Online property companies soar on China's real estate recovery

[NEW YORK] Real estate Web portals Leju Holdings Ltd and SouFun Holdings Ltd are standing out among US-traded Chinese stocks, rebounding as government stimulus and a recovering property market improves the outlook for growth.

Leju has surged 44 per cent over the past month in the best performance on the Bloomberg China-US Equity Index, which gained 4.6 per cent during the same period. SouFun has rebounded 25 per cent from this year's low in February. Both were among the 10 worst-performers on the gauge this year through early February, slumping at least 40 per cent while the benchmark slid 23 per cent.

The turnaround comes amid monetary stimulus from the central bank and an easing of housing-market regulations. The companies are also benefiting from government policies geared toward increasing the role of privately-owned technology and service businesses in China's economic development, said Brendan Ahern, managing director at Krane Funds Advisors.

"Companies like SouFun are going to orient toward those tier-one coastal cities where you see a fairly robust real- estate market rebound," said Mr Ahern, who invests in Chinese Internet companies, including SouFun, by phone from New York.

"Within China, you have a massive adoption of Internet that plays into the real-estate market as well, particularly in major cities."

Slumping home prices in smaller cities as the economy expanded at the slowest pace in 25 years weighed on earnings last year. SouFun, the country's largest property website, posted its first annual loss since at least 2008, data compiled by Bloomberg show. Leju, which ranks second, posted adjusted net income that dropped 37 per cent to US$57.4 million.

The momentum behind the stock rallies picked up as data showed a recovery in China's property market accelerated, led by gains in major cities. Steps the government has taken to encourage home buying have included a reductionof minimum down payments and cuts in deed and business taxes on home transactions.

Prices in Shenzhen, a southern business hub that borders Hong Kong, posted a 57 per cent of jump in February from a year earlier, while those in Shanghai increased 21 per cent, according to data from the National Bureau of Statistics.

'Fierce Competition'

Property-related services in China are "showing sustainable rates of growth," which has led to "fierce competition among existing market leaders and new entrants, especially since 2014," Nomura Holdings Inc analysts led by Jeffrey Gaowrote in a February research report on the industry.

SouFun, which controls 56 per cent of China's online property advertising market, and Leju, which has 29 per cent, are well-positioned to adapt to that environment, in which consolidation "is inevitable," they wrote.

"An established platform, strong execution, and adequate capital are key to win in the market consolidation, which will lead to profitability," the analysts wrote.

SouFun entered the online-to-offline market in 2014. While its aggressive offline investment weighed on margins, Morgan Stanley analysts led by Amanda Chen said the company is "heading in the right direction."

They raised the stock to the equivalent of buy last week. A large user base, strong brand image and superior technology will support SouFun in its market expansion and operating efficiency improvements, the analysts said in the report.

Analyst Ratings

Leju's profitability is being hurt by "near-perfect" competition from new entrants in the market, Robert Cowell, a Shanghai-based analyst at 86Research Ltd who rates Leju as neutral and SouFun as a buy, said by e-mail.

On a scale from one to five, SouFun has a consensus recommendation of 4.6, compared with three for Leju and an average of four among 11 global peers, according to data compiled by Bloomberg.

Analysts covering SouFun forecast that the company will post a 31 per cent increase in sales for 2016, compared with an estimated 16 per cent for Leju.

"Although the competition will increase in China's online property portal industry, the strong rebound of the property market in core cities will help maintain growth rates of the portals," China International Capital Corp analysts led by Beijing-based Eric Zhang wrote in a report this month.

BLOOMBERG