E-House Beats, Raises Guidance, Rallies and Convertible Summary

by Bill Feingold and Jeffrey Alton

E-House cruised past estimates, reporting $0.08 non-GAAP net income per share on revenues of $163.3 million, up 40% year-over-year. Consensus analyst estimates were $.04 per share and $138.65 million. GAPP earnings were $0.02 per share. E-House also raised 2014 revenue guidance to a range of $910 million to $930 million, up from $880 million to $900 million.

E-House is a real estate service company operating exclusively in China. Their businesses include traditional brokerage services as well as operating online real estate listing websites.

Convertible Securities Summary

E-House’s 2.75% convertible bonds due in December 2018 provide a reasonably cautious alternative to owning the shares.  We say “reasonably” because it is a small issue—only $135 million—and so liquidity can be problematic. In addition, it’s never a great idea to assume that bondholders of Chinese issuers will get comparable treatment in a restructuring—should one come to pass—to what they might expect in the States.

Those caveats aside, the E-House convertible offers some noteworthy benefits. Not only do they mature in under five years, but they can be put back to the company at par in December 2016, just over two and a half years from now. As such, they yield nearly 5% to that put date.  While that wouldn’t be sufficient yield in and of itself to recommend the bonds, it provides a useful fall-back option if the stock fails to continue its recent turnaround.

 As for upside, the bond’s conversion premium of about 58% speaks to its moderate ability to participate in further stock gains. The conversion price of $16.50 is still substantially above the current stock level:  a scenario in which the stock appreciates 50% over the next several years while bondholders make less than 5% is quite possible. At the same time, investors who think E-House could do substantially better than that, but who want the added safety of a fixed-income security, might find this convertible quite appealing.

 Let’s say the stock gets to $30 by the time it matures—roughly a triple from current levels.  Between capital appreciation and coupon income, convertible holders would double their money.  That’s the kind of “two-thirds of the upside” performance long associated with convertibles. But prospective buyers should be aware it will take a big move to get that kind of participation.

More on E-House and Last Quarter

The revenue beat was particularly impressive against a backdrop of a slowing real estate market in China. According to the National bureau of Statistics of China, total floor space for newly started housing dropped 22.1% year-over-year in the first four months of 2014 to 81.3 million square meters.

E-House results were positive across the board as the company posted increased revenue in all of its businesses.

The majority of E-House’s revenues now come from its online services group, which posted a 97% YOY increase in revenues to $78.5 million for the quarter. Within that group, revenues from e-commerce services grew 238% YOY to $49.7 million. Notably, this division runs the real estate and home furnishings websites for SINA and Baidu, including e-commerce, online advertising and listing services. The group also sells discount coupons through the websites, a potentially countercyclical business during real estate downturns. E-House also just released its mobile e-commerce platform. In April, E-House completed a public spin-off of 24.5% ownership in the online services business which trades under the name of Leju Holdings Limited (NYSE:LEJU).

E-House’s real estate brokerage services increased by 5% YOY to $59.3 million for the quarter.  Real estate brokerage services are E-House’s original business, with the bulk of revenues coming from primary brokerage services, or selling new buildings. In 2013, E-House provided primary real estate service for 757 projects in 130 cities in China. Secondary brokerage services, or sales from existing properties accounted for only about 1.5% of revenues in 2013. The secondary real estate market in China is much less developed in comparison to the United States.

Revenue from E-House’s real estate information and consulting services were $17.8 million for the quarter, up 52% YOY.

Raising guidance in a slowing real estate market exemplifies the confidence that E-House has in its core businesses, particularly in the transition of the Chinese real estate market from a broker-run industry to an online industry.