Real estate services: time to buy?
Soufun's latest results point to a strong rebound for buying and selling activity in the real estate market, providing potential upside for the company's profits and shares.
After showing early signs of a pickup last fall, online real estate services firm Soufun (NYSE: SFUN) is sending even stronger signals that springtime may indeed be coming for companies that make their money from buying and selling activity in the property market. Here it's important to point out that this coming spring for market leaders Soufun and E-House doesn't mean that China's real estate prices are going to start rising sharply again anytime soon. Instead, what it means is that real estate buyers and sellers are starting to feel confident that the market has stabilised after more than a year of uncertainty due to government cooling policies.
Of course there's always a chance the government could take new measures to cool the market, where prices are now largely flat to growing slightly. But since it's been more than a year without any new government moves, home buyers and sellers are probably starting to feel they can safely start to re-enter the market because they know what to expect.
New stability and waning uncertainty have been steadily boosting transaction volumes in the market, as buyers and sellers who stood on the sidelines for much of the last year resume their activity, according to one of my friends in the business. That kind of activity is what drives demand for both real estate brokers and companies like Soufun, which make most of their money from property buying and selling regardless of pricing trends.
The growing confidence and stability in the market has provided a nice lift to Soufun's latest earnings, and also to its stock price. Soufun's shares are up more than 50 per cent since mid-November, when it first showed signs of a nascent recovery after a prolonged slump. Likewise, rival E-House shares are also up more than 50 per cent over the last two months.
Let's have a closer look at Soufun's latest results, which show the company's revenue up 30 per cent in the fourth quarter to US$147.5 million, a strong acceleration from the previous quarter's 17 per cent rise. The growth was stronger than the company's previous guidance, allowing it to beat its earlier revenue target for all of 2012 by a comfortable margin. Profit growth also accelerated sharply to 50 per cent, a big jump over the 15 per cent rise in the third quarter.
Within the total revenue figure, growth from traditional marketing services returned to a positive track, recording slight rise after declining in the previous quarter. But perhaps most encouraging, the company's newer and fast growing e-commerce services revenue quadrupled to US$40 million, accounting for nearly a third of Soufun's total revenue.
The company only gave a forecast for its full-year revenue in 2013, predicting the figure would rise about 21 per cent to $520 million, down slightly from last year's 25 per cent growth. I suspect that Soufun is probably being conservative in its latest full-year forecast, as its final 2012 revenue figure was about 10 per cent higher than its initial forecast made at the beginning of last year.
Of course there's still the chance the rebounding market could cool, perhaps quickly if Beijing were to suddenly announce new tightening measures. But based on current trends, the market does appear to be steadily gaining momentum in terms of transaction volume, meaning we could see some nice accelerating growth for Soufun and E-House in the year ahead in terms of profits, revenue and stock price.
Bottom line: Soufun's latest results point to a strong rebound for buying and selling activity in the real estate market, providing potential upside for the company's profits and shares.
To read more commentaries from Doug Young, visit youngchinabiz.com