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Food for thought: E-House Hold.

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real_estate August 17, 2010 (Chinavestor) There has been a lot of hot potatoes within the Chinese real estate market in 2010. To separate darlings from the dogs, we put E-House Holdings (NYSE:EJ) under the microscope to see where it stands. Here are the findings.

Financial strength

E-House (China) Holdings Limited (NYSE: EJ) has been in a real good shape for the last three years in terms of its financial stability.

The company’s quick ratio (Figure 4) and current ratio (Figure 5) are both far above the industry average, which indicates that the company is running with a low level of debt and there is no going concern for the company from a short-term perspective.

Total debt to equity illustrated in Figure 6 indicates that the majority of the assets in the company are financed by issuing shares which can result in a larger financial flexibility.




Figure 6 Total debts to equity of E-House (China) from 2007 to the first quarter of 2010


In terms of profit generating ability, E-House (China) (NYSE:EJ) has been doing fairly well for the last three years. Both its profit and operating margin has been above the industry average for the last 12 quarters, except in the first quarter 2009, the operating margin dropped below 14.4%, which was arguably attributable to the financial crisis.

After the recovery from the economic crisis, dramatic decrease of both margins occurred in the first quarter of 2010. It was arguably due to the recent cooling-off measures carried out by the government, which largely cut down the trading volume.

The curbing policy has decreased the revenue of E-House China from primary service, since primary service is mainly about providing marketing solutions to the company’s contracted developers. It is expected that the developer will hold the price and wait for the market reaction and cease further investing in the marketing and promotion activities.

The income from secondary real estate brokerage services will also be directly influenced as a consequence of resulted lower trading volumes, since the secondary service of E-House China is about advisory services on property selection, accompanying potential buyers on open house viewing trips, drafting purchase contracts and negotiating contract price and terms. Many potential buyers stop buying with the expectation that the property price will decrease in the near future.

Although the current market conditions has negatively impacted E-House's financial results, Mr. Xin Zhou, the E-House's executive chairman indicated that "the current market condition also presents unique opportunities for the company to help their clients formulate and execute effective marketing and sales strategies. Project pipeline are built up and market share of the company will increase during the periods with market fluctuations and volatility which will provide the foundation for strong growth when market conditions improve. In fact, in the weeks since the announcement of the new policies, the company has already intensified the dialogue with its developer clients and seen accelerated new project signing.” If it is the case, it is reasonable to foresee that the financial performance of E-House will be largely improved after the market becomes stable and the trading volume comes back to a reasonable level.




The table below shows the profitability of E-House on 28th June, 2010. We can see that the financial performance has been improved compared to the first quarter 2010. As discussed above, the recovering trading volume is arguably the major contribution to the improved financial data. Due to the drop of property price, the trading volume of 68.2% of the major cities in China has started to increased compared to last month. While Beijing incurred a 46% decrease, the trading volume of property in Shanghai, Shenzhen and Guangzhou has increased by 69.6%、23.8%、64.7% respectively.



Management Effectiveness

The table below presents the key ratios indicating the management effectiveness of E-House (China) (NYSE:EJ). Overall, the management of the company is performing much better than the industry average. However, compared to its previous performance (Figure 9), both ROA and ROE are still lower than its 2007 levels.




IFM Investments Limited (NYSE:CTC) and Hopefluent Group Holdings Ltd (HKG: 0733) are two major competitors of E-House in China, which also went public.

IFM Investments Limited is a real estate services provider (NYSE:CTC). The Company is a franchisor in China for the CENTURY 21. As of September 30, 2009, its CENTURY 21 China network covered 34 major cities and maintained approximately 4.7 million property listings. It operates in three business sectors: company-owned brokerage services, mortgage management services and franchise services (Source: Google finance).

Hopefluent Group Holdings Limited (HKG: 0733) is an investment holding company. The Company, through its subsidiaries, is engaged in providing real estate agency services. It also provides a range of other property related value-added services, including mortgage referral, property valuation and property auction (Source: Google finance).

Charts below are comparison between E-House (China) (NYSE:EJ), IFM Investments Limited (NYSE:CTC) and Hopefluent Group (HKG: 0733) in terms of current ratio, return on equity and profit margins. (Note: statistics of IFM Investments Limited (NYSE:CTC) in 2007 are not available)

It is clear that E-House (China) has performed much better than its competitors in terms of profitability and financial stability, especially during the 2008 financial crisis.



Overall comment and business outlook of E-House (China) (NYSE:EJ)

From the perspective of the company’s operating environment, more fluctuation is expected during the following months. However, from a long-term perspective, China real estate market will continue its stable growth, since China considers real estate as one of the pillar industries of its economy.

From the viewpoint of the company itself, concluding from all the financial information released by E-House (China) (NYSE:EJ), the company has been operating fairly well and growing at a relatively fast rate since it went public. The company has a stable financial status and effective management team. However, fast growth may also bring potential thread to the company, especially the integration of management and facilitation of communication after the merging or allying with other real estate service businesses (such as real estate web channels of



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