Fang Holdings Limited
Q2 2015 Earnings Call Transcript

Published: 9 Aug 2015

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Quarter Two 2015 SouFun Holdings Limited Earnings Conference Call. At this time, all participants are in listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded today, August 7, 2015. I would now like to hand the conference over to your speaker for today, Dr. Lei, Deputy Chief Financial Officer. Please go ahead, sir.

[Hua Lei:]

Thank you, operator. Hello, everyone and welcome to SouFun’s second quarter 2015 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 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 uncertainty. 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. Now, let’s look at the numbers. Firstly, second quarter number. Revenue, SouFun reported total revenue of $210.9 million for quarter two, representing an increase of 25.4% from $168.2 million for the corresponding period in 2014 primarily driven by the growth in e-commerce services, partially offset by the decline in marketing services and listing services. Revenue from marketing services was $60.6 million for quarter two, a decrease of 18.4% from $74.3 million for the corresponding period in 2014 primarily due to less customers in the market. Revenue from e-commerce services was $106.8 million for quarter two, a 119.3% increase from $48.6 million for the corresponding period in 2014 primarily due to the growth of the direct sales services for new homes and the growth of the real estate brokerage services as well as rapid growth of the home decorating services. Revenue from listing services was $34.6 million for quarter two, a decrease of 16.9% from $41.7 million for quarter two – for the corresponding period in 2014 primarily due to our reduction of unit price per paying subscribers given that the number of paying subscribers has reached a historic high at the end of quarter two. Revenue from Internet financial services was $4 million for quarter two. SouFun began to offer Internet financial services in August 2014. Revenue from other value-added services was $4.8 million for quarter two, an increase of 35.6% from $3.6 million for the corresponding period in 2014 primarily due to the rapid growth of our research-related products. GMV increased by 306.7% quarter-by-quarter to $6.8 billion. Cost of revenue was $104.9 million for quarter two, an increase of 258.2% from $29.3 million for the corresponding period in 2014. The increase in cost of revenue was mainly attributable to the increased staff. In addition increased e-commerce costs related to direct sales services and the increased decorating costs related to home decorating services also contributed to the increase in cost of revenues. Gross margin was 50.2% for quarter two compared to 82.6% for the corresponding period in 2014. Operating expenses was $83.5 million for quarter two, an increase of 45% from $57.6 million for the corresponding period in 2014. Selling expenses was $54.5 million for quarter two, an increase of 71.5% from $31.7 million for the corresponding period in 2014, primarily due to increased staff, increased expenses paid to our marketing agents for our SouFun membership services and the increased advertising and promotional expenses. General and administrative expenses, was $29 million for quarter two, an increase of 12.3% from $25.9 million for the corresponding period in 2014, primarily due to increased staff costs. Operating income was $22.3 million for quarter two, a decrease of 72.7% from $81.7 million for the corresponding period in 2014. Income tax expense was $10.2 million for quarter two, a 58.4% decrease compared to $23.9 million for the corresponding period in 2014. SouFun’s effective tax rate was 38.6% for quarter two as compared to 26% for last year. The increase in the effective tax rate was primarily due to the increased penalty and interest accrued for the difference between the income tax for 2014 accrued in 2014 and the amount actually paid in May 2015 for tax return. Net income attributable to SouFun’s shareholders was $16.2 million for quarter two, a 76.3% decrease from $68.2 million for the corresponding period in 2014. Fully diluted earnings per ordinary share and per ADS was $0.18 and $0.04 respectively for quarter two, a 73.3% decrease from $0.77 and $0.15 for the corresponding period in 2014. Adjusted EBITDA, defined as non-GAAP net income before income tax, interest expenses and interest income, depreciation and amortization, was $28.4 million for the quarter two, a decrease of 67.6% as compared to $87.8 million for the corresponding period in 2014. As of June 30, 2015, SouFun’s cash, cash equivalents and short-term investments of $533.6 million compared to $667.8 million as of March 31, 2015. Cash flow generated from operating activities was $4.1 million for quarter two, an 89.8% decrease from $40.1 million for the same period in 2014. The decline in cash flow from operating activities was primarily due to a $52 million decrease of net income as compared to the second quarter 2014, a net cash outflow of $76.4 million in loan provided to homebuyer under our internet financial services program, a rough $47.4 million increase in cash flow due to an increase of accrued expense and other liabilities. Now, let’s look at first half 2015 results. Revenue, SouFun reported total revenue of $334.3 million for the first half 2015 representing an increase of 15.5% from $289.4 million for the corresponding period in 2014 primarily driven by the growth in e-commerce services, partially offset by the decline in marketing services and the listing services. Revenue from marketing services was $101.2 million for the first half, a decrease of 16.5% from $121.3 million for the corresponding period in 2014. Revenue from e-commerce business was $158.4 million for the first half, a 103% increase from $78 million for the same period in 2014. The growth was primarily a result of the company’s efforts in e-commerce expansions in direct sales services, real estate brokerage services and decorating services. Revenue from listing services was $58.3 million for the first half, a decrease of 30.5% from $83.8 million for the corresponding period in 2014, primarily due to our reduction of unit price per paying subscriber. Revenue from internet financial services was $7.6 million for the first half. Revenue from other value-added services was $8.9 million for the first half, an increase of 43.2% from $6.2 million for the corresponding period in 2014 due primarily to an increase in real estate data-related services. Cost of revenue was $148.6 million for the first half, an increase of 174.1% from $54.2 million for the corresponding period in 2014. The increase in cost of revenue was primarily due to the increase in staff costs and the increased e-commerce costs related to the direct sales business. Gross margin was 55.6% for the first half compared to 81.3% for the corresponding period in 2014. Operating expenses was $155.3 million for the first half, an increase of 48.3% from $104.5 million for the corresponding period in 2014. Selling expenses was $102.5 million for the first half, an increase of 72.9% from $59.3 million for the corresponding period in 2014 primarily due to an increased staff cost, increased expenses paid to our marketing agents for our SouFun membership services and the increased advertising and promotional expenses. G&A expense was $52.8 million for the first half, an increase of 17% from $45.2 million for the corresponding period in 2014 primarily due to increased staff costs. Operating income was $29.8 million for the first half, a decrease of 77.3% from $131.3 million for the corresponding period in 2014. Income tax expenses, was $15.8 million for the first half of 2014, a 59.6% decrease compared to $39.1 million for the corresponding period in 2014. The effective tax rate was 41.5% for the first half compared to 26.3% for the corresponding period in 2014. The increase in effective tax rate was primarily due to increased penalty and interest accrued for the difference between the income tax for 2014 accrued in 2014 and the amounts actually paid in May 2015 per the tax return. Net income attributable to SouFun’s shareholders was $22.3 million for the first half, a decrease of 79.7% from $109.7 million for the corresponding period in 2014. Fully diluted earnings per ADS, was $0.05 for the first half, an 80% decrease from $0.25 for the corresponding period in 2014. Adjusted EBITDA, defined as non-GAAP net income before income tax, interest expenses, interest income, depreciation and amortization, was $39.7 million for the first half, a decrease of 72.1% compared to $142.5 million for the corresponding period in 2014. Cash, net cash used in operating activities was $50.7 million for the first half as compared to net cash generated from operating activities of $166.3 million for the same period in 2014. SouFun adjusted its revenue guidance for 2015 from $808.3 million, representing a year-on-year increase of 15% to $843.4 million, representing a year-on-year increase of 20%. This forecast reflects SouFun’s current and preliminary view, which is subject to change. Thank you for taking time to join us today. And we will now open the call for your questions. Operator, please go ahead.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from the line of Hillman Chan from Macquarie. Please ask your question sir.

[Hillman Chan:]

Congratulations on the strong momentum in your direct sales business. I have two questions. The first one is about your cash. Now you are doing a placement and you raised an additional $1 billion on top of your about $400 million cash. So, how are you going to spend it to fund the direct sales business? Maybe you can break it down by segment? And I have another question afterwards.

[Vincent Mo:]

Okay, this is Vincent. Yes, we have about $500 million cash now. We intend to raise another $500 million to $1 billion cash for the company’s future use. Several aspects we need money, one is the transformation of the company. As you know, we have been aggressively moving into a new, resale, rental and home furnishing business in the transaction model. This needs – especially at the beginning stage it needs a lot of people to implement, to close the deals. Although most of the work can be done online, but still we need online and offline combined to deliver good results for our consumer, our clients. So, expansion in our human resource, especially with our expansion of the transaction model into more cities across China that needs financial support in the short period of time and we are not making profit out of that new transaction model business yet. So, that’s the main one. Other than that, the second place, we are going to spend is data to support the transactions across major cities with respect to new, resale, rental and home furnishing. We needed transaction technology tools. Internally, we recorded transaction platform – technology platform reported each transaction, so that we can automate the process eventually of all the transactions as much as possible in order to increase efficiency and to make sure that we can do the transactions in a much better efficient way and in a low cost way going forward. But that needs technology platforms to support the transactions, especially when we expand into more cities. Like new home, we are now 30 plus cities. In the resale, we are 10 plus cities. But going forward, we are going to move into 50 cities or even 100 cities or even more cities after this 100 cities. So, to build up a solid efficient technology platform that we are going to invest heavily in that direction, so that’s the – including human resource, including softwares and other tools, technology tools as needed. So, that’s the second thing we need to do. You probably know, other than those two things mentioned, we have a $400 million convertible bond, which is going to be due and I think it’s in November next year, so we need to be prepared for that also. So for those parts, places we are going to spend money, so we are going to prepare way ahead so that we can focus very much on our transformation and to make this transformation successful.

[Hillman Chan:]

Got it, Vincent. So another question will be about your commission level since we are sort of undercutting competitors. I just want to have a sense on your internal – maybe your criteria or KPI, for example, when you are going to normalize your commission level, sort of criteria you have in mind. It can be in terms of market share. It can be in terms of the amount of transaction that you want to achieve. It can be in terms of city coverage. So what’s in your mind when you think about normalizing commissions in the mid to long term?

[Vincent Mo:]

At present, we are having about 2% commission from the new transaction – new home transaction and 0.5% commission for the resale market transaction, and we are charging – starting from this month, we are charging one-tenth of one month’s rent for the rental market. So, for the home furnishing, our price is about 20% to 30% lower than the market price. So we are aggressively moving into those directions at this stage, and. It’s my belief that with our efficiency increasing enough, with our volume big enough, I think even at the current commission rates, we are still going to make money. Other than that, with the volume growing and when we reach some scale, multiple value-added services can be added to our transaction – all kinds of transactions, so that will create new revenue stream for us going forward. So that’s the current status for – on the things we think about into the future. Of course, with the competitive commissions, it’s much easier for us to get into this market and penetrate into this market and have a much bigger market share in a shorter period of time.

[Hillman Chan:]

Okay, got it. Just one quick follow-up question since you talked about efficiency. So how is the compensation of our – for example, our resale agent or our primary home agent compared to the traditional agent? Since we are paying them a base salary and then we’re paying – we are also sharing a part of the commission with them, right? So, how is their compensation right now compared to the traditional players?

[Vincent Mo:]

Roughly, our base salary is better than the traditional agency company. But the traditional agency company, they’re also coming up – with the competition from Rossdale, they’re also coming up with better salary. So that’s one thing. Commission-wise, we are charging a much lesser commission now comparing to most other agency companies. We have – with the lower commission we actually give out our commission 80% to our agents. So, that’s how we are charging – how are we paying our clients. The commission is, in fact, high comparing to the traditional agency companies paying their agent. But as you know, our 0.5% is lower than the traditional agency companies. But we believe because of the efficiencies, things like in the resale market, we are thinking about – we are moving toward three transactions per agent per month, but a traditional agency business agent, they are having one transaction per three months, per quarter. So, that’s how are we going to move this transaction business forward.

[Hillman Chan:]

Okay, got it. Thanks, Vincent. That’s very helpful. Thank you.

[Vincent Mo:]

Thank you.

[Operator:]

The next question comes from Fan Liu from Goldman Sachs. Please ask your question.

[Fan Liu:]

Hi, Vincent. Thanks for taking my questions. Could you please share with us the new home e-commerce revenue breakdown between direct sales and coupons in second quarter please? Among the direct sales segment, how many units are sold out by our in-house team and third-parties respectively? And the second question is related to our marketing and listing services. The marketing revenue witnessed the weakness in this quarter. Could you please help guide how should we see the top line growth for these two segments for this whole year and next year, if possible? Thank you.

[Vincent Mo:]

Lei Hua, why don’t you go ahead?

[Hua Lei:]

Yes. For the first question regarding to the breakdown of our revenue in e-commerce, our direct sales revenue in quarter two is $44 million, around $44 million. Our coupon revenues are $40 million. So, yes, for the units, totally weighted are 22,000 units are direct sales, for the coupon weighted, 40,000 units. So, this for your number – so, it’s for your first question, right?

[Fan Liu:]

Yes. And second question is related to marketing and listing services, how should we see the top line growth for these two segments for this whole year and the next year, if possible?

[Vincent Mo:]

Yes. I think going forward for the marketing services, which is mainly advertising services, we are seeing the pure advertising model continue working, and it’s coming back. So we will see that the decreasing trend will stabilize, and it will be – most likely, it can do – grow from our current bottom line. So, that’s for the marketing. For the listing, it’s in the same situation. Actually, our paying subscribers from outside, third-parties agent subscribers, has been reaching this peak in the history, especially after early this year or last year – late last year’s boycott from our agency clients. It’s coming back. Because we charge a much lower price, we still see some slowdown from decrease in the listing services revenue. Going forward, I think it’s also going to be stabilized. Frankly, I’m kind of confident in this advertising and the listing traditional Internet model. But on the other hand, we are also very cautious that we are not going to see a very high growth in these two sectors into the future. I think to the end of this year, it’s going to be stabilized. And next year, we will see, we don’t have a clear picture about the next year yet.

[Fan Liu:]

Okay. Thank you, Vincent and Dr. Lei.

[Vincent Mo:]

Thank you.

[Hua Lei:]

Thank you.

[Operator:]

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

[Evan Zhou:]

Hi, good evening, Vincent and Dr. Lei. Thanks for taking my questions. First, in our e-commerce direct channel, could you maybe have some more details about kind of the rebate level in our recent quarter? And what’s the breakdown of 1P versus 3P? Is commission still stable at, like, 1.9%, 1.8% or maybe did it decline a little bit? And also, if you’ll comment on the general gross profit margin level for the direct channel, it will be helpful. And I have a follow-up.

[Hua Lei:]

Yes. For the question regarding to the rebate in our direct sales model, currently, we still rebate around 40% or something in our direct sales model and use that to the homebuyer directly if they finish the transaction with our in-house team. If we are – if we use the third-party agent company to finish the transaction, now we are rebating over 85% of the commission fee with the third-party agent if they finish the transaction for us. For your question regarding to the commission fee, in quarter two, we are seeing the commission fee slightly lower than quarter one. I think our direct sales model, by using our in-house team, our commission fee is about 1.7% something or around. For the commission fee with the third-party agent company, it’s less than 1% roughly, yes.

[Evan Zhou:]

Got it. Thanks. Second question is regarding the latest headcount and also this future headcount expansion plan. If you can share some thoughts on kind of what’s the – our outlook should be by the end of this year and maybe next year? That would be helpful. Maybe a range will be helpful to us. Thank you.

[Vincent Mo:]

I will pick up this question. We added – I think we added about 11,000 people in quarter one. And in quarter two, we added about....

[Evan Zhou:]

15.

[Vincent Mo:]

15,000 around the people in quarter two, and altogether for the first half this year and to July, as we added more than 25,000 people, mainly focusing on the transaction model. That’s our core thing going forward, our e-commerce business. Because at this stage, we still need agents to close the transactions other than getting clients, getting listings from online. So going forward, I think in the early stage expansion – expanding into more cities. We’re strengthening our market share in the existing cities, so we’re going to see – we are going to add more people into our transaction business. While the result is good in Guangzhou, Chongqing and Wuhan, those big three cities in July and – since June and July, we are already number one players in the resale market in those cities. And for the 10 biggest cities in China, we have business there for the resale market. Every city, we are now in number – in the top five players. So, it’s paying off. In the early stage, I would say, half year, 12 months or even 18 months or 24 months, we still need lots of people and – to do the transactions. With the automation process going on with our transaction technology platform coming up, the efficiency will be better – much better in the future comparing to today. Up to that point, we will see the cumulative results are going to be stable, and probably, human resource – the agent staff, we will start even decreasing when we get to that point. So that’s something we are experiencing, and it is also something we look into the future.

[Evan Zhou:]

Understood. Thanks a lot, Vincent and Dr. Lei.

[Vincent Mo:]

Thank you.

[Operator:]

The next question comes from Tian Hou from T.H. Capital. Please ask your question.

[Tian Hou:]

Hi, Vincent and Dr. Lei. Questions related to – one is micro, one is your secondary home sales expansion plan. In terms of micro, we saw two fronts of decline or problems, one is macro economy. And every month, we saw the PMI and every quarter we saw the GDP. They are definitely not so positive. And – however, we saw the housing market recover and we saw the auto market decline. So I really want to understand what’s the relationship? Why is the macro coming down so much if housing recovered? And that is number one. So what do you see in the secondary home markets? When Chinese people start to register their properties, which government said that they should start March 1 this year, what could happen in the secondary home market? So, that is much more macro-picture related. And then related to your secondary home, your direct sales, I wonder what’s the next expansion plan. How many city total do you plan to enter, by when? And how far have you gone already?

[Hua Lei:]

Okay. Thank you, Tian. Yes, I will pick up this question. For your first, the macro question, yes, although we are seeing the macro economy is not performing well at this moment, but we think the market still will keep the current momentum in quarter three and quarter four, because we think at this moment the government still needs the broker market to boost up the whole economy. So, I would say this is the simple reason.

[Vincent Mo:]

Let me get this question. Actually, China is probably a market divided into at least two markets. In the big cities – in the big markets like Beijing, Shanghai and other like 15 big cities or even the 30 provincial capitals, I’ve been always confident with these markets. So we have been seeing since actually three months ago, the market – the whole agents market has been – as a whole, average price has been recovering. You see increase sequentially. Especially in the big cities, like Tianjin, it jumped, I would say, even over 20% in the past three months. And Beijing, Shanghai, they’re all going up, again, the big cities. But still, in the smaller third tier or fourth tier cities, it is still kind of struggling, and demand and supply is still tough. The price is still remaining – slowing down or decreasing. So when we look at China’s market, we need to be careful. We have to look at China’s market thinking about several markets. So in the big cities, I don’t think we need to worry about it. But in the third tier or fourth tier cities, we do need to pay attention to those cities. Linking from the market to the economy, we all know the economy is struggling, if you use the serious word, but actually 7% is not that bad. So I would – especially with the stock market going up, people – those people who made money out of the market, they will – in return to buy properties. So overall, we have not seen impact from the slowing economy. It’s my belief those big city markets will remain strong, and those third tier or fourth tier cities will continue their pressure in the coming 12 months or even longer.

[Tian Hou:]

Okay, that’s helpful.

[Vincent Mo:]

The second question?

[Hua Lei:]

Yes. So your second question is about our sales for the secondary home, right?

[Tian Hou:]

Yes, it’s about the secondary home, the expansion plans, how many cities do you plan to enter, by when, in total? And so how far have you gone at this point?

[Vincent Mo:]

Okay. I believe we are now in 13 cities and we have 18 other cities prepared to expand into. So, that’s the current plan. But going forward, I hope that we can – we are going to be at least in 30 cities by the end of the year. And hopefully, we can get into more cities by the end of the year.

[Tian Hou:]

Okay, got it. That’s all my questions. Thank you for answering.

[Vincent Mo:]

Thank you.

[Operator:]

The next question comes from the line of Jeffrey Gao from Nomura. Please ask your question.

[Jeffrey Gao:]

Thanks. So, congratulations on good results and a successful transformation. So, there are two questions from me. First of all, when are we expecting less CapEx, because with improving cash flow – are we expecting better cash flow next year with less CapEx in 2016? And the second question is what’s our view on our competitors’ movement like Homelink, because we know that Homelink is acquiring competitors at a cost that is improving the density of their stores in some key cities like Shanghai. What’s our view on this movement and what’s our strategy to development in these cities? Thanks.

[Vincent Mo:]

Do you want me to? Okay. Yes, answering your first question. In the coming two quarters and four quarters, which means 6 months and 12 months, I would not expect that CapEx will be slowing down. 6 months to 12 months, we are still going to grow rapidly into the transaction businesses and into more cities across China and across new, resale, rental, home furnishing sectors as we are. So I would not expect that CapEx is going to slow down in the coming 6 to 12 months. Because market share and deep penetration, that’s the scale of the company transaction model. That’s the focus of the management in the coming 6 to 12 months. And other – after the 12 months, going forward, probably with the transaction technology model up and running efficiently, we will – the efficiency will be much better than current status. By then, we are going to slow down the CapEx. So that’s the answer to your first question. The second question is that competition is there, but from an online perspective, from Internet, mobile, PC websites, in the past, we are still very dominant in China. So we believe with our focus on this platform on the mobile, PC and WAP elsewhere, we are sure we’re going to steer – we are going to maintain our leadership in this aspect. The transformation from online to offline, there is challenge there. But the 6 months it’s tested, our people have adjusted it quickly to the new business model from online, pure online information business which is advertising listing business to online transaction business, together with offline support. So the funding, we plan to raise is partially to support our expansion and especially we need to compete with any competitor, we will do that by using our resources.

[Jeffrey Gao:]

Sure. Thank you. Very helpful.

[Vincent Mo:]

Thank you.

[Operator:]

The next question comes from Anne Shih from Brean Capital. Please ask your question.

[Anne Shih:]

Hi, Vincent and Lei. Thanks for taking my question. Understand investments in headcount, geographic expansion, your technological build-out will continue, but also seeing relatively, I think, stable commission levels. I know this might be more granular, but could you share some color on where you think margins will go for, say, the second half of the year maybe the outlook as well for 2016? And then longer term, I think you touched on this last quarter, the normalized margin levels for the business overall? Thank you.

[Vincent Mo:]

I think in the coming 6 months, it’s to – 12 months, our focus will be very much on the market share and the market penetration in our transaction model in across 50 cities or even more than 50 cities. So that way we are going to spend or invest as much as we needed in order to quickly occupy those markets, to be the leader in those markets in our new model, the Internet model, due to the traditional agency business. Whether it’s new, resale, rental or even related home furnishing businesses. So, profitability wise, internally, I give my team, I give myself a guidance. At large, we are profitable, we are very happy going forward. But even if we may lose some money, if we need to do that to maintain our momentum in growing this business, we’ll also – we will do that. So, as you can see that the top line has been growing with a very good – with a good momentum comparing to four quarters, three quarters ago. So, we believe after 12 months, in the second half of next year, the margin is going to come back. And we are continually improving into a longer future. So that’s our current judgment of the direction the business is going.

[Anne Shih:]

Thank you.

[Operator:]

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

[Gregory Zhao:]

Hi, Mo. Hi, Dr. Lei. Thanks for taking my questions and congratulations on the very strong quarter. And I have three follow-up questions. The first one is about our secondary market services. So I hope the management can share with us your view about the business model of the secondary market. We see – we have both the listing services and the direct service model. So, we have seen globally, for example, in the UK, that our peers like Rightmove and Zoopla, they also see some resistance from the agency groups. So in the long run, do you think the listing, advertising services will be a better business model or do you think it – eventually all the internet companies have to move to the direct sales model? So this is my first question.

[Vincent Mo:]

Gregory, it’s a good question. Actually, I talked with Rightmove guys, when I was in London, last year. I also talked to the U.S., our counterparts like Zillow, Trulia and the move.com there. I know their CEOs quite well. Frankly, and I believe the advertising and the listing model is going to sustain. And I think they are also going to have a good profitable margin. And we are also continuing our marketing and listing model. We are not giving that up or we are just expanding more into this transaction model. We are still trying very hard to maintain and build up our traditional internet listing and advertising model. So SouFun, what we are doing now is that as we described it before, we have the traditional Internet information platform, which we generate advertising and the listing revenue. And now, we are also having the transaction platform. We are generating commission from our transactions. And thirdly, we have our financial service platform, which is strongly supporting our transaction platform and at the same time also providing services as a platform – open platform to our outside partners. So, SouFun, I would say, we are going to maintain our independent open platform to our partners in the industry, in the markets like brokerage houses, agency, people – agents and other small and medium-sized players in the market. So, they are still with us. Our marketing and the listing service still – especially marketing still there and the – actually recovering from the worst time, two quarters ago. So, on the other hand, we have the – you know, the transaction platform, which is we are doing directly transactions. These two things are in contradict to each other in some way. I was thinking very hard the last half or last year trying to figure out whether we can only do one thing rather than the two things. And eventually, we tested the different things and we found out we can have both things and we can – actually these two things can support each other going forward as long as we can build up these two things all big, both of it enough. So, that’s – we have been testing, that’s the way we have been following going forward. At the same time, I also did some study on other similar business – businesses like jd.com. They started doing direct sales. And I think it’s about four years ago or even longer, they opened a platform to third-parties to outsider elsewhere. And now, both their direct sales and their platform – open platform worked well. So that’s something give us more confidence to move forward with both the open platform and our direct sales platform. Even traditional companies like Carrefour, they have – their products in their stores about 20-plus or even more products comes from – come from Carrefour’s – their own product and about 80% from the third party providers. So we found out, in our transition, we’re going to maintain our traditional Internet volume quarter platform, which is – we are generating revenue from the advertising listings and other value-added services. We’re going to keep that as our open platform. And at the same time, we’re also building up our direct sales platform. And I think in the longer run, you might reasonably thinking of this company going forward. In the longer run, after both the information platform and the transaction platform grow to some scale, to some point, and the whole SouFun, the whole company, again, will become a very huge open platform again. So that’s how we are thinking about the direction the company is going and also the stages the company will be in the process.

[Gregory Zhao:]

Okay, thank you. Actually, you also answered my second question, so I would directly move to my third question. So, my third question is about – is still about the margin outlook of our direct sales speaking model. So, as you mentioned, now if our – the effectiveness of our sales team, for example, we can generate two transactions for the newer partner sales per month and our subsidiaries for the barriers, we assume is around 40% to 50%. And even we include the sales guys’ basic salary and some bonus to the sales guys. So, I think in the long run, this business can be – the profitability of the business can be around – about 30% or even 35% margin. So, do you think in the long run we can reach that high margin? Thank you. That’s all my questions.

[Vincent Mo:]

I wish we could. At this moment, we are – we don’t have profit margin for those transaction basis. But I believe as you mentioned 30% or so I believe eventually, but really I don’t know how long it’s going to take – maybe, I would not expect a 30% profit margin for the transaction model within 12 months. I think beyond those 12 months, after the automation becomes more and more with our transaction model, I think we are going to get to there, get to the numbers you just mentioned.

[Gregory Zhao:]

Okay, thank you. Thank you very much.

[Vincent Mo:]

Thank you.

[Operator:]

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

[Ming Xu:]

Hi, Mo and Dr. Lei. Congratulations on the strong quarter. So, I have two questions. First is about the direct sales business, so obviously, if you look at your market – your sales volume, transaction volume with the total industry sales – transaction volume, the market share is still very small. However, because you only operate in selected cities, so I guess in those cities alone, your market share is actually quite high. I would guess maybe 10% to 15%, I am not sure whether I am right. So, I am just wondering what do you think is the market share that you can rise to in these cities or if you operate in the new cities, what kind of market share can you expect to get to? That’s my first question. I have another question.

[Vincent Mo:]

Okay. I think our market share now is low. I think it’s definitely below 10%. Other than some cities, some selected cities, for our new market, new home market, for the retail market, we are – we are very low. In average, we are not more than 5% in market share. So, that’s why this market – our transaction model, which is having a huge potential going forward. So, we hope that eventually for the – in the new market we hope we can get to 30% to 50% market share, because new market is more standardized. Its information is more transparent. And for the resale market, if we can get at national level, national need, if we can go to 10% to 12% – 10% to 20% market share that will be huge enough. So that numbers would be the numbers we are targeting to get in the coming 12 months to 24 months.

[Ming Xu:]

Okay. So my second question, regard to – is regarding to your breakeven point or the profitability of the secondary home business, their in-house agent secondary home business. So it’s actually a follow-up to a previous question. So basically you actually charged very low commission from the homebuyers or the home sellers. And at the same time you gave out quite generous commission to the agents you hire. So, that actually – that of course, can attract a lot of homebuyers to your platform. But I mean, at least at the same – at least currently, your margin is very low or it’s actually negative. So, I am just wondering what time horizon or what kind of transaction volume do you see as breakeven point or for you to – for your profitability to actually become positive? And also in this process, what’s the driver for this change? Is it simply volume growth or is it a raise in commission rate you charge or is it actually a – maybe a cap or like a cut in your commission, giving out to the agents? Thank you.

[Vincent Mo:]

Yes, I would say we are under the second part. I would say it’s a combination of all of this. Low commission and you know, plus our very strong online platform, whether it’s app or it’s WAP, or including the traditional website in the PC end. So, I would say it’s a combination of all of these for us to penetrate this market. I don’t know I might answer incorrectly or you can come up with something.

[Hua Lei:]

Yes. I think your question is related to the margin for our 0.5 mortgage business. Actually as Vincent mentioned it before, the company still maintains low commission fee, adding more value-added services to our success. Also, we have our financial success with online services which can bring and generate more revenue and profit to us. So, in the – I mean, in the long run, we did some rough calculation, we think in current efficiency rate, if we can get over 1% of the commission fee or commission fee based value-added services – value-added commission fee, we can breakeven. So we can – if we can generate a higher efficiency rate, for example, two units or three units per month. With the financial services revenue, definitely, we are going to make some business profits of this business in the long run.

[Vincent Mo:]

Yes, in the long run, yes, I would say, margin wise, within 12 months, I would – we are not expected that we are going to have in a good decent positive margin, but 12 months from today and beyond, I think definitely we will consider that if we are having a reasonable market share. So, that’s the future we can see from today.

[Ming Xu:]

Sure, thanks. Maybe finally a small follow-up specifically on your compensation, so my understanding is that if you maintain the current pay structure that a basic pay and also a quite generous revenue sharing or actually commission sharing with the agents you hire. If you maintain the structure, then even if you have higher efficiency say your agent can sell maybe three homes per month compared to the traditional agent who would sell one home in three months, even if your agent have high efficiency, but that will also mean that you need to pay the agents much more than the traditional agent can earn. But if that is the case, I mean your – actually your margin have – in my view have limited upside. So my – the question I want to ask is that whether you would try to maybe going forward when the bill size is fully ramped up, try to control the increase in compensation or set a cap or lower the commission rate, etcetera. And do you have any comment on that?

[Vincent Mo:]

I think you are right. We will definitely adjust the commission structure and the payment to our – the payment structure to our agents that will be our evolving process. But in the early stage, the current stage, in the coming six months is where we are very cautious to make quick adjustment. I would like to see that we grow this business for some time and for our people, for our team to be in shape before we make adjustment. Actually we can make money right now. We can make profit right now. But I would not say it’s good for us in the longer run. Even if we are – we may loose some money with transaction model, as you know, we do have a profit making model in the traditional Internet advertising and listing. So we may just focus on doing the 0.5% model. So which I think eventually, when we get to some point to a scale and it will be very easy and to make the profit out of it by adjusting our pricing model, by adding more value added services in which you need to pay and also by adjust [Technical Difficulty].

[Ming Xu:]

Just like to follow-up on the margin questions, you talked about the – in the future, the improved efficiency and higher market shares would make the new businesses much more profitable. But could you explain, under this kind of outlook, what would be your assumptions on the competitive landscape, because obviously for your new business model, right now you are undercutting some of the existing players in terms of commission and all that, do you foresee any other – and either existing or new players also undercutting yours, so that making the margin upside less feasible in the future?

[Guan Lanying:]

Yes. And this is Guan I will start this question. Yes. We are seeing that many competitors in this market, including the traditional agent companies like Homelink, also we have the newcomer like the [indiscernible], yes. So this is why we need to more aggressively, we need to expand rapidly into more new cities. In next 6 months to 12 months, so probably you will not see a quick increase in our margin as quick in our new business, but at we – at our market share, market share reached at certain points in which there is more market share and after we reach the a bit more in efficiency rates, we do believe we can increase our margin at some point.

[Ming Xu:]

But that’s with the assumption that competitors are also sticking with the current commission rates, what I am trying to say is, if they are actually offering – starting to offer even lower commission rates than yours and in response to that maybe you want to take longer time in order to reach an optimal margin. And also as we all know, especially in the service industry, with commissions in many of the cases, is easy to lower the commission, but after the commission gets lower, it’s very difficult to raise the commission again, we would see that in many other areas and also including the property sales agency business as well, right. So at what kind of market share you think you would be able to have a dominant kind of influence in the market so that actually you can raise the commissions up – upward rather than having to follow the others?

[Vincent Mo:]

I think I can divide this into two questions, one that about commission itself, we may not adjust the commission at all, we are going to – we may keep the 0.5% forever. But that said we are going to have value-added services for the transaction process, which is going to generate new revenue for us, which is equivalent of increasing the commission. So that’s – we don’t have a plan to execute it, yes that is – this has been in my mind for some time. So this is about the commission. On the other hand, another part of your question is really about the market share. As I mentioned, this national-wide, we would hope that the total target in the new market, new home market, I hope that we can have 30% to 50% of the market share. In the retail market and notionally if we can have 10% to 20%, that will be great in the not longer future. But really, I do not have a very exact number for a very longer future.

[Ming Xu:]

Alright, thanks.

[Vincent Mo:]

Yes, thank you.

[Operator:]

The next question comes from Nathan Snyder from CLSA. Please ask your question.

[Nathan Snyder:]

Thank you very much and hello to Vincent and Lei Hua. I have two questions, although a lot have been answered. The big thing I wanted to focus on, Vincent was around the new CB and the equity placement. And two questions on this. First is, are there any covenants that would change the dividends, so in other words, as you raise more money, should we expect any change to the dividend that we have paid. And the second question is I am wondering if you are willing to disclose roughly, how much you personally will be taking as a percentage?

[Vincent Mo:]

Dividend wise, as you know we did have dividend for almost every year in the past. But you probably also know that we do not have a definite dividend policy with the company. So we are going to decide whether we are going to dividend add or not really based on the company’s situation. If we have enough cash and if we do not expect near-term or reasonable term in a big spending, we may do dividend. But I would say based on the current transformation and huge CapEx investment into the future, we are caring more about expansion or growth of this company rather than dividend at this stage. So that’s the situation. About the investment, the management and it’s mainly myself, we are going to have up to 30% of the total money we are going to invest.

[Nathan Snyder:]

Okay, that’s perfect. And then one other question to follow-up to a number of questions on the call, in terms of the secondary direct sales business, what is this efficiency now, I mean I think it’s somewhere around less than one sale per agent on a monthly basis. And then besides the technology which changes and then maybe 12 months, over the next 6 months to 12 months, so before the technological platform comes in how do we think about raising the efficiency in the secondary direct sales business?

[Vincent Mo:]

Well, this is the key actually to win in this market. So increase the efficiency of each agent is a tough task for us. The good thing is that we have even after only six months we are better than the average efficiency of this market. So our technology platform is in shape, it’s partially used and we are improving that, we are spending more money, hiring more people to do a much better transaction technology platform. So, I believe another 6 months to 12 months, the efficiency will be much higher than our current status. I would expect in around 12 months, I hope that our agent can generate two transactions per month. So, if we get there, it will not be that far to more than three transactions per month.

[Nathan Snyder:]

Okay, thank you.

[Vincent Mo:]

Thank you.

[Operator:]

The next question comes from the line of Cheng Yang from CICC. Please ask your question.

[Cheng Yang:]

Thanks for taking my question, Vincent and Dr. Lei. Well, my question is actually just a follow-up to the efficiency in the secondary retail market. Well, I mean over the past recent months, I think our agent achieved a close to one transaction per month per agent, and the efficiency level like that. So basically, going forward, our market share is more of a function of the number of agents we hire and the efficiency we can achieve. So basically my question is to how or can you give us more color on how the technology-based tools can improve the efficiency? So that will be my first question. And I have a follow-up.

[Vincent Mo:]

Yes. It’s my belief that definitely we are going to use technology or tools, technology tools to improve the efficiency. It’s actually straightforward. Two things, one thing – or three things, one thing is really we acquire buyers from online, from our mobile end, from our WAP, from our traditional PC website. So, that’s going to be – you don’t need to spend a lot of money to acquire buyers from online. And secondarily, definitely, we can also have sellers to lease their properties with us directly through the platform. So that will be much higher efficiency elsewhere. And thirdly, it’s really the profiting center, we are establishing across multiple cities. So, the buyers or sellers we put them online, on our platform so they can automate their process from applying for the profits, applying for mortgages, so it is until they are to the end of closing the deal. So those are the three ways we are trying, we have been in the process to improve the efficiency by using a better technology platform and a better technology tools to our – for our agents and our management to use.

[Cheng Yang:]

Alright. Just a quick follow-up how much money are we talking about for those technology-based tools to lay out in the cities we are entering now and we will be entering? Thanks.

[Vincent Mo:]

How much money?

[Cheng Yang:]

Yes. I mean, for those technology-based tools, like in terms of CapEx.

[Vincent Mo:]

Well, it’s going to be lots of money. Frankly, I don’t know exactly how much money we are going to spend, but I hope I wish I could. So – but definitely, we are going to spend as needed. We don’t have a limit for our expansion, our technology development and including technology people.

[Cheng Yang:]

Alright, perfect. Just a second question is we actually saw market to pickup in the GMV for the rentals as well in the recent quarters, so can you just give us a little bit color on what are possible revenue streams that we can derive from those rental businesses in the secondary market? Thanks.

[Vincent Mo:]

Well, I am happy to hear from you that you mentioned the rental market. Frankly, rental market or our rental division, I was not that – at least it’s not in my – in our first top three things in the business. But in the past two months, they changed my attitude and my thinking about the rental market, actually rent market it could be huge potential. Two ways, one way is that the transaction itself, we are as a middleman or as an agent to do the transaction itself. This business, I do not think it’s going to be a huge business. So, this is the one thinking after 6 months of testing, but we have been doing over 45,000 transactions in the rental part, so which is becoming substantial. This is going to – although directly it may not bring us a lot of profit eventually, but because of this high volume of transactions, there it will bring some multiple value-added services to us, which we may not know yet. So, that’s one way. That’s one way of thinking about rental business. And on the other hand, interestingly, in the past two months, we have been testing, managing apartments through technology ways, through our transaction platform and through our different technology tools, which is interesting. Because in China, you know, there are many families and people, they have multiple apartments, the homes in the market, they don’t – actually, they don’t care and they do not even rent out. And we started testing that we can take – they can – they can dedicate or give their apartments in our database and under our management. So, for five years or something, we can make one month rent out of their 12 months rent, so which is about close to 10% of the total annual rental fee. Plus, every year, there will be some rental increase and especially in the big cities in China. So, that part becomes very attractive to us now. And currently, we have over 5,000 units under our management. We started only two months ago. So, I would hope that someday we can have 0.5 million units or apartments or homes under our management or even 1 million homes under our management. When we get to that scale, I would not worry about where we are going to make money out of. I think that basically it will be a very profitable business going forward.

[Cheng Yang:]

That’s very helpful. And again, congratulations on the strong quarter and looking forward to more positive growth. Thanks.

[Vincent Mo:]

Yes, thank you.

[Operator:]

The next question comes from Allan Lee from Deutsche Bank. Please ask your question.

[Allan Lee:]

Hi, Mo and Lei. Thanks for taking my questions. This is Allan asking on behalf of Vivian. And my first question actually regarding the competitive landscape and we know some offline agencies such as Homelink, also making business transition and actively promoting their own online platforms to capture homebuyers in more cost effective way. So just wondering in the long run, what are our core competitive advantages in the e-commerce site compared with these major offline agencies if they finally ramp up their online traffic and become more cost efficient like us? Thanks.

[Vincent Mo:]

Yes. As you probably know, SouFun, we are doing the huge transition. And we are – I will say we are the first mover to do this. We are the pioneer in changing ourselves and moving into a transaction model through online ways, Internet ways, because we have been Internet company. So, going forward now and going forward, it’s my belief, in our platform, our mobile apps, WAPs and PC and web, they will be the core things for SouFun. They are also our competitive advantage over any other potential or future competitors. So, we are going to strengthen our technology, our investment into those platforms. We are going to have – generate our traffic, so that’s very important, not only general traffic, but qualify it – traffic with quality, the real buyers and sellers on our platform. So, we are going to invest around this fundamental of this company. This is something which differentiated SouFun from other potential investors. Of course, at the same time, we are also going to absorb traditional technologies, which have been supporting agency businesses in a long time. So, technology, the transaction platform, our traffic to our mobile and traditional websites, those are the things we need to focus very much. We are going to spend money. We are going to invest in.

[Allan Lee:]

Got it. Thanks. And just one quick follow-up on the GMV breakdown by city tier in secondary markets, so what’s the GMV contribution from Beijing, Shanghai, Shenzhen and also other Tier 2, Tier 3 cities for the secondary market? Thanks.

[Vincent Mo:]

I think we are only in 13 cities now. So, the top 10 cities, as you know, it’s all major cities in China. But in Beijing, frankly, we are not that good, although we are fixed, we are ranked now the fifth according to the transactions we made in Beijing. But market share wise, it’s slow. We have less than, I think, less than 5% for sure in Beijing, so which is also not a contributing a lot to our fast growing resale business yet. Shanghai is better. So, but still, Beijing and Shanghai are contributing, I would say, about 10% to 15% to our total transactions in the resale market. I am sorry I do not have the exact number and Lei Hua may come up with some exact number.

[Hua Lei:]

Yes, sure. Yes, I look forward to give the number later to you.

[Vincent Mo:]

Yes.

[Allan Lee:]

Okay, thanks. Very helpful. Thanks for the help.

[Vincent Mo:]

Well, thank you.

[Operator:]

There are no further questions at this moment. Please continue, sir.

[Hua Lei:]

Yes. So, if no more questions, so we may end the conference call. So, thank you, operator. Thank you, everyone.

[Operator:]

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