Leju Grows Even In Soft Chinese Real Estate Market

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It has not been a banner year for China's real estate market, with home prices and sales activity declining in many areas of the country.

The folks atLeju Holdings ( LEJU ) know all about it. The company provides real estate e-commerce, advertising and listing service via its website as well as through mobile apps.

Its stock debuted on the NYSE in mid-April, right in the middle of a slowdown in the Chinese real estate market.


Leju, a spin-off of the larger real estate service firmE-House (China) Holdings ( EJ ), was forced to cut its initial public offering to 10 million shares from 17.7 million and priced at the low end of its proposed $10 to $12 range.

After Leju reported robust first-quarter results on May 20, the company showed that even a challenging real estate market can have its upside.

In fact, Leju might have been helped by the slowdown in China's real estate market, says Chief Financial Officer Min Chen.

"In a slightly challenging year for developers, there is actually greater demand and need for our (service) to help them sell units," Chen told IBD in a phone interview from China.

Coupon-Fueled Growth

Leju's Q1 revenue nearly doubled from the prior year to $78.5 million, thanks in large part to a 238% surge in e-commerce revenue -- much of it related to Leju's discount coupons sold to new-home buyers.

Net income grew to $7.7 million vs. a net loss of $4.3 million a year earlier.

Following Leju's Q1 report, the company's shares shot up 26% over the next three sessions, closing at 12.69 on May 22. The stock set a record high of 14.20 on July 24 and still trades near there.

The company eyes continued growth in its e-commerce business in coming months.

"We expect this year's coupon sales to be higher despite the softer market," Chen said.

She says first-quarter coupon sales more than doubled from a year earlier, when the property market was hotter.

Since the coupon model in China is still relatively new, Leju expects penetration rates to go up off a small base.

Of all new residential property units sold in China last year, only 3% were sold using discount coupons. Leju shares the tiny market with chief rivalSouFun ( SFUN ), a Chinese real estate Web firm with a slightly bigger market share.

"We're seeing more developers receptive to this new model, which means our market share will continue to grow," Chen said.

Analysts agree.

"Feedback from developers continues to suggest Leju's e-commerce services are gaining popularity," analyst Jinsong Du of Credit Suisse noted in a recent report.

Leju, which means "happy living," works with dozens of major developers in China and a host of local ones in smaller markets.

In return for selling coupons to buyers, it provides developers marketing and promotion service and helps buyers choose projects.

Sales of discount coupons made up more than 60% of Leju's revenue in the first quarter. An additional 30% came from online advertising. That business includes placing banner ads for developers on Leju's website and on the sites of partnersSina ( SINA ), China's leading Internet media company; andBaidu ( BIDU ), the largest Chinese-language search engine.

Leju gets paid for running Sina's and Baidu's many real estate and home furnishings sites. It also receives fees from brokers who list homes on the sites.

In an effort to expand into mobile apps, Leju recently formed ties with two popular social media mobile networks: Sina's micro-blogging platform Weibo andTencent 's (TCEHY) Weixin (known as WeChat outside China).

"We're focused on moving from the PC side to the mobile side," Chen said, noting that several new mobile products were launched this year.

Meanwhile, the company's listing business for existing homes made up only 5.5% of revenue in the first quarter. That business has been a challenge in a country where new housing is preferred.

Du considers China's secondary housing market "still premature."

Leju's existing-home listings are focused mostly in Beijing, and the city's secondary listing market has been "sluggish," according to a report from JPMorgan analysts. Even so, Leju recently signed existing-home listing agreements with more than 100 brokerages in 17 cities in China.

All Grown Up

Leju got started as an online business under E-House in 2008.

"It reached a stage where E-House thought it could function as a stand-alone business," Chen said of the IPO.

Shanghai-based E-House owns 75.5% of Leju's shares and considers it a subsidiary. Tencent, which is a big player in online games and social networks in China, owns 15%. Most of the remaining shares are traded publicly.

E-House consolidates Leju's revenue, profit and expenses in its financial statements. However, E-House doesn't include 25% of Leju's profit, omitting the stake in Leju it doesn't own. E-House reports all of Leju's revenue as "revenue from real estate online services," which in the first quarter made up 48% of E-House's total revenue.

Leju and E-House use separate management teams. Prior to joining Leju in 2008, Leju's CEO, Yinyu He, was publisher and chief editor of Information Week China and previously worked as a print and broadcast journalist in China.

Chen, who joined Leju in March, previously was a managing director with Bank of America Merrill Lynch in Hong Kong.

Leju expects its 2014 revenue to rise 49% to 55% from last year to a range of $500 million to $520 million. Analysts estimate Leju will earn 74 cents per share in its first year as a public company.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: LEJU , EJ , SFUN , SINA , BIDU

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