Fang Holdings Limited
Q3 2014 Earnings Call Transcript

Published: 6 Nov 2014

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Quarter Three 2014 SouFun Holdings Ltd. Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by question-and-answer session. (Operator Instructions) I must advise you that this conference is being recorded today, Thursday 6 of November, 2014. I’d now like to hand the conference over to your first speaker today, Dr. Hua Lei, Deputy CFO of SouFun. Thank you. Please go ahead, sir

[Dr. Hua Lei:]

Thank you, operator. Hello, everyone and welcome to SouFun third quarter 2014 earnings conference call. I am Hua Lei, Deputy CFO. Joining me today are SouFun's Chairman and CEO, Mr. Vincent Mo; and CFO Mrs. Guan Lanying. This conference call is being broadcasted on the Internet and is available through our IR Web site at ir.fang.com, together with our earnings release. Before we carry on, I’d like to remind you that during the course of this conference call, we may make forward-looking statements, statements that are not historical factors, 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. SouFun 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 the SEC, including our Form 20-F. Our earnings press release and this call include discussions of certain unaudited non-GAAP financial measures. Our press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures and is available on our IR Web site. We will have a Q&A session after the following prepared remarks. Due to the decline in China property markets and the transition of our business, it has been our weakest quarter since IPO and we only delivered 3% year-over-year in top line growth. We are seeing good signs from our two new platforms. In order to achieving the long-term goal, we will continue to carry on our expansion and the transformation, even though these will impact our financial performance in the short-term. During the quarter, we also announced our investments in China’s leading real estate franchise company Century 21 and the China’s leading new home agency company (indiscernible) as part of our O2O strategy. This strategic investments and the partnership, will not only allow SouFun broader and a deeper access to property transactions both in primary and the resale markets, but also enhance our partnership company’s leadership and the transformation by integrating Internet and mobile elements into their broad offline operations. Now let’s looking at the numbers. Revenues in the third quarter totaled $190.5 million, an increase of 3% compared to Q3 of last year. The slowdown of growth rate primarily is due to the decrease in listing services and the marketing services compared to Q2 2013. Revenue from marketing services decreased 6.4% to $81 million in the third quarter of 2014, due to the developer launched much fewer new projects comparing to a year-ago and the more advertising clients used our e-commerce services instead of marketing services in (indiscernible) property markets. Revenue from our e-commerce services grew 36% to $67.6 million in the third quarter. We are now offering e-commerce services in 72 cities compared to 42 cities a year-ago and 6 city in the previous quarter. During the quarter over 64,000 new home sales were completed on our e-commerce services platform. We are seeing strong growth in our new e-commerce model, although we only started this new service since several months ago. Grouping market services and e-commerce revenues together, we will say that in aggregate our revenue from new homes market grew about 9% in the quarter. Revenue from listing services was decreased 20.8% to $36.7 million in the third quarter. As of September 30, the number of paying agent subscribers own our PC platform increased by 0.47% compared to the end of June, reaching about 175,000 (indiscernible) more client support to our (indiscernible) after pricing cuts in June. The listing business was negatively impacted by the significant slowdown in the secondary home sales and our reduction of listing fee nationwide. Our data shows secondary home transactions was down about 43% in first tier city and then down about 47% in second tier cities, significantly impact our agency clients business and in turn negatively impact the spending on our listing platforms. Revenue from other value-added services was $5.3 million in the third quarter of 2014, an increase of 107.8% compared to quarter three in 2013, primarily due to the fast growth of our financial services. Cost of revenue increased by 71% to $48.8 million in the third quarter. The increase in cost was primarily due to the expense incurred on the new e-commerce model, increased staff cost, and the taxes. Q3 gross margin decreased by about 10% from a year-ago to 74.4%. Operating expense was $71.2 million in the third quarter, an increase of 54.3% from a year-ago. Regional operating expenses, offsetting expenses, in the third quarter was $41 million, an increase of 61.4% from a year-ago. G&A expenses were $30.2 million, an increase of 45.5%. The increases in operating expenses are primarily due to the expenses incurred on the new e-commerce model, increased advertising and promotional expenses and the increased staff cost. In 2014, we substantially increased collaboration with some of China’s leading Chinese language portals to enhance traffic to our site. In addition, we’ve continued to spend on TV and outdoor and the public transit marketing campaigns to increase brand awareness, bringing more users to our Web site and our mobile applications. As a result of the significant increase in operating expense, operating income declined 36% to $70.8 million in the third quarter. However, we believe that the investments in personnel and the new business were affecting the operating income in the short-term will enable us to achieve our longer term objectives. Our income tax expense was $18.9 million for the third quarter, a 33.5% increase compared to a year-ago. This may be because of a one-time benefit of $50 million resulting from a lower withholding tax rate was (indiscernible) in the third quarter of last year. Our third quarter GAAP net income decreased by 40.6% to $61 million from a year-ago on a GAAP basis. Fully diluted earning per ADS was $0.14 decreased by 41.8% -- 41.7% from previous $0.24. Non-GAAP fully diluted earnings per ADS was $0.16, a decrease of 30% from a year-ago. And adjusted EBITDA decreased by 33.4% to $78.3 million in the quarter. As September 30, 2014, our cash, cash equivalents, and short-term investments totaled $896.9 million, up 51.7% compared with the beginning of the year, but down slightly by 3.3% compared to the beginning of the quarter. Operating cash flow was $53.1 million in the current quarter, a 57.9% decrease from last year, mainly caused by about $14.6 million entrusted loans provided to developers and home buyers under our financial services program and about $27.9 million decrease in advance payments from our clients as compared to the third quarter of 2013. SouFun adjusts its revenue guidance for 2014 from between $727 million and $739 million, or a year-over-year increase of between 14% and 16%, to between $675 million and $688 million, or a year-over-year increase of between 6% and 8%. SouFun is adjusting its revenue guidance for 2014 in light of the slowdown in the real estate market in China, our reduction in fees we charge for listing services for the remaining of 2014 and a longer time for new businesses to contribute significantly to revenue growth. This forecast reflects SouFun's current and preliminary view, which is subject to change and may not reflect actual results. Thank you for taking the time to join us today and we will now open the call for your questions. Operator, please go ahead.

[Operator:]

Thank you. Ladies and gentlemen, we’ll now begin the question-and-answer session. (Operator Instructions) The first question comes from the line of Dick Wei from Credit Suisse. Please ask your question.

[Dick Wei:]

Hi, good evening. Thanks for taking my questions. I have two questions. First question is on the primary business. I wonder if you can give an update on the new e-commerce model as well as maybe some other cooperation with some of your invested company as well. I think that would be little bit helpful to kind of update on that. Thank you.

[Tianquan Vincent Mo:]

Thank you, Dick. This is Vincent. Yes, you probably remember we had our so-called old e-commerce model we started 3.5 years ago, which was great job in our gross in the past three years. And starting from this year, we experienced a decrease in margin from the old e-commerce business, so we’ve been exploring the new models to step-by-step expanding our old e-commerce model to something which may result in higher margin model. So the new model incorporates directed sales from our Web site, our mobile end as well or directly online sales. So starting from August, last quarter -- and we experience August, we prepared in last quarter and started generating results from August to September and to October as we have seen this direct online sales of properties have bringing us some positive results. Every quarter we’ve sold -- in the past three months, every month we have sold double unit properties -- properties from August-September to August to October. October along we sold a direct case through the Web site, more than 1,000 units. So that’s quick, although the number is still not material, still not a -- a big number, but we’re seeing months by months, every months its double than last months result. So looking to the future, we -- it’s my belief that the new model together with the traditional model, will drive up our e-commerce business into the future. And what’s your second half of the question?

[Dick Wei:]

Maybe another questions on the secondary business, I wonder what is the kind of the attitude of the secondary agents to what our distant surface and then what are some of the strategies that would be defensive, offensive, how we can kind of look into the business line down the road, is it going to like go down to zero for the listing business for example? Thank you.

[Tianquan Vincent Mo:]

It’s about the listing services, right?

[Dick Wei:]

Right.

[Tianquan Vincent Mo:]

Hello, Dick? Yes, okay. I will get back to your first question about our investment into other agency companies offline. So that we can -- we can have a online -- offline partnership into the future. So investments into those companies we’re really looking to the future three years from today or even three, four years from today and by then together we can make this market much more efficient and we can also cover the market from different aspects. So at this stage, it would just partnership with mutually supporting each other across our business lines. And specifically we have a plan to set up joint ventures with our agency partners, offline partners as well, to move our financial platform in forward. So that’s about the recent investment into four -- three of the top five players in China. So it’s my belief that it is going to effect step by step especially if we see it from a longer term point of view. But now back to your second -- your question about the secondary market, resale market, since quarter two of this year actually from April-May we have being experiencing some boycott from our agency clients, because they claim that our prices keep on increasing in the past, so I think its mainly because of the market was tough in a sense to beginning of this year. For the resale market all our -- most of our clients if not all they have experienced tough time and most of them are not -- have not been making money, and they’re loosing money. So we requested a (indiscernible) cut of our price. And we agreed to that and we cut over national -- our price of 40% in nationwide and because with that cut, SouFun’s long-term strategy for this resale market is really trying to provide a comprehensive information in the transaction platform for this market. Listing is only part of the longer term strategy for the information platform and the transaction platform. And most recently we’ve added financial services to our resale market platform, transaction platform. We are also adding listings platform so that our agency partners they can sale our listings as well. We have recently also added the – (indiscernible) guarantee system to the resale market, so that the buyer, sellers they can pay or collect money through our platform and we’re also going to make sure their title is right and also we’re going to make sure the transaction itself its going to be handed to the buyer in a click. So in doing all of this things plus the profit -- transaction processing in a support to major and the small agency companies, we believe in the longer run we’re going to establish a broader supporting transaction platform for our agency partners other than our current purely at listing services, so that’s our kind of situation and our future expansion direction.

[Dick Wei:]

Great. Thank you very much, Vincent. I do look forward to hearing more execution of this strategy. Thank you.

[Tianquan Vincent Mo:]

Thank you, Dick.

[Operator:]

Thank you for your questions. The next question comes from the line of Vivian Hao from Deutsche Bank. Please ask your question.

[Vivian Hao:]

Hi, Vincent and Dr. Hua. Thank you for taking my question. I got two questions. First one is regarding our revised guidance. It’s implying a year-over-year decline for the fourth quarter, if my calculation is correct. Can you please provide us more color on the segment trend respectively for the marketing, also e-commerce and the listing services? My second question is regarding the margins. There is a significant decline this quarter for the gross margin. Just wondering if there is any changes in the cost structure for cost of revenue and also the trend for the future quarters? Thank you.

[Tianquan Vincent Mo:]

Thank you, Vivian. Its Vincent again. Yes, I’m sorry that we did not have a good quarter, for the second time this year. And I’m -- frankly I’m experiencing a very tough time myself in my -- funding this Company, since I founded this Company. So we revised the guidance then and which means in quarter four we expect that we’re going to have a 5% to 10% decrease in growth in our top line revenue. But going forward, I think with our current transformation, our expansion from a pure information platform to a future or three platforms including information platform, the transaction platform and the financial platform. So its -- given this transitions, we’ve experienced two quarters, tough quarters and with my understanding the company and looking to the next step, I think we’re going to experience another two to three quarters in tough time. By the second half of next year, it’s my expectation the Company will come back and come back strong. So for this quarter or for the coming quarter four, we revised our guidance. So for the whole year, the guidance will be about from -- the growth will be 6% to 8%. So that is for the revised guidance and the reasons behind. For the margin, we -- SouFun’s margin you probably remember we had a very good margin and very high margin in the past. In the last year we had over 40% or even or 45% in the property margin net. So that’s the past and now with the transformation we’re spending more on promotion, on marketing, we’re spending more, we’re investing more into our transaction platforms across new home resale and home furnishing sectors as well. So with more people, technology people, it’s specifically into the fundamental infrastructure building up of the Company. So we’re going to see the margin, its not going to maintain over 40% as we’re dealing in the past. For this quarter, we still had a 32% or 34% net property margin. Going forward, we will emphasize more on the expansion or the transformation of our current business, so that to make sure we’re still going to be dominant in this market. So we may invest heavily again. We are going to promote heavily again. So this may affect our margin.

[Vivian Hao:]

Okay. Thank you.

[Tianquan Vincent Mo:]

Thanks.

[Operator:]

Thank you for the question. The next question comes from the line of Alex Yao from JPMorgan. Please ask your question.

[Alex Yao:]

Hi. Good evening, Vincent. Thank you for taking my question. My first question is what are the key metrics you look at to gauge and evaluate the different model transition?

[Tianquan Vincent Mo:]

I’m sorry Alex, could you elaborate a little bit the key metrics, what does that mean, I’m sorry?

[Alex Yao:]

I mean, is there any numeric number or any (indiscernible) or anything you look at to judge how successful the transition is? Perhaps maybe for example in Beijing how many number of units -- new units is sold through the new e-commerce model and what would be the penetration rate today and what would be the future forecast et cetera, whatever metrics or numbers or ratio you think will be important to evaluate the transition?

[Tianquan Vincent Mo:]

Okay, got you. Frankly it’s too early to talk about materially the numbers or the -- for the new things. I’d like to elaborate a little bit from three aspects. One thing it’s about the fundamental about the -- our platform set up with the transaction platform. So we’re fundamentally changing our new home resale market and home furnishing sectors. We are going to make sure eventually our consumers including our major players and our management; we can do all this transactions through our platforms, three platforms. So overall throughout this country covering more than larger cities eventually and at the same time in doing this supporting transaction platforms we’re building up our PC end, PC portals and our mobile ends as well. So our mobile traffic has been growing more than 80% comparing to the same time last year, total although the PC portals its everybody experienced, its slowing down and with that our traffic -- overall traffic still grow 30% comparing to the -- to last year’s number. So this is one thing we’ve been seeing that eventually it’s going to support all of our change, your transformation to transaction and financial services. That’s one direction. And second, something for the new e-commerce model, as I mentioned, in August to September and October the last three months is we have seen the directed sales through our online transaction platform has been doubled every month. So October along we’ve seen directed sales have passed 1,000 units and into the coming months we’re going to see its going to double every month. So that’s a good sign for the new transaction model. For our financial service model, we have also seen a -- it’s amongst the double in growth as well although the number it’s still not that material and not that substantial. For the resale financial services online, through online through our platforms, last quarter we had more than RMB200 million lending done, it’s the banks money and not our own money. And for this month, for this November month like we’re going to see December is going to be four times of last month. So we are seeing good signs from the financial transaction platform elsewhere. So those are the three things we see they’re going to support the transformation and they’re going to support our expansion from that pure information platform to include the transaction and as we’re -- as the financial platforms.

[Alex Yao:]

Got it. The second question is, how do you balance the transition to new business model and your existing business?

[Tianquan Vincent Mo:]

Alex, that’s really the challenge I’m facing myself. As you read the numbers, our traditional business marketing services or listing services they are being affected. One reason is definitely the market is not that good, and the recent market is really the boycott from our -- the kind of boycott from our agency clients. And another reason is really because the expansion, the transformation itself, our emphasis at least it is divided between the traditional core business and the new business itself or themselves. So, the balance is a challenging thing. The strategy is that, if we need to change -- if we need to expand for our future growth, one, two, three years from today, we’re going to do that, very determined to make sure the change -- the transformation, the expansion happened as we’re planning to do it. Of course at the same time if we can balance between this two old and new businesses that will be great, but the first priority is the new business. It’s the future in a more bigger scale business in our overall strategy and overall plan.

[Alex Yao:]

Got it. That’s very helpful. Good luck to the execution and transition. Thank you. I’ll get back to the queue.

[Tianquan Vincent Mo:]

Thank you.

[Operator:]

Thank you for the questions. The next question comes from the line of Eddie Leung from Merrill Lynch. Please ask your question.

[Eddie Leung:]

Hi. Good evening. Thank you for taking my questions. I have two questions. The first one you talked about your new direct sales e-commerce business model. Just wondering could you explain a little bit more about the partners or your clients you have on your direct sales business model at the moment versus the traditional e-commerce business model. Are we seeing basically the big or larger deferrable more willing to test the new business model, or actually the smaller guys, are we seeing like new developers or new products you’re testing this new business model or actually it would be the most loyal or (indiscernible) like that. The developers that you have are the longest relationships who will be willing to test this to see this model. So, just curious on the client mix between a new direct sales business model and your old business model? And then secondly, just a broad question on your financial services. Could you remind us the business model you have right now? Are you charging per transaction or referral or are you charging for a month of our loans lend to your customers? Thank you.

[Tianquan Vincent Mo:]

Eddie, let me answer your second question about financial services first. We are -- at this stage we are helping our partners, small, medium sized agency companies and some individual standalone agents as well help them to provide financial products to their home buyers and home sellers as well. So, mostly we get the referral fees and needs charge from banks not from our agents and clients. So the amount is small, but the loan itself or the product itself the amount has been increasing very rapidly as I answered in last question, so that is only one thing. But based on the multiple demands from -- in the resale market as well as the new home market, so there are other value added financial services which may require the request from the home buyers, home sellers as well. So in providing those multiple financial service products and their services we believe that we’re going to generate more and better margin in revenues from those value added financial services as well. But anyway it is steering the real estate, and we will give you more numbers or details going into the next one, two, three quarters. At this stage, the only thing we can say that, well it looks good and we have a good signs, real signs coming from this new financial service platform. Okay, back to your question. One, it’s about the business model about the e-commerce. Well the e-commerce business model we had was advertise driven and we’re still going to have that advertise driven e-commerce. At the same time, we are expanding into the directed sales, well online sales, directed online sales part. In doing this directed online sales part, part of it is directly through our platform, our websites, our mobile ends through our transaction in a platform. Part of that is going to be coming from our partners, our agents and brokerage companies. We are a partner with them and they’re going to walk with us and to sell the developers properties because we so far has had a very good relationship with the developers, and we have been partners with developers in the past 10 plus years. So, that the new transaction, directly transaction related part we call it more new e-commerce model. We have also seen good signs from that part as well as I described in my answer to Alex Yao’s question. So the -- it is very promising. We have seen the sign’s in the past three months. The units is sold directly through our platform. Going forward we’re going to see month-by-month it’s going to double for multiple months, its going forward. So that’s the current situation for the model, expanding our change with transformation from a traditional -- our traditional ad driven e-commerce model to both ad driven and also directed sales driven model.

[Eddie Leung:]

Got it. Thanks.

[Operator:]

Thank you for the questions. The next question comes from the line of Philip Wan from Morgan Stanley. Please ask your question.

[Unidentified Analyst:]

Hi. Good morning everyone and this is George calling on behalf of Philip. Thank you very much for taking my question. I had two questions. The first one is related to your transition to the transaction and also financial service and also information platform. So, my question is basically regarding the distribution channel because in some of the verticals we actually observed that with the development of the mobile internet the distribution channels actually become more fragmented or decentralized, and now you’re talking about, actually you’re investing in the top three out of the top five traditional primary agents. But then do you think in the longer run the kind of agent market can become even more fragmented than it is today, meaning that some of the individual or smaller agents can actually get more business from the bigger guys. And if that’s the case especially with help of mobile internet of course, so, if that’s the case what's your strategy to cope with that? And that’s my first question.

[Tianquan Vincent Mo:]

I think you’re right with the mobile applications, different mobile applications in use to sell properties as well as other products. Looks like its going to be more diversified. But it my belief, the big companies like SouFun, like those more traditional offline agency companies for new home. I think we’re going to have more, better, efficient products for our partners to use and also for our end consumers probably buyers to use for our end developers to use as well. I believe our partners in the primary market, as I mentioned the top three out of the five top five companies in China, they’re also evolving. They’re also using PC end, they’re using app ends, mobile ends as well to do their sales as well. So together I think now and into the future the medium players, they are going to play, they will continue to play important roles in the primary market and as well in the resale market as well. So that might be, eventually the big players, they’re going to have a much better platform. They’re going to have a much better app as well, and their transaction processing will be more efficient than smaller ones. So that’s why in the longer run, I’m not expecting to get some return quickly from our recent investment. But if we look into a little bit future, two, three years from today or three, four years from today I think by then and together we can change this market, and together we can contribute to a big part -- a greater part of China’s property market. So, that’s my thinking and my answer to your -- this question.

[Unidentified Analyst:]

Okay. That’s very helpful. And my second question is a follow-up basically on your investment to some of the primary and also secondary agents. So, can you elaborate a little bit more on the progress of your cooperation with each of the more maybe some of these investees and what's your plan going forward? Just any color will be very helpful.

[Tianquan Vincent Mo:]

I think the reasons behind, first of all those companies, especially the primary agency companies the three, the top three of the top five companies invested they are very good companies. They have proved they are the top companies in China. We only partnership with good companies and let them to do everything, we’re just here to support with what we’re good at which is internet and mobile in a business. So that’s one. We invest into good companies. And secondarily, we can support each other. In this online, offline model thing we are good, we are good at online, and they’re good at offline. So, this partnership where you have both parties, for our investee companies they’re going to benefit from our online service and for us we’re going to benefit from their offline services. As -- specifically one of them is really we’re fitting up with joint ventures to do online (indiscernible) financing services. So that’s second for the counter thinking. And going forward, I’m much more optimistic or strategically important to us is in the future. And into the future together as I mentioned we can make the sales changing and we can make this the market much more efficient, and we can contribute to the market and at the same time we can also get return better from the market.

[Unidentified Analyst:]

Okay. Got it. That’s very helpful. Thanks.

[Tianquan Vincent Mo:]

Thank you.

[Operator:]

Thank you for the questions. The next question comes from the line of Jiong Shao from Macquarie. Please ask your question.

[Jiong Shao:]

Thank you for taking my questions. I have a few follow-ups, if I may. Firstly, just follow up on the margins. I remember in the past you have prudent the suggested tax margin back then were too high, you think the sustainable margin should be in sort of the mid 30% range if I recall correctly. And given we are now making very good investments for the future, for the business transformation. So in the near term should we consider all bets are off in terms of the newer term margin target and eventually we’re going to reset or go back to that mid 30% target, that’s my first follow-up?

[Tianquan Vincent Mo:]

Well, thank you for asking this. Frankly I did strongly -- said that we’re going to have 30%, 35% of margin going forward. So, that’s something I talked about last year with where we’re competent to be. So without change or big change of this company. But based on our current situation you have noticed that our margin has decreased from over 40% to now, we’re -- although we’re still about 30%, but its 32%. So, going forward, I think the margin is something I’m watching. But frankly as I mentioned the expansion and the change, the transformation of this company from a pure [ph] [content] information platform to a three platform, tier platforms is my first priority. In order to do that, in order to make sure we’re going to dominant to the market throughout this transaction from the new home to resale, and actually to the home furnishing sectors. If we need to do things, if we need to spend to invest that will be my first priority. And with that done I think we’re going to pay attention to the margin again.

[Jiong Shao:]

Okay. Understood. The second follow-up is on the business transformation. As you try to get closer and closer to the transaction in both primary market and secondary market. Are you going to built-out your own offline capabilities? Have your agents running around showing houses or you are going to almost exclusively rely on your partners going forward?

[Tianquan Vincent Mo:]

I think based on the current situation as we mentioned it is really SouFun’s long-term strategy that we’re going to do things as close to the transaction stage, that’s close to the transaction, that’s close to the money stage if possible. That is our long-term strategy. So what we are doing now for the change expansion and transformation is really we’re executing this. But how to do it? How to execute that? That’s something in front of us. For a short period of time, for the near term we’re going to walk with our partners, those agency companies and those capable standalone agents. And at the same time we’re also going to test the market. We’re going to do it directed ourselves. Why we are going to do it ourselves at this stage? First, we need to know how to do the transactions. We need to have a team, internal team that can do it. We can do it directed. So we know everything -- every point, every part of the whole transaction chain. So that’s something we need to do it ourselves. And at the same time the model to establish the transaction model, the new transaction models through online, we cannot wait our partners to build-out the model, to make sure the model works. Its better we do it directly. We can make the model workable more quickly. So, in the short period of time you may see we are going to have a team doing the similar things but it’s -- internet is online based, and at the same time mostly we’re going to walk with our partners to do it for the transactions. So, that the fundamental is still we’re going to focus very much online, and we’re going to partner with our offline partners to do our transaction, to do our e-commerce as our financial services.

[Jiong Shao:]

Okay. Just follow on this, Vincent, to ask you the obviously follow-up, as you do this on your own in some cases you obviously may potentially compete with your partners. How are you going to address that concern from some of your partners? Or how you balance the potential conflict?

[Tianquan Vincent Mo:]

Well, if you look at -- at this stage it looks like there are conflicts there. But the conflicts has always been there, because of this internet revolution, mobile revolution, this new economy model, that’s going to hit into -- in some degree the traditional business or the traditional functions. We’re going to replace some of the traditional functions. But together in SouFun with its new technology, new platform we’re going to make this transaction more efficient, and our partners are going to benefit from this efficient platform because they can do more deals although for each deal they may not make that much money. But like formerly they can do six deals a year, and now they can do 12 deals a year. So, overall everybody is winning from this gain, because the market is going to be more efficient and more transparent of information flow, transaction flow and cash flow is going to be more easier and more efficient and faster. So that’s my belief going forward with our evolvement, and with our getting into as closer to this transaction stage possible with new tools and new platforms, new systems I think our partners they’re going to win, and we’re going to win.

[Jiong Shao:]

Okay. Understood. My last question is that, there being some signs that the market both in primary and secondary market has recovered in the months of October after the government relaxed some of the policies towards the end of September. I was wondering could you please share with us what you sort of have seen since end of Q3? Any color you can share with us will be great.

[Tianquan Vincent Mo:]

You’re right. We have seen October has rebounded from September, but it’s sequential. If we compare October to October last year still the price has been done and both sequentially and compared to some months last year. So for the rest of the year, I would not see a big improvement of the market. I think September will be a good month, December will not be bad. But if we’re going to see, if we’re talking about a big jump back, I would not expect that. I think the market we are staying as it is for some time. Going forward to the coming first to six months of next year, I would expect it will be still the same. It’s not going to get very much worse comparing to current situation, but I would not expect it is going to come back quickly or to another rapid increase of price or transaction volume. I would say six months -- the second six months or second half of next year we’re probably going to see a steady recovery of the market for another 12 months or so even couple of years. So that’s my last judgment of the market based on my understanding of the current situation.

[Jiong Shao:]

And your comments apply for both primary and secondary markets? I just want to confirm.

[Tianquan Vincent Mo:]

That’s right. They are inline, most of it.

[Jiong Shao:]

Okay. Great. Thank you so much Vincent for the very straightforward answers.

[Tianquan Vincent Mo:]

Thank you.

[Operator:]

Thank you for the questions. The next question comes from the line of Tian Hou from T.H. Capital. Please ask your question.

[Tian Hou:]

Hi, Vincent, it’s Tian. So related to you’re -- the change -- internal change in terms of your business direction strategy, I have couple of questions. One is related to the offline, online. So, I do realize for what you try to accomplish online, offline cooperation is very important so that’s why you invested in those three offline agencies. And in your cooperation, so are they going to work with you exclusively or they are going to have their own website or are they going to also work with other online agencies or not? That is number one question. Number two, what's going to happen to your listing business and since you’re involving in the transaction, online transaction and so that is, you’re going forward. Are we going to see this part of revenue declining? Or are we going to see you changed the terms of the listing service revenue? So that’s the second. The third one is related to e-commerce. So transactions you have a primary housing transaction, and you also have a retail transaction. So are you going to unify the business model currently the (indiscernible) e-commerce is like you collect money from users from purchasers, they buy a member and then they get discount. So going forward, are you going to walk away from such model and going to the transaction model. So that’s the three questions.

[Tianquan Vincent Mo:]

The first question is about the investment. As I mentioned we invested in the three of the top five biggest agency offline companies in China. They are great companies. We are quite satisfied with their performance in the past, and their kind of situation. And also I have a big bet on their future expansion, especially their adoption of technology, mobile and internet as well. I have been always encouraging them and also our other strategic partners as well to make the best use of new technology, new platforms including mobile and the PC to support traditional businesses. So, I believe they’re going to do that and they’re going to keep their leading role in China’s agency businesses -- offline agency businesses. SouFun is standing by to support as needed. And in the process definitely we are going to support each other. But we don’t need to bind each other together. So SouFun has its own agenda or strategy, and each of the big companies offline agency companies they have their own strategies, and we’re going to support each other. And mostly for many business lines across, both sides we can cooperate, we can support. So that’s the status quote. For the listing business we’re going to continue to strength our listing business through our partners with our agency and agents. In doing that we can provide much better service to our consumers for them to have a better experience through our mobile end, through our PC end, as well. At the same time, not really we’re trying to do the same thing as our partners, also clients or partners that they are doing. We are trying to provide a better, broader platform with more services and products, so that our partners they can make the best use of SouFun’s broader platforms more multiple products and services from financial services, from transaction processing services, and also to our listings as well, our guarantee your business as well. To make their business much more efficient, to make their business -- to make their consumer in a buy side or sell side quicker to close. So that’s our strategy for the resale market. So that’s our strategy to build up our transaction platform and financial platform for the resale market. The third question is about the e-commerce. So, Lei Hua could you elaborate to that?

[Dr. Hua Lei:]

Yes, (indiscernible) is about e-com center, transformation right, Tian?

[Tian Hou:]

Yes. [Foreign Language]

[Dr. Hua Lei:]

I think well it depends on the project, developer’s that’s the end. We are going to partner with them. We have been partners for a long time in the past -- 10 past years. If the developers that prefer the buyers pay the traditional membership fee for the traditional e-commerce business or the new directed sales commission based business, and we’re going to respect that. So the buyers are going to pay. If the developers that prefer that pay directly, and we’re also happy to accept that. So, selling properties whether it’s a traditional advertise driven e-commerce model or the new directed sales model whether it’s with our partners together or whether it’s directed through the online platform, it depends our negotiations, our contract with the developers.

[Tian Hou:]

Okay. And also relate to your financial service. So, for the financial service and as you’re generating enough revenue, and you have three business lines, like information and transaction and financials; so going forward are you going to change how you release your -- how you classify your revenues? Currently you have marketing service, e-commerce and the listing. So, even going forward, are you going to change it?

[Dr. Hua Lei:]

I think so, when the numbers becomes material. Now our financial services is in our value added services. So we have not separated that out yet, because the numbers is more comparing to our top line and bottom lines. So, we are going to re-categorize when we get to that point.

[Tian Hou:]

Vincent, the last question for the transaction, currently what percentage of commission do you take?

[Tianquan Vincent Mo:]

Well it depends. It depends on how we talk with our developer clients, and mostly from 1% to 3%. So, that’s the general practice now.

[Tian Hou:]

Okay. That’s very helpful. Thank you. That’s all my questions.

[Tianquan Vincent Mo:]

Thanks.

[Dr. Hua Lei:]

Hello, operator. Any more questions?

[Operator:]

The next question comes from the line of Piyush Mubayi from Goldman Sachs. Please go ahead.

[Piyush Mubayi:]

Thank you for taking my question Vincent, and I appreciate the candor. Now in the transformation you described, what are the risks and specifically your view for recovery in second half, is that predicated on the broader recovery in both the primary and the secondary market that you described 12 months out or so? Thank you.

[Tianquan Vincent Mo:]

Could you hold on one second? Yes, I’m sorry, I’m back. I think you have the -- actually the toughest question for me and the challenge to me. My challenge now is our internal issue or how determined we’re going to do this in a transformation or expansion from a pure information platform to three platforms. So, I think we’re quite confident and we have seen the lights at the end of the tunnel, and of course the bigger the risk or the challenge is really our execution. So whether I myself and together with my top management team can bring together SouFun’s consulting across people, to execute what we planned going forward, the transformation or the expansion. So that is really the big challenge we are facing.

[Piyush Mubayi:]

So it’s decoupled from potential recovery in the market as you described?

[Tianquan Vincent Mo:]

Yes, well the market it’s always my opinion and the market could go down and up, and based -- I would not expect China’s property market is going to go very bad or simply great, its (indiscernible) time. So, I think its mainly, it depends on our execution, our own management, skill to make sure that we can make this change or expansion happen, so that we can balance all the business and the new business in a good way to make sure our new business can offset or support our total growth of this company. So that’s the biggest challenge to us, I think is mainly steer our execution whether we can execute where and whether we can mobilize the whole company to execute both the old line business -- business lines and the new promising future business lines.

[Piyush Mubayi:]

Thank you very much, Vincent.

[Tianquan Vincent Mo:]

Thank you.

[Operator:]

Than you for the questions. Next question comes from the line of Anthony Thong from 86 Research. Please ask your question.

[Anthony Thong:]

Hi. Good evening. Thank you for taking my questions. Vincent could you help us, maybe understand the cost structure of the new e-commerce model? It appears that more plus personals will be needed -- will be deployed offline to support sales. Just wondering how many of those personals they need for each project? And what are the other incremental costs or expenses related to this new model? And then secondly, we also noticed that you have been giving out subsidies to home buyers to persist new business model, I think that in September month. So the question is that, is this strategy will be carried on going forward or is there something into at the initial stage of this business. So also, I’m wondering how will those cost, I mean subsidies be booked accounting wise? Are they deducted from, directly from revenues before booking the revenues or are they going to in expenses? And finally could you just give us an update on the latest share count? Thank you.

[Tianquan Vincent Mo:]

Okay, we’ll answer it. If I do not answer completely, (indiscernible). For the e-commerce business, we will not have an offline team there. But all of our transaction team will be online with offline support, but there will be online sales. There would be online transaction platform based, so that’s a clear cut. But when we’re starting, when we are expanding in doing this transaction online and we’re going to promote it. We’re going to spend money building up the process. So we’re going to have more people before we have more revenue. So that’s going to affect our cost structure. So, in the early stages you would see that we’re going to have relatively high cost or expense. So that’s for your question. And the second question is about subsidiary or …?

[Anthony Thong:]

Yes, about subsidiaries.

[Tianquan Vincent Mo:]

We are not going to -- I’m sorry which subsidiary company you’re mentioning?

[Anthony Thong:]

The subsidies for the home buyers. For instance you gave subsidies for each deal on top of the six months [multiple speakers].

[Tianquan Vincent Mo:]

Okay. I got it. I got it, yes. Well they’re subsidized to the home buyers; it’s my personal belief that this will be a continuous thing for SouFun. Because it’s my belief that market will become much more transparent, and the information flow will be much more efficient. So our consumers they deserve to get something back from us and actually from the industry, from the minimum industry as a whole. So, I think it’s my belief that we’re going to give out something we own from the transaction to our consumers, to our buyers. So, it is my belief that we’re going to continue to do this. It’s not something just in the early stage. So this is the answer to the subsidiary. And the third question is about?

[Dr. Hua Lei:]

About new e-commerce model -- for the for the new project.

[Anthony Thong:]

Headcount. Sorry, it’s about the headcount. The third question is about the latest headcount.

[Tianquan Vincent Mo:]

The headcount -- our employee?

[Anthony Thong:]

Yes. That’s right.

[Dr. Hua Lei:]

Yes. We have like 10,500 people now.

[Anthony Thong:]

Okay. Thank you.

[Tianquan Vincent Mo:]

So totally.

[Dr. Hua Lei:]

Yes.

[Operator:]

Thank you for the questions. The next question comes from the line of Xin Yang from CICC. Please ask your question.

[Xin Yang:]

Thanks for taking my question. First question is as actually a follow-up to Eddie’s question earlier. As we know the direct sales model charges higher commission rate from developers. So my question is how confident are we that developers will choose a direct sales model rather than some e-commerce business model provided by your competitors which does not really take up your marketing budgets? So that’s the first question. The second question is some developers are shifting their marketing budget to the online -- to the mobile front. So can you talk -- give us more color as to what is our progress on the mobile front and also the last question is what are the biggest challenges made -- has made our transformation into directed sales business model? Is it the human capital or is it the relationship we have to balance among our client partner agency companies? Thanks.

[Tianquan Vincent Mo:]

Give me one second.

[Dr. Hua Lei:]

Okay, yes, for your first question, the new e-commerce model to compare with the current one, actually we think it’s the new e-commerce model we didn’t put extra expense for the developer. Currently, I think developer pay you like around 2% totally to the increased advertising also the coupon thing and other -- and also to the agent companies as well. But for us, so far it comes like a last stop shop for the developer. So we’re providing the advertising, plus the new e-commerce model together to the developer. So it’s kind of like a combined service for the developer actually we don’t -- we charge much more than the current model. So these are for your first question. So what’s -- your second one is about your -- the mobile trends, right?

[Xin Yang:]

Second question is some developer shifted their marketing budget to the mobile front so are we seeing that trend and could you -- also can you talk about our progress on the mobile front? Thanks.

[Tianquan Vincent Mo:]

Hi, this is Vincent. Yes, you’re right. Mobile has been developing very fast and actually that’s one thing we’re very, very confident that our mobile traffic is now -- is taking about 50% of our total traffic, which means our mobile traffic is (indiscernible) of our PC traffic. So we’ve seen the mobile application, the mobile is more efficient, especially for transactions for buy and the sale. So we’re also doing mobile advertising at this stage, although we’ve not monetized from our mobile traffic, not yet. Only about 5% advertise revenue comes from our mobile ends, but the trend going forward especially for the transaction oriented in apart, I think the mobile is going to play a more and more and more important role. Developers, they’re adopting the mobile ads, but frankly at a slow pace now. So we expect for the developers, for our advertising clients to fully recognize this. It’s going to take them another 6 or even 12 months. So that’s our expectation. And the third question is about -- yes the challenge to our transformation, expansion change as I mentioned before, its ourselves, the execution and the mobilization of our 10,000 plus people. So that is the challenge to us. We believe the whole team, our management team they’re ready and our mid level local city -- level managers they’re ready. And we’re in the process to a quicker point in the process. So although we may experience another two quarters or three quarters, tough time and -- but we’re seeing signs -- good signs ahead. So we believe the second quarter of next year the company will recover and we will come back, and we will come back strongly.

[Xin Yang:]

Thanks. Thanks very much and looking forward to the positive growth on that front. Thanks.

[Tianquan Vincent Mo:]

Thank you.

[Operator:]

Thank you for the question. Next question comes from the line of Wendy Huang from SCB. Please ask your question.

[Wendy Huang:]

Thank you. I have two questions. First, you are resenting your e-commerce model. I recall that when you launched your old e-commerce model a couple of years ago, your competitor quickly actually copycat your model. So where is that [ph] [interval] of your new e-commerce model and how easily can your competitors to replicate your success?

[Tianquan Vincent Mo:]

Well, firstly the model itself is simple. But to efficiency, to make the model work you need a platform. SouFun -- the big advantage of SouFun have over any other competitor is really it’s a big traffic to its fun.com Web site and to its WAP end and to its app end, including iPad end. So that’s something we have 4 million to 5 million unique visitors and most of the probably buyers and sellers to Web site. So that’s something nobody else in China’s property market have, so that is the big -- the advantage we have. So with that we can do things more efficiently, we can do things quickly. So that’s the answer to your first question.

[Wendy Huang:]

My second question is, in the first quarter this year, your fast growing e-commerce in this start seeing a growth deceleration and then we start seeing the price cut on the listing business. And in Q3, now we’re seeing the -- perceived this notes to stable and marketing success also get into the negative growth territory. And now you’re resenting your e-commerce business and e-commerce resumed growth. So how quickly you can turnaround the other two business including the marketing subjects? So far I think we only heard about initiatives related to the e-commerce and or so your partnership with offline agencies and you might do something on the listing front and how about the marketing subjects front? And also related to that, I think even what we’ve observed over the past three quarters, every time when we start hearing a bit of the (indiscernible), the Company started to kind of lower the kind of street expectation and or so the guidance. So what kind of visibility that you can kind of provide to the investors to make sure next time when this kind of a cyclical downturn hit market or hit your business, we can have more than one quarter visibility? Thank you.

[Tianquan Vincent Mo:]

Well to your last question first, we believe that -- I’m sorry, we had two bad quarters including this one and it’s also based on our current situation although we are seeing good signs in the new business lines, our new business platforms. We still think we will stay in this bottom place for another two or even three quarters, but we have -- we know that the marketed company and we will come back in the second quarter -- second half of next year. So that’s what we expect and what we believe based on what we have and in the stage we’re in this transformation. So to your question about recovery of our marketing and listing services, it is very challenging to us, because with the new business model going on, including the transaction platform and also financial service platforms, which is going to impact our marketing services as well as listing services, because the transaction service and the financial services, they’re more directly making the transactions happen and make the transaction happen more efficiently. So we’re going to work on the advertising services and we’re also going to work on the listing services. But its recovery, I’d not say we’re going to have a quick recovery of the marketing services and the listing services in the coming one quarter or even two quarters. So that’s my understanding.

[Wendy Huang:]

Thank you.

[Tianquan Vincent Mo:]

Thanks.

[Operator:]

Thank you for the question. The next question comes from the line of Gregory Zhao from Barclays. Please ask your question.

[Gregory Zhao:]

Hi, Mo, hi Dr. Lei, I have very -- two very quick follow-up question. The first question is about our secondary listing services and recently we noted that in Beijing there are some decline of the number of listings and also some backlash from some agencies, some secondary agencies. So overall what’s the impact to our listing services and when do we expect some rebound from the listing services? This is my first question. My second question is direct sales model in longer term, maybe I missed it, in longer term if the business come in to a mature stage, if we regarded as a separate independent business, so roughly what’s the percentage of the operating margin shall we expect? Thanks.

[Tianquan Vincent Mo:]

Well, frankly to your first question, we have not seen listing decreasing even in Beijing and the Shanghai, the big cities. The decreasing is they paid clients. The listing itself, as you know in China all the listings they’re not exclusive listings, it’s not like in the U.S. So we still have all the listings, if not all most 95%, 99% of the listings there. So that’s the -- so our consumer, our probably buyers, sellers experience is still remained and we’re also trying from different angles like to make sure the listings they are real, they’re not incomplete listings. We are also trying from different aspects to make sure our consumers probably buyers and probably the sellers, they have a very good experience with our listing services through our PC ends and our mobile ends as well. For the second question, -- okay, for the new e-commerce model together with the -- with all the traditional advertising driven e-commerce model, in the short period of time, we probably we expected some of the margin is going to be lower than the purely advertising driven e-commerce model. But in the longer run, (indiscernible) up through some critical points we will see the margin, we are improved. So that’s my judgment from what we know our business model and what we have been practicing with.

[Gregory Zhao:]

Okay. Got it. Thank you very much.

[Tianquan Vincent Mo:]

Thank you.

[Operator:]

Thank you. There are no further questions from the phone line. I’d like to hand the call back to your presenters for any closing remarks.

[Dr. Hua Lei:]

So thank you everyone for joining us today.

[Tianquan Vincent Mo:]

Yes, thank you everybody and have a good day. Thank you. Bye, bye.

[Dr. Hua Lei:]

Thank you.

[Operator:]

Thank you ladies and gentlemen. That does conclude our conference for today. Thank you for your participation. You may now disconnect the line.