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 2014. 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. ALK994 dennisyao@gfgroup.com.hk +852 3719 1065 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$500-520m, 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 80 70 60 50 40 30 20 10 0 (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$16.00, equal to 35.0x 2015E P/E. Future earnings catalyst: profit margin expansion given more efficient expenses control. Key risks: Entry barriers in Chinese online advertising are quite low, which may lead to more intense completion and profit margin shrinkage for the company. Source: Bloomberg Key data Nov 4 close (US$) 15.98 Shares in issue (m) 133.5 YTD share price performance (%) 34.7 Market cap (USD bn) 2.1 52w 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) 2013 335 43 0.318 n.a. 50.2 17.1 1.863 8.6 2014E 523 44 0.331 4 48.3 11.0 2.992 5.3 2015E 667 62 0.462 40 34.6 13.4 3.454 4.6 2016E 822 76 0.568 23 28.1 14.1 4.022 4.0 Sources: Company data, GF Securities (HK) Research Note: Calculated based on diluted shares.
Company profile Leading real estate services provider in China The company was listed on the NYSE in April 2014. 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 2012. 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 2014-16. 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 www.leju.com or house.sina.com.cn. We expect sales of discount coupons to grow at a CAGR of 40-50% in 2014-16 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 2012. 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$500-520m, 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
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 2015-16. 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$16.00, equal to 35.0x 2015E P/E. Figure 1: Key assumptions 2013 2014E 2015E 2016E Revenue grow th rate E commerce 530% 100% 40% 40% Online Advertising 5% 10% 5% 5% Listing Services 257% 15% 0% 0% Total revenue 96% 56% 28% 23% Gross margin 81% 88% 84% 84% Operating margin 14% 10% 11% 11% Net margin 13% 8% 9% 9% EPS grow th rate (YoY) -5% 4% 40% 23% ROE 17% 11% 13% 14% SG&A/revenue 67% 78% 73% 73% Tax rate 7% 17% 17% 17% Sources: Company data, GF Securities (HK) Research Key risks: Entry barriers in Chinese online advertising are quite low, which may lead to more intense completion and profit margin shrinkage for the company. Figure 2: Financial summary Page 3
Income statement (US$m) 2013 2014E 2015E 2016E Balance sheet (US$m) 2013 2014E 2015E 2016E Revenues Cash and Cash Equivalents 99 254 293 339 E-commerce 170 340 477 667 Accounts Receivable, Net 87 113 147 191 Online Advertising 145 160 168 176 Amounts Due from Related Parties 3 0 0 0 Listing Services 20 23 23 23 Deferred Tax Asset-net 28 27 27 27 Total Revenues 335 523 667 822 Prepaid Expenses and Other Current Assets 6 9 11 15 Cost of Revenues (64) (63) (107) (131) Total Current Assets 223 403 479 572 Gross profit 271 460 561 690 SG&A expenses 226 408 487 600 Property and Equipment, net 7 7 9 12 Other Operating Income 1 0 0 0 Investment in Affiliates 0 0 0 0 Goodw ill Impairment Charges 0 0 0 0 Goodw ill 41 40 40 40 Operating income 46 52 73 90 Intangible Assets, Net 129 116 116 116 Interest Income 1 1 1 1 Other Non-current Assets 4 4 4 4 Other Income/expense 1 0 0 0 Non Current Assets 180 167 169 172 Earnings before taxes 46 53 74 91 Total Assets 403 570 648 745 Provision for Income Tax 3 9 13 16 Loss from Equity in Affiliates 0 0 0 0 Accounts Payable 1 0 0 0 Minority Interest (After Tax) 0 0 0 0 Other Tax Payables 19 21 27 35 Net Income (Loss) 43 44 62 76 Accrued Payroll and Welfare Expenses 31 34 34 34 EPS (US$) 0.318 0.331 0.462 0.568 Income Tax Payable 41 44 44 44 Other Current Liabilities 11 27 35 46 Cashflow Statement (US$m) 2013 2014E 2015E 2016E Amounts Due to Related parties 5 5 6 8 Operating Activities Advances from Customers, Deferred Revenues 7 8 8 8 Net Income (Loss) 43 44 62 76 Liability for Exclusive Rights, Current 9 3 3 3 Depreciation and Amortization 38 50 65 84 Total Current Liabilities 124 142 158 178 Amortization of Discounts 1 1 2 2 Goodw ill Impairment Charge 0 0 0 0 Deferred Tax Liabilities 28 28 28 28 Others 1 (10) (69) (96) Liability for Exclusive Rights, Non Current 0 0 0 0 Cash Flow from Operating Activities 83 85 59 66 Non Current Liabilities 28 28 28 28 Cash Flow from Investing Activities (17) (20) (20) (20) Advance from Related Parties 3 0 0 0 Common Stock- Par Value 0 0 0 0 Proceeds of Loans 44 0 0 0 Additional Paid in Capital 686 821 882 958 Contribution from E-house 0 0 0 0 Accumulated Deficit 443 (426) (426) (426) IPO proceeds 0 90 0 0 Accumulated Other Comprehensive Income 6 5 5 5 Cash Flow from Financing Activities 41 90 0 0 Subscription Receivable 0 0 0 0 CF at beginning 71 99 254 293 Total Shareholders Equity 249 399 461 537 Net change 27 155 39 46 Minority Interest 3 2 2 2 CF at end 99 254 293 339 Total Liabilities & Shareholders Equity 403 570 648 745 Sources: Company data, GF Securities(HK) Research Page 4
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