China’s online real estate vertical：Primary, resale and rental – some fare better than others

Please refer to page 40 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures. CHINA Direct sales (e-Commerce) as % of nationwide residential transaction value Source: company data, Macquarie Research, June 2015 Resale commission across players (traditional vs e-Commerce) Source: company data, Macquarie Research, June 2015 Stock details: Soufun (SFUN US, US$12.5, OP) Leju (LEJU US, US$12.7, OP) Analyst(s) Hillman Chan, CFA +852 3922 3716 hillman.chan@macquarie.com Wendy Huang, CFA +852 3922 3378 wendy.huang@macquarie.com Alice Yang +852 3922 1266 alice.yang@macquarie.com 22 June 2015 Macquarie Capital Securities Limited China’s online real estate vertical Primary, resale and rental – some fare better than others Event  China’s property market is experimenting with different e-Commerce models. Soufun, with its new labour-intensive direct sales model, leverages on its massive online user base and works on user conversion. Primary home looks to be the only profitable segment. Resale is proving hard to penetrate, while rental adopts fast but is far from profitable. Leju, with its rich advertising resources, continues to pursue the proven coupon model. We upgrade Soufun to Outperform due to solid market share gain, higher sales efficiency compared to traditional agencies, upside in commission rates and SFUN’s share in commissions and reiterate Outperform on Leju. Impact  User traffic and rebate intensity still the keys in primary home market. Soufun, FangDD and Haowu compete for the same primary home units and the same secondary property agencies, so only user traffic and commission sharing (close to 100% in some cases) matter – profitability is thin. Soufun has the best combination of in-house sales agents, a large online user base and commission rebate (50-60%), and looks to be in the sweet spot. As long as Soufun can improve sales efficiency and maintain the service level, this is a competitive and profitable model. Downside risks are the labour-intensive nature of the business and higher vulnerability to macro softness.  Coupon model is proven, but marketing efficiency open to question. Margin pressure persists in the conventional coupon model because of competition and questionable marketing efficiency. The take rate will likely stabilize at the current sub-50% level going forward. Leju aims to deepen coupon sales in existing cities, while Soufun may switch from coupons back to advertising and focuses on direct sales for the primary home market.  Undercutting the new norm in rental – subleasing the longer-term earnings driver. iwjw charges half of conventional commissions; Dingding and Soufun undercut this with one-quarter and none. Soufun has overtaken iwjw as no. 1 in Shanghai and entered the top 3 in Beijing. iwjw is close to breakeven, but none of the companies is making any profit. Subleasing and managing rental properties rather than commissions are potential ways to monetize the rental user base.  Distrust and cumbersome procedures may hinder e-Commerce adoption in resale market. Again iwjw (1%) and Soufun (0.5%) undercut traditional players (2%+). iwjw and Soufun are now top 10 players in Beijing's resale market but account for only a combined 2% market share. Unlike primary home sales, where delegated real estate agents are present at sales offices to close the transactions, resale participants may not trust e-Com platforms without physical stores on large transactions. It will take longer to grow the resale market with user education and set-up of physical signing centres. Outlook  Soufun and Leju are our preferred picks in the online real estate verticle. 0%1%2%3%4%FY14FY15EFangDDHaowuSoufun0.0%0.5%1.0%1.5%2.0%2.5%3.0%Traditional (Beijing)Traditional (Shanghai)iwjwSoufun Macquarie Research China’s online real estate vertical 22 June 2015 2 The property market is experimenting with different e-Commerce models Fig 1 Participants in China's online real estate vertical Categories Key participants Strengths Weaknesses Media websites (Verticals, portals, classifieds) Soufun, Leju, Sohu Focus, House365, 58, Anjuke, Ganji - online user traffic - brand recognition among users - Unable to pinpoint marketing efficiency (e.g. coupon model) - Some lack of offline resources (customer services, advertising) during transition to direct sales Agent/marketplace platforms FangDD (房多多), Jiwu (吉屋), Qfang (Q房網), iwjw (愛屋吉屋), Soufun - consolidating fragmented secondary agency resources and connecting respective client networks - consolidating secondary home/rental units on to a single platform for users - can lead to higher bargaining power with property developers (primary home sales) - Lack of online user traffic to platforms (from homebuyer end) - but not necessarily a must as platforms essentially connect homebuyer clients of secondary home agents to primary home units - Marketing efficiency not directly proved as homebu