November 8, 2012 (Chinavestor) As a real estate service company, E-House (NYSE:EJ) has a substantially different asset structure and capital structure compared with other real estate companies. Its current assets are highly liquid, and non-current assets are mostly intangible. It doesn’t have borrowings, and most of the liabilities are interest free. It seems the company doesn’t rely on debt financing, and has no need to do so.
Upon the end of second quarter in 2012, E-House (NYSE:EJ) had $956.853 million of total assets. The liquidity of assets is quite good. At the end of second quarter 2012, current assets occupied 61% of total assets. This figure kept relatively stable for the past three years. Among current assets, 80% were cash and cash equivalents and accounts receivables and there was no inventory, reflecting a strong liquidity of current assets.
Non-current assets consisted of intangible assets, goodwill, property and equipment and so on. Intangible assets weighted more than 50% of non-current assets. Goodwill and property and equipment each made 10% of non-current assets.
Major intangible assets included advertising agency agreement, license agreements with SINA (NASDAQ:SINA) and exclusive rights with Baidu (NASDAQ: BIDU). All these intangible assets were subject to amortisation. Through the license agreements with SINA, E-House became the exclusive advertising agent of SINA’s non-real estate channels for advertising sold to real estate advertisers. Through the exclusive rights with Baidu (NASDAQ:BIDU), E-House (NYSE:EJ) obtained the exclusive right to sell Baidu’s real estate keyword advertising. These agreements helped generate substantial amount of revenue from the sale of online advertising, thereby enhanced the online real estate services.
As for the goodwill, 80% of the goodwill related to the acquisition of China Real Estate Information Corp (NASDAQ:CRIC) in 2009. Because of the restrictive government policies and big slump of CRIC share price, E-House recognised a $418 million write-off in goodwill in 2011, reducing the goodwill by nearly 90%. The written-off had a substantial effect on income taxes. The effective tax rate dropped from 20.59% in 2010 to 0.58% in 2011.
Taking a glance of the composition of liability and equity, we can find that liabilities occupied a small proportion in the capital structure. E-House (NYSE:EJ) had no short term or long term borrowings in recent three years. Most liabilities were interest-free. Main items in current liabilities were advance from customers and deferred revenue, accrued payroll and welfare expenses and income tax payable. Main item in non-current liabilities was deferred tax liabilities. These liabilities arose from operation activities and actually were interest free loan to the company. A good use of those payable accounts can reduce the capital cost significantly.
Liabilities and total E-House equity kept stable in recent years. Change mainly occurred in non-controlling interests. In the second quarter of 2012, non-controlling interests decreased from $271 million to $8.8 million. This was mainly due to the merge of CRIC which E-House (NYSE:EJ) increased its controls and thus reduced the non-controlling interest on balance sheet.
In general, the capital structure of E-House is quite stable. Though a little costly, equity financing doesn’t have fixed payment pressure on the company. Considering the harsh government policy and difficult industry environment, this capital structure can favourably help the company go through hardship.