Fang Holdings Limited
Q3 2016 Earnings Call Transcript

Published: 28 Nov 2016

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2016 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 you that this call is being recorded today, November 28, 2016. I would now like to hand the conference over to your first speaker today, Dr. Hua Lei. Thank you. Please go ahead.

[Hua Lei:]

Thank you, operator. Hello, everyone, and welcome to Fang’s third quarter 2016 earnings conference call. I’m Hua Lei, Fang’s CFO. Together with me today is Fang’s Chairman and CEO, Mr. Vincent Mo. Before we carry on, I would like to remind you that during the course of this conference call, we may make forward-looking statements that are not historical facts including statements about our beliefs and expectations. Forward-looking statements involve inherent risks and uncertainty. A number of important factors could cause actual results to differ materially from those contained in any forward-looking statements. Fang assumes no obligation 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 SEC, including our Form 20-F. Now, let’s look at the numbers. Revenue, our revenue in quarter three was $250 million, an increase of 1%, compared with last year. Revenue from e-commerce services was $167 million, an increase of 17% compared with last year, primarily driven by the growth of the brokerage services for the secondary home, partially offset by the scaling down of rental and home furnishing due to the adjustments of Fang’s strategies in this year. However, up to this quarter, the remaining of rental and home furnishing is minimal. If we take out the revenue from rental and furnishing, we will find a stable growth for the rest of the business. If we exclude rental and furnishing, the total revenue would be $242 million, a 7% increase on the same basis compared with last year. E-commerce revenue would be $159 million, a 32% increase on the same basis compared with last year. Taking a certain look at those growth risks without the impacts from the RMB depreciation, the year-over-year growth for total revenue and the e-commerce revenue would be 14% and 39%, respectively, and even better results. Revenue from marketing services was about $36 million in the third quarter, a decrease of 46% from $66 million compared with last year, primarily due to less demand from property developers for online advertising. Revenue from listing services was $29 million in the third quarter, an increase of 4% from $27 million compared with last year, primarily due to the increased unit price per paying member. Revenue from Internet financial services was about $7 million in the third quarter, an increase of 14% from $6 million compared with last year, primarily due to the contribution from existing loans of new home financial services. Revenue from other value-added services was $11.4 million in the third quarter, an increase of 75% from $6.5 million compared with last year, primarily due to the growth of big data services in research business. Cost of revenue was $157 million in the third quarter, a decrease of roughly 17% from $186 million in the corresponding period of 2015 and a decrease of 32.1% from $231 million in the second quarter of 2016. The decrease in cost of revenues was mainly due to the downsizing of the agent team related to the secondary brokerage services, and the scaling down of the rental and home furnishing in e-commerce services. Operating expenses was $93 million in the third quarter, generally consistent with the same period of 2015. Selling expenses was $57 million, an increase of 7% from $53 million in the same period of 2015, primarily due to the increased advertising and promotional expenses. G&A expense was $36 million, a decrease of 10% from $39 million for the same period of 2015, primarily due to the decreased bad-debt expense and bank surcharges. Operating income was $0.2 million in the third quarter, compared with operating loss of $32 million in the same period of 2015. The income tax expenses was $8 million, compared to income tax benefit of $29 million in the corresponding period last year. Net loss attributable to Fang’s shareholders was $4.9 million in the third quarter, compared with net income of $1.4 million last year. Loss per fully-diluted ordinary shares and ADS was $0.05 and $0.01 respectively, compared with earnings of $0.02 and nil in the corresponding period of 2015. Adjusted EBITDA, defined as non-GAAP net income before income taxes, interest expenses, interest income, depreciation, and amortization, was $1.6 million in the third quarter compared to the loss of $24.3 million in the corresponding period of 2015. Cash as of September 30, 2016, Fang had cash, cash equivalents, and short-term investments of $893 million compared to $984 million as of December 31, 2015. Net cash generated from operating activities was $77 million, compared to cash flow used in operating activities of $83 million in the same period of 2015, primarily due to the repayment of loan principals in our financial services, which was about $87 million for the three months ended September 30, 2016. As of November 28, 2016, Fang had purchased about $17 million ADS’ with a total consideration of $81 million. Fang will continue to purchase the ADS with an aggregate value of no more than US$200 million under the current program. Fang adjusted its total revenue guidance for 2016 from $1,148.6 million to $927.7 million, representing a year-on-year increase of 5%. This forecast reflects Fang’s current and preliminary view, which is subject to change. Thank you for joining us 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] The first question comes from the line of Hillman Chan of Macquarie. Please ask your question.

[Hillman Chan:]

Good evening, Mo and Hua Lei. My first question is about your view on the impacts on policy measures on our primary and also secondary home business into the fourth quarter and next year? And how long would you expect the negative impact with that? And then I have a follow-up question?

[Tianquan Vincent Mo:]

This is Vincent. I’ll answer this question. And we have been in a close contact with authorities from the central government and local government as well as one of the major players in the market. It is my experience and my feeling that the current regulation will continue three to six months, this is for sure. But it’s also my belief that after six months, if there were no further regulations and the market should be back on track, it may not be back to the crazy high volume time as it happened in the first-half of this year. But I think after six months, the market should mostly come back to its normal level.

[Hillman Chan:]

Okay, and thank you Mo. And related to that, so based on your judgment on the property market, how do SouFun position itself going into 2017, particularly around our headcount planning, offline store, as well as M&A strategy, if I need to acquire third-party agencies to complement our sales force?

[Tianquan Vincent Mo:]

I think 2007, as a whole, will be a promising year for us. As you know, we have been struggling in the past two years to today transforming the company from a pure vertical information model platform to three, including the information platform, transaction platform, and the financial platform. It is a tough transformation. And we experienced and we’re still experiencing turbulences in the process, but we also accumulated more and more experiences in the process. As you probably know from our reporting that we had a huge loss in quarter one and a big loss in quarter two, and this quarter mostly we have achieved our operational profitability. So it is a learning process. We are getting back to a more sustainable situation going forward. Back to your question for 2007, other than a – just mentioned, we will continue our transformation. We’re going to focus more on the resell market and the new home market transacting model. We will fine tune and optimize the whole process into more details with respect to whether we’re going to acquire or merge with other opportunities, up to today we don’t have something in our mind yet, but we are open to all good opportunities, which could benefit the company.

[Hillman Chan:]

Okay. Thank you, Mo, that’s very helpful.

[Operator:]

The next question comes from the line of Evan Zhou of Credit Suisse. Please ask your question.

[Evan Zhou:]

Hi, Mo and Lei, thanks for taking my question. Two questions. First is on, again, the strategy and probably more specifically our information platform, the open, basically the marketing and listing [ph] Mo, how do you see that kind of the strategic importance of this segment for us, especially during the period where we will be kind of under few turbulence of the agency model business because of the market situation, where I think the legacy business provides – still provide decent cash flows and profitability? And as we do our [indiscernible] biggest property-related or app on the market, so how do you see the strategic value of that? And how do you see kind of the normalized cash flow or operating profit for that business going forward? And I think these two segments have been kind of flat or down two years, and we’re kind of, will we see like a recovery of growth in – maybe in 2017, or kind of stabilization for the top line? That will be the first question.

[Tianquan Vincent Mo:]

Okay. As you probably know, we’re running two separate lines of business. One is the open platform, the other one is our own transaction in itself leadingtransaction business. With respect to the – our traditional core open platform business, advertising and the listings are two major revenue products or revenue lines for the company. We have been experiencing a rough year for our traditional new home advertising, as the market was really good for this year up to today actually, the new home business. And property developers, they are not that much in the mind of the Internet or mobile advertising for their properties. So we have been seeing the marketing revenue going down in a substantial rate this year. But it’s always my belief. Going forward, I think, the advertising – Internet advertising, mobile advertising are very useful for promoting new home properties for the developers. So with the market back to normal, not like what happened in the first-half until today, the market situation this year, I think the demand for advertising will still be strong. So that’s my belief. The challenge into us is that we’re going to update our products, upgrade our products, and to make sure we can use more advanced advertising model like big data and online and instant direct broadcasting product, and all of this to feed the demand from the developers. So that’s for the traditional advertising. And for the listing services, I – we had a bad year last year. And this year, we are recovering from that. The cash flow – the cash in for the listing has almost doubled of what we had last year. So we are going to see this momentum going to continue into next year. The only thing, which is – which has uncertainty is the current regulation, which are targeting at the resale sector at agency and brokerage companies. That will be an active point in the listing business. So this will be my thinking, my judgment with respect to the traditional advertising, the listing business going forward into 2017.

[Evan Zhou:]

Got it. Thank you Mo. Second question is regarding our agency transactional platform. I think we have been doing some downsizing to adjust the – for the market situation. I think, is there like a right size for us in your mind for these businesses like on a sustainable basis, what kind of – on the new home and used home side, secondary side, the right size of agency and also the kind of the offline outlet level? And sorry, lastly maybe Mo or Lei, could you maybe comment a little bit on our funding and cash flow situation? Do we still see it is healthy? I think we’ve been repurchasing stock and still have decent size of cash. But there is essentially some impact on the Internet financing, so if you can kind of comment on that, it will be helpful. Thank you.

[Tianquan Vincent Mo:]

Okay, let me answer your second question about the right size of the agency or the people. Frankly, I don’t know. I don’t know whether 10,000, 20,000 or 50,000 are the right number for a successful resale business. But there’s one thing, I think, I’m learning from the process. We got to have a very solid foundation to support the transaction, whether it’s from our app, WAP or PCNs, or from our internal operating system to support the transaction. So I think this technology and platforms are very, very important. Without that, it is – it will be impossible to support a large-scale agents in operations there. So with respect to the size, if, I’m going to say, I think it will be very tough to own for a time, i.e., very big size in a very big scale of agents going forward. I think there will be some kind of arrangement between the agents and the company like a partnership, which will make the transaction business more sustainable going forward. So that’s something we’re trying at this stage. We’re going to see, the best model we’re going to use going forward. So that’s where your second question. The third question is about?

[Hua Lei:]

Is about the funding, it’s about our cash?

[Tianquan Vincent Mo:]

Okay. The funding side, as you see from our numbers, we accounted we have close to $900 million in our hands. We are going to pay back about $400 million next month for the convertible. And after that, we are pretty sure with other resources we have and we’re pretty much sure, we’re going to have around $500 million free cash in hand. So we – for the time being, we’re not that much worried about the funding thing. As you know, we are – now we are around the break-even. And we probably – we will not make a lot of money out of it, because we’re going to expand the business. And on the other hand, we are also not going to lose a lot of money going forward. So we are quite confident with the cash in hands that we are pretty much safe and the cash, we’re also be very supportive to our growth into 2017 and 2018.

[Evan Zhou:]

Got it, Mo, thanks. Just very quick follow-up. Will the Internet finance part a – still an area that we will invest that may impact our cash flow down the road?

[Tianquan Vincent Mo:]

Our Internet finance service will be mainly to support our transaction business for the resale and the new home business. Frankly, the – with the most recent regulation from Chinese government, from the financial authorities and from the residential authorities, as well, we will be very focused on helping the transaction itself. We’re not planning to expand the Internet financing out of our existing transactions. We’re mainly going to support our business. As long as our transacting business keeps them going on, keeps them expanding after consolidation, I’m pretty much sure that the size of the Internet financing for our own transacting business will be very promising going forward.

[Evan Zhou:]

Very helpful. Thank you, Vincient and...

[Operator:]

The next question comes from the line of Alvin Jiang of Deutsche Bank. Please ask your question.

[Unidentified Analyst:]

Hi, management, this is Marima [ph] on behalf of Alvin Jiang. Thank you for taking our question. We have two questions here. First, what was the headcount number for 3Q? And what is your headcount plan for next quarter and the coming year? And the second question is more on macro. Could management share your ideas on how to balance the development of company business under the macro or the market risks? Thank you.

[Hua Lei:]

Yes, for the headcount on 3Q, totally, we will have over 27,000 employees for the whole company. For the e-commerce side, we have 19,000 people there. Especially, for the resale part, we have 17,000 people at the end of quarter three. So actually, you will say, for the resale part, we did had a very big decrease, I mean, compared to quarter two this year, yes, so this is why we’re saying, we had a much better cost control in quarter three.

[Tianquan Vincent Mo:]

Yes. I’m sorry, what’s your second question?

[Unidentified Analyst:]

The second question is on, how do you balance the development of company business under the macro or the market risks?

[Hua Lei:]

Yes. We will say, the market risk is always there. Actually, since I have been in this company, we have experienced several cycles like in 2010 and 2014. So the risk is always there. For the company, for us definitely, I would say, so first thing is, we need to grow our traditional business, which is our marketing services and the listing business to make sure we can have very good positive cash there also good profit there. Secondly, under current situation, we had a much better cost control there. So we will also grow our e-commerce business, resale, both on new home and the resale parts in a controlled way. So this probably is our [indiscernible]. For the policy, as well as I explained before, we expect next three to six months the policy probably still will be there. For the long-term, we believe the government definitely there’s still one to grow our property markets to the one todestroythe markets. So after six months, probably we will see a much every month there. I’m not sure, whether that answer your question or not?

[Unidentified Analyst:]

Yes, that’s very helpful. Thank you.

[Hua Lei:]

Okay. Thank you.

[Operator:]

The next question comes from the line of Robert Cowell of 86Research. Please ask your question.

[Robert Cowell:]

Good morning, Mo and Hua Lei, thank you for taking my question. I guess, I want to follow-up a little bit on this strategy for the secondary market. Last summer, you – or this summer, you kind of rolled out a strategy called [indiscernible] basically a team of agents. I want to hear some color on how your relationship with some of these big secondary agencies, where that relationship stands right now? Specifically, I’m aware of big one in Beijing Mytian [ph] is now back on the platform. And then you mentioned just minutes ago, potentially looking at deeper ways to partner with some of these agencies, how might something like that work? Thank you.

[Tianquan Vincent Mo:]

Okay. Yes, we initiated a partnership – kind of a partnership program with our listing clients since the past three, four months ago, which has been successful, because as you probably know, that in – one year ago, we had a very tough relationship with our client in a brokerage houses, because we did transacting business ourselves for our transaction platform. But actually, most of the players in the market and most of the brokerage companies, agent companies in the market, they like our product, like our SouFun bond product, like our listing product, because their return is much better than our competitors. So we need to explain our strategy to them to make sure they understand that our open platform and our self transaction models are independent. And it’s actually independently run by independent division companies or groups within our holding structure. So I think it has been successful. They have more and more brokerage companies coming back to us, including almost everybody in the market. So that’s why we have a recovery of our listing business this year comparing to last year, it’s almost doubled the amount of listing clients and the listing revenue. So that’s the situation for the [indiscernible] strategy we did in the past. And the second part of the question is about…

[Hua Lei:]

Is part of the partnership with the agent, right?

[Tianquan Vincent Mo:]

Oh, yes. I talked about several minutes ago about our transaction model, our transaction in a business ourselves. So we’re going to test a partnership with our own agents going forward. We’re going to provide our platform, our management, our trainee, our system to them. So that they can use everything, as they did in, I’d say, a full-time employee of the company going forward. So I believe that direction will be, at least, part of our operations for transaction model going forward.

[Robert Cowell:]

Interesting. Thanks for the color on that. Maybe if I could get one more follow-up. I know, I guess, earlier in the year, there was a lawsuit related to the SouFun or SouFun brand. And now we’re using the brand name Fang [indiscernible]. I want to know if that has had any impact on your operations? And I guess, how we see the brand going forward? Thanks.

[Tianquan Vincent Mo:]

Actually, it has – it does not have a lot of things related to our operations. We started using Fang [indiscernible], our content, brand more than two years ago with the change of our domain name from S-O-U-F-U-N to fang.com, F-A-N-G.com. We bought the name more than two years ago, which is very easily recognized by Chinese people, especially when we go to more smaller cities. So that strategy has been very successful. And ever since about two years ago and we have been branding Fang [indiscernible] all of the country. And now, I think, it’s a very highly recognized brand in the market already.

[Robert Cowell:]

Great. Thank you.

[Operator:]

The next question comes from the line of Amanda Chen of Morgan Stanley. Please ask your question.

[Unidentified Analyst:]

Hi, management, thank you for taking my question. It is [indiscernible] from Morgan Stanley asking questions on behalf of Amanda. So I have two questions. My first question is, the company has some CB [ph] in fourth quarter and need to borrow some offshore U.S. dollars, will this have impact on the company’s break-even targets in next quarter? And my second question is about management’s view on transaction and listing business for 2017. So, given the increase in restrictive regulations, will the company reduce headcount for transaction business next year. So can you share some color on the headcounts plan going forward next year? And do you expect the listing business to resume high growth as before? Thank you.

[Tianquan Vincent Mo:]

Well, I’ll let you answer the first one.

[Hua Lei:]

Yes. So first question is about our offshore loan to repay the CB, as well, which will impact our profitability, is this one?

[Unidentified Analyst:]

Yes.

[Hua Lei:]

Actually, yes, actually, we need to do some offshore loan, because we need to repay the CB. But as you know, the overseas interest rate actually is very, very low. I would say, it’s less than 2%, because we will use our domestic RMB as collateral to borrow the U.S. dollar overseas. So and also, we are planning to yield a long-term loan to replace its offshore loan actually. So for me, I don’t see, that is a very big impact from these arrangements, yes, to our profitability.

[Tianquan Vincent Mo:]

Yes, for the second question about the listing and our own transaction business for the resale market into 2017, I think the listing business will be – will continue to be good for the whole year 2017. It is my estimation the current regulation, although it’s tough, but I think after three to six months, the market will come back, again, of course, not to the very hot level, it will back to a normal level. So as long as the market is normal there, the listing business will still be very promising, especially, as I mentioned, the return on our listing business is comparatively much better in the market. With respect to the transaction business, we’re doing ourselves. We’re cautiously adjusting our scale and also our business model into profits to adopt it to the change of the market, also adopt it to the change of the regulations that is a must. But I think the opportunity is still there, especially going forward into longer future. So 2017, we will continue our optimization, but we do not have a plan to scale down the operations itself. Although, we’re going to optimize everything the details, but growth is still something high on my list going forward and going into 2017 and 2018.

[Unidentified Analyst:]

Okay, that’s very helpful. Thank you.

[Operator:]

Your next question comes from the line of Ming Xu of UBS. Please ask your questions.

[Ming Xu:]

Hi, Mo and Hua Lei. So, I have a question – I have some questions on the efficiency of the resale agency business. So after we raised the commission rate to 1.5% and offer 1% – offer 0.6% to the agents, we are now obviously better positioned than before to offer a competitive package to the agents compared to our competitors. So I just want to – but of course, here the efficiency still matters. So I just want to know, number one is, what’s the current efficiency in the business? And number two, what’s the new kind of break-even efficiency under the new commission structure? And thirdly is, what are targets for the – maybe for the next 12 to 18 months?

[Hua Lei:]

Yes, for the efficiency in quarter three, our sales efficiency in the resale is probably 0.4%, which is similar to quarter two this year. But given, we increased our commission fee from 1 to 1.5 on June, actually, this number is not bad, I would say. If we look at the individual months, what we’ll say, actually on June, our – actually, our efficiency is only less than 0.3%. On July, it’s 0.33%. On August, it’s 0.39%. On September, it’s 0.47%. So actually, the efficiency, the third efficiency, actually they are – is increasing month by month. So actually this is very good change for the company, because our strategy is to cut cost, those underperforming agents. So you will say, the efficiency rate is keeping increasing. So this is for the first question, right.

[Ming Xu:]

Yes. And also what’s the break-even efficiency now?

[Hua Lei:]

For the break-even efficiency, I’d say, if we can keep like 0.5% efficiency rate, we probably will be break-even, yes, in most of cities.

[Ming Xu:]

Okay. All right, fine. And what’s the target for the next 12 to 18 months?

[Hua Lei:]

Actually, our target for the efficiency is definitely will be in a much higher than current number, because as – from the first day we start this business, our goal is to produce much higher efficiency than traditional Asian companies also to have much more than the transparent process in the whole buying and selling process. Actually, earlier in our business, we had like 0.8% efficiency rate in some cities, even we had a well, – why efficiency rate, but definitely, which under 0.5% commission fee. Going forward in the future, we believe the bad thing in our system with good training, we will increase our efficiency to a much higher level. But I don’t know which will be one or even higher, yes, that’s definitely is our goal.

[Ming Xu:]

Got it. In terms of a final follow-up. So with the rising efficiency, is there any potential for us to – because obviously in the rising efficiency will increase the attractiveness to the agents. So but with that, is there any potential to cut the fixed salary we currently offer? And also Mo, you just mentioned about partnership you’re trying out. So is there also a way that you can reduce the fixed salary and make the cost structure more flexible? Thanks.

[Tianquan Vincent Mo:]

Actually, we have been doing that already. We – in the past several months, we have been optimizing the cost structure of our resale transaction business. That’s one of the reasons we got to today with the marginally operational profitability. So we will continue this optimization and to make sure that our agents, they can make money and the company can also make money. And so that we can create a win-win game for most of our agents and the company going forward.

[Unidentified Analyst:]

Thanks.

[Operator:]

At this time, I would now like to hand the conference back to Dr. Hua Lei, for the closing remarks.

[Hua Lei:]

Thank you. Thank you all for joining us today. That’s all. Thank you.

[Operator:]

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