May 10, 2010 (Yantao Li) There has been a lot of activity within the Chinese real estate and related sectors lately. One related company, E-House Holdings (NYSE:EJ) is a NYSE listed China ADR that is worth paying attention to. Related articles on Chinavestor: Company Overview: China Housing & Land Development (NASDAQ: CHLN) and Overview: China real estate market.
The E-House (China) Holding Limited is a leading real estate service provider in China which was founded in 2000 in Shanghai, China and went public on New York Stock Exchange (NYSE:EJ) in August,2007.
In October 2009, the Company’s subsidiary, China Real Estate Information Corporation (NASDAQ: CRIC) completed its IPO on NASDAQ and acquired 66% equity interest in China Online Housing Technology(NASDAQ:COHT) which was a subsidiary of SINA Corporation.
Revene and Net Income
In 2009, the total revenues of E-House (China) reached $299.5 million, increased 94% from 2008, including $13.8 million which was contributed by COHT. Net income increased 197% from 2008 and amounted to $117.4 million. Total gross floor area (GFA) of new properties sold increased 170% from 2008 and stood at 11.1 million square meters. Total value of new properties sold reached $12.7 billion, an increase of 184% compared to 2008.
The line chart below shows the changes of total revenue and net income of E-house (China) from March 2007 to the end of 2009. The total revenue has a similar pattern as the net income, which might suggest that E-House (China) has an effective operating and internal control system that has kept its costs of revenue and administrative costs stable.
There was a temporary peak of both revenue and net income in the fourth quarter of 2007. It was primarily due to the company’s further expansion of primary real estate agency operations, which resulted in a significant increase in the gross floor area (“GFA”) and total transaction value of new properties sold and the company’s initiative to commercialize its proprietary CRIC database system by offering subscription service.
During year 2008, revenues and net incomes were staying at a relatively low level, which is arguable attributable to the financial crisis.
Recovering from the 2008 financial crisis, the total revenue as well as the net income of E-House (China) have experienced constant increase.
However, indicated in the “E-House Reports Fourth Quarter and Full Year 2009 Results”, the estimated revenues for the first quarter of 2010 will be in the range of $69 million to $71 million, a roughly 40% decrease from the previous quarter. Correspondingly, the share price of E-House (China) has shown a downward movement in the first quarter of this year. The decrease may largely due to the government’s curbing policy regarding the overheated real estate market.
Figure 1 Total Revenue and Net Income of E-House (China) Holding Limited
Figure 2 Share price movement of E-House (China) Holding Limited.
(Source: google finance http://www.google.com/finance?q=ej)
Comparing the revenue chart with share price, it can be concluded that for the last three years the share price basically reflected the net income the company has earned. Therefore, the etimation of company’s management about the company’s future earnings can be considered as a reasonable indicator for its future share price movements.
Break down of the Revenue
The total revenue can be divided into three segments before 2009, which are primary real estate agency services, secondary real estate brokerage services, real estate consulting and information services. A new business segment, real estate advertising services, was introduced in the second half of 2008 and first time generated $1.3 million revenue for the first quarter of 2009.
Figure 3 Total Revenue breakdown of E-House (China) Holding Limited
It is clear that the major contributor to the total revenue has been the primary real estate agency service sector, followed by real estate consulting and information service sector and secondary real estate brokerage service sector.
E-House (China) provides primary real estate agency services to real estate developers, chiefly to developers of residential properties. The services include profiling typical buyers and selecting public relations and advertising companies to design marketing materials and marketing venues based on profiling activities, executing marketing campaigns, establishing functional sales offices and outlets on-site for each development project and providing specifically trained sales staff on the location until a large majority of the units are sold.
To further secure its primary business, E-House (China) has formed strategic partnerships with leading developers in China, such as Evergrande(HKG:3333), Vanke(SHE:200002), Glorious Property (HKG:0845) and COFCO Property (Group) Co., Ltd (SHE: 000031). The comparison between the share price of E-House (China) (NYSE:EJ) and the share prices of Top Five real estate developers in China demonstrates the close relationship between E-House(China) and real estate developers.
Therefore, it is arguable that any economic or policy impact on China real estate developers will be passed on to E-House (China) to a large extent, since real estate developers are primary sources of the revenue of E-House (China).
Figure 5 Share price movement comparison between EJ and top five real estate developers in China
(Source: google finance)
(Amounts in thousands US dollars)
In terms of the annual net cash flow, The E-House (China) has been doing quite well for the last three years. The net cash and cash equivalents on hand has increased about 110% on average on a year-on-year base.
In terms of the cash flow from operating activities, the net cash outflow for 2007 was mainly attributable to an increase in payments of customer deposits as part of the company’s drive to build up its project pipeline.
The negative figures in the cash flows of investing activities in both 2007 and 2008 are mainly due to company’s expansion which resulted in increased amount of capital expenditure.
Overall, the E-House (China) has had a steady financial performance since it went public. It is partly due to E-House’s leading position in the real estate service industry, especially after its acquisition of China Online Housing Technology (COHT), which results in even fewer competitors of the comparable size in the market. The strategic alliance between E-House (China) and the leading real estate developers also contributes to its good financial performance through securing the major source of revenue. However, also because of the close connection between E-House (China) and real estate developers, the current government real estate market policy will foreseeably have a negative impact on E-House (China) through curbing the revenue of real estate developers.
Nevertheless, from a long-term perspective, the government policies are necessary for a health real estate market. In a long run, it is reasonable to foresee that E-House (China) will continue its growth with China real estate market.