Fang Holdings Limited
Q4 2017 Earnings Call Transcript

Published: 29 Mar 2018

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 and Full Year 2017 Fang Holdings Limited Earnings Conference Call. At this time, all participants are in listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your first speaker today, Ms. Dana Cheng. Please go ahead.

[Dana Cheng:]

Thank you, operator. Hello, everyone, and welcome to Fang’s fourth quarter and full year 2017 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 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 go ahead.

[Hua Lei:]

Thank you, everyone, for participating in today’s call, and this is Hua Lei. Let me walk you through our financials first, and then Vincent and I will start on the Q&A session. I will start with revenues, fourth quarter 2017 results revenue. Fang reported total revenues of reported total revenues of $112.2 million in the fourth quarter, a 85.8% decrease from $174.7 million in the corresponding period of 2016, primarily due to the decline in e-commerce services by $81.4 million. Revenue from listing services was $41.8 million in fourth quarter, an increase of 8.2% from $38.6 million in the corresponding period of 2016, driven by the increased numbers of paying members. Revenue from marketing services was $49.6 million in the fourth quarter, an increase of 3.4% from $48 million in the corresponding period of 2016, primarily driven by the refocus of Fang’s effort in the online business. Revenue from e-commerce services was $8.5 million in the fourth quarter, a decrease of 90.6% from $89.9 million in the corresponding period of 2016, primarily due to Fang’s transformation back to a technology-driven open platform model. Revenue from Internet financial services was $3.6 million in the fourth quarter, a significant increase from $0.6 million in the corresponding period of 2016, primarily due to the recovery of loan operations and the introductions of collateral loans products. Revenue from other value-added services was $8.6 million in the fourth quarter, an increase of 67.5% compared to $5.2 million in the corresponding period of 2016, primarily driven by the growth of data products in the research business. Cost of revenue was $28 – $29.7 million in the fourth quarter of 2017, a decrease of 66.8% from $89.4 million for the corresponding period of last year, primarily driven by the closing of the self-owned brokerage stores, deduction of e-commerce business staff and cost optimization under the technology-driven open platform. Operating expenses was $51.9 million in the fourth quarter, a decrease of 44.9% from $94.2 million for the corresponding period of last year. Selling expenses was $27.8 million in the fourth quarter, a decrease of 53% from $59.2 million for the corresponding period of 2016, primarily driven by the decrease of advertising and promotion fee, sales and commission fee. G&A expense was $24.3 million in the fourth quarter, a decrease of 31.1% from $35.3 million for the corresponding period of 2016, primarily due to the deduction of staff cost. Operating income was $30.6 million in the fourth quarter of last year – of this year compared to the operating loss of $8.9 million in the corresponding period of 2016, primarily attributable to the closing of the self-owned brokerage stores and effective cost control. Income tax expenses was $13.1 million in the fourth quarter compared to $3.1 million in the corresponding period of last year. Net income attributable to Fang’s shareholders was $15.2 million in the fourth quarter compared to net loss of $10.4 million in the corresponding period of 2016. Earnings per fully diluted ordinary shares and ADS was $0.16 and $0.03 in the fourth quarter compared to a loss per fully diluted ordinary shares and ADS of $0.11 and $0.02 in the fourth quarter of 2016, respectively. Adjusted EBITDA, defined as the non-GAAP net income before income tax, interest expense, interest income depreciation and amortization, was $35.6 million in the fourth quarter compared to $2.4 million in the corresponding period of 2016. Cash, as of December 31, 2016, Fang had cash, cash equivalents and short-term investments of $507.1 million compared to $590.5 million as of December 31, 2016. Net cash generated from operating activities was $57.1 million in the fourth quarter of 2017 compared to cash flow generated from operating activities was $85.1 million in the same period of 2016, primarily due to the decrease of cash inflow of the loan receivable related to operating activities compared to the fourth quarter of 2016. Fiscal year 2017 results. Revenue, Fang reported total revenue of $444.3 million for 2017 representing a decrease of 51.5% from $916.4 million for 2016, primarily due to the decline in e-commerce services revenue by $489.9 million. Revenue from marketing services was $149.3 million for 2017, a decrease of 9.8% from $165.4 million for 2016, primarily due to less demand from property developers. Revenue from e-commerce services was $87.8 million for 2017, a decrease of 84.8% from $577.7 million for 2016, primarily due to Fang’s transformation back to a technology-driven open platform model. Revenue from listing services was $165.4 million for 2017, an increase of 40% from $118.1 million for 2016, driven by the increased number of paying members in lower tier cities. Revenue from financial services was $12.1 million for 2017, a decrease of 59.3% from $29.6 million for 2016, primarily due to the reduced loan demand from decreased secondary transaction volumes of Fang’s own franchised brokerage services and a strategic shift to a more diversified loan business, which is still at its early stage. Revenue from other value-added services was $29.8 million for 2017, an increase of 16.6% from $25.6 million for 2016, primarily driven by the technology of data products in research business. Cost of revenue was $174.6 million for 2017, a decrease of 74.6% from $687.2 million for 2016, primarily driven by the closing of self-owned brokerage stores, deduction of e-commerce staff and cost optimization under the technology-driven open platform. Operating expenses was $232.9 million for 2017, a decrease of 38.8% from $380.7 million for 2016. Selling expenses was $91.3 million for 2017, a decrease of 60.3% from $229.8 million for 2016, primarily driven by the decrease of advertising and promotion fee, sales commission fee. G&A expense was $141.1 million for 2017, a decrease of 6.7% from $151.3 million for 2016, primarily due to the deduction of staff cost. Operating income was $36.8 million for 2017, compared with operating loss of $151.4 million for 2016. Income tax expenses was $21.4 million for 2017, compared to $25 million for the corresponding period in 2016. The expenses decrease was primarily due to the reversal of previously recorded ASC 740 (FIN 48) tax and interest liability. Net income attributable to Fang’s shareholders was $16.3 million for 2017, compared to net loss $169.6 million for 2016. Earnings per fully diluted ordinary shares and ADS were $0.18 and $0.04 in 2017, compared to net loss per fully diluted ordinary share and ADS of $1.81and $0.36 in 2016, respectively. Adjusted EBITDA was $63.6 million for 2017, compared to negative $121.2 million for 2016. Cash generated from operating activities was $126.9 million for 2017, compared to net cash generated from operating activities was $131.2 million for 2016, primarily due to the decrease of cash inflow of the loan receivable related to operating activities compared to 2016. Business outlook. Fang estimates its net income from 2018 will range from $100 million to $120 million, representing a year-on-year increase of 388.3% to 485.9%. This forecast reflects Fang’s current and preliminary view, which is subject to change. Thank you for participating. We are now open for the questions. Operator, please go ahead.

[Operator:]

Certainly. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] The first question comes from the line of Ella Ji from China Renaissance. Please go ahead.

[Ella Ji:]

Thank you, management. Good evening. Thank you for taking my question. The fourth quarter, your operating income has quite a big bit of the consensus, and so congratulations on that. In the meanwhile, I noticed that your revenue line had some volatilities on a quarter-over-quarter basis. So could you walk us through the – each of your major revenue lines and then discuss the current market situation and your outlook for these major revenue lines one by one? That’s my first question. And the second question is, I noticed that your operating margin continued to go up. And so looking forward to 2018, do you think your 4Q’s gross margin and operating margin can be the baseline for 2018? Or do you think that even further upside to that number? Thank you very much.

[Hua Lei:]

Yes. For the first question, for the outlook each business division, we think, for 2018, our listing service still will have strong growth, definitely. And we will try to make our marketing service be stable with some growth there, for sure. Those two businesses are our major business. And also, we will try to grow our financial services – grow our financial service that are growing quarter-by-quarter. And we will put more resource and focus to our financial services in 2018, hope we can have good results there. And also, we are seeing the strong growth in our research business, which is in the other value-added services in the payments and there is potential for our research business as well. So this is our outlook for the year for each business line. For your second question about the margin, yes, we are seeing our gross margin and operating margin, they are improving significantly compared to 2016. And we expect those margin level will, at least, keep at the same level in 2018, maybe we are able to improve it further. So thank you.

[Ella Ji:]

Thank you. Can I just quickly follow-up about your listing services. Could you share with us how many paying agents you have as of end of 2017 and what’s your expectations for 2018?

[Hua Lei:]

Yes, in quarter 4, we have 260 – 268,000, nearly 270,000 paying members, which is around – over 18% growth year-over-year. But we are seeing some decline on the quarter-over-quarter, about 5% decline because the seasonality caused the quarter four market and broad market is non-effective. We are still expecting the number will grow in 2018, probably we can say like 20% to 30% grow in our pay members.

[Ella Ji:]

Thank you. I’ll go back in the queue.

[Hua Lei:]

Thank you.

[Operator:]

The next question comes from the line of Tian Hou from T.H. Capital. Please go ahead.

[Tian Hou:]

Yes. Hi, Lei and Mo. So the question is much related to China housing market, in general. So it looks like the government continued its tightening policy, and actually there’s a structural change going on. And how SouFun, in this kind of event, to continue to grow its listing business and also other type of business?

[Vincent Mo:]

Okay. As you just described, the market regulation in China continues into 2018. And I believe the current regulation will go on for the rest of the whole 2018, whether it’s in the development market, new market or the resale market. That said, we have also seen that – two things, and the one is that, we’re not talking too much about the regulation now from the central government to local governments. So it is easy, although the regulations are still there. So that’s one. And second phenomenon we have been noticing is that, some places, some cities are doing different policies. It’s also from the top – from the central government, which says depending on special situations, each area, each city or part of the city, they can have their own specific regulations, which could be different from the – from other tightening policies. So although the current regulations has – have not been losing, the whole attitude is more positive than half year ago and one year ago. So that’s the general situation. Specifically to our listing business and advertising business and other businesses as well, I think 2018 will not be worse than 2017. So that’s my judgment. I think it will be relatively stable, and to us promising because we are having new products out to the market. So I would not complain or blame the regulation in 2018.

[Tian Hou:]

Okay, thank you, Mo. It’s helpful.

[Vincent Mo:]

Next?

[Operator:]

The next question comes from the line of Monica Chen from Credit Suisse. Please go ahead.

[Monica Chen:]

Hi, good evening, Mo and Lei. I have two questions. My first question is regarding our marketing business. So can management provide some latest updates on our product development of the new marketing tools, I mean, the cloud product? I think we were talking about a launch [indiscernible] in cloud product a little last year. So what is the contribution to our marketing revenue for the fourth quarter? And how much contribution do we expect for the full year 2018? And then I have a follow-up question.

[Vincent Mo:]

We will talk about this. You probably know we are working on the products, which are backed up by big data and artificial intelligence. I’m personally focusing very much on the products myself. We have [Foreign Language] for development market, and we have [Foreign Language] for the resale market. And then we have [Foreign Language] for the home furnishing market. So those are the set of cloud services we call internally, the three clouds, we have into the market. Actually we have put our services and empowering tools and products into one places, which is the – which are the three cloud service – cloud products we are moving into the market. It is my intention and the company’s plan that we’re going to leverage the whole technology cycle within this company throughout all of our products driven by data and technology, specifically those AI technologies, so that we can do business more efficiently and our partners can also do business more efficiently and everything can be trackable through our cloud services. So that’s more in a macro level. On a micro level, we’re having some new products. They are like the – we call internally, we call it [Foreign Language] which is a needs product for the development market, the new market and the resale market as well plus the home furnishing market together. So that’s one new product that we anticipate. We can make the best use of our traffic and our big data to generate fresh revenue for the company in 2018.

[Monica Chen:]

Thank you. So my second question is about our e-commerce business. So actually we saw the revenue contribution for e-commerce is getting smaller and smaller over time. But I remember, in the last couple quarters, we were still talking about this franchise model and how we’re going to help more agents to grow their business. So I wonder is there any change in our e-commerce business strategy? Or do we still have a plan to actually regrow the e-commerce business in the future? Thank you.

[Vincent Mo:]

Yes, we have a fundamental change in doing this transaction business. As you probably know, we did it ourselves in the past two, three years. And frankly, we failed to succeed in that transaction business by ourselves. And then we tried franchise business, but the scale is small, and in – it’s also in some ways been compared to our platform – open platform model. So we decided to stop franchise business elsewhere, although it’s never been substantially there. So that is the decision of the company. Going forward, we are still going to be there in the transaction business by providing all kind of leads to our partners and open our database and open our other tools products to our partners to empower our product – our partners to do transaction business and encourage our partners to use our transaction platform to do transaction business. So that’s the way we’re going to stay very much in the transaction business, and we are going to get into much more in detail as we could into the transaction business. So that’s the direction we’re going to go going forward.

[Monica Chen:]

Thank you. Thank you very much.

[Vincent Mo:]

Thanks.

[Operator:]

The next question comes from the line of Robert Cowell from 86Research. Please go ahead.

[Robert Cowell:]

Hi, management. Thanks for taking my question. I actually have two. The first one is about a building that [indiscernible] purchased a while ago in New York City at 72 Wall Street. My understanding is that it’s currently undergoing renovation. So I’d like to hear any updates on that renovation and [indiscernible] grants for that building in the future? And then my second question is about the tax rate in the fourth quarter. It looks like your effective tax rate is abnormally high. So I’m wondering what’s the reason for that higher-than-expected tax rate is? And going forward how you all see the effective tax rate? Thank you.

[Vincent Mo:]

Yes, the – our U.S. properties in the Wall Street building, it’s for our global training purpose. It is still under renovation. So that’s the current status quo. And I would like Lei Hua to answer the tax question.

[Hua Lei:]

Okay, yes. In quarter four, the tax expenses was a little bit higher than other three quarters. I think the main reason is that because in the previous three quarters, we had 58 tax reversal actually, which caused – actually the impact – the income tax expense was negative there. So I would expect – still we will see some reversal there in the 2018. And I think the effective tax rate will be a little bit lower than the quarter four level. Thank you.

[Robert Cowell:]

Okay, thank you.

[Hua Lei:]

Thank you.

[Operator:]

The next question comes from the line of Binbin Ding from JP Morgan. Please go ahead.

[Binbin Ding:]

Hey, good evening, Mo and Lei. Thanks for taking my question. I have two here. My first question is regarding your listing service. I noticed that your listing service growth has kind of slowed down to 8% year-on-year, and also the total number of paying members, I think, also has seen some like quarter-over-quarter decline. I’m wondering is it because that the high base in the first quarter of 2016, or is there any other reasons leading to the slowdown? And going forward, how should we look at the growth rate moving into the year of 2018? And is it 4Q growth rate is a good benchmark to look at the future growth? My second question is on the competition from some popular mobile news and information apps such as you know Tudou. I think they are doing pretty good in the number of key verticals, such as auto and others. I’m just wondering how do you view your potential relationship with Tudou in the future, is it more like incorporation? Or you view Tudou actually as a strong competitor? Thank you.

[Vincent Mo:]

You have noticed that the listing business’, the growth has slowed down in some way. It’s – one of the reason is that, last year the regulation is very heavy, specifically targeting the resale market. There is a – the effect lacks behind the regulation itself. So that’s one of the reason, the slowing down of the market. On the other hand, we are moving out with the new version of our listing product. Currently, we call the cloud service, so we called it [Foreign Language] in Chinese. So in this transition, the – there is a smooth process procedure in it, that’s also affected our growth in the listing business. I think after this transition – smooth transition, we were – and after our clients are permitted to our new cloud service, including the listing service, the market will be much more promising going forward. So that’s one of the two questions. And the second question is about the other competitors in the market. You’re right. The market – we have seen new competitors like Tudou in the market. We have been working together with actually the big portals, including, Tudou, in different ways, including Baidu, Tencent and Ali – Alibaba, including Tudou, all of this big portals. On the other way, we have also been competing in different ways like we have been doing with all other big portals, big players elsewhere. I think there was – we have different advantage. We have different competitive agents there. For us, we are more focused vertical portal and visitors – the traffic has been growing very heavily recently. And the visitors, they are more accurate in a potential property buyers to our clients. So that’s the advantage we have been enjoying in the past dozen-plus years.

[Binbin Ding:]

Thanks for the color, very helpful. Thank you, Mo.

[Vincent Mo:]

Thanks.

[Operator:]

The next question comes from the line of Wei Xiong from UBS. Please go ahead.

[Wei Xiong:]

Hi, management. This is Wei Xiong on behalf of Ming Xu. Thanks for taking all questions. We have two questions here. Firstly, recently, we saw a news that SouFun is cooperating with Alibaba, Ping An and Haofangtong to establish an open platform for secondary housing agents. So could management share your strategic thinking behind this cooperation? And how this might impact your operation this year? And secondly, we also see that some Internet companies have shown slowing of online traffic growth and increasing online traffic acquisition costs. So could management also comment on your current online traffic growth trend as well as your strategy to continue improving your user traffic? Thank you.

[Vincent Mo:]

Well, to your first question, the company has building up its open platform strategy or open platform model since about 1.5 years ago. We call it a retransformation back to our open platform in a model. So the – we would like to partner or cooperate with all partners in the market, including the partners you just mentioned, including Haofangtong, Alibaba and Ping An Haofang, all of these partners in the market. We have our advantage, and we’re going to open our resources and our platform to potential players in the market. And in return, and our partners and other players in the market, they are going to open their platform, their resources to us. So together, we can make this market more efficient. Also, of course, we would like to enjoy the results from the partnership from the opening in a platform strategy. So that’s one – that’s the question to your – the strategy, your question. The second one is – Lei Hua, why not you go ahead.

[Hua Lei:]

Yes, actually, we would say, in most of the companies, the traffic growth was slowing down. For us, they were slowing in United States – both United States. So our traffic, actually, is stable, if you look at the traffic itself compared to 2016. But as Mo had already mentioned, we are – currently, we are also working in the select Tudou and other big portals like in Tudou, which is the new hub. Those two improve our traffic there. We are gradually massive in traffic from other big portals to support our platform growing. So we’re seeing positive results now already, and we are going to continue to do it in 2018. And we will also probably spend more on traffic probably in the new year. Thank you.

[Wei Xiong:]

Thank you, Mo and Lei. Thanks for the color.

[Operator:]

The next question comes from the line of Miranda Zhuang from Merrill Lynch. Please go ahead.

[Miranda Zhuang:]

Good evening, Mo and Lei. Thanks for taking my questions. I have two questions regarding two business areas. The first one is the listing service. The management mentioned that due to the launch of the new [indiscernible] products, so there will be a learning period for the agents. So I’m wondering from your experience, how long is the learning period? And when should we expect the subscriber base to ramp up in FY2018? And then also about the listing business, I remember in last earnings call, management mentioned about testing to the price hike for the subscription packages or the listing business. So can management give us an update about this aspect? And my second question is about the financing business. Management mentioned that you will increase the investment in this area in this year. Can you elaborate more about your initiatives? Thanks.

[Vincent Mo:]

I would answer the second question. Why not you answer the first question. About the financial business, actually, we started about four years ago. And fortunately, we established our online micro loan company and we have that license. So we can do national micro loan or micro lending to needed clients. So it is the company’s strategy that we are going to elaborate the licenses and to move out or move quicker, expand our financial business. But we’re going to focus very much in what we have been doing in our ecosystem in the transaction research and searching and new transaction, including rental business in this three business. So we are not going to expand to other non-related financial businesses. So that is the strategy of our financial services. We are going to hire more talent to expand into more cities. Currently, we cover more than 600 cities in China, and we have people in about 100 cities. So with that expansion, we believe, the financial service business will grow steadily and smoothly. We are not going to expect it’s going to have the explosion expansion or quick expansion. The safety of the financial business is very important to us.

[Hua Lei:]

Yes, second question about the [indiscernible] and the listing business, yes we have to measure renovations to – in the listing business to maintain the growth on listing business. First one is now, we have already merged all the agent-faced online portals into one agent cloud to improve the convenience efficiency. Going forward, agents will no longer need to log into different accounts towards mobile listing or the rental listings. They have a unified account on agent cloud and given through the listings from one product to another without changing the accounts. Also the second, we are changing the pricing model for the first three through five slots on the listing pages from purely fixed cost to CPC plus fixed costs. So actually suspending of the agent will be increased in new model. So actually we expect the agent, they will spend at least about 10% after the new servicing model. Thank you.

[Miranda Zhuang:]

Thank you. I have a follow-up. So can you give us an update about the headcount by the end of 4Q? And then what’s the headcount expansion plan for FY2018? Thanks.

[Vincent Mo:]

Yes. As of the 4Q, we have around 5,700 staff with – which is about 700 less comparing to last quarter, I mean, quarter three. And we – in 2018, we said we will continue to control our headcounts, probably we said that we can make our headcount to around 5,000 or even less in the 2018. Thank you.

[Miranda Zhuang:]

Thank you very much.

[Operator:]

There are no further questions. I would now like to hand the conference back to our presenters for today.

[Dana Cheng:]

Thank you all for joining us with the call today, and we look forward to speak with you in the next quarter. Thank you.

[Operator:]

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