operations in the first quarter of 2011 was RMB86.2 million compared to a non-GAAP loss from operations of RMB44.4 million in the fourth quarter last year and RMB19.3 million in the first quarter of 2010.

Net loss attributable to ordinary shareholders in the first quarter 2011 was RMB85.7 million compared to a net loss of RMB45.6 million (Company corrected after the conference call) in the fourth quarter 2010 and RMB28.2 million in the first quarter of 2010, attributable to ordinary shareholders.

Non-GAAP net loss attributable to ordinary shareholders for the first quarter 2011 was RMB84.4 million compared to a non-GAAP net loss attributable to ordinary shareholders of RMB43.1 million for the fourth quarter of 2010 and a RMB20.5 million in the first quarter of 2010.

On the balance sheet items, we have RMB509.6 million in cash, cash equivalent and time deposit as of March 31, 2011 as compared to RMB640.6 million as of December 31, 2010, and RMB854.5 million as of March 31, 2010. Including RMB32.8 million of loans receivables balances outstanding as of March 31, we would have had RMB542.4 million or equivalent of $82.8 million in cash and cash equivalents and the time deposits.

Our net accounts receivable balance as of March 31, 2011 was RMB39.2 million, a decrease from RMB50.6 million as of December 31, 2010, mainly due to sequentially lower revenue generated from Company-owned brokerage services in the first quarter of 2011. An average AR turnover is approximately 30 days for the first quarter of 2011.

Finally, regarding the guidance for the second quarter 2011, based on the current market condition we detailed earlier, we're estimating our total net revenue for the second quarter of 2011 will be in the range of RMB160 million to RMB170 million. This forecast reflects our current and preliminary view, which is subject to change.

This concludes our prepared remarks. Operator, we're now ready for questions. Please begin with your first question.

Question-and-Answer Session


(Operator Instructions). Our first question come from Liping Cai, William Blair.

Liping Cai - William Blair & Company, LLC

First of all, I want to get your outlook for the government policies for the rest of the year from your perspective. Given the transactions in Beijing continue to be low but Shanghai is starting to see some uptick, what's your outlook for the [policy fund]?

Harry Lu

From our view, I think it's a consensus of market views. We don't see any signs the government are going to loosen up the policy, but it's simply because of the visibility is a little bit better because everything has settled down here. So you're really going to see some market -- some signs of market recovery in most of the cities of China except Beijing. So we don't see any big change on the policy in the near term, but we do expect the visibility of the policy itself will be much better than Q1 and Q2.

Liping Cai - William Blair & Company, LLC

Okay, great. And then on your store closing initiative, you closed I think a few stores in -- outside of Beijing. Do you anticipate more substantial closings for the rest of the year?

Harry Lu

At this moment, we don't have any plan to close a big number of stores at this stage, but obviously we're going to be very cautious of expansion. So we kind of expect to just stay where we're at, at this moment.

Liping Cai - William Blair & Company, LLC

Okay, great. And then my last question is regarding your primary and commercial businesses. Do you expect sequential growth from this business going forward, and then also how -- what's the margin from this business compared to your secondary brokerage services?

Harry Lu

Yes, we do expect some sequential growth from this business line and -- currently because of the size of the business, the margin will be very similar to what we have in secondary business here. But we do see signs of growth from this part of business because we have the strong pipeline and we do have some projects already kicking out. We had another two new projects just kick out in north part of China here, so we do expect to see some revenue pickup on this part of business here.

Liping Cai - William Blair & Company, LLC

All right. That's all I have. Thank you.

Harry Lu

Thank you.


Ella Ji, Oppenheimer.

Ella Ji - Oppenheimer & Co.

Regarding those stores that you temporarily closed, did you still keep the locations?

Harry Lu

Yes, at this moment. The temporary store closing is the one way for us to control our headcount. You will see that in certain neighborhood or location, the performance is not that well, we decided to temporarily shut it down and move the good agents to other location and kind of force the underperforming agents out of our system; that's what we tried to do. But other temporary shutdown, every month we're going to look at those stores and decide whether we want to keep these or not. At this stage, we still keep the store and still have to pay the rent.

Ella Ji - Oppenheimer & Co.

So in terms of the cost of savings, I guess it's from -- maybe you will cut down some of your sales force and also you no longer need to pay those utilities for those stores?

Harry Lu


Ella Ji - Oppenheimer & Co.

Okay. So those are the cost savings for temporary --?

Harry Lu

Yes, the main problem is human resource, the headcount, because when you look at our cost structure basically, the headcount or commission and the agent-related cost is a big amount of our cost. So the key for us is try to identify who is underperforming agents, who is the one still with the potential and try to decide which part of the team should be diminished and what kind of agents should we kick out from this system.

Ella Ji - Oppenheimer & Co.

Got it. And in addition to this, do you have any other plans of cost savings going forward, if the market remains still kind of slow in the next few quarters?

Harry Lu

I think the main approach for us is still the control of headcount and you're probably going to see the headcount number actually is going down from -- for the rest of the year, where the office number being stable here because that's a big part of our cost. Obviously, we're going to look at the other cost items like marketing spend, but the marketing spend duly will go down where you cut your agents. When you have less agents, you definitely are going to pay less related costs to those Internet portals. So that's how you're going to control marketing expense as well; also utility and things like that.

Ella Ji - Oppenheimer & Co.

Got it. And regarding your network expansion plan for this year, could you clarify that -- could you give us an update of how many stores do you plan to have by end of this year?

Harry Lu

So for this year we've got to basically slow down and we'll keep the relatively stable size business in Beijing city, Shanghai and [Chengdu], so you're probably not going to see a big office count increase for the rest of the year.

Ella Ji - Oppenheimer & Co.

Got it. And then switching gears to the primary and the commercial services. For those two projects, have they started -- are they open yet or are you still in the preparation stage?

Harry Lu

It is already on sale and we have made some preliminary sales because of recognitions, so it didn't yet recognize as revenue. But yes, we really already launched them; one of them is a commercial property; another one is in residential but not in the City of Beijing, so it's not related to a restriction policy right now we have here.

Ella Ji - Oppenheimer & Co.

Right. Could you give us a little bit more color in terms of the sales rate of that residential project? And it would be helpful if you can provide the average sale price of that project so that we can get a better idea of the market situation.

Harry Lu

I'll just give a good example. For the project we have here is -- the average price -- they start at around 75,000 -- no, RMB7,500 per square meter for the residential properties. For the commercial ones above the RMB10,000 level.

Ella Ji - Oppenheimer & Co.

Got it. Okay. And for the sales force for the primary and the commercial projects, can you use your existing secondary sales agents or do you need to hire new sales force for that?

Harry Lu

Yes, we do have to hire the independent new sales force to manage the lease sales side, as you know other people do. But we do use our existing channel network to sell these -- cross-selling this project. For the commercial -- the project we mentioned about, we didn't make a big amount of -- a percentage of sale through our secondary network.

Ella Ji - Oppenheimer & Co.

Got it. That's very helpful. Thank you for taking my questions.

Harry Lu

Thank you.


(Operator Instructions). We are now approaching the end of the conference call. I would now like to turn the call over to the Executive Vice President of Century 21 China Real Estate, Mr. Kevin Yung, for his closing remarks. You may proceed.

Kevin Yung

Thank you, everyone, again for joining us for Century 21 China Real Estate's first quarter 2011 earnings call. We look forward to speaking to everyone again soon. Have a good day and a good evening.


Thank you, ladies and gentlemen, for your participation in today's conference. This concludes the presentation. You may now disconnect; and have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!