Leju Holdings (LEJU US)

Transcription

1 Equity Research Property Leju Holdings (LEJU US) Hold (Initiation) Target price: US$16.00 Fairly valued major real estate services provider; initiate at Hold Major real estate services provider in China The company has strong brand equity and nationwide geographic coverage in China (over 250 cities). It is active in three business segments: e-commerce (selling discount coupons to property buyers in China), online advertising, and fee-based online listing for real estate agents. The company listed on the NYSE in Apr In the online discount coupons sales segment, it mainly competes with SouFun (SFUN US, NR), while in real estate related online advertising, it mainly competes with SouFun and Sohu Focus. Dennis Yao SFC CE No. ALK GF Securities (Hong Kong) Brokerage Limited 29-30/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong Strong parent, exclusive advertising agent for Sina and Baidu The company is 76% owned by E-House China (EJ US, NR), a leading Chinese real estate services provider. Tencent (700 HK, NR) also holds a 16% stake as a way of providing property-related content and WeChat-based solutions to its users. The company is an exclusive advertising agent for SINA s real estate & home decoration related advertising, and an exclusive advertising agent for Baidu s Brand-Link product. 1H14 results review: e-commerce segment driving growth Total net revenue rose 75% YoY to US$196m. E-commerce revenue grew 188% YoY to US$118m, contributing 60% of total revenue. Online advertising revenue grew 12% YoY to US$69m, 35% of total net revenue. Listing revenue remained flat. Non-GAAP net income rose 290% YoY to US$28m. Management has maintained its previous 2014 fullyear revenue guidance of US$ m, which would represent a YoY increase of 49%-55%. First/second-tier cities the main drivers The company s e-commerce and advertising businesses are active in about 73 cities in China. According to management, revenue from first/second-tier cities accounts for 40%/53% of total e-commerce revenue respectively, and 36%/50% of advertising revenue respectively. Stock performance 90 % return (10) (20) Apr-14 Jun-14 Jul-14 Sep-14 Oct-14 HSI Index LEJU Fair valuation; initiate at Hold We expect 2014/15 net earnings to grow 4%/40% YoY to US$44/62m respectively. The stock is trading at 34.6x 2015E P/E. We see its valuations as fair, and initiate our coverage at Hold, with a target price of US$16.00, equal to 35.0x 2015E P/E. Future earnings catalyst: profit margin expansion given more efficient expenses control. Key risks: Entry barriers in Chinese online advertising are quite low, which may lead to more intense completion and profit margin shrinkage for the company. Source: Bloomberg Key data Nov 4 close (US$) Shares in issue (m) YTD share price performance (%) 34.7 Market cap (USD bn) w high/low(us$) 18.60/8.01 Source: Bloomberg Stock valuation Turnover Net Profit EPS EPS YoY PE ROE BPS P/B (US$m) (US$m) (US$) ( %) (x) (%) (US$) (x) n.a E E E Sources: Company data, GF Securities (HK) Research Note: Calculated based on diluted shares.

2 Company profile Leading real estate services provider in China The company was listed on the NYSE in April It is 76% owned by E-House China (EJ US, NR), a leading Chinese real estate services provider. Tencent (700 HK, NR) also holds a 16% stake as a way of providing property-related content and WeChat-based solutions to its users. It is active in three business segments: e- commerce (selling discount coupons to property buyers in China); online advertising, and; feebased online listing for real estate agents. Industry analysis: oligopolistic markets According to iresearch Consulting, a third-party institute, spending on online real-estate-related advertising in China rose 3.75x from Rmb0.8bn in 2009 to Rmb3.0bn in Major players include Leju, SouFun, and Sohu Focus. NBS data show 9M14 total GFA sold declined 8.6% YoY to 0.77bn sqm; total property sales dropped 8.9% YoY to Rmb4.9trn. Residential GFA sold was down 10.3% YoY, while residential property sales declined 10.8% YoY. Given disappointing sales figures in 9M14, we expect real-estate-related online advertising sales to grow at a CAGR of just 5-10% in The company competes with SouFun in the e-commerce segment (sales of residential real estate related discount coupons). Potential home buyers can purchase the coupons through or house.sina.com.cn. We expect sales of discount coupons to grow at a CAGR of 40-50% in on high property prices and robust demand from home buyers. The company s Weibo and WeChat-based mobile services are still at an early stage in their development, and management is searching for good business models to monetize these platforms. Company likely to benefit from new PBoC policy The PBoC recently lowered the downpayment ratio for first- and second-house buying families with real demand to 30%, and cut the mortgage rate to 70% of the benchmark. We expect this stimulative monetary policy to boost mass-residential property transaction volume. As a major channel for Chinese property transaction volume, we believe the company will see a rise in transactions through its platforms. In addition, the PBoC policy may mean Chinese developers start to see strong revenue growth on transaction improvements. Thus developers may have more money to spend on online platforms. Competitive edge The company has strong brand recognition given its broad member base and nationwide coverage (over 250 cities). It has a strong parent, E-House, and major shareholder, Tencent. It is also the exclusive advertising agent for SINA s real estate & home decoration related advertising, as well as an exclusive advertising agent for Baidu s Brand-Link product. Recent development As of Aug 2014, the company had more than 36m borrowers on its Weibo and WeChat accounts. We are more bullish on its WeChat-based business as it is much more user friendly. In Jul 2014, the company entered into a strategic cooperation with over 100 broker agencies across 17 key cities in China, to develop its verified listing model. Financial analysis Operating losses in 2011 and 2012 The company booked an annual operating loss of US$40m in both 2011 and However, driven by its high-growth e-commerce segment, it turned profitable in 2013, with a net profit of US$42.7m. 1H14 results review: e-commerce segment driving growth Total net revenue rose 75% YoY to US$196m. E-commerce revenue grew 188% YoY to US$118m, contributing 60% of total revenue. Online advertising revenue grew 12% YoY to US$69m, 35% of total net revenue. Listing revenue remained flat. Non-GAAP net income rose 290% YoY to US$28m. Management has maintained its previous 2014 full-year revenue guidance of US$ m, which would represent a YoY increase of 49%-55%. First/second-tier cities the main drivers The company s e-commerce and advertising businesses are active in about 73 cities in China. According to management, revenue from firstand second-tier cities accounts for 40% and 53% of total e-commerce revenue respectively, and 36% and 50% of advertising revenue respectively. We believe more penetration into its current first/second-tier cities will drive future growth for the company. Page 2

3 Things to watch: high operating expenses, low profit margin We expect the company s SG&A expenses to account for 78% of total revenue in 2014 as its expands its market share in its current business and its innovative mobile services. Any change in operating expenses ratio will significantly affect profitability in We expect the company s operating margin to drop by 400bps YoY to 10% in 2014 on high expenses. Fair valuation; initiate at Hold We expect 2014/15 net earnings to grow 4%/40% YoY to US$44/62m respectively (see assumptions below). The company has a low operating margin of 10-14%, and we expect operating margin expansion to be a major catalyst for earnings growth given more efficient expenses control in the future. The stock is trading at 34.6x 2015E P/E. We see its valuations as fair, and initiate our coverage at Hold, with a target price of US$16.00, equal to 35.0x 2015E P/E. Figure 1: Key assumptions E 2015E 2016E Revenue grow th rate E commerce 530% 100% 40% 40% Online Advertising 5% 10% 5% 5% Listing Services 257% 15% 0% 0% Total revenue 96% 56% 28% 23% Gross margin 81% 88% 84% 84% Operating margin 14% 10% 11% 11% Net margin 13% 8% 9% 9% EPS grow th rate (YoY) -5% 4% 40% 23% ROE 17% 11% 13% 14% SG&A/revenue 67% 78% 73% 73% Tax rate 7% 17% 17% 17% Sources: Company data, GF Securities (HK) Research Key risks: Entry barriers in Chinese online advertising are quite low, which may lead to more intense completion and profit margin shrinkage for the company. Figure 2: Financial summary Page 3

4 Income statement (US$m) E 2015E 2016E Balance sheet (US$m) E 2015E 2016E Revenues Cash and Cash Equivalents E-commerce Accounts Receivable, Net Online Advertising Amounts Due from Related Parties Listing Services Deferred Tax Asset-net Total Revenues Prepaid Expenses and Other Current Assets Cost of Revenues (64) (63) (107) (131) Total Current Assets Gross profit SG&A expenses Property and Equipment, net Other Operating Income Investment in Affiliates Goodw ill Impairment Charges Goodw ill Operating income Intangible Assets, Net Interest Income Other Non-current Assets Other Income/expense Non Current Assets Earnings before taxes Total Assets Provision for Income Tax Loss from Equity in Affiliates Accounts Payable Minority Interest (After Tax) Other Tax Payables Net Income (Loss) Accrued Payroll and Welfare Expenses EPS (US$) Income Tax Payable Other Current Liabilities Cashflow Statement (US$m) E 2015E 2016E Amounts Due to Related parties Operating Activities Advances from Customers, Deferred Revenues Net Income (Loss) Liability for Exclusive Rights, Current Depreciation and Amortization Total Current Liabilities Amortization of Discounts Goodw ill Impairment Charge Deferred Tax Liabilities Others 1 (10) (69) (96) Liability for Exclusive Rights, Non Current Cash Flow from Operating Activities Non Current Liabilities Cash Flow from Investing Activities (17) (20) (20) (20) Advance from Related Parties Common Stock- Par Value Proceeds of Loans Additional Paid in Capital Contribution from E-house Accumulated Deficit 443 (426) (426) (426) IPO proceeds Accumulated Other Comprehensive Income Cash Flow from Financing Activities Subscription Receivable CF at beginning Total Shareholders Equity Net change Minority Interest CF at end Total Liabilities & Shareholders Equity Sources: Company data, GF Securities(HK) Research Page 4

5 Rating definitions Benchmark: Hong Kong Hang Seng Index Time horizon: 12 months Company ratings Buy Stock expected to outperform benchmark by more than 15% Accumulate Stock expected to outperform benchmark by more than 5% but not more than 15% Hold Expected stock relative performance ranges between -5% and 5% Underperform Stock expected to underperform benchmark by more than 5% Sector ratings Positive Sector expected to outperform benchmark by more than 10% Neutral Expected sector relative performance ranges between -10% and 10% Cautious Sector expected to underperform benchmark by more than 10% Analyst Certification The research analyst(s) primarily responsible for the content of this research report, in whole or in part, certifies that with respect to the company or relevant securities that the analyst(s) covered in this report: (1) all of the views expressed accurately reflect his or her personal views on the company or relevant securities mentioned herein; and (2) no part of his or her remuneration was, is, or will be, directly or indirectly, in connection with his or her specific recommendations or views expressed in this research report. 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