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Executives

Josh Gartner – Brunswick Group

Donald Zhang – Chairman of the Board

Harry Lu – Vice Chairman of the Board

Kevin Cheng Wei – CFO

Analysts

Liping Cai – William Blair

Ella Ji – Oppenheimer

Century 21 China Real Estate (CTC) Q2 2011 Earnings Conference Call August 16, 2011 9:00 AM ET

Operator

Good evening, and thank you for standing by for Century 21 China Real Estate’s Second Quarter 2011 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 will now turn the call over to your host for today, Josh Gartner from Brunswick Group. Please proceed.

Josh Gartner

Thank you, everyone, for joining us for Century 21 China Real Estate’s Second Quarter 2011 Earnings Call. With us today, are Donald Zhang, the Company's Founder, Chairman, and Chief Executive Officer, Harry Lu, the Company's Founder, Vice Chairman, and President, and Kevin Wei, the Company's Chief Financial Officer.

Before we continue, please allow me to read you IFM Investment's Safe Harbor Statement. Some of the statements during this conference call are forward-looking statements made under the Safe Harbor provisions 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 Investments Limited does not undertake any obligation to publicly update any forward-looking, 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.

Donald Zhang

Thank you, Josh. Good day to everyone and I thank you for joining us on this call. Let me begin today by providing you with our updates on our view of the property market in China. As you may be aware, governmental regulations continue to dampen transaction volume in both the secondary and the primary market in the second quarter of 2011. The secondary market continues to be particularly affected.

In the second quarter, we did see signs of stabilization, although at a very low transaction levels. We have confidence that the pent up demand in the secondary market remains very strong, and we have seen a number of indicators that policy, not fundamental market demand, is suppressing transaction volumes.

First, we have seen the transaction volumes in Shanghai are almost twice as high as in Beijing, where the policy environment is much more stringent. Second, we have seen relatively strong upward pressure on rental prices in Beijing and Shanghai as vacancy rates have decreased. We believe this is from would-be home buyers being forced into the rental market.

In recent months, prices in the secondary market have begun to level off, in less central locations in Beijing and Shanghai. We have noticed modest price declines. In addition, some primary market prices have seen values decrease, putting additional downward pressure on the secondary market. And we believe that if this trend continues, some buyers may decide to re-enter the market. Nevertheless, we do not expect any major changes in policy for the rest of this year, and we therefore don't expect to see a significant pick up in the secondary market, and until the second half of 2012.

So we are focusing our energy on expending our primary unit business, finding strong partners in tier two and three cities for sub franchise agreements, and reducing cost. We are already seeing the benefit of this strategy, with our revenue for the second quarter increasing, and our losses narrowing. This is encouraging, and we believe we will see further improvement on the top and the bottom line in the second half of 2011, as our primary business ramps up, and our cost control measures take hold. Let me now turn the call over to Harry, who will provide you some more update on our business for the last quarter. Thank you.

Harry Lu

Thank you, Donald. Donald had just mentioned how the secondary housing market continues to be substantially hampered by the regulatory environment. So, as we outlined last quarter, we are responding to this challenging market environment by taking actions that to diversify our revenue base and implement cost saving across network.

Let me look first at what we are doing to build revenue from areas outside our core secondary business. We are particularly encouraged by the success of our effort in building our primary business line. We saw good growth in the second quarter. Revenue from primary and commercial service in second quarter of 2011 was RMB9.9 million, representing 5.9% of total net revenue. That is an increase of 41.4% from RMB7.0 million in the first quarter of 2011.

One important development that I want to flag here is our acquisition of commercial real estate broker Beijing Shanggu, which closed in the second quarter. This unit has already started to contribute revenues, and we expect this to accelerate in the third quarter as more of its projects goes on sale.

Our existing primary unit is also making very healthy progress. The primary market outside of Beijing that we are focused on has been less affected by the current policy restriction. And we believe that Century 21 China is well positioned to grow our revenue from these segments. We continue to see a lot of interest among developers in engaging Century 21 China Real Estate to support their sales, because they recognize that our leading network experienced sales team enable us to move properties quickly and effectively.

And while sales of two of the projects under contract have experienced delays, we successfully signed one new project, a 79,000 GFA commercial property in Beijing that should come on sale by the end of August 2011. In total, including both Beijing Shanggu, and our existing primary unit, we now have 14 primary projects under contract, with a total gross floor area of 3.45 million. Of this, 290,000 GFA is currently available for sale.

So we expect to see additional upside in our primary sales in the second half of 2011 and 2012. We are also encouraged by our progress in increasing primary sales through our secondary focused company-owned store network. In Shanghai, for example, primary sales and rental now account for a significant portion of our revenue from our company-owned stores.

The second area of progress that I would like to highlight is our regional sub-franchise stores network. As part of our strategy to target China's rapidly growth tier two and tier three cities, in the second quarter, we signed contracts with partners in Xuzhou and Nanjing, two fast-growing cities in Jiangsu Province. We intend to continue identifying strong regional partners in cities where we expect good economy growth.

Turning now to our cost-reduction strategy. We are committed to responding to the current market environment by maximizing productivity across our own store network, in order to maintain a healthy revenue-per-store ratio. We have, therefore, closed under-performing stores in order to focus on those with higher productivity.

As of the second week of August, we had 493 company-owned stores in operation. Of the 493 stores, 176 were in Beijing, 239 were in Shanghai, 72 were in Shenzhen, and six were in Chengdu. In addition, 39 stores were temporarily closed as of the second week of August, of which 38 are located in Beijing.

Kevin will provide more detail on this, but I want to note that there are some special write-offs on costs related to these store closures, such as rental deposit. So we expect the cost-savings resulting from these closures to be increasingly evident from the end of the third quarter, and in the fourth quarter.

For the rest of the year, we will continue to be diligent in controlling expense, and closing under-performing stores where necessary. We believe that once the current round of closure is complete, our network will be optimized well enough to allow us to take advantage of market growth opportunities. While ensuring we're controlling costs, we may, however, choose to shift resource in order to focus on the most productive location.

To sum up, the market environment remains challenging, but we are encourage that our efforts to build out our revenue streams, and rein in spending are gaining traction. As Donald highlighted, we believe that the underlying secondary market demand remains strong, but is currently being suppressed by the stringent regulating environment, and we do not expect to see any major policy change for the remainder of this year. So, looking ahead, we will maintain our focus on building revenue from our primary and commercial business line, while keeping a firm hand on cost.

Before I conclude, I would like to welcome the new member of our management team, Alan Xia, who will join the Company as a Vice President of Investor Relationship, Business Development, and Fund Management Business, effective September 3, 2011. Alan is a true veteran of the real estate sector here in China, and we are very excited to have him on board. With that I will turn it over to Kevin Wei, our CFO, for a detailed discussion of our second quarter financial performance.

Kevin Wei

Thank you Harry. Now I would like to share with you our second quarter 2011 unaudited financial results.

The Company’s total consolidated net revenue in the second quarter of 2011 was 168.5 million RMB, representing a 22.7% sequential increase from 137.3 million RMB, and a year-over-year increase of 44.8% from 116.4 million RMB.

Revenue from company-owned brokerage services was approximately 140.7 million RMB, representing a 17.8% sequential increase, and a 32.4% year over year increase. The sequential increase was mainly attributable to higher sales and purchase transaction volumes as well as rental transaction volumes completed by company-owned brokerage in the second quarter of 2011. Specifically, we completed 3,763 transactions for the second quarter of 2011 versus 3,275 transactions in the first quarter of 2011 (a 14.9% increase). We have also significantly increased our rental transaction volumes in the second quarter of 2011 to 9,900 from 6,300 in the first quarter of 2011, with total rental commission revenue account for around 20% of total commission revenue.

The average number of operating sales offices for the second quarter 2011 decreased to 582 from 607 in the first quarter of 2011, this was a result of our permanent and temporary store closings, mentioned earlier in the call. During the second quarter of 2011, we had 34 average number of stores that were temporarily closed and as of the second week of August, that number stood at 39. Our average monthly net revenues per operating sales office increased to 80,500 RMB for the second quarter of 2011 from 66,000 RMB in the first quarter of 2011.

The year-over-year increase in revenues from the company-owned brokerage service was mainly due to higher sales and purchase transactions volume of 3,763 transactions for the second quarter of 2011 versus 2,657 transactions for the same period of 2010, a 42% increase, which in turn is due to expansion in the number of stores in our network year over year. We have increased the average number of company-owned sales offices to 582 in the second quarter 2011 from 417 in the same period 2010. Because of these factors, our average monthly net revenues per operating sales office for the second quarter of 2011 declined to 80,500 RMB from 85,300 RMB for the second quarter 2010.

Revenue from primary and commercial business units in the second quarter of 2011 was approximately 9.9 million RMB, or 5.9% of total net revenue, representing 41.4% sequential increase. The sequential increase was mainly due to the sale of approximately 37,415 square meters GFA of new homes and consulting fees earned on advising developers on some new commercial real estate projects. The newly acquired Beijing Shanggu unit brought in 1.3 million RMB net revenue during the second quarter of 2011 selling through close to 20,000 square meters GFA. The weighted average ASP was 5,145 RMB per square meter, with weighted average commission rate from developers is around 3.21%.

As Harry mentioned earlier, we have been continuing to build up pipelines for primary residential and commercial projects throughout the first half of the third quarter and we expect to generate more commission revenue from two primary agency units.

Revenue from mortgage management services in the second quarter of 2011 was approximately 5.9 million RMB, or 3.5% of total net revenue, representing a 9.2% sequential decrease and a 7.3% year-over-year increase. The sequential decrease was mainly due to a decline in the total volume of mortgages, from 900 million RMB in the first quarter of 2011 to 480 million RMB in the second quarter of 2011. The percentage of revenue from advising consumers for home equity loans and fees earned from entrusted loans accounted for 56% of total mortgage service segment revenue in the second quarter of 2011, vs. 42% in the first quarter of 2011. The year-over-year increase was mainly due to higher revenues from new product of entrusted loans, which we began to offer from the third quarter of last year.

Revenue from franchise services in the second quarter of 2011 was approximately 12 million RMB, which accounts for 7.1% of total net revenue, representing a 185.7% sequential increase, and a 155.3% year-over-year increase. This increase was due to a total of 8.8 million RMB initial franchise fees earned as the company granted two new regional sub-franchisors in the second quarter of 2011 as mentioned earlier.

On the cost side, our commission and other agent-related costs in the second quarter of 2011 were 119.8 million RMB, representing a 19.6 % sequential increase and a 63.9% year-over-year increase. These increases were mainly due to increases in fixed salaries and benefit costs in the company-owned brokerage segment as a result of an increase in headcount for sales staff. We had an average of 9,700 company owned brokerage services sales staff during the second quarter of 2011, vs. 8,400 in the first quarter of 2011 and versus 5,800 in the second quarter of 2010. As to the variable costs, our commission expenses as a percentage of total consolidated revenue for the second quarter of 2011 was 27.1%, compared with 27.9% and 29.8% for the first quarter of 2011 and the second quarter of 2010.

Total consolidated operating costs for the second quarter of 2011 were 77.5 million RMB, representing a 11.2% sequential increase, and a 68.5% year-over-year increase. During the second quarter this year, we have incurred approximately 6 million RMB write-off charges in store closing related costs such as unamortized leasehold improvement and forfeited rental deposits. In addition, the year-over-year growth in the number of operating stores contributed directly to 14.1 million RMB year-over-year increase in rental expenses, as well as a 9.5 million RMB year-over-year increase in store related costs such as utilities, telecom, and depreciation and amortization expenses. As we have closed additional stores into the third quarter this year, we would expect more write-off charges in the third quarter of 2011. Total depreciation and amortization expenses in the second quarter of 2011 were 8.9 million RMB.

Our total SGA expenses in the second quarter of 2011 were 52 million RMB, representing a 5.3% sequential decrease, and a 30.3% year over year increase. 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. And the sequential decline was due to less amount of professional fees accrued and smaller Share-based compensation charges.

Net loss attributable to IFM Investments Limited in the second quarter of 2011 was 80.4 million RMB, compared to a net loss of 85.7 million RMB in the first of 2011 and 39.5 million RMB in the second quarter of 2010, respectively. Excluding share based compensation expenses, Non-GAAP net loss attributable to IFM Investments Limited for the second quarter of 2011 was 79.6 million RMB, compared to a non-GAAP net loss of 84.4 million RMB in the first quarter of 2011 and 35.6 million RMB in the second quarter of 2010, respectively.

On the balance sheet items, we had 423.3 million RMB in cash and cash equivalent and time deposits as of June 30, 2011, as compared to 509.6 million RMB as of March 31, 2011. Including 32.8 million RMB of loans receivables outstanding as of June 30, 2011, we would have 456.1 million RMB or 70.6 million USD equivalents in cash and cash equivalents and time deposits. Our net accounts receivable balance as of June 30, 2011 was 60.4 million RMB, increased from 39.2 million RMB as of March 31, 2011, mainly due to sequentially higher revenue generated from company-owned brokerage services and franchise services in the second quarter of 2011. Our average AR turnover day is approximately 27 days for the second quarter of 2011.

As we disclosed in our release, company completed the acquisition of Beijing ShangGu during the second quarter of 2011, and in July made a 25 million RMB first installment of the total estimated acquisition consideration of 95 million RMB for the initial 55% of its equity interests. The remaining future acquisition payment for the 55% equity interests will be made on an annual installment basis based on the future earnings results from 2012 to 2014.

Finally, regarding guidance for the third quarter of 2011,

Based on the current market conditions that we detailed earlier, we are estimating our total net revenue for the third quarter of 2011 will be in the range of 170 to 180 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.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Liping Cai with William Blair. Please proceed.

Liping Cai – William Blair

Hi, good evening. I have a few questions. The first one is regarding your third quarter guidance. Based on what you have guided to it seems like you’re expecting essentially a flat revenue growth from the second quarter to the third quarter, so you’re not expecting any seasonal uptick?

Harry Lu

Usually [ph] the market will have seasonal uptick, but due to the current market environment, I think we probably shouldn’t expect a big jump on transaction widening in cities like Beijing, Shanghai and Tianjin. And also [inaudible] some of the primary project has been delayed to another month or so, so we kind of expect that revenue has to come – come in probably at the last quarter of this year and that’s the reason why we have this forecast here, Liping.

Liping Cai – William Blair

Okay. And so, Harry, you mentioned you don’t expect the market to recover up probably until the second half 2012, so you’re saying the revenue level in the second quarter is something we should model out for the next few quarters?

Harry Lu

For secondary market, probably we’re still going to see some chance out to increasing on the store productivity, but the more important I think is the primary part of the business. So I think for the rest of the year, by the time when the project have been kicking, we should be able to see some uptick on the revenue.

Liping Cai – William Blair

Okay. And, yes, I am talking about for the primary and commercial business, how much growth – or as a percentage of total revenue how should we think about it for 2011 and maybe 2012?

Kevin Wei

Well, I mean, we disclosed that we have a pipeline that of which about 290,000 square meters GFA that are currently available for sales and obviously we’ll try to push these through the third quarter as well as the fourth quarter of this year. Unfortunately, we cannot give any specific breakdown guidance on our next quarter revenue. Having said that, I mean in the second quarter we had about RMB10 million. We definitely expect to have a much significant increase in terms of the primary and commercial business revenue and contribution in the third quarter as well as in the fourth quarter.

Liping Cai – William Blair

Okay, that’s helpful. And then lastly for your store closing or temporary store closures, so do you expect to close additional stores in the next couple of quarters? And, if so, do you have a target of how many stores you would like to have in its main cities?

Harry Lu

I think we’ll probably would – should not expect a big amount of a store closure in the follow-on quarter, so we’re probably looking at something around 450 to 470 of a store in operation for the rest of the year.

Liping Cai – William Blair

Okay, thanks a lot.

Donald Zhang

Thank you, Liping.

Operator

(Operator Instructions). Your next question comes from the line of Ella Ji with Oppenheimer. Please proceed.

Ella Ji – Oppenheimer

Hi, good evening, Donald, Harry, and Kevin. Relating to – regarding your primary and the commercial business you mentioned that you have 14 projects, how many of them are in the purchase restriction markets?

Harry Lu

I think that luckily none of the project for that – latest acquired a company in Shanggu, are commercial properties. So even though there is – some of the projects are in the city of Beijing or some in the restricted city, but they are not referred to a restriction policy, because it’s a commercial properties.

Ella Ji – Oppenheimer

Great. And you said that the commission rate for those projects are on 3% or do you think that’s maintainable in the future?

Kevin Wei

Well, actually the current quarter 3% is obviously based on the 37,000-square meter – actual square GFA sold, and the range is from 1.4% from one particular to 600% in another project. So it’s totally a future weighted average of blended commission rate will be dependent on the product mix, if you will. So the more – there is a quite a bit of these 3 million GFA – are probably going to be in the bulk range of 1.5% and to 2% kind of range. So the more of those units got sold, the effective commission rate could potential come down.

Like we said before, I mean some of our other project we earned more of a premium, if you will, when we achieve certain targets. So each quarter these effective commission rate could vary going forward, but we have been enjoying fairly a decent commission rate so far, although the volume are quite low. Going forward, we certainly expect the volume would be higher, but potentially the rates could come down.

Ella Ji – Oppenheimer

Got it. And given that the secondary market is still quite slow, I’m wondering if there is any change in the commission rates in the secondary brokerage market.

Harry Lu

Yes, it depends on the competition which we do see in some cities. Especially in a city like Beijing we do see that effective commission rate is actually going down. But that’s not stable and that varies from month to month, and then for recent months we do see some big uptick on the commission ratio. So Shanghai is kind of a very stable for commission rate. So we consider and expect a big decrease I think before commission rate, especially effective commission rate.

Ella Ji – Oppenheimer

And then should we expect a significant impact on the revenue accordingly?

Harry Lu

No. Actually the – actually more – I think the writing more relates to the transaction we’re dealing with. So no matter it’s an effective commission rate probably will be lower that seems to be doing more deals. So probably it’s not that sensitive to actually refer to the commission rate.

Ella Ji – Oppenheimer

Okay. And then could you tell us how much franchisee you collected from the two new franchisees this quarter?

Kevin Wei

RMB8.8 million for two recent.

Ella Ji – Oppenheimer

All right.

Kevin Wei

Are you talking about the two new ones, right?

Ella Ji – Oppenheimer

Yes.

Kevin Wei

Yes, RMB8.8 million.

Ella Ji – Oppenheimer

And could you comment on the pipeline of new franchisees maybe in the second half of 2011 and also for 2012?

Kevin Wei

We always target around four to five on an annual basis, so – but these type of sales of a new region now becomes plus selected for us. And so we have to see to find a right partner for those particular region and cities before we agreed to a final sales and agreed upon a price. So for this year, we already sold two. We still remain hopeful that we maybe able to sell a few additional hopefully through the end of this year.

Ella Ji – Oppenheimer

And given –

Kevin Wei

Probably Four to five a year.

Ella Ji – Oppenheimer

Right. Okay. And given this volatility in the market, I’m wondering if you will seek to say [ph] maybe pursuing more aggressively in franchise in selling to the franchisees so that there would be less volatility in your business line?

Harry Lu

Yes. We generally are taking effort on expanding our franchise network, that’s for sure. And we do believe and we already see that evident for those two franchise partners, they do feel it’s right timing to entering into this market. But that is also important we try to make sure we find the right partner, because it’s not only the joining fee we’re also looking at, we’re also looking at the long-term as a royalty fee, if they can successfully run the operation in less city, so we can receive a constant revenue from the ongoing royalty fee.

Ella Ji – Oppenheimer

Okay. And lastly, what’s your expectation for total sales force employed by the company-owned stores by end of this year?

Kevin Wei

Well, I can try to help, and certainly Harry can kind of contribute. But where we set the – we have been reducing the number of stores. At the peak of the second quarter, we have over 600 stores; now we’re down to in the August time is about 493 stores; and then by the end of the year as Harry mentioned, 450 stores to 470 stores. Accordingly, we would have some reduced sales staff headcount if we only maintain a 450 stores, 470 stores for the four cities that we operate company-owned stores. Just by reference, we have 9,700 average sales headcount for the second quarter where we have 582 stores. So it is kind of pro rated to arrive at a little less of the headcount with 470 stores.

Ella Ji – Oppenheimer

Okay, got it. Thank you very much.

Kevin Wei

Well, thank you, Ella.

Operator

(Operator Instructions). We are now approaching the end of the conference call. I will now turn the call over to the CFO of Century21 China Real Estate, Mr. Kevin Wei for his closing remarks.

Kevin Wei

Well, thank you everyone for joining us for our earnings call today. We’re looking forward to speaking with everyone again soon. Thank you and have a good day and a good evening.

Operator

Thank you for joining today’s conference. That concludes the presentation. You may now disconnect and have a great day.

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