Fang Holdings Limited
Q2 2018 Earnings Call Transcript

Published: 29 Aug 2018

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Second Quarter 2018 Fang Holdings Limited Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions]. I must advise that the conference is recorded today. I’ll now hand the call over to your first speaker today, Ms. Jessie Yang. Thank you. Please go ahead.

[Jessie Yang:]

Thank you, operator. Hello, everyone, and welcome to Fang’s second quarter 2018 earnings conference call. Joining us today to discuss Fang’s results are our Chairman and CEO, Mr. Vincent Mo; and our CFO, Dr. Hua Lei. After our prepared remarks, Mr. Mo and Dr. Lei will answer your questions. Before we get started, I would like to remind you that during the course of this conference call, we may make forward-looking statements, statements that are not historical facts, including statements about our beliefs and expectations. Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those contained in any forward-looking statements. Fang assumes no obligations to update the forward-looking statements in this conference call and elsewhere. Potential risks and uncertainties include, but are not limited, to those outlined in our public filings with the SEC, including our Form 20-F. I will now go through our financials first and Dr. Lei and Mr. Mo will answer your questions shortly. Okay. And I’ll start with revenues. Fang reported total revenues of 74.4 million in the second quarter of 2018, a 32.4% decrease from 110.1 million in the corresponding period of 2017, primarily due to the decline in e-commerce services revenue. Revenue from listing services was 33.2 million in the second quarter, a decrease of 21.7% from 42.3 million in the corresponding period last year, caused by the decrease in the number of paying members. Revenue from marketing services was 25.1 million in the second quarter, a decrease of 28.3% from 35 million in the corresponding period last year, primarily due to slowdown in real estate market and the continued impacts of tightening policies. Revenue from value-added services was 8.4 million in the second quarter, an increase of 17.9% from 7.1 million in the corresponding period of 2017, primarily due to a rising demand for our database and research services. Revenue from Internet financial services was 6 million in the second quarter, an increase of 121.8% from 2.7 million in the corresponding period of 2017. This was driven by increased demand for products on our diversified loan platform. Revenue from e-commerce services was 1.7 million in the second quarter, a decrease of 92.4% from 22.9 million in the corresponding period last year. And the decline was primarily due to Fang's transformation back to a technology-driven open platform model. Cost of revenue was 8.1 million in the second quarter, a decrease of 83.4% from 48.7 million in the corresponding period of 2017. The decrease in cost of revenue was mainly caused by the optimization in our cost structure under the technology-driven open platform model, and the reversal of 9.2 million of previously recorded ASC 450 business tax and interest liability. Operating expenses were 49.6 million in the second quarter, a decrease of 26.4% from 67.4 million in the corresponding period last year. Selling expenses were 19 million in the second quarter, a decrease of 17.7% from 23.1 million for the corresponding period in 2017. This was primarily due to the decrease in advertising and promotional expenses. General and administrative expenses were 33.8 million in the second quarter, a decrease of 22.5% from 43.6 million for the corresponding period last year, and this was primarily due to the effective cost control. Operating income was 16.7 million in the second quarter compared to operating loss of 6.1 million in the corresponding period last year. This was due to downsizing e-commerce services and effective cost control. Change in fair value of equity securities for the second quarter was 80.3 million. This amount represents changes in the fair value of equity securities in accordance with FASB ASU 2016-01, which became effective on January 1, 2018. Income tax benefits were 38.3 million in the second quarter compared to income tax benefits of 0.6 million in the corresponding period last year. This was due to the effect of the change in fair value of equity securities and the reversal of previously recorded ASC 740 or FIN 48 income tax and interest liability. Net loss attributable to Fang's shareholders was 26.6 million in the second quarter compared to a net loss of 2.1 million in the corresponding period last year. This is caused by the change in fair value of equity securities. Loss per fully-diluted ordinary share and ADS were $0.30 and $0.06 in the second quarter of 2018. This was compared to a loss of $0.024 and $0.005, respectively, in 2017. Adjusted EBITDA, defined as non-GAAP net income before income taxes, interest expenses, interest income, depreciation and amortization, was 27.4 million in the second quarter of 2018. This is compared to 1.3 million in the corresponding period in 2017. As of June 30, 2018, Fang had cash and cash equivalents, restricted cash which includes current and non-current and short-term investments of 481.8 million. This is compared to 547.1 million as of December 31, 2017. The net cash generated from operating activities was 41.3 million in the second quarter of 2018 and this is compared to cash flow generated from operating activities of 23.1 million in the same period in 2017. Now I’ll move on to the first half of 2018 results. Fang reported in the first half of 2018 total revenues of 137.2 million representing a decrease of 37.6% from 219.9 million for the corresponding period in 2017. This is due to the decline of e-commerce services. Revenue from listing services was 59.9 million in the first half of 2018. This was a decrease of 21.6% from 76.4 million for the corresponding period in 2017. This is caused by a decreased number of paying members. Revenue from marketing services was 42.4 million in the first half of 2018. This is a decrease of 32% from 62.4 million for the corresponding period in 2017. This was caused by a slowdown in the real estate market and continued impacts of tightening policies. Revenue from value-added services was 15 million for the first half of 2018. This is an increase of 11.4% from 13.4 million in the corresponding period last year. This is due to a rising demand for our database and research services. Revenue from Internet financial services was 11 million for the first half of 2018. This is an increase of 123.2% from 4.9 million in 2017. This is driven by increased demand for products on our diversified loan platform. Finally, revenue from e-commerce services was 8.9 million for the first half of 2018. This is an 85.8% decrease from 62.8 million for the first period in 2017 -- for the same period. This decline was primarily due to Fang's transformation back to a technology-driven platform model. The cost of revenue was 28.4 million for the first half of 2018. This represents a decrease of 74.1% from 109.5 million for the corresponding period last year. This decrease in cost of revenue is mainly caused by the optimization in our cost structure under the technology-driven open platform model, and the reversal of 9.2 million of previously recorded ASC 450 business tax and interest liability. Operating expenses were 96.1 million for the first half of 2018. This is a decrease of 21.6% from 122.6 million for the corresponding period last year. Selling expenses were 34.7 million for the first half of 2018. This is a decrease of 25.4% from 46.5 million for the corresponding period last year. This is due to the decrease in advertising and promotional expenses. General and administrative expenses were 64.6 million for the first half of 2018. This decreased 13.9% from 75 million for the corresponding period last year, and this is due to effective cost control measures. Operating income was 12.8 million for the first half of 2018. This is compared to an operating loss of 12.2 million for the corresponding period last year. This was due to downsizing the e-commerce business and effective cost control. The change in fair value of equity securities for the first half of 2018 was 122.6 million. This represents changes in fair value of equity securities in accordance with FASB ASU 2016-01, which became effective on January 1, 2018. Income tax benefit was 42.5 million for the first half of 2018. This compared to income tax expenses of 4.3 million for the same period last year, and this is due to the effects of the change in fair value of equity securities and the reversal of previously recorded ASC 740 or FIN 48 tax and interest liability. Net loss attributable to Fang's shareholders was 71.4 million for the first half of 2018. This compared to a net loss attributable to shareholders of 14.1 million in the same period in 2017. This was mainly caused by the change in fair value of equity securities. Loss per fully diluted ordinary share and ADS were $0.80 and $0.16, respectively, for the first half of 2018 compared to $0.16 and $0.03 for the same period in 2017. As of June 30, Fang had cash and cash equivalents, restricted cash including current and non-current, and short-term investments of 481.8 million compared to 547.1 million as of December 31, 2017. Net cash generated from operating activities was 34.3 million in the first half of 2018 compared to net cash generated from operating activities of 12.1 million in the same period last year. Based on current market conditions and current operations, Fang will increase expenditure on marketing and promotion. The company’s non-GAAP net income is expected to be profitable for the fiscal year ending December 31, 2018. These estimates represent management's current and preliminary view, which are subject to change. Thank you so much for joining today. And we’re now open for questions. Operator, please go ahead.

[Operator:]

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from the line of Monica Chen from Credit Suisse. Please ask your question.

[Monica Chen:]

Good evening, Mo, Hue Lei, and Jessie. Thank you for taking my questions. So, I have a question regarding the overall competitive landscape given we have seen a lot of dynamic changes in real estate verticals in the past quarter such as [indiscernible] aggressively promoting the bigger platform and [indiscernible] also launched their separate [indiscernible]. So, at this time point, how do we see our positioning and our differentiated competitive strategy in the market, either any change to what we discussed before? [Foreign Language]

[Hua Lei:]

Monica, this is Lei here. Let me answer your question. On competition, we have been in this market for over three years at least, so we have really seen many differences in our competition. From my point of view, I said the competition depends on two things. One is the traffic and the another one is products. Since last year, we gave a lot of importance to our products – our internal products like those newer products in our listing services like [indiscernible] product and others, so we believe we are now in the right direction to develop and upgrade our products. So, I think we’re in the right direction. Another big service [ph] is the traffic. Unfortunately, we are still not seeing very strong growth on traffic, so therefore firstly we need to spend more on the traffic acquisition, including promoting our brands online/ offline, and also more importantly for me, I said is the content. We need to continue to produce that content to our homebuyers, to the home sellers, and then we can retain them in our platform, so going forward I think we also will invest more in the content to attract, you know those home buyers. Based on these two things, I think we are still the leading platform in real estate in China. Also, we are seeing like home buyers say [indiscernible]. So, I think if we can continue to have best content, best traffic, and good products, we still have a benefit to compete with these other competitors. Thank you, Monica.

[Monica Chen:]

Thank you, Lei. Can I also have a follow up? So, I understand we plan to increase our marketing and promotion spending under the competitive environment and to gain market share. So, can you give us a little bit more color on how much do we plan to spend on traffic acquisition and how much to invest on content development? Thank you.

[Hua Lei:]

Yes, I said, cost – we’re saying since last year cost for I think our competitors, they invested a lot in the traffic and in the spending, so definitely we need to catch up on this. And currently, we don’t have a very clear figure for how much we’re going to spend. As you know, we have already, you know, lowered [ph]our guidance to be profitable from 500 [ph] million net profit. So, it means that we want to have more room for us to spend in the traffic acquisition including the branding and promotion. So, this is our current thinking. If we have better picture on the spending, we will update you later. Thank you.

[Monica Chen:]

Thank you, Lei.

[Operator:]

Thank you. Our next question comes from the line of Robert Cowell from 86 Research. Please ask your question.

[Robert Cowell:]

Hi, management. Thanks for taking the question. I’d like to ask about the Wanli transaction. I see that that was completed a couple of weeks ago. I’m interested in strategically how that transaction benefits Fang and going forward what type of cooperation or plan you’ll have for working with Wanli?

[Hua Lei:]

Yes, for the Wanli transaction, as we also discussed in the last earnings call, which is a long-term investment for the company and also which is in line with our long-term strategy, because Fang before we only had one platform and one [indiscernible]. So, in our longer thinking if we can have an insurance company, it means that maybe we can use the insurance company to develop some new products which probably has the synergy with Fang’s current business and maybe which is not the same business. So this is our thinking behind the Wanli transaction. So we are still on the internal discussion about how to best use Wanli in the future. Thank you.

[Robert Cowell:]

All right, thank you.

[Operator:]

Thank you. Our next question comes from the line of Miranda Zhuang from Merrill Lynch. Please ask your question.

[Miranda Zhuang:]

Thank you management for taking my questions. I have a couple of questions. The first one, can management update us on a number of paying agents in the platform and your outlook for the real estate market for the second half of the year? And also the other question is, it seems that the deferred revenue of the company has been growing quite strongly since 3Q last year. It has been growing over 20% and close to 30% even in this quarter. So does that indicate that the revenue momentum for the listing business could be stronger in the second half of the year or like what’s your outlook for the business? Thank you.

[Hua Lei:]

Yes, for your first question about the paying member of our listing business, in quarter two the total paying member for the listing business is over 228,000 totally, so around half is from the PC and another half is from the mobile. We are seeing our mobile paying member is keeping very strong growth and unfortunately [also seeing our PC members they are] [ph] decline a lot both in the year and quarter-over-quarter basis. And if we look at different tier cities, our mobile pay members, they have very strong growth in tier 2 and tier 3 cities while our PC paying members they have not been good from tier 1 to tier 3 cities. So this is the answer for your first question. Your second question is about the outlook of the property market. Until today, we are still seeing Chinese government they still want to control the market very much by keeping or putting different regulation and process to the market because they don’t want to [indiscernible] the price and the property price to go up again. So for the property risk policy I think it will stay at similar current policy maybe at least for the second half of this year, probably will not see any big change on the policy in the near future. So this is my personal thinking on the property market. For your third question it’s about trend of the listing business, right?

[Miranda Zhuang:]

Right.

[Hua Lei:]

Yes. I think first on [indiscernible] we upgrade our products on the listing business which caused some transition problem. Also our clients will need to take more time to get used to our new interface and new products which caused some further decline in the listing service. On quarter two, we are seeing some recovery on the client basis and although this business still is declining year-over-year, we expect we will see stronger listing business at least on quarter-over-quarter basis for quarter three and quarter fourth. Thank you.

[Miranda Zhuang:]

Thank you very much.

[Hua Lei:]

Thank you.

[Operator:]

Thank you. [Operator Instructions]. Our next question comes from the line of Wei Ying from Morgan Stanley. Please ask your question.

[Wei Ying:]

Hello. I want to ask a question about [indiscernible] continue losing market share in quarter two. So can you comment why and can you elaborate your plan of regaining the market share?

[Hua Lei:]

Yes, for your question about the market share, I said we are on the timing which is seeing some decline in our listing business and also market business. And as I discussed before in the previous questions, as long as we can continue to produce [better][ph] content to the homebuyer, as long as we can have better products, we can have the ability to compete with our competitors. Currently I think we are on the right direction but we need more time to achieve our goal. So this is the current situation.

[Wei Ying:]

Okay. And another question about what is the reversal of previously recorded ASC 740 or FIN 48 income tax and interest liability [indiscernible] tax benefit in half quarter, in this year?

[Hua Lei:]

Yes, on the ASC 740 or FIN 48, this tax benefit is caused by the tax policy difference between Chinese tax and the U.S. GAAP taxes, because in China we are paying the tax based on the invoice of our [indiscernible] which is different from U.S. GAAP taxes which is on the accrual basis. So it means in the past we are paying more taxes under U.S. GAAP, so according to the accounting policy, if finally the tax benefit after five years if the tax difference is not – we are not getting any penalty from the tax authority so we can [reverse] [ph] the tax difference which is causing the FIN 48 which is a tax benefit for us for the [reverse] [ph]. I’m not sure whether that explains very clear which is caused by the tax policy difference. And as long as the tax policy difference is narrow, we will continue to see this kind of a tax benefit in the future.

[Wei Ying:]

Okay. Thank you.

[Hua Lei:]

Thank you.

[Operator:]

Thank you. [Operator Instructions]. There are no further questions at this time. I’d now hand the call back to Jessie Yang. Please continue.

[Jessie Yang:]

Thank you, operator. And thank you everyone for joining the call today. And we look forward to speaking with your in the third quarter of 2018. Thank you.

[Hua Lei:]

Thank you.

[Operator:]

Ladies and gentlemen, this does conclude our conference for today. Thank you for participating. You may all disconnect.