Fang Holdings Limited
Q4 2014 Earnings Call Transcript

Published: 10 Feb 2015

[Operator:]

Good morning, my name is Angel and I will be your conference operator today. At this time I would like to welcome everyone to the quarter four 2014 SouFun Holdings Ltd earnings call. [Operator Instructions]. I would now like to turn the call over to our host, Dr. Lei, Deputy CFO. Sir, you may begin.

[Hua Lei:]

Thank you operator. Yes, this is Lei Hua from SouFun. Hello everyone and welcome to SouFun's fourth quarter 2014 earnings conference call. Joining me today are SouFun's Chairman and CEO Mr. Vincent Mo and CFO Mrs. Guan. This conference call is being broadcast on the internet and is available through our IR website at ir.fang.com together with our earnings release. Before we carry on 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 risk and uncertainties. A number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. SouFun assumes no obligation to update the forward-looking statements within 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. We will have a Q&A session that is following prepared remarks. Firstly let's look at the fourth quarter numbers. SouFun reported total revenues of $223 million for the fourth quarter, representing an increase of 2.7% from $217.2 million for the corresponding period in 2013, mainly driven by the growth in e-commerce services. Revenue from marketing services was $92.2 million for the fourth quarter, a decrease of 5% from $97.1 million for the corresponding period in 2013, mainly due to difficulty in real estate markets. Revenue from e-commerce services was $98.7 million for the fourth quarter, a 47.2% increase from $67.1 million for the same period in 2013, mainly due to the fast growth of our e-commerce business. Revenue from listing services was $25.2 million for the fourth quarter, a decrease of 49.7% from $50 million for the corresponding period in 2013, mainly due to discounts which the Company has offered to the agency clients since the end of June 2014. Revenue from other value-added services was $6.8 million for the fourth quarter, an increase of 126.8% from $3 million for the corresponding period in 2013, mainly due to the rapid growth of our financial services and the research-related products. We began offering financial services on our financial platform which mainly include loans to developers and homebuyers. Cost of revenues was $42.7 million for the fourth quarter, an increase of 53.6% from $27.8 million for the corresponding period in 2013. The increase was mainly driven by our new e-commerce model, increased staff cost, as well as an increase in VAT taxes and surcharges. Gross margin was 80.8% for the fourth quarter of 2014, compared to 87.2% for the corresponding period in 2013. Operating expense was $72.8 million for the fourth quarter, an increase of 15.6% from $63 million for the corresponding period in 2013. Selling expense was $47.6 million for the fourth quarter, an increase of 36.6% from $34.8 million for the corresponding period in 2013, mainly due to the new e-commerce model, and increased advertising and promotional expenses. G&A expenses were $25.2 million for the fourth quarter, a decrease of 10.4% from $28.2 million for the corresponding period in 2013, mainly due to our cost control efforts. Operating income was $107.6 million for the fourth quarter, a decrease of 15.1% from $126.7 million for the corresponding period in 2013. Income tax expense was $23.6 million for the fourth quarter, a 22.6% increase compared to $19.2 million for the corresponding period in 2013. Our effective tax rate was 22.2% for the fourth quarter of as compared to 14.6% for the same period in 2013. The increase in the effective tax rate was mainly due to the Fin48 effect of releasing our deferred tax liabilities in the fourth quarter, which drove down our effective tax rate in that earlier period. Net income attributable to SouFun's shareholders was $82.5 million for the fourth quarter, a 26.4% decrease from $112.1 million for the corresponding period in 2013. Fully diluted earnings per ADS was $0.19 for the fourth quarter, a 24% decrease from $0.25 for the corresponding period in 2013. Adjusted EBITDA, defined as non-GAAP net income before income taxes, interest expenses, interest income, depreciation and amortization, was $112.2 million for the fourth quarter, a decrease of 15% as compared to $132 million for the corresponding period in 2013. As of December 31, 2014, SouFun had cash, cash equivalents, and short-term investments of $809.9 million, compared to $896.9 million as of September 30, 2014. Cash flow used in operating activities was $5 million for the fourth quarter of 2014, compared to the cash flow generated from operating activities of $142.4 million for the same period in 2013, which was mainly due to micro loans of around $45.3 million provided to developers and homebuyers under our financial services platform, customer deposits of approximately $47.3 million paid to real estate developers in the fourth quarter. Now let's look at 2014 whole year results. SouFun reported total revenues of $702.9 million for 2014, representing an increase of 10.3% from $637.4 million for 2013, mainly driven by the growth in marketing services and e-commerce services. Revenue from marketing services was $294.5 million for 2014, an increase of 5.8% from $278.3 million for 2013. Revenue from e-commerce services was $244.3 million for 2014, a 29.9% increase from $188.1 million for 2013. The increase was mainly driven by the fast growth of our new e-commerce business. Revenue from listing services was $145.7 million for 2014, a decrease of 9.8% from $161.5 million for 2013. This decrease was mainly due to the slowdown in secondary home sales and our reduction in listing service fees. Revenue from other value-added services was $18.4 million for 2014, an increase of 95.7% from $9.4 million for 2013, mainly due to the rapid growth of our financial services and research-related products. Cost of revenue was $145.7 million for 2014, an increase of 42.2% from $102.5 million in 2013. The increase was mainly driven by our new e-commerce model, increased staff costs, as well as an increase in VAT taxes and surcharges. Gross margin was 79.3% for 2014, compared to 83.9% for the corresponding period in 2013. Operating expenses were $248.4 million for 2014, an increase of 34.1% from $185.3 million for 2013. Selling expenses were $147.9 million for 2014, an increase of 45.1% from $101.9 million for 2013, mainly due to the new e-commerce model, increased advertising and promotional expenses and staff cost. G&A expenses were $100.6 million for 2014, an increase of 20.6% from $83.4 million for 2013, mainly due to increased staff costs. Operating income was $309.5 million for 2014, a decrease of 11.7% from $350.4 million for 2013. Income tax expenses were $81.6 million for 2014, a 17% increase compared to $69.8 million for the corresponding period in 2013. The effective tax rate was 24.4% for 2014, compared to 18.9% for the corresponding period in 2013. The increase in the effective tax rate was mainly due to the release of deferred tax assets under Fin48 in 2013, which was not repeated in 2014. Net income attributable to SouFun's shareholders was $253.2 million for 2014, a decrease of 15.2% from $298.6 million for the corresponding period in 2013. Fully diluted earnings per ADS was $0.58 (sic - see press release '$0.57') for 2014, a 19.7% decrease from $0.71 for 2013. Adjusted EBITDA, defined as non-GAAP net income before income taxes, interest expenses, interest income, depreciation and amortization, was $333 million for 2014, a decrease of 10.3% as compared to $371.1 million for 2013. Cash from operating activities was $214.4 million for 2014, a 47.5% decrease from $408.1 million for 2013, which was mainly due to entrust loans and micro loans of around $81 million provided to developers and homebuyers under our financial services platform, customer deposits of around $47.3 million paid to real estate developers in 2014. Looking to 2015, SouFun estimates its total revenue for 2015 will be between $773 million and $780 million, representing a year-on-year increase of 10% to 11%. This forecast reflects SouFun's current and preliminary view, which is subject to change. In addition, SouFun declared a cash dividend of $1.00 per share on SouFun's ordinary shares. Five SouFun's American depositary shares, ADS, represent one ordinary share. The cash dividend will be paid by March 31, 2015 to shareholders of record as of the close of business on March 13, 2015. Dividends will be paid to SouFun's ADS holders through the depositary bank, JPMorgan Chase Bank, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. Thank you for taking the time to join us and we will now open the call for your questions. Operator, please go ahead.

[Operator:]

[Operator Instructions] And your first question comes from the line of Vivian Hao, Ma'am, go ahead.

[Vivian Hao:]

Hi. Thank you Lei and [indiscernible]. Thank you for taking my questions. I've got two questions here. My first question is, could you please give us a breakdown of your new EC model and [indiscernible] model by revenue and units. What is your total new EC model GMV and also in terms of the respective gross margin for each of the segments. Basically we are trying to understand what is the allocation of costs to COGS and also OpEx for the new EC model. This is my first question. My second question is regarding the recent rolled out secondary listing direct sales model with only 0.5% commission. Since there's major resistance from the offline agencies, what is SouFun's strategy on this front? And also what is the current cost structure for this new model and the margin? Thank you.

[Hua Lei:]

Yes, Vivian I will answer your first question. For the new EC model currently we've booked $30 million revenue from the new EC model and we've sold 8,815 units through the new EC model. For the old [indiscernible] model already $60 million revenue and we've sold over 79,000 units in quarter four through the [indiscernible] model.

[Vivian Hao:]

Okay. What about the margins, the gross margins?

[Hua Lei:]

Yes. For the margin quoted in quarter four we decreased the rebate to the homebuyer, the individual homebuyer, from 80% in quarter three to around I'd say 60% in quarter four. So I think our gross margin for the new EC model, I mean in-house people, our sales team with the EC model it's around 60% -- sorry, 40% gross margin. But for the third party agents this part we still need to rebate over 80% of our total revenue to the third party agency companies, so the gross margin is about 20%.

[Vivian Hao:]

Okay got it.

[Hua Lei:]

And the [indiscernible] within the new EC model in quarter four with 8,815 units, we sold around 60% of the total units through our in-house sales team.

[Operator:]

And your next question comes from the of Hillman Chan. Please go ahead.

[Hillman Chan:]

Hi, thank you management for taking my question. I just want to ask about, regarding your new e-commerce model. Since you are rebating some of your customers and you are competing with the offline agencies, are we seeing these offline primary home sales agencies getting together complaining to the property developers about the rebate that you're giving? And also, do these property developers give the same access to the primary units to both the offline agencies and also the direct sales force of SouFun? That's my first question.

[Hua Lei:]

Generally we think the developers they like our direct sales model because we have a higher efficiency than the traditional offline agency model. So you can see from the numbers we made very good progress in quarter four as well. So [actually in the new homes] we don't think actually we are competing with, you know, with some clients because the developers [indiscernible] to decide budgets.

[Hillman Chan:]

Right. But I think for, you know, like certain conditions that you are giving back to your customers that for the offline agencies they may not be doing this and there may be pressure on their side. Are we seeing pushback on [indiscernible]?

[Hua Lei:]

Yes, for the offline companies then maybe they don't like our rebate to the client, I mean to the end users. But for us we think that SouFun want to develop and design more products which can benefit the end users, which means the homebuyers. So we think we are doing the right thing.

[Hillman Chan:]

Okay, thank you. My last question would be about the collaboration between you and also one of the primary home sales agencies, World Union, can we have more color on the collaboration?

[Hua Lei:]

Yes, we think our joint venture with World Union has been approved by the authority and also we are working with other agency companies like Hopefluent and Tospur to provide financial services to the homebuyer. In the future we are looking forward to work more closely with the agency companies, with our partnership agency companies, to offer more products to the homebuyer.

[Hillman Chan:]

Are we starting in the lower tier cities where these offline agencies have best coverage for? And then maybe they can tap into the traffic that SouFun can provide. I just would like to see how the collaboration between you and the primary home sales agencies can get rolling?

[Hua Lei:]

Yes. Certainly we think it's the agencies, the offline agencies, they are the in-house sales team for the developer. For us our direct sales model is more like channel sales because before when the property market was really good the developers they don't really need the channel sales, but in the future we think because of there's some over supply problems in some cities, we see that channel sales is more and more important for the developer to get a customer to finish the transaction. So in the future we think that we can collaborate with the new home agency companies together to provide better services to the homebuyer.

[Operator:]

Thank you. And your next question comes from the line of George Meng. Please go ahead.

[George Meng:]

Hi, good evening everyone. Thank you very much for taking my questions. I have two questions. The first one is a follow-up to Vivian's question, so can you actually elaborate like, because the reason that you got some more boycott in the city of Wuhan because, you know, number one they want some refund from the listing fees and number two, basically you are rolling out a 0.5% commission versus maybe 2% traditionally, so that business is definitely competing with them. First of all can you comment on that and, as a result, do you see your listing service revenue at risk, especially if we see that in the fourth quarter the listing service revenue actually, the decline actually accelerated. So do you think that business line can actually decrease faster? But at the same time do you see your second hand transaction based model versus the agency model revenue contributions kicking in maybe any time soon, like in the second half of this year? And that's my first question, I have a follow-up. Thanks.

[Hua Lei:]

Yes, we just started to test our transaction model in the resale markets in several cities like Wuhan. We do see some reaction from the agency companies but we think in the long run we are doing the right thing. We offer cheap commission fees to the homebuyers, also we increase the transparency of the buying and the selling process during the selling a home. Also we think that we can offer better services to the homebuyer. Overall we think probably in the short-term our listing service will not be affected by the reaction of the agency companies but in the long run we think we are setting up new rules for this industry. We are trying to increase the efficiency of this industry so other companies in the future we think they also will follow this trend as well.

[George Meng:]

Okay.

[Hua Lei:]

So for the contribution from our transaction model, we probably will see some numbers on the second half of this year.

[George Meng:]

Got it. And my second question is related to your [indiscernible] finance, obviously finance business. So first of all regarding your peer-to-peer business, I just wonder because a lot of those risks are already guaranteed or afforded by some of the guarantee companies or the property developers, so we also see incidences where those platforms themselves need to take the credit risk. So do you think if that happens do SouFun need to maybe provide some credit support or maybe to actually compensate the loss from the investors? I know legally you don't need to but actually do you think you will have to take some of the credit risk? And number two is regarding your micro loan business. I just wonder to what extent you are actually using your own balance sheet, what percentage of your net cash you are using to do that business. Because you mentioned the cash flow is actually impacted by the deposit and also the micro loan business. Thanks.

[Hua Lei:]

Yes, for the peer-to-peer question, firstly, we're very careful to select the projects when we do our lending, so we try to minimize the risk during the lending. So, if something, I mean some extreme thing really happens, we also have the guarantee company which is separate from our SouFun to provide the guarantee to the lender, so to the borrower in the P2P platform. But for your second question, it's about micro loans right?

[George Meng:]

Yes.

[Hua Lei:]

Currently, because we've just started this business and our peer-to-peer platform scale is not big enough so we still use our balance sheet, part of our balance sheet to finance the micro loans. In the long run we think we will try to increase the scale of the peer-to-peer platform, also try to fund it from other financial institutions to support our loans.

[Operator:]

And your next question comes from the line of Fan Liu. Please go ahead.

[Liu Fan:]

Good evening Vincent and Dr. Lei, this is Liu Fan speaking on behalf of Fang Fei. Congratulations on a strong result. We have a quick question. This question is regarding to your 2015 guidance. It's actually a bit lower than what we had expected, would you mind giving us your 2015 revenue growth expectation for each business unit i.e. marketing, listing, e-commerce and the loan business. What's the potential upside and the downside risk to this expectation please? Thank you.

[Hua Lei:]

Okay thank you. Yes, firstly as Mo [indiscernible] mentioned, in the first place we tried very hard to maintain two-digit-growth in 2014, so in 2015 firstly we don't want to miss the guidance again. So secondly we think because in 2014, in the first half of 2014 we were doing well so it means the base for 2015 is high for the first half, so for us we tried to give a truer guidance for our business. Regarding to your second question, for the growth rate for each business line right?

[Liu Fan:]

Right.

[Hua Lei:]

Yes. We think firstly for the marketing services which will be in line with the transaction volumes of the property market, now people are expecting in 2015 we will see a more active market in 2014, so this is the general judgment. For our new e-commerce business, we think e-commerce business will have a higher growth rate than marketing services undoubtedly, we will try to expand our new e-commerce model into more cities in 2015 and with more people as well. For the listing services, probably you will see some negative impact from our introduction-based products, until that date probably we cannot give out a very clear clue or guidance for the listing services. For our financial products, certainly you will see us very strong in our financial services in 2015 because we are going to offer more loans to the homebuyer and to our clients in the home decoration and in the (secondary) home as well.

[Liu Fan:]

Thank you Dr. Lei. Just a follow-up question, so based on your observation so far, what's your expectation for the overall property market this year?

[Hua Lei:]

From the restructuring part from the China Index Academy which is the research department of SouFun, its report says according to the model it predicted so it's maybe 5% gross in the transaction volumes for 2015, compared to 2014.

[Operator:]

And your next question comes from the line of Anne Shih.

[Anne Shih:]

Hi, Lei, Vincent, thanks for taking my questions. I just have two. First, could you elaborate on your cost-cutting efforts in the fourth quarter? Basically how are you balancing the transition with greater offline and high-touch efforts but considerably lower costs and expenses? And then my second question is just on margins. In the past I think the company had mentioned moving away from 35% as a floor for a pro-forma net margin, but achieved an excellent 43% this quarter. So how should we think about adjusting net margins in the first half as you complete your transition and what's achievable on a normalized basis? Thank you.

[Hua Lei:]

Okay yes, thank you Anne. For your first question, yes, yes it's difficult to balance between the transaction and the traditional models. But fortunately we do see the efficiency of our new e-commerce model is higher than the traditional agency model. So this is why we are able to decrease our rebates to the homebuyer in quarter four, so this is why you are seeing that we save a lot of costs in quarter four which increased our margin. So yes, so I'd say this is the main reason. Also another reason is we save some costs in the staff costs between some staff they didn't meet their internal KPIs so they received less wages or bonus, so this is the second reason. For the margin for the new year, for 2015, we're setting the new year because we are expanding our transaction model to the retail market, it means we need to put more new people, so we need to spend a lot of money to do the promotion and we have intention also to rent more new offices. So these will be the extra costs for us for the new year, so yes, we expect in the new year our margin probably cannot still maintain the current level.

[Operator:]

And your next question comes from the line of Eddie Leung, please go ahead.

[Eddie Leung:]

Good evening Dr. Lei, Vincent and [Jen]. Thank you for taking my questions. I have a couple of questions. The first one is about your listing business. Could you give us the number of agency or [channels] in the fourth quarter? And how did that change from the third quarter after some disputes with the secondary agencies? And then secondly a question about your coverage. You mentioned that in 2015 you consider to increase your city coverage of our direct e-commerce business, so could you remind us the number of cities you have right now and what's your planned for 2015? And then finally, just a follow-up question on your financial services, could you give us an update on the average terms of your loans and if there is any bad debt ratio. Thank you.

[Hua Lei:]

Yes. For your first question regarding to the paying members for our listed services, in quarter four our paying number for the listings is about 165,000, compared to quarter three it decreased by 11,000. The main reason is the loss of Homelink, also Homelink's impact to the other agency companies. So this is for your first question. For your second question, about the rebates right?

[Eddie Leung:]

Sorry, about your coverage, the cities of your direct sales model. Wondering what's your plan for 2015 in terms of expansion and how many cities are there right now?

[Hua Lei:]

Yes currently we have like 23 cities, yes. In 2015 going to expand into like around 40 cities, is our plan.

[Eddie Leung:]

Okay. And then finally about your financial services, especially on the loan side. Any color on the terms, like in terms of the years of your loans, as well as any bad debt ratio you can share with us? Thanks.

[Hua Lei:]

Yes. Normally the terms is within one year, is from six months to 12 months. Normally what are the terms, before the home buyers they really move into the property, so it's like a bridge loan which can minimize the risk. Regarding to the bad debt, yes so currently we haven't seen any big bad debt. We seem to work into the risk very well.

[Operator:]

And your next question comes from the line of Cheng Yang. Please go ahead.

[Cheng Yang:]

Hello Dr. Lei, hello Mo-zong. This is Cheng from CICC. A couple of housekeeping questions first. First can you give us a rough breakdown of the 8,800 units sold through the new EC model in terms of city tier? And second, what is the overlap between our new EC model and the traditional SouFun call business? And I have a follow-up, thanks.

[Hua Lei:]

Yes. For the new EC model we did 800 -- 8,815 units. I think all of in-house team they did around 58%, so it's like over 5,500 something. So the third-party agent coming they did around more than 3,000. So -- yes so this is the split.

[Cheng Yang:]

Sorry, I mean in terms of city tier, by how much from the first-tier cities like Beijing, Shanghai and what's the number coming from the others?

[Hua Lei:]

For the -- in terms of the tiers, we're seeing the more revenue contribution from the secondary tiers, which include nine cities in our definition like Chengdu, Chongqing, Wuhan and other big tier cities in China. So, yes, so not -- mainly it's come from the tier one, tier two cities.

[Cheng Yang:]

For the 8,800 units sold through the new EC model, how much of that came from tier-one cities?

[Hua Lei:]

I think for tier-one cities around 20% like --

[Cheng Yang:]

For the new EC model, not the traditional SouFun card business.

[Hua Lei:]

Yes, for the new EC model, yes.

[Cheng Yang:]

Okay, sure. Alright. And then what's the overlap between our new EC model and traditional SouFun card services?

[Hua Lei:]

Overlap it's the -- for us we think the old coupon-model is a performance-based advertiser model. The new EC model actually is a commission model. It's like the -- it's a commission fee from the developer. So they are active --

[Cheng Yang:]

Right, right. So I understand. So for all the projects we were cooperating with developers and what percentage, or what is the proportion that, having both the old SouFun card service and new EC model, and what is the proportion?

[Hua Lei:]

In terms of the new projects, we think now it's 40% of the project values and -- in our model [indiscernible] values in the new EC model.

[Cheng Yang:]

Alright. And my follow up question is a few primary brokers so we invest in also offer similar financial service such as down payment loans and bridge loans. So correct me if I'm wrong, but I heard that SouFun has made some non-competition agreements with them to avoid possible conflict. So my question is, how does SouFun position itself and its investee companies when it comes to building up the financial platform? Thanks.

[Vincent Mo:]

Sorry, this in Vincent. We do not have an exclusive arrangement with the primary brokerage companies. Our partners they do enjoy a preferred status in our dealing with the financial services.

[Cheng Yang:]

Okay.

[Vincent Mo:]

So there is no conflict here between our joint efforts to do financial services and we do it ourselves.

[Cheng Yang:]

Okay. So but how does SouFun position itself in all this -- into this whole picture? So we are going to work on the cooperate terms or there will be collaboration or something like that? Thanks.

[Vincent Mo:]

Yes. We have -- we are doing financial services to this market, primary resale market in ourselves. And, at the same time, we are working with our partners in the primary market to provide financial services, to combine ourselves our primary market partners. The market is huge. There is no competition among -- between ourselves and our partners and there is no competition among our partners as we are at this stage. China's property market is huge and its related financial services market is also huge. It's very, very early at this stage for us to face competition. So I think it's going to take a long time for us to really to get into competition. I wish that eventually we are going to compete with each other, which means both sides, or our partners and ourselves will grow to a much bigger scale.

[Operator:]

And your next question comes from the line of Alex Yao.

[Alex Yao:]

Hi, good evening guys and thank you very much for taking my question. And congrats on a very solid quarter. My first question is on the investment into the in house agency business in the secondary property market. What are the necessary building blocks that you guys need to incubate or to establish before you can really jump start this business? Can you talk us through from demand side, from the supply side, what are the key issues further also you need to address? Thank you.

[Vincent Mo:]

I will take up this question. So Alex, this is Vincent. I think the one thing as you know we're transforming or expanding from a very traditional Internet media platform to three platforms, including the traditional media platform, transaction platform and the financial services platform. So we are doing all these kinds of transaction-related business, including in the primary brokerage business and in the resale market agency business and in the rental market transaction business or agency business, actually including the home furnishing business as well. So we are testing all kinds of transaction-related business across our business lines. Up to today, we have achieved some real businesses and we're generating revenue from all of these business lines, including new resale rental and home furnishing business as well. But we feel, I still question -- we feel a big change for us across this transaction thing is whether we -- our people they're capable to do the real transactions. So that is the building thing we need to execute or to deliver the results. We do these transactions based on our PC platforms and our mobile platforms as well, because we have the traffic there, we have all the buyers there and we've got all the listings there. So the challenge for us, for our people is trying to link the buyers and sellers from our websites, from our mobile platforms to complete the transaction. We have been hiring people from traditional industry agency business. So we ask them to link or combine their traditional experience in agency business with online resources we have. We're also training our inside, in house people, so that they could have Internet or mobile, so that they can not only making use of the resources online, but also they can make the transaction happen by combining the sellers and the buyers together. So that's something we have been doing and we are experiencing in this transformation and expansion.

[Alex Yao:]

Got it. A quick follow up question is, can you remind us the headcount of the Company now and what's the target headcount by the end of this year? What will be the incremental headcount you need to add to the new e-commerce business model and what are headcount you need to add to the secondary agency business model.

[Vincent Mo:]

I think Alex, frankly, we do not have an exact number for that, but with the expansion of our business into new resale, rental and home furnishing sectors, and this O2O model we need lots of people to execute. So if you -- if I need to say a number, I think 2,000 to 5,000 people, that will be in the range we're going to add to this Company this year.

[Alex Yao:]

Understood. Lastly a very quick housekeeping question. What percentage of the traffic of your marketing, the total revenue -- the total business is coming from mobile? And what percentage of the revenue is from mobile in terms of the marketing services revenue? Thank you.

[Vincent Mo:]

Hua Lei why don't you follow up this question.

[Hua Lei:]

Yes. I think roughly from the December I think our -- the share from the mobile is around 53%, a little bit over half from the mobile in terms of the unique weightage.

[Vincent Mo:]

[indiscernible].

[Hua Lei:]

Yes. For the revenue split, roughly we think we have like 5% from the mobile and 95% still from the PC.

[Operator:]

And your next question comes from the line of Tian Hou, please go ahead.

[Tian Hou:]

Hi Vincent and Dr. Lei. The question is related to the shift in your business model and as you're going into e-commerce, e-commerce not only in new home but also in secondary home. And secondary home is going to be a big driver in 2015 and going forward. And as what you said, Vincent, you're going to hire a lot of people and, as well, people to deliver these O2O services. So how is that going to impact the margins going forward? And should we model the Company in a much more lower margin range? That's number one question. Number two, also related to this, as you move into e-commerce business, how does the existing marketing service and the listing service business fit into this new direction? [indiscernible].

[Vincent Mo:]

[indiscernible]. With respect to the transaction business, actually what we are going to do and what we are doing now is really we're doing it two ways. One way is we do it directly. So we have our online agents who are going to help complete the transactions. And on the other hand we have our partners, our partner agency companies and our partner agents themselves. So they are our partners; they are helping buyers and sellers to do it, to complete the transactions. So we are -- in doing that, we are going to have our franchise model out in this month, so that we can help more partners, whether they're companies or they're individual agency -- agents, so they can work together with us to provide transaction services to the home buyers and sellers Of course, at the same time, we're also doing it directly. So just that both ways we're going to get into this transaction business. Our franchise model is going to be -- it's going to replace partially our listing services, including our online shop businesses. We're going to integrate our listing model, our listing business and our online shop into our franchise model so that our partners they can get more support from us, including our brand, including the listings and including the home buyers and the financial services and also including [title] service and the training services as well. So that's something we're having out to our partners in this agency market. I believe, in doing that, we can reach out to more buyers and sellers. I don't know if -- what you're going to add something, or if you have numbers.

[Tian Hou:]

That's very helpful, yes.

[Hua Lei:]

So Tian for your second question is about the impact from the new e-commerce model to the marketing services and the coupon model right.

[Tian Hou:]

Yes. For the listing and the marketing, so what's the impact on those two lines of business. So how are they going to perform in 2015?

[Hua Lei:]

Yes. As I mentioned earlier, we think in the short term our listing services' profit will be affected negatively by our transaction model in the resale market. For the marketing services, we think this will be in line with the increase of the transaction volumes for the new home market.

[Tian Hou:]

Okay. I think it's very helpful. Vincent, I just have one follow-up question. It's a very detailed technical question. So when you guys have been listing these [indiscernible] listings, how do you decide which listing is for your in house, which listing is for your franchise partner?

[Vincent Mo:]

Well, you -- I don't know whether you know or not the situation in China's resale market, most of the listings they are not exclusive.

[Tian Hou:]

Yes.

[Vincent Mo:]

So listing is like a public listing, so any agent they can work for the seller or for the listing seller. So frankly, one listing we can work on that, our in house direct sales they can work on the listing. And our partners and others, outsider agents, they can also work on those listings.

[Operator:]

And your next question comes from the line of Luo Yu. Please go ahead.

[Luo You:]

Thank you Mo-zong and Lei-zong. I have a quick follow up. First is regarding to the listing business. Do you have any plan to improve or any expectation to see rebound of the listing business any time this year or next year, or do you think we are already getting here and going forward we will not put this business as a key focus any more. Thank you; this is the first question. Second question regarding to the industry, do you have any merger and acquisition plan for this year. If yes, what areas would you conduct this year and also can you comment on some other players' business model, like Lin Jai De Chan's online business and also Fong Do Do. Thank you.

[Vincent Mo:]

I think I will pick up the questions on -- for the listing services, as we just discussed, we are going to maintain these listing service because some -- most of the agents they still need the services to support their business. And at the same time we're not relying on the listing businesses to grow our business. We actually have this new product, like our franchise model out, which is going to positively integrate our listing services into the franchise, in the model. So that will -- we expect that's going to bring new revenue to us. So this is about the listing things. Going forward, I believe that we're going to have -- other than franchise business, we're going to have other business as well, business products as well to offset the potential decrease of our listing services. So that's one. And second questions --

[Hua Lei:]

[indiscernible].

[Vincent Mo:]

At this stage we do not have a plan to do any substantial M&A for -- in this year, although we keep eyes open for strategic partners. But up to today we do not have anything specific in mind yet. With respect to other business models, I think this is a free market, so we can do whatever we want to do with respect to the business. So we respect other competitors. And we also keep eyes very widely open to watch out and to study other people's initiatives and other good business models so that we can improve our business models, so that we can adapt our business models to the needs of the end users, including both the developers, the sellers and the home buyers as well.

[Operator:]

And your next question comes from the line of Anthony Thong. Please go ahead.

[Anthony Thong:]

Thank you for taking my question. I have two questions. First of all on the strategy of the e-commerce business, so given the new e-commerce model, it's gaining tractions. Do you plan to de-emphasize the old membership card service and shift to committing more resources to grow the new e-commerce model? And how do you balance the two different models? That's my first question.

[Vincent Mo:]

Well we do not want to decrease our traditional advertising-driven e-commerce model, but definitely we're going to emphasize and put more resources to our direct sales model. So we hope that both model could grow, including the old advertising-driven model and the new direct sales commission-based model.

[Anthony Thong:]

Okay. Second question is that, given that we are trying to transform the old media -- the media platform into a transaction-driven platform, do you -- for instance, the second home business, the new initiative, do you allow some buyers to make transactions through online primary platforms like Alipay or any chance you will consider for applying for an online payment license for itself?

[Vincent Mo:]

Actually we do have online payment for new resale, rental and even home furnishing e-commerce model already. So our clients, the buyers settle so they can make their payment through our payment system online.

[Operator:]

And your next question comes from the line of [Evan Jouwen].

[Unidentified Analyst:]

Hi, good evening Lei-zong, Vincent. Thanks for taking my questions. I've got a follow-up question on the listing business. So you mentioned that we may have, in our new business model for the secondary market, that we may see some revenue coming in second half this year. Just wondering if you can give us some color on what kind of the revenue model that we may use for the -- for in house secondary transaction business and what kind of expansion plan of cities that we plan to do? Now we only started in a few cities and how fast the expansion could be for the new secondary business for the rest of the year. Thanks.

[Vincent Mo:]

Yes, we're starting our e-commerce business which is a more direct transaction business in the resale market mainly from large demand. Currently we are testing in five cities, including Beijing, Shanghai, Wuhan, Chengdu and Guangzhou. The growth is good, because the scale is small at this stage. So the whole year, based on the result of the testing of these five cities, we're going to decide how we're going to expand into other cities, either by direct operations or by franchise arrangements with our partners. So we're going to take both ways going forward.

[Unidentified Analyst:]

Understood, thank you so much. So my second question is regarding the new e-commerce volume that -- what kind of commission that we are now charging for -- per transaction? I remember in 3Q it was still roughly like 2% and is still like close to 2% in 4Q? And how do you see that e-commission rate going forward for 2015? Thanks.

[Vincent Mo:]

This is for the new development market right --

[Unidentified Analyst:]

Yes, the new development.

[Unidentified Company Representative:]

Yes. We said in Q4, we still say close to 2% for the commission fee. So it's still similar as quarter three. Going forward, we probably will see some decline in the commission fee; it's possible because while getting into more, new cities, also we try to increase the scale of our e-commerce model. So we see that maybe we use a lower commission fee to gain more market share.

[Operator:]

And your next question comes from the line of [Simon Tan], please go ahead.

[Unidentified Analyst:]

Hi there. Yes, thanks for taking my call. Just had a couple of questions; one of them is just trying to bridge the cash flow used in operating activities, which was $5 million, with the cash, the decline in cash from $897 million to $810 million, so it's about $87 million shortfall. I guess some of that's down to CapEx and some of that's down to investments, but just wondering if you could break it down for us.

[Hua Lei:]

Yes. On the earnings call we said the difference of the cash flow mainly due to the -- first is the micro-loan to the home buyer and the developer, so it's about $45 million, through our financial platform. Also we paid $47 million, around $47 million to the developer as their customer deposit.

[Unidentified Analyst:]

Just reading back, I said that it seems to me that that is built into the -- that's above the operating cash flow line and hence that's why the cash flow, operating cash flow is minus $5 million. I'm just wondering what the bridge between that minus $5 million and the minus $87 million in terms of actual cash change over the quarter, just wondering what that is.

[Hua Lei:]

Yes. Also I think the decrease is because of the -- we had less income in quarter four, net income in quarter four compared to 2013 is another reason.

[Unidentified Analyst:]

Yes.

[Hua Lei:]

Also in quarter four we paid out some -- the money for our investments, yes, to the -- our financial companies, yes.

[Unidentified Analyst:]

Right, okay. Got you. And just on the subject of the customer deposits of $47 million, I'm just trying to understand how that flows through the business, i.e. is it -- how that -- it's that big working capital swing effectively, these customer deposits.

[Hua Lei:]

Yes. We are having some very small deposits to some famous developer in China to book some revenue for their sales model, also for the market sales -- marketing of -- yes, so for the advertiser, I mean. This is mainly for the customer deposit.

[Operator:]

And your next question comes from the line of Gregory Zhao, please go ahead.

[Gregory Zhao:]

Good evening Mo-zong and [indiscernible]. I have two very quick follow up questions. The first one is about the acceptance level of developers, property developers over our traditional online marketing services, which is the major feature display advertising, as we have seen our traditional competitors, media competitors and also some transaction=based new players like Fong Do Do is disrupting this business, so just want to get your views about the developers' acceptance of this traditional business. My second question, also a follow-up question, about the e-commerce business. I think for direct e-commerce model, so in your view what's the normalized margin in longer term? And I think we can get higher commissions from the developers compared to the old coupon business. So in terms of absolute profit, how is it compared to the old e-commerce business? Thank you very much.

[Vincent Mo:]

I will pick up the question on -- the marketing service or the advertising business; I'm a believer of that. It was there, it is still there and I expect the marketing services, developers they're going to need it going forward as well because the developers and the sellers they do need buyers, they need mass buyers to look at their project before they even go to see the projects themselves. So I think the marketing business is definitely a viable, sustainable business, alth9ugh the growth of the marketing business or advertising business may not going to grow at a high speed, at a high growth rate. So that's my thinking about the marketing services. In regard of this other model, I don't know whether other model works, frankly, at this stage. So that is a question to your -- that's the answer to your first question. And second question is -- Hua Lei you want to follow up?

[Hua Lei:]

For the normalized margin for the direct sales model, we think the long term currently we can decrease the rebate portion to 50%, so that means the gross margin is like 50%, so the OP margin is like [indiscernible] for the direct sales model. For the absolutely value, it's first of all if we can get a high commission fee in some lower-tier cities, it's possible we can have a higher [indiscernible] value for the direct sales model comparing to the old coupon model.

[Gregory Zhao:]

So you mean the margin is going to go up or go down? Margin, margin up?

[Hua Lei:]

Yes.

[Gregory Zhao:]

Okay.

[Operator:]

And there are no further questions at this time.

[Hua Lei:]

Yes, no more questions. Operator?

[Operator:]

Yes sir.

[Hua Lei:]

There's no more questions, right?

[Operator:]

Not at this time sir. Would you like me to prompt about questions again?

[Hua Lei:]

No. We said if no more questions we can finish this call, yes.

[Operator:]

Okay. And would you like me to close the call out?

[Hua Lei:]

Yes please.

[Operator:]

Thank you. Ladies and gentlemen, thank you for your participation. This does conclude today's conference call. You may now disconnect.