Broker's View

China’s online property agencies face prolonged downturn, analysts say

PUBLISHED : Tuesday, 20 December, 2016, 1:41pm
UPDATED : Tuesday, 20 December, 2016, 9:57pm

China’s online property services market is entering a deep freeze, and there’s little hope for a thaw anytime soon as authorities continue to push cooling measures that have essentially shutdown transactions.

“The property market is entering a long winter for at least six months, we believe,” said Alvin Jiang and Alan Hellawell, analysts at Deutsche Bank, in their latest research report. “The weakness in the property market will last until at least late 2017.”

Deutsche Bank downgraded China’s major online property operators Fang Holdings (SFUN) and (WUBA) to reflect its concern on the continuing weakness in the property segment.

Starting from mid-2016, Chinese officials introduced a series of strict policies to manage property prices and limit property transactions.

About 20 Chinese cities, including Beijing, Shanghai, Guangzhou and Shenzhen, and tier 2 cities, such as Nanjing, Zhengzhou and Wuhan have announced a series of tightening measures since the end of September in order to control the rapid home price increases this year.

The policies helped to put a damper on property transactions in most cities. Transaction volume in the top 10 cities decreased 25 per cent in October from the prior month.

New and secondary home sales have suffered from the tightening measures while advertising revenue including listing and online marketing services will take time to see the full impact as developers and sales agents cut their advertising budgets, Jiang said.

“Compared to the secondary home market, we believe the new home market is more influenced by these tightening measures across the cities, as most of the measures addressed developers, the down-payment ratio and the citizenship requirement of buyers, while fewer measures affect the secondary home market,” Jiang added.

For new home sales, transaction volume has been declining in recent months and the average selling price has been on a downward trend since October, reversing the positive trend seen in the earlier part of the year.

“We think the overall property market risk will trim the secondary home transactions, but the impact will be less than that on the new home market,” Hellawell added.

“SFUN is a pure online property company. The previous main focus transaction business suffered most from the strict policies,” said Jiang. “It will need more time to cut the team, rebalance the business focus and restructure the team in our view. Marketing and listing business will likely continue to lose market share to other players with diversified channels.”

SFUN’s transaction business, in particular secondary house sales, relies heavily on the expansion of sales agents, which results in a large amount of personnel-related expenses. SFUN used to pay a higher-than-market average base salary of 6,000 to 7,000 yuan per month.

“We believe this business can achieve break-even target when the company cuts the base salary to about 3,000 yuan, with other factors remaining unchanged,” Jiang added. “As a result, we prefer listing and marketing services to transaction services, seeing the direct revenue decline ahead.”

WUBA, however, has 57 per cent revenue coming from non-property verticals. “We believe over 50 per cent year-on-year growth in job and auto verticals could partly offset property market risk,” said Jiang.

“Despite the weakness in the property business, the job and automotive verticals in WUBA will enjoy healthy growth with over 55 per cent year-on-year growth in 2017, in our view.”