Fang Holdings Limited
Q3 2017 Earnings Call Transcript

Published: 18 Nov 2017

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Third Quarter of 2017 Fang Holdings Limited Earnings Conference Call. [Operator Instructions] I must advise that this conference is being recorded today, Friday, November 17, 2017. I would like to hand the conference over to your first speaker for today, Ms. Dana Cheng. Thank you. Please go ahead.

[Dana Cheng:]

Hello, everyone and welcome to Fang’s third quarter 2017 earnings conference call. Joining us today to discuss Fang’s results is our Chairman and CEO, Mr. Vincent Mo and our CFO, Dr. Hua Lei. After their 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 pass the call over to Dr. Lei to discuss the financial results. Dr. Lei, please.

[Hua Lei:]

Thank you everyone for joining in today’s call and this is Hua Lei. Let me walk you through our financials first and then Vincent and I will answer your questions. I will start with revenues. Fang reported total revenues of $112.2 million in the third quarter of this year, a decrease of 55.1% from $250.1 million in the corresponding period of last year primarily due to the decline in e-commerce services revenue by $150.8 million. Revenue from listing services was $47.2 million in the third quarter of this year, an increase of 65.6% from $28.5 million in the corresponding period of last year, primarily driven by increased number of paying members. Revenue from marketing services was $37.3 million in the third quarter, an increase of 4.8% from $35.6 million in the corresponding period of last year. Revenue from e-commerce services was $16.6 million in the third quarter, a decrease of 90.1% from $167.4 million in the corresponding period of last year primarily due to Fang’s transformation back to a technology-driven open platform model. Revenue from Internet financial services was $3.5 million in the third quarter, a decrease of 52.4% from $7.3 million in the corresponding period of last year primarily due to the decreased transaction volumes of secondary homes. Revenue from other value-added services was $7.7 million in the third quarter of this year, a decrease of 12.1% from $11.4 million in the corresponding period of last year. Cost of revenue was $35.4 million in the third quarter, a decrease of 77.4% from $157 million in the corresponding period of last year primarily driven by the closing of self-owned brokerage stores and cost optimization under the open platform model. Operating expenses was $58.4 million in the third quarter of this year, a decrease of 37.2% from $92.9 million in the corresponding period last year. Selling expenses was $16.9 million in the third quarter of this year, a decrease of 70.2% from $56.7 million from the corresponding period of last year, primarily driven by the decrease of advertising and promotion fee, sales commission fee and staff costs. G&A expenses were $41.8 million in the third quarter of this year, an increase of 15.4% from $36.2 million for the corresponding period of last year, primarily due to increased bad debt and the disposal fee related to closing the self-owned brokerage stores for secondary home transactions. Operating income was $18.4 million in the third quarter compared to $0.2 million in the corresponding period of last year primarily due to the agent reduction and effective cost control. Income tax expenses were $4.1 million in the third quarter compared to income tax expenses of $8 million in the corresponding period of last year. Net income attributable to Fang’s shareholders was $15.2 million in the third quarter of this year compared to net loss of $4.9 million in the corresponding period last year. Earnings per fully diluted ordinary shares and ADS were $0.16 and $0.03 in the third quarter of this year compared to a loss of $0.05 and $0.01 respectively in the corresponding period of last year. Adjusted EBITDA was $25.6 million in the third quarter compared to $1.6 million in the corresponding period of last year. As of September 30, 2017, Fang had cash, cash equivalents and short-term investments of $543.3 million compared to $590.5 million as of December 31, 2016. Net cash generated from operating activities was $57.8 million in the third quarter of last year compared to cash flow generated from operating activities of $76.8 million in the same period of last year. The decrease of the cash generated from operating activities was primarily due to the reclassification of certain loan receivables to investment activities compared to the third quarter of last year. Thank you for joining us today and we are now open for the questions. Operator, please go ahead.

[Operator:]

Thank you. [Operator Instructions] Your first question comes from the line of Monica Chen of Credit Suisse. Please ask your question.

[Monica Chen:]

Hi, good evening management. Congratulations on very strong third quarter. My first question is regarding our listing business as we see very strong growth from this segment. So a housekeeping question will be what is the number of paying members for listing business? And also, do we see the contribution still mainly come from lower tier cities as we mentioned in your last earnings call? What is management’s like growth outlook for next year for the listing business? And then I have a follow-up. Thank you.

[Hua Lei:]

Yes. For the total paying members, now we have – as of end of quarter three, we have 286,000 paying members and 30% demand comes from our mobile. Now, we are still seeing more – sorry, yes?

[Monica Chen:]

Sorry, I was trying to ask – so last quarter I think we mentioned there are more contributions from lower-tier cities. So, do we still see that in this quarter?

[Hua Lei:]

Yes. We are still seeing more growth comes from the low tier cities and from the mobile. If you look at the number actually, our mobile paying members compared to last year for the same period, we increased more than 100% and for the low-tier cities, we increased about 55%.

[Monica Chen:]

And what is management’s expectation on the listing business for next year?

[Hua Lei:]

Next year, personally I still expect our listing business will grow at a good rate and I will say probably because we see that the pace actually is not that low. So, I think growth rate probably will not be as good as this year but still will be a good growth rate.

[Monica Chen:]

Thank you. So actually, I have a follow-up on the listing. So we actually see I think the ARPU for listing business, so per paying user basis, has increased quite a bit year-over-year. So we are trying to understand does this come from like each agency using more portals or we have maybe increased the price for listing business or do we have like any plans to increase our price in the future, because I think management previously said our price is more competitive, it’s still lower than what our competitors offers. So, do we have any plan to increase the price in the near future or next year? Thank you.

[Vincent Mo:]

Hi, Monica, this is Vincent. Yes, we do have a plan to adjust our price by the end of the year and we are going to increase the price, but the magnitude is still – we are still studying that, i.e., we can finalize that around the end of the year. The direction is to have some increase of our listing products.

[Monica Chen:]

Okay, thank you very much. Thank you on the model.

[Vincent Mo:]

Thank you.

[Operator:]

Thank you. Next question comes from the line of Binbin Ding of JPMorgan. Please ask your question.

[Binbin Ding:]

Hi, good evening and thanks for taking my question and congrats on profit for the quarter. My first question is on the transition to the e-commerce franchise model. So, how does management look at the transition progress so far? Are you generally satisfied with the progress? What kind of metrics are you looking at to evaluate whether the transition is success or not? And is there any achievements you can share with us on this transition? And my second question on the strategy side. So I think this year’s key focus or key strategy is pretty much on the transition and cost reduction or cost optimization. And on top of that, what is your key strategy for the year of ‘18 and are there any initiatives – new initiatives we can expect in the next 12 months? Thank you.

[Vincent Mo:]

Yes, this is Vincent. For your first question about franchise business, frankly, we are not quite mature for this section, franchise business yet. We are focusing very much on the technology big data behind everything now with our transition. The franchise model is a transaction model. I believe transaction is going to be and will be an important part of our business. But how to do that, that’s something we are studying different ingredients of doing transactions like what we want to do into the future is really try to empower our partners to do business rather than we do it directly ourselves. So, even for the franchise business, it’s also how to find out the tools and our resources like data or like the buyers and sellers, the detailed information so that our partners that can match the buyers and sellers together much easier, much more efficient. So that’s the direction we are still exploring. To your second question about the – in like the year 2018, growth and expansion will be the priority of the company and myself into the coming 2018. Fundamentally, I think three things behind next year’s strategic planning one thing is really our fundamental websites, like our apps, our WAPs and our PC ads. So, those are the fundamentals of the company and we are going to emphasize on that, so that our traffic can be very valuable and also with the capacity to empower our partners. So, that’s one. And secondarily, it’s really our application products and the tools which we can sell our products we can sell to our partners, our clients so that they can use our products to do the work much more efficiently. All of this are going to be backup by our technologies and including big data and artificial intelligence all of those new things we are applying to this very traditional real estate industry or real estate market. The third part is really our sales and marketing part. So, that’s something we are going to reorganize the company and to monetize whatever we have from our websites and also from our new products and the tools. Those are the three things in our plan to drive up hopefully 2018’s growth and expansion.

[Binbin Ding:]

That’s very helpful. Thank you very much, Mo.

[Operator:]

Thank you. Next question comes from the line of Ming Xu of UBS. Please ask.

[Wei Xiong:]

Hi, good evening managment. This is Wei Xiong calling on behalf of Ming Xu. Thank you for taking our questions. We just have a quick question. Could management share the outlook for property market next year and maybe share how SouFun is positioned in the market environment? Thank you very much.

[Vincent Mo:]

I got the first part of the question. What’s the second part of the question?

[Hua Lei:]

First part is the market outlook for the property market next year.

[Vincent Mo:]

No, that’s the first part.

[Dana Cheng:]

How is that going to impact our...

[Vincent Mo:]

Our business, right, okay.

[Wei Xiong:]

Yes, yes. Correct, thank you.

[Vincent Mo:]

Okay, got it. Well, as a practitioner in the market for almost 20 years, my judgment about the market situation now is twofold. One aspect is really the policy side from the central government throughout to local government. They are still very keen to put the market under control. Under control means they don’t want to see the increase of price. So that’s the bottom line. I have been in talks with them frequently and I can feel this is very determined and from the top to the local government. With that in mind, for 2018, of course, to the end of the year, we are not going to see price increase in the coming quarters even through the whole year of 2018. So, that’s the policy aspect. Well, on the other hand, the market situation, we are talking about a purely market situation, the demand is still very, very strong and people even need to wait in line to buy property. So that’s the situation. So, we do not have enough supply in the market to now. Of course, the government control is one of the reasons behind that. But still if the demand is there and there are enough people to buy properties and they have the purchasing power to buy properties, so that’s the market situation. So, I think for the whole year 2018, the market is still going to be very much under the government control. The price is not going to increase. I believe the transaction volume is going to be stable at current level, not the level of early of this year, which means the transaction volume will not be big. It will be the lowest probably comparing the amount this year and the year before. So, that’s my judgment about the market. With that said how it’s going to impact our business? I think as you probably know, we have experienced 2, 3 years transformation and we had a lot of challenges in it. And we are overcoming them one by one and we have come back to the technology-driven open platform so that we can empower our partners to do business rather than we do it ourselves. So, it has been effective. We have optimized in everything. All the processes internally and working together with our partners, with our clients. So, that has been effective. So, we believe the market is not going to impact our current business into the next year as we are recovering from our worst situation. So that’s what I can see from today.

[Wei Xiong:]

Thank you very much.

[Operator:]

Thank you. Next question comes from the line of Alvin Jiang of Deutsche Bank. Please ask.

[Maria Minli:]

Hi management. This is Maria asking on behalf of Alvin. First I think before taking our question congratulations for the strong quarter. We just have one question. We noticed this quarter’s margin was quite strong. So may I know that is the profitability sustainable for next year and also next quarter? Thank you.

[Hua Lei:]

Yes. Actually, because in quarter 3 we had very good cost control, both on the cost of revenue and also the selling expenses, so our margin is improving. Personally, I expect, next year, our margin will keep improving, because this year, quarter 1 and quarter 2, we still had many loss from our secondary e-commerce business, from day 1 2018. So I think the loss from our secondary e-commerce business will be minimal. So for the whole year, the margin will be better than this year. So this is my current thinking for the margin of next year. Thank you.

[Operator:]

[Operator Instructions] Next question is from Ella Ji of China Renaissance. Please ask the question.

[Ella Ji:]

Thank you and congratulations on strong quarter. I just want to discuss in terms of the whole restructure model, which innings do you think you are at now? For example so the number of staff, headcount, do you think you already restructured it to the optimum level for your businesses at this point? And then my second question is also about your business development. I recall that you mentioned that your penetration in the lower tier cities are relatively still low especially for the marketing services. So can you update us with the development in this area? Thank you.

[Vincent Mo:]

What is the first question?

[Hua Lei:]

For the headcount.

[Vincent Mo:]

Yes, the optimization question. Ella, as you know, we are doing a series of optimizations throughout this whole organization. Headcount is definitely one of them. As the company is transforming to a technology driven open platform model and we need the right people with the right skills to do the right thing. So that’s we have been to meet that goal or that purpose, we have been optimizing our working staff. Of course, the working force has also been changing with the restructure of our business lines. So as for today, we still have about 6,000 employees’ full-time employees with the company. It is my plan it’s my belief that we are going to continue of our optimization of the workforce, and we are going to hire more talented people with the skills, with technology and equipped with some new things, some new development in the market. At the same time, we are also going to train our existing people so that they can adapt to the transformation and to the needs of the new products and the services. Of course, in the process, there will be some people that will not be able to catch up with the progresses of the company, so we are going to optimize those categories of people. So one word, we are going to continue this optimization, and we are going to have more skilled people join us. We will keep on hiring people and, at the same time, keep on optimizing our workforce. So that’s one. And the...

[Hua Lei:]

The second one is for the business development for the low tier.

[Vincent Mo:]

Yes, the second thing the second question really is an overall strategy of the company. It’s my belief the big cities and midsized cities and the Tier 3, even Tier 4 cities, they are all important to us. At this stage, we cover about close to 100 cities actually, with people on the grounds, we cover more than 100 cities. So there is still a huge space there or a huge potential there for us to expand across from big cities to midsized cities to lower-tier cities as well. Expansion is our key thing next year, and growth expansion that’s the tune for the company. Thanks, Ella.

[Ella Ji:]

Thank you.

[Operator:]

[Operator Instructions] Next question comes from the line of Robert Cowell of 86Research. Please ask.

[Robert Cowell:]

Hi management. Congratulations on a good quarter. I am looking at the marketing services revenue in particular. I think this is the first quarter of positive year-on-year growth for your marketing services business since at least 2014. What is driving the turnaround there? And on a related note, is mobile a factor? How is your marketing services business on mobile performing? Thank you.

[Vincent Mo:]

Yes. We had nearly 4% I think 4%, right, growth in our marketing services. The good thing is that we are now we have stabilized the product line with 2 things there. One thing is that we are adding new ingredients to our marketing services, like data services. Like we are going to have and we are having some new tools for our developers, for our developer clients to use to do marketing services much easier. So those are one side of it. On the other hand, we are working together with the transaction with our data there, with our buyers there. We are trying to monetize the huge visitor’s unique visitors to our website site. This was we have around 5 million unique visitors to our website every day, and those 5 million people, they are really accurate property buyers and sellers and renters to our website. They’re not just trying to come to our website to play so how to make the best use of the unique visitors and use them to empower our partners’, our clients’ efficiency to realize transaction. So that’s the second part supporting the growth or supporting our marketing services. Together, I believe that after we stabilized these marketing services, and we are going to see the growth in this direction, but with not only in the traditional marketing, advertising things together with our kind of a club service, combining all of our resources to empower our clients, our partners to do their business.

[Robert Cowell:]

Alright, thank you.

[Operator:]

Thank you. [Operator Instructions] There are no further questions at this time. Please continue.

[Dana Cheng:]

Thank you all for taking the call with us today, and we look forward to speaking with you in the next quarter. Thank you. Have a good night.

[Operator:]

Thank you. Ladies and gentlemen, that does conclude the conference for today. Thank you for participating. You may now all disconnect.