INTERNET: 58.com Gets Bargain For Real Estate Site
Bottom line: 58.com’s purchase of a secondary real estate trading site at a big discount looks like a shrewd move for the longer term, but could cause a short-term drag on profits due to weakness in China’s property market.
Local media are buzzing about a relatively large Internet deal that will see leading online classified advertising site 58.com (NYSE: WUBA) buy Anjuke, one of China’s largest online platforms for services involving secondary real estate. But the source of the buzz isn’t the deal itself, but rather the huge bargain that 58.com is getting compared to what Anjuke said it was worth just a year ago. That massive discount reflects the broader gloom surrounding China’s real estate market as it teeters on the edge of a major correction, and certainly doesn’t bode well for listed peers like E-House (NYSE: EJ) and SouFun (Nasdaq: SFUN).
According to its official announcement, 58.com, which is often called the Craigslist of China, said it has acquired Anjuke for $267 million, including $160 million in cash and the rest in 58.com shares. (company announcement) Well aware that investors might not get excited about an investment linked to the weak real estate market, 58.com issued a statement saying there is still plenty of room for growth. It added that the combination of its own related site with Anjuke will create a clear national leader with the scale to weather the current downturn.
Despite the hype, investors weren’t impressed and 58.com’s stock ended the session largely unchanged. Before I start listing the problems with this deal, I should first point out that I quite like the combination as a longer-term strategic investment. China’s real estate market is certainly looking shaky right now, but the weakness is unlikely to last for more than a few years. When the market does come back, 58.com will be well positioned to benefit from the strong rebound in demand with this new secondary property leader.
What’s more, 58.com got a huge discount on this purchase. According to another media report, Anjuke was boasting just a year ago that it had a market value of up to $1.5 billion. (Chinese article) It made the boast at the start of an IPO wave that saw Chinese Internet firms raise billions of dollars in New York, as foreign investors salivated at almost any China technology firm that went public.
The reports say Anjuke, which was founded in 2007, was itself considering such a listing to take advantage of the bullish market. But then the real estate market began to rapidly chill, ending more than a decade of breakneck growth. The rapid cool-down has sharply reduced the volume of property sales, which has hit all of the service firms that depend on transaction based fees for most of their income.
The earlier $1.5 billion valuation boast was probably a bit inflated, but for analysis sake let’s say the true value was perhaps around $1 billion. That still means that Anjuke’s value has fallen about 70 percent over the last year. That’s actually roughly comparable to what’s happened to SouFun, whose shares have lost 65 percent of their value over the last year, and E-House, whose shares are down about 52 percent. Anjuke’s value may be down more than the others because of its relative youth, and perhaps also because its investors were willing to sell at a discount due to the huge uncertainty in the real estate market.
I should close out this post by giving my view that all the pessimism over the future of these real estate companies seems a bit overblown. Both E-House and SouFun are still quite profitable, and I doubt we’ll see either fall into the loss column unless the downturn gets quite severe. Anjuke’s profits may not be quite as strong due to its youth, but it now has a strong financial backer in the cash-rich 58.com, which is doing quite well. Accordingly, I would expect this acquisition to help 58.com over the longer term, and commend the company for getting a nice discount on the purchase.
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