E-House Holdings IPO Offers Investors Risks, Rewards

China residential real estate service company, E-House Holdings, was scheduled to debut on NYSE today under the symbol EJ. From the company website, E-House’s business includes “real estate agency services, secondary real estate brokerage services and real estate consulting and information services.”

Based in Shanghai, China’s financial capital, E-House employs more than 1800 real estate brokers and has branches in 20 cities. According to IPOHome.com:

Its principal source of revenue is primary real estate agency services (82% of 2006 revenue), where it provides comprehensive marketing and sale services of new properties for real estate developers. In 2006, it sold nearly 2 million square meters of development property for just over $2 billion with an average commission rate of 2.2%. Additionally, E-House recently expanded into brokering secondary real estate transactions and provides consulting and information services to real estate firms across China.

If China’s economy is considered as hot (11.9% GDP growth in the second quarter of 2007), then its real estate market is even hotter. I remember 20 years ago in China, everybody who had a job could eventually get an apartment (big or small depending on the service year and job title) with no or very small cost as part of the benefits for working for the state. Not any more.

According to Reuters IPO View, Chinese real estate price has grown 26% nationwide, with major cities seeing a rise of 30% or more. However, the skyrocketing price has made owning their own house/apartment a “dream” to many people living on salaries. Shanghai’s per capita GDP is $6,200, yet the price per square meter (about 10 square feet) in Shanghai could reach RMB12,000 (about $1,600), which is still at the low end. To cool the red hot real estate market, the government has introduced measures to curb investments in real estate and tighten regulations on lending. Interest rate is also expected to rise further in an effort to slow down the economy, which could hurt the housing market. As noted in the Reuters report, “real estate in China cannot continue to grow at its current pace forever."

Despite E-House’s leading position in some areas, the company isn’t the dominate force in real estate services in China and is facing challenges from competitors, such as Century 21 and Coldwell Banker. For E-House, IPOHome warms investors for potential risks of the company, including

• The company’s cash inflow has significantly lagged its reported net income.
• The firm’s top ten clients accounted for 48% of its 2006 revenue.

Nonetheless, China’s 1.3 billion population needs affordable housing and real estate is one area that has lots of growth potentials. EJ finished today up nearly 41%.

Comments

[STLPlace]

I don't think this will be the next HMIN, due to couple reasons:

1) EJ derives main revenue from new home sales, in a booming market like this, the developers don't need EJ to help them to sell; on the other hand, if market takes a turn, that won't help EJ either.

2) Competition is heating up. It does not take too much money to start a broker business.

I also listed more details in my own blog:

www.stlplace.com/2007/.../

That being said, short term, the stock could go up, note I am not an expert on predicting short term trend.

[Chimin Sang]

I don't like the valuation of this company.

Q1 it made 4.4 million; it expects to make 6.0 to 6.5 million in Q2. An educated guess for the full year is probably 25 million, compared to 18 million last year.

Total shares 75 million, that gives 33 cents EPS for 2007. The current price made a 54x 2007 PE, however, its growth ratio is only at 40% this year.

The stock has to be cheaper to attract serious investors.