E-House (China) Holdings Limited (EJ)
Q2 2008 Earnings Call Transcript
August 20, 2008 8:00 am ET
Kate Kui – Director of Corporate Development and IR
Xin Zhou – Chairman and CEO
Le-Lan Cheng – CFO
Echo He – Oppenheimer
Robert [ph] – Merrill Lynch
Hao Hong – Brean Murray
Jason Singh [ph] – Merrill Lynch
Robert Rich [ph] – William Blair & Co.
Good evening and thank you for standing by for E-House's Second Quarter 2008 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 is being recorded. If you have any objections, you may disconnect at this time.
I would now like to turn the meeting over to your host for today's conference, Ms. Kate Kui, E-House's Director of Corporate Development and Investor Relations. Please proceed.
Hello, everyone, and welcome to E-House Second Quarter '08 Earnings Conference Call. Today, we're going to give you an update on our financial results for the second quarter and first half of 2008. If you need a copy of the earnings press release or you would like to sign up for our investor distribution list, please to go IR section of our Web site at www.ehousechina.com.
Leading the call today as usual is Mr. Xin Zhou, our Chairman and CEO, who will be giving a few business highlights for the second quarter '08. And then our CFO, Le-Lan Cheng will discuss the financial results in more detail. We'll then open the floor for Q&A.
Before we continue, please allow me to read you E-House's Safe Harbor Statement. Some of the statements during this conference call are forward-looking in nature and 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 filing with the SEC. Please take note that unless otherwise noted, all figures mentioned during this conference call are in U.S. dollars.
I will now turn the call over to E-House Chairman and CEO, Mr. Xin Zhou. Mr. Zhou will be speaking Mandarin and I'll translate his comments into English. Mr. Zhou, please go ahead.
[Interpreted] Thank you, everyone, for joining us on the call today. I'm very pleased to report a strong performance for E-House in the second quarter and first half of '08. Our second quarter total revenue grew to $43 million, representing an increase of 79% year-on-year while net income grew to $11.7 million, increasing 85% over the same period of last year.
The Chinese real estate market remains sluggish during the second quarter due to a combination of tight monetary policy and earthquake in Sichuan province. And the real estate property transaction volume was down substantially across the major cities compared to the same period of last year.
Despite such unfavorable market conditions, E-House was still able to achieve growth in both sales volume and transaction value which downstream our expanding market share and enhance brand recognition as well as industry leadership.
In the meantime, revenues on our real estate consultancy and information services continued to show robust growth contributing strong growth in our total revenue and profit.
Overall, given the current market conditions, I'm satisfied with our performance for the first half of '08 and confident that we can continue to deliver solid results to our shareholders.
Looking ahead to the third quarter we expect conditions within the real estate market to remain challenging. July and August are traditionally slow periods for real estate transactions in China and this year trend is more pronounced than usual.
In addition to the lingering wait and see attitude exhibited by both developers and potential buyers, the 2008 Beijing Olympics Games to a certain extent may have matched with temporary but noticeable slowdown in real estate transaction volume for July and August in many major cities across China.
These factors will likely make real estate transaction volumes for July and August compared very unfavorably with the same period in '07 which so unusually strong transaction activity at the peak of the real estate market boom.
At the same time however, we are seeing the many developers have adjusted their sales strategy to compare with the coming peak season in September. Their main strategy is to focus on increasing sales volumes and cash flow in the last four months of '08.
Meanwhile, we continue to believe that the long-term fundamental demand for real estate in China remains strong as developers and buyers were closing the gap such demand will be gradually released providing compelling reasons for transaction volume to rebound starting in September.
In the face of a challenging market we continue to expand our market share increasing our project pipeline. We're aggressively growing our real estate consulting and information services. We therefore expect to continue solid growth in revenue in the third quarter, demonstrating E-House value in negative transaction volume.
I would also like to reiterate that the short-term volatility in the real estate market present an excellent opportunity for our long-term growth. Our asset-light service-oriented business model insulates us from cash flow problems faced by most developers during times of low transaction volume.
Also as sales becoming more difficult, we will be able to convert more developer clients by our professional services, thereby building up our project pipeline. As this round of market adjustment run this course and transaction volume gradually recovers, our existing project pipeline will eventually be converted into substantial increase in sales volume the agency revenue.
Moreover, heightened uncertainties in the market are waiting demand front developers for better information and solution services which translate into an opportunity to grow our consulting and information services business line. Again, we have full confidence in our company's long-term prospect and our ability to deliver value for our shareholders.
Now, we have our CFO who will review this quarter's financial highlights.
Thank you, Mr. Zhou, and Kate and greetings to everyone on the call. Before I go into details of our second quarter results I want to reiterate that we achieved very strong growth in revenue and profit in the second quarter under very challenging conditions for China's growth end market.
Transaction volumes for most major cities were down more than 20% year-on-year. But volumes sold by us increased by more than 24%. As Mr. Zhou pointed out, market conditions have been even more difficult so far in the third quarter partly as a result of this 2008 Beijing Olympics Games which may have slowed down real estate transactions.
Preliminary data indicated year-on-year volume decline by more than 30% for many cities. Despite this, we are still confident in our ability to deliver solid growth in the third quarter.
Also I want to emphasize again that our asset-light service-oriented business model is a huge advantage compared to most developer despite during this slow period. As of June 30th our cash balance is $223 million which is about $2.7 per share. Adding accounts receivable and customer deposit our liquid assets are close to $5 per share.
Furthermore, this challenging market presents us with an ideal opportunity to build up our project pipeline and position ourselves for future growth when the market rebound which we firmly believe it will.
Now, I will walk you through our second quarter results in more detail.
Total revenues were $43 million for the second quarter of 2008, an increase of 79% from $24 million for the same quarter in 2007. For the first half of 2008 total revenue were $76.2 million, an increase of 90% from $40 million over the same period in 2007.
Revenues from primary real estate agency services were $28.3 million for the second quarter, an increase of 38% from $20.6 million for the same quarter in 2007. For the first half of 2008, revenues from primarily real estate agency services were $50.1 million, an increase of 51% from $33.3 million over the same period in 2007.
This increase was mainly due to the further expansion of our primary real estate agency operation, which resulted in up building more projects, more GSA and total transaction value.
The average commission rate was 2.7% in both the first half of 2008 and 2007. Revenues from secondary real estate brokerage services were $3.3 million in the second quarter, an increase of 45% from $2.2 million for the same quarter of 2007.
For the first half of 2008, revenues from secondary real estate brokerage services were $6.1 million, an increase of 49% from $4.1 million over the same period in 2007. This growth was primarily attributable to the expansion of our brokerage store networks during 2007. As of June 30, 2008, E-House had a total of 161 secondary real estate brokerage stores in five cities in China.
Revenues from real estate consulting and information services were $11.2 million for the second quarter of 2008, a big increase from $1.2 million for the same quarter in 2007. For the first half of 2008, revenues from real estate consulting and information services were $19.5 million, also a big increase from the $2.8 million over the same period in 2007.
This substantial increase was primarily due to substantial consulting revenue derived from strategic arrangements the company entered into with major developers, covering multiple cities and projects as well as increase in the number of consulting projects competed for other developer.
Now, moving on to the cost side, cost of revenue, which is product-related costs associated with our primary real estate agency services was $7.3 million for the second quarter of 2008, an increase of 61% from $4.5 million for the same quarter in 2007.
This increase was primarily due to an increase in salaries and commissions paid to the company's sales staff as a result of a higher transaction value for new properties sold. The increase was also due to higher costs associated with developing, maintaining and updating the CRIC database system as a result of the expansion of our real estate consulting and information services.
For the first half of 2008, cost of revenues was $13.3 million, an increase of 93% from $6.9 million over the same period in 2007.
Selling, general and administrative expenses were $18.4 million for the second quarter of 2008, an increase of 89% from $9.7 million for the same quarter in 2007. This was primarily due to an increase in staff salaries, bonuses, rental and traveling expenses as a result of hiring additional managerial employees, and an increase in the number of secondary brokerage stores, and expansion of consulting and information services.
The increase was also due to higher advertising and promotional expenses incurred to promote the CRIC database system as well as higher share-based compensation expenses as a result of share options granted in 2007-2008. For the first half of 2008, selling, general and administrative expenses was $33.6 million, an increase of 92% from $17.5 million over the same period in 2007.
Income from operations was $17.2 million for the second quarter of 2008, an increase of 77% from $9.7 million for the same quarter in 2007. For the first half of 2008, income from operations was $29.2 million, an increase of 87% from $15.6 million over the same period in 2007.
Net income was $11.7 million for the second quarter, an increase of 85% from $6.4 million for the same quarter in 2007. For the first half of 2008, net income was $20.4 million, an increase of 90% from $10.8 million over the same period in 2007.
Now, moving on to the balance sheet and cash flow, as of June 30, 2008, we had a cash balance of $223 million. Net cash inflow from operating activities was $34 million in the second quarter of 2008.
This cash inflow from operating activities was mainly due to net income of $11.7 million and the reduction in customer deposits by approximately $26.4 million, partially offset by an increase in accounts receivable by approximately $14.1 million.
I will now review E-House's financial guidance for the third quarter of 2008. The company estimates that its revenue for the third quarter of 2008 will be in the range of $43 million to $47 million, representing an increase of 40% to 53% over the same period in 2007.
We will now open the call to questions regarding our second quarter 2008 performance.
(Operator instructions) Our first question comes from the line of Paul Keung of Oppenheimer. Please proceed.
Echo He – Oppenheimer
Hi. Hello, can you hear me?
Echo, go ahead, please. We can hear you.
Echo He – Oppenheimer
Hi, this is Echo He for Paul. The question is about your primary agency service. Could you just talk about what the price and the volume trend during the second quarter in the first-tier and now first-tier cities? And also, your primary agency revenue split between first-tier and now first-tier cities?
(Foreign Language) [Interpreted] Echo, do you want to talk about general market or E-House?
Echo He – Oppenheimer
Yes, general market.
[Interpreted] Generally speaking, the whole Chinese market, the real estate market volume remains sluggish in Q2. And we continue to see price drop especially Pearl delta river areas. On the Pearl delta river cities compared to the peak price, timing for last year, priced at about 50% in Q2 while for first-tier cities like Beijing and Shanghai, prices still hoarding very well. In Q2, we didn't really see too much price drop however, volume remains pretty sluggish. It's more momentum issue. Other second-tier cities like Wuhan and they are more or less get influenced by the earthquake and momentum as well. The Yuashesi [ph] Wuhan first job is pretty obvious compared to (inaudible). So in general, we think for those who experience or those city of experience is more or less irrational price exuberance in last year, and got hit the most, for instance in the southern part of China, those cities have got hit the most.
We do think – E-House we are experiencing a pretty even growth for all the efforts – for the half cities. And E-House has presence in China. We do see more revenue coming from the first-tier cities like (inaudible) river cities, because the transaction volume stays pretty unsteady while for some second-tier cities like Wuhan as I just mentioned there is a certain volume fluctuation in Q1 and Q2 due to some outside factors. But in general, the company is still experiencing pretty even growth in all the cities that we cover.
As you know, in Q1 and Q2, the general real estate market in China is still pretty sluggish, but slightly a volume shrink by about 30% in the general market E-House continued to grow about 25% in terms of volume, which will also demonstrate E-House market share increase one fold in the first six months of '08. So that actually also shows that we are keeping benefiting from our pipeline of projects.
It also shows when market recovers in this round of fluctuations and due to our advantage on the market share it will be easier for us to generate more revenue from our existing projects in the pipeline.
Echo He – Oppenheimer
And can I just roughly say your primary agency revenue can be split 50-50 among first–tier cities – between first-tier cities and now first-tier cities?
[Interpreted] It depends how you define which ones are the first-tier cities, which ones are the second-tier cities so to speak. But in general, we are enjoying a pretty even development in growth for all the cities that we cover as just maybe in the first six months, Shanghai is stronger, and Wuhan is weaker, but otherwise, we're enjoying a pretty experiencing pretty even growth all the cities that we cover. As you define, it is a just 50-50 if you count Beijing and Shanghai as fruitful roughly.
Echo He – Oppenheimer
(Operator instructions) Our next question comes from the line of Jason Singh [ph] with Merrill Lynch. Please proceed.
Robert – Merrill Lynch
Hi, this is Robert [ph] actually.
Robert – Merrill Lynch
First of all, congratulations on a very good quarter despite some very difficult trading condition. My question mainly stem on the balance sheet side of things. I just noticed a few things and I wanted to get some good clarity on. First is with regard to the advanced payment for properties of 8.8 million, then there is another item that's new compared to the first quarter, balance sheet of this investment in affiliates, these are all – and in the last item is given the fact that you are in a cash rich position, I still notice short-term borrowings I mean it was there at the end of first quarter as well what of above 50 million. Now if there is a big negative interest spread between your borrowing cost and your deposit interest, I’m just wondering whether or not it's absolutely necessary to incur this spread, negative spread on that 50 million. So just those three questions. Thank you very much.
The advanced payment for property is for a small office building that we purchased for own use, adjacent to our existing office space. And because we made a payment, but we haven't received a formal property title so it's listed as advanced payment for property. And the investment in affiliates, it's for a safety – you know, Shanghai media company which we disclosed in the press release, we acquired a 33.3% stake in a Shanghai media company for a total price of 50 million RMB which is about 7 or 8 million U.S. It's a media company that – it's an media agency company that has exclusive contracts with some of the leading newspaper in Shanghai for real estate-related advertising. We made our investment to provide a better service to add another tool that we can use to provide services for our developer client. This is something we disclose in the press release. Now, to your third question, the short-term borrowing, almost all of the short-term borrowing is RMB norm we borrow from within China, secured by our U.S. dollar deposit offshore. So, the mirror image of that short-term loan is on the balance sheet is the restricted cash that's also on our balance sheet, this is the way for us to get more money – get more offshore U.S. dollars onshore so that we can use that onshore – we have to do this because given the high restriction imposed by the Chinese foreign exchange authorities for converting into the RMB. So this is what we did it in March. That's why the similar amount showed up on our March balance sheet as well.
[Interpreted] Mr. Zhou just wanted to – want to add on the point of our investment in this advertising company in Shanghai. Like I said before this is a Shanghai-based advertising agency. And our investment in this company allows us will improve our ability to gain further – gain more market share in Shanghai by – being able to provide better and more diversified service for our clients. This is a small investment that we feel is actually working in our advantage.
Robert – Merrill Lynch
Are we likely to see any revenue from this additional investment in the third or fourth quarters?
Yes. It will show up in as profits from associated companies. Because we – we made investment only when we were certain that they had already entered into exclusive advertising agency contract with some of the leading newspapers in Shanghai. So the product – the proportion of profit from this company will show up on our financial statement in later this year.
Robert – Merrill Lynch
Our next question comes from the line of Hao Hong with Brean Murray. Please proceed.
Hao Hong – Brean Murray
Thank you. Hi, Le-Lan. Hi, Zhou. I want to ask about your forward guidance, I remember you to – earlier this year you had mentioned that your target for this year is $8 million square in terms of volume and your target commission rate is about 1.5% I'm just wondering whether we are still sticking to that target for 2008?
[Interpreted] In terms of commission rate, our historical average for the full year has been between 2% and 2.5%. For this year we still see our total commission rate for the full year falling in that range. As for total GSA sold whether we can still hit the 8 million sq. meter target, a lot of that will depend on the market performance, market transaction volume, starting September, for the last four months of this year, which is traditionally the peak season. And we said earlier, that we already noticing developers, putting more focus on transaction volume, they are more focused on generating cash flow and we will obviously work very hard towards achieving that goal first off, whether we hit 8 million it will depend on extent to which the market recover.
Hao Hong – Brean Murray
Alright. That's good. And also can you give us an update on the Evergrande, and its deposit, I noticed that for this quarter, you recovered 27 [ph] million from customer deposit. Can we have an update on that, please?
[Interpreted] Our relationship with Evergrande is very good. Our collaboration is working well. As many of you know, Evergrande was successful in raising a private placement – fund raising earlier this year in the second quarter, and that would help them execute their business plan and also will – in short are working very sincere for progress as well and also probably to some extent, alleviate some in investor concern over our deposit.
Their successful fund raising also help – will help them formulate and execute the business plan. And as far as we know they have 10 to 12 projects scheduled to launch between October and December, so that will help – a long way help in terms of generating transaction volume not only for Evergrande itself, but for E-House as well.
We want to emphasize again that our relationship with Evergrande is a very successful execution of our business plan and will go a long way in helping our long-term growth.
Hao Hong – Brean Murray
Alright. Just one last question on the consulting service, I know this performance is very well, it's very good on a division. I'm wondering in terms of converting the subscribers from a trial base to and to fully delay – beating basis, wondering whether you can give us an update on that?
[Interpreted] You're referring to the subscription service (inaudible) or CRIC. The paid subscription was launched in April and the last few months that has progressed well and we have now tied up more than a 1,000 subscribers on a single city basis.
Perhaps more significant then just the number of subscribers is that through our promotion of the quick database more developers have come to know E-House capability in providing intelligence, providing consulting service and using information as a platform to provide value-added service. And this will set a foundation for our future growth – further growth in our consulting and information service.
I think just some of the investors anticipate the – our consulting and information service business with quick data is at its core will become a very important, very key focus of our future – of our growth for the next phase.
Hao Hong – Brean Murray
Alright. Thank you.
(Operator instructions) Our next question is a follow-up from the line of Jason Singh [ph]. Please proceed.
Jason Singh – Merrill Lynch
Hi. I just wanted to find out this office building is that in addition to your current office needs for as a replacement for? I'm just wondering if I need to take into account future depreciation expenses or as a net addition to costs or is that going to be roughly offset by a reduction in rental expenses? And then also just want to quickly touch on one small thing that's deferred revenue non-current portion. Just wondering what that is. Thank you.
[Interpreted] It's the office expansion (inaudible) business line expansion. And to attend to your question it's being addition to our current E-House staff office. In terms of the price, it's definitely come. We are in this business, so it should definitely have appreciation, otherwise we won't be purchasing at this time.
To give you a sense of how much sort of benefit that we enjoyed, it should be about 30% lower than the market price. So it definitely will have the appreciation after the boom in the future. This line item called deferred revenue non-current is a result of the accounting treatment for our investment in SINA's real estate channel. I don't think you want me to go through the accounting steps that that end of this line item. All I can say is it's a somewhat complex accounting treatment given the side both SINA and E-House invested in both cash and intangible asset, SINA in the form of intacting its whole real estate and the home furnishing channel when this elated advertising revenue into this new entity. And E-House provided license for quick database, for this new entity to use. So, the related accounting treatment and the fair value of knowledge of these intangible assets resulted in this number. And if you are into the – go offline and probably to the more details of it.
That's fine. Thank you.
Our next question comes from the line of Robert Rich [ph] with William Blair & Co. Please proceed.
Robert Rich – William Blair & Co.
Hello. Just going back to your guidance I wanted to see if you're maintaining the full year guidance for 210 million to 240 million in revenue. And as part of that full year guidance I was hoping if you could just discuss some of the assumptions you are making in terms of volume and pricing in the primary business as well as contributions from secondary and the consulting work? Thank you.
[Interpreted] First of all, we can reassure you the consulting business line because that line of business is least affected by the market fluctuation and its growing very stable.
Talking about the primary business, the key is next four months as you can see from the numbers. However according to all the developers, they are as to the market now we find that they are looking for volume and also to get a cash back push that inventory out. However they keep looking for that goal and try to achieve that goal. We think that we can still achieve the so-called golden September – September golden October which is an industry norm in the real estate sector this year and then hopefully in the next four months will help us to achieve as much as we can.
The project in our pipeline if we add up all those numbers we are not worried at all to reach the guidance number. However the key question is how much that we can push that to the market. It really depends on the market, but we are still very confident in the next four months and we think we are hopeful to reach the full year guidance.
Even if we set back a little bit, we wouldn't actually think – in a worst case scenario order projects will be pushed out sooner or later, the worst case scenario is it will be released early next year, however, to meet our full year guidance it's still heavy like.
We are working really hard to make sure the guidance that we provided are still we will be able to achieve.
Robert Rich – William Blair & Co
Great. Thank you.
We are now approaching the end of the conference call. I will now turn the call over to E-House's director, corporate development and investor relations, Ms. Kate Kui for a closing remark.
Thank you. Once again, we would like to thank all of you for joining today's call. And if you have any questions please do not hesitate to contact me. Thank you.
Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.
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