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EJ and Chinese real estate

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real_estate April 9, 2012 ( Pan Zhang) Real estate industry is one of the pillar industries of national economy in China. It is an industry sensitive to government policies. The boom of the real estate industry starts from the beneficial policies which encouraged mortgage purchase and market allocation of residential houses. These policies aimed at increasing investment and consumption to pull up the economy. It had great effects in real estate industry, making it a pillar industry of national economy.

Accompanied with the intensive investment is the overheated market and surging real estate price. From April 2010, State Council started the first round control with a notice of Firmly Curbing the Surge in Housing Price in Some Cities (also known as No. 10 National Notice). Then in September 2010, the State Council issued another No. 5 National Notice, which required implementing differentiation on mortgage credit policies. After that, 48 cities in China raised strict criteria on house purchase.

 

As we can see from the chart below, residential real estate price kept increasing from 2010 to August 2011, then dropped till now. The trend tells us that the control measures of Central Government have come to effect. In March 2012, Premier Wen Jiabao stated that the central government will continue the control measures in real estate industry. The 48 cities which issued restriction of purchasing house continued the restriction policies in 2012. Central government’s policies control the supple of tradable land, and local governments’ policies curb the demand of commercial housing. All these indicate that real estate companies are and will continue to struggle in a tough environment.

realestate_20120409


Performance of E-House and its industry peers

E-House Holdings Ltd. (NYSE:EJ) is a real estate services company offering a wide range of services including primary sales agency services, secondary brokerage services, real estate information and consulting service, real estate advertising, promotion, online services and fund management services.

Shenzhen World Union Property Consulting Co.,Ltd (SHE:002285)is comparative in business lines and scale. Shenzhen World Union covers primary agency service, secondary brokerage service, consulting and property management services.

In the secondary brokerage sector, IFM Investment Limited (NYSE: CTC) is also competitive. IFM is the exclusive franchiser of Century 21 Real Estate.

In the real estate information, advertising and online services sector, E-House Holdings Ltd. (NYSE:EJ) has a subsidiary China Real Estate Information Corporation (NASDAQ:CRIC) which operates in this part. The main competitor is SouFun Holdings Limited (NYSE: SFUN). Based on the internet portal, SouFun provides property information, home furnishing and improvement content, marketing and listing services different communities of users.

A brief comparison of these companies is as follows:





unit: $ million

Geographic Coverage

Revenue

Net Profit

in total

year on year

in total

year on year

E-House

> 170 cities

401.63

13%

-465.00

-1005%

World Union[1]

33 cities

262.88

30%

26.79

-32%

IFM

31 cities

96.06

13.9%

-53.47

107.5%








Table 1: Scale comparison

From the table 1 we can see, E-House (NYSE:EJ)  is larger in scale and earns more market share compared to the other two companies.






unit: $ million

Primary Agency Service

Secondary Brokerage Service

Consulting& Information

revenue

year on year

revenue

year on year

revenue

year on year

E-House

158.2

-24%

18.2

-13%

223.0

39%

World Union

181.1

26%

6.1

-25%

65.6

52%

IFM

7.1

529.6%

81.6

6.4%

-

-









Table 2: Sector revenue comparison

From the table 2 we can conclude E-House Holdings Ltd. (NYSE:EJ) is most outstanding in consulting & information service. World Union is more advantageous in primary agency service while IFM is better in secondary brokerage service.


Strategy in the hard time

Threatened by the fierce profit decline, E-House Holdings Ltd. (NYSE:EJ) and World Union (SHA:002285)  find different solutions for future.

In November 2011, E-House signed a non-binding term sheet with IFM Investment Limited (NYSE: CTC) and proposed to buy 960 million Class A ordinary shares at $0.0267 per share ($0.4 per ADS) jointly with the founders of CTC. If the transaction completed successfully, E-House Holdings Ltd. (NYSE:EJ) will become the largest shareholder of Central 21 China Real Estate (NASDAQ:CYN). From the strategic investment, E-House can gain a valuable distribution channel from the national coverage of CTC secondary brokage sector. Combined with its advantage in primary agency services, E-House Holdings Ltd. (NYSE:EJ)can strengthen the secondary brokage sector and integrate the whole industry chain vertically.

In December 2011, E-House signed a definitive merger agreement with CRIC. If successful, E-House will integrate the online and offline sales channel and build an internet property transaction platform, which may be an innovation in real estate agency business pattern.

In contrast, Shenzhen World Union seeks solutions from another direction. In August 2011, World Union acquired 60% equity of Qingdao Yayuan Property Management Co., Ltd. After the acquisition, World Union can increase its coverage in property management, thus extend its industry chain horizontally.

 


[1] *World Union’s revenue is converted from CNY amounts to USD amounts based on the rate of USD1=CNY6.3009 on December 31, 2011



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