Fang Holdings Limited (NYSE:SFUN) has been the victim of questionable overreactions of late. Splitting from China Index Holdings Limited (NASDAQ:CIH) was a good move that reduced the company’s annual cash drain by 22.2%, yet the market erroneously saw it as a Sell signal. Despite Q1’s Chinese housing market slump and the company’s corresponding earnings report, SFUN was nevertheless in better financial shape. Yet, the market again saw it as a Sell signal. These overreactions put the share price under $1 and prompted a reverse split, which, of course, caused more unwarranted selling.
Meanwhile, evidence has emerged suggesting that Q2 was good for the Chinese real estate market, which will likely be reflected in SFUN’s upcoming earnings report. This, coupled with the facts that the company is tariff-proof, and its price-to-book is unusually low especially when compared to its peers, suggests that a massive upward market correction is inevitable. Investors should take advantage of the cheap bargain prices and buy aggressively now.
About The Company
Fang Holdings, formerly SouFun Holdings (hence the ticker SFUN), operates websites that primarily provide property listings and other real estate information covering 658 cities in China. It is basically the Chinese property portal equivalent of U.S. sites such as Zillow (NASDAQ:ZG), RedFin (NASDAQ:RDFN), and the like. Property owners use the websites to market properties, while home buyers and other consumers use the site to search for properties to buy or rent.
SFUN provides other services as well. For example, the company provides financial services, such as loans to home buyers and real estate developers. The loans originate primarily online through its financial channel website. The company further generates revenues through marketing services (ad placements on its websites), e-commerce services (such as direct sales services for new homes), and other value-added services in addition to its property listing services.
SFUN is one of two major property portals in China. The other is Anjuke, which was acquired by 58.com Inc. (NYSE:WUBA) for $160 million on March 1, 2015. The company, often referred to as Fang or Fang.com, is ranked 26th globally among real estate websites. SFUN relies heavily on web traffic, and boasts roughly 18 million visits per month on average.
Evidence Suggests That The Chinese Housing Market Did Well In Q2
Future Land Development Holdings, a major Chinese land developer, reported a 19% increase in sales for June 2019. In fact, the company further reported that its contracted sales were up 28.4% for H1 2019 (January to June 2019) from the same period the year prior.
Similar results were reported by Vanke, another major Chinese developer. Vanke reported that contracted sales were up 9.6% for H1 2019, including a 21.5 million square meter sales area representing a 5.6% increase, from the same period the year prior.
This evidence strongly suggests that Q2 marked an amazing improvement over Q1’s slump in the Chinese housing market. Given that SFUN’s revenues are strongly correlated with the health of the real estate market, the data strongly suggests that the company’s Q2 2019 results may be much better than anticipated. Such a positive earnings surprise would send the stock soaring.
Market Overreaction To China Index Separation (Which Actually Cut 22.2% Of The Company’s Cash Drain)
On June 12, 2019, during after-hours trading, SFUN announced completion of its separation from CIH. The next day, the stock price fell 14.81%, closing at $4.60 from the prior day’s close of $5.40. Simple, rudimentary math shows that the selloff was an asinine move by the market.
In SFUN’s Q4 2018 Annual Report, the company reported a net change in cash in the amount of ($43.7 million). In order to be listed on the Nasdaq after the spinoff, CIH filed a Form F-1 on May 24, 2019. The filing reported financial data specific to CIH, derived from SFUN’s prior consolidated financial filings and accounting practices. The filing disclosed that CIH’s net change in cash for 2018 was ($9.7 million).
|SFUN 2018 Net Change in Cash||CIH 2018 Net Change in Cash||SFUN's Annual Cash Drain Attributable to CIH|
|($43.7 M)||($9.7 M)||22.2%|
A consolidated financial statement for a parent company, such as SFUN, combines the data from its subsidiaries, such as CIH. Accordingly, SFUN’s net change in cash factored CIH’s change in cash. Stated otherwise, CIH represented 22.2% of SFUN’s 2018 cash drain.
What this means is that any revenues CIH brought to the table for SFUN were negated by the cash required to run the subsidiary. Thus, although CIH reported total revenues of $61.2 million for 2018, which constituted 20.2% of the $303 million in revenues reported by SFUN for the same period, the revenues were worthless.
This is because of CIH’s debt obligations. Although CIH’s F-1 shows $29.5 million in net cash generated as a result of operations for 2018, it also shows that the subsidiary had to pay $39.9 million for “financing activities.” That most likely refers to capital or finance leases. Indeed, the reason CIH has a negative book value is because the balance sheet data provided in the F-1 reveals that its $26.5 million in net assets are trumped by the subsidiary’s $37.6 million in liabilities.
For these reasons, separating from CIH was a wise decision. By doing so, SFUN relieved itself of a subsidiary that cost it $9.7 million per year, which constituted 22.2% of the company’s annual cash drain. The selloff following the news was thus unwarranted. Investors should have seen the move as a bullish sign.
Market Overreaction To Q1 Earnings Report (Which Actually Showed The Company Was In A Better Financial Position)
SFUN released its Q1 2019 quarterly report pre-market on June 17, 2019. From the prior day’s close until close on June 25, 2019, the stock fell 19.3% from $4.14 to $3.34. This was another questionable overreaction.
In fairness to traders, it is true that SFUN reported a revenue decline for Q1 2019. Specifically, revenues fell from $64.7 million in Q1 2018 to $51.9 million in Q1 2019, marking a 19.8% YoY decrease.
Nevertheless, investors failed to realize that the report also revealed that the company was in a better financial position. First, it showed that the company’s net income increased YoY, from ($44.9 million) to $13.4 million. Second, the earnings per share for the American Depository Shares (meaning the shares from the foreign company that are in play on the U.S. exchange) increased YoY, from ($0.10) to $0.03.
Third, SFUN’s cash and equivalents increased QoQ from $195.1 million to $198.9 million. This is important because it shows that, despite Q1’s slump in the housing market, the company continued to generate enough cash to support nine months of future operations (the Q4 2018 report showed that the cost of revenues and operating expenses for the year totaled $266.5 million). In fact, by eliminating CIH from the equation, SFUN now has even greater financial leeway.
In sum, SFUN’s net income and earnings per share increased YoY, as did its cash on hand QoQ, all despite the Q1 slump in the Chinese housing market. Moreover, the nine months of cash reserves were greater than the six months recommended by most financial experts. Clearly, the company was in a better financial position, despite the decline in revenues. The selloff following the earnings report was, therefore, a patent overreaction.
Overreactions Put The Stock Under $1 And Thus Led To A Reverse Split, Which Caused Further Unwarranted Selling
All of the share price quotes in this article factor in the 5:1 reverse split announced on June 25, 2019, which took effect a few days ago on July 8, 2019. Given the overall financial health of the company, the split was in all likelihood done simply to ensure continued listing on the NYSE.
And this should be music to investors' ears. The NYSE requires a stock to be at least $4 per share to be listed. Yet, SFUN only did a reverse split that (as of the date it was announced) was calculated to bring the stock to roughly $3.50. Reading between the lines, we believe this means that insiders are confident the stock will surge well over $4 soon.
The reverse split was necessary because of the unwarranted reactions to the CIH spinoff and Q1 2019 results. Predictably, the reverse split has proven to cause another sheepish overreaction, as more selling has taken place since.
This is good news for investors. The current cheap prices represent an amazing buying opportunity.
The Current Price Is A Bargain, And The Price-To-Book Confirms This
Price-to-book is a ratio that divides the share price by the company’s book value (assets minus liabilities). The financial metric can provide insight concerning whether a stock price is too high or low.
Investors used to believe there was a sort of bright line rule where a price-to-book greater than 1 indicated an overvalued stock price (since the market sentiment exceeded the tangible net worth of the company), while a value less than 1 indicated a bargain. This way of thinking has been abandoned in light of modern accounting methods, which place greater emphasis on intangible assets.
Accordingly, modern analysts focus on a company’s price-to-book history, and also the median price-to-book for that industry, in order to determine what a given value indicates for a company.
Concerning SFUN’s historical price-to-book, the following graph clearly shows that the metric is about 92.5% lower than usual for the company. What this means is that the present stock price (the numerator in the division equation for calculating price-to-book) is not yet high enough to get the price-to-book where the market normally feels it should be. In other words, a historical view of SFUN’s price-to-book suggests that the stock is vastly undervalued.
When compared to its peers, the price-to-book is also way too low. For example, Zillow's price-to-book is 3.09 and 58.com's (SFUN’s main Chinese competitor) is 2.57. Moreover, as indicated by the preceding links, Seeking Alpha shows that the pertinent sector median price-to-book is 2.25.
According to Nasdaq.com, SFUN presently has 59.5 million shares outstanding. In its Q1 2019 quarterly report, the company reported $1.87 billion in total assets and $1.25 billion in total liabilities, for a book value of $620 million. On July 9, 2019, the day prior to drafting this article, the stock closed at $2.80. Using that value results in a price-to-book of 0.27. Clearly, when compared to its peers, SFUN is tremendously oversold.
What this tells us is that the stock price is due for a massive upward correction. This is compounded by the fact that the stock is immune to the U.S.-China trade war.
Fang Holdings Is Tariff-Proof
Perhaps the icing on the cake is that the Chinese housing market has proven to be shielded from the ongoing U.S.-China trade war. Indeed, in order to avoid the impact of tariffs, many experts speculate that China may take measures to boost in the real estate market. This would only inure to SFUN’s benefit.
SFUN is particularly tariff-proof because it is exclusively China-based. It is a Chinese web service focused exclusively on Chinese real estate. The evidence cited in the first section of this article, suggesting that the Chinese housing market actually improved in Q2, corroborates this assessment.
How High Will The Share Price Rise In The Short Term?
As outlined above, the only real changes with the company consist of the YoY decrease in revenue, increases in net operating income and cash on hand, cutting 22.2% of its cash drain, and evidence that Q2 was strong for the housing market. So, for those who view revenue in a vacuum, the low-end fair value of the stock would mirror a decline from last year’s price commensurate with the percentage decline in revenues.
As mentioned previously, revenues for Q1 2019 declined YoY by 19.3%. The Q1 2018 earnings report was released pre-market on July 25, 2018, and the following chart shows that the share price oscillated between $13.25 and $18.50 in the immediate aftermath.
Accordingly, our low-end projection, which again sheepishly assumes that the world revolves around revenues and nothing more, is that the stock is going to rise to the price level that is 19.3% less than the price immediately following the Q1 2018 earnings report. If one conservatively uses $13.25 (the low part of the dip) as the starting point, then the low-end projection is a rise to $10.69 leading up to this year’s Q2 earnings.
Our high-end projection takes into consideration the clear positive developments for the company and the evidence suggesting that the upcoming Q2 earnings will reflect improvements in the housing market. At minimum, these factors suggest a rise back to where the company was a year ago ($13.25 to be conservative).
However, again, the upcoming Q2 earnings report will likely result in a positive surprise due to emerging evidence suggesting that the Chinese housing market did well in Q2. As such, the potential return for investors leading up to the Q2 earnings report (which the company typically releases at the end of August) will probably be much greater. Indeed, given how markets typically overreact to news, whether positive or negative, the upcoming Q2 results may well push the stock over $18.50 (the high immediately following the Q1 2018 earnings report).
For these reasons, our conservative outlook is that the stock will rise to $10.69-13.25 in the very near term. The present share price (as of 1:53 p.m. on July 10, 2019) is $2.61. As such, investors who buy now stand to gain a relatively quick 309.6-407.7% return.
Investors should aggressively buy the present unwarranted dip. Such a move (at the current price of $2.61) will probably result in a relatively quick three-fold or four-fold return.
Disclosure: I am/we are long SFUN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.