Bottom line: Shares of E-House and Leju are likely to trade flat to downward over the next year due to continuing pressure on China’s real estate market, while Renren is likely to get bought out over that period.
The latest earnings from 2 of China’s 3 top listed online real estate firms reflect the challenges facing the sector, with soaring costs undermining profits at both E-House (NYSE: EJ) and its affiliated Leju (Nasdaq: LEJU). Meantime, a separate earnings report from fast-fading social networking site Renren (NYSE: RENN) shows the former Internet superstar is fast becoming worthless as it sells off assets and its core SNS business shrinks. I expect the end will come soon for Renren, probably in the next 12 months, since the company’s largest asset now is its big cash pot that could attract a buyer who simply wants the money.
Investors weren’t too impressed with the earnings reports from any of these 3 companies, with shares of the trio all dropping after the announcements. E-House and its separately traded Leju affiliate both fell about 8 percent, while Renren dipped by a more modest 0.4 percent. Leju’s shares made their IPO a year ago and briefly surged as much as 80 percent above their offering price on a broader wave of bullishness towards Chinese Internet stocks. But they have moved steadily downward since August, and now trade about a third below their IPO price. Renren’s latest decline took the stock to a new all-time low of $2.39, a far cry from its all-time high of $16.80 in 2011 when people were calling it the Facebook (Nasdaq: FB) of China.
Let’s begin with a look at the 2 real estate service companies, which are both suffering from the same weakness as China’s property market shows signs of heading into a major correction after years of huge gains. That reality has put service providers like Leju, E-House and larger rival SouFun (NYSE: SFUN) under intense pressure to boost marketing spending to maintain their business, even though such a move undermines profits.
That trend was quite evident in the latest earnings reports, with E-House and Leju marketing costs jumping 36 percent and 52 percent, respectively. (E-House announcement; Leju announcement) That caused profits to slump by 28 percent for E-House and 7 percent at Leju. On a more upbeat note, both companies posted relatively healthy revenue growth of 22 percent for E-House and 36 percent for Leju, showing the companies are still able to grow despite the tough environment.
Next let’s look at Renren, whose revenue is becoming a joke following recent sales of many of its non-core assets and the rapid shrinking of its main SNS business. The company posted just $17.2 million in revenue in its latest quarter, down 39 percent from a year earlier and less than half the level of 2 years ago. (company announcement) The company’s operating loss narrowed slightly, probably due to the sale of money-losing assets that were dragging down its already pathetic performance.
I had a look at Renren’s latest market value, and was quite surprised to see that the company still has a market capitalization of nearly $850 million — a remarkably high figure for such a small and shrinking company. But then I checked its earnings report and saw Renren still has nearly $700 million in cash, meaning investors now value its actual operating assets at just $150 million.
None of these 3 reports looks especially encouraging, and the negative trend reflects other recent downbeat announcements we’ve seen from the likes of Baidu (Nasdaq: BIDU), Alibaba (NYSE: BABA) and Qihoo (Nasdaq: QIHU) as China’s economy slows. I wouldn’t expect much over the next year from E-House or Leju stock, which are likely to feel pressure as China’s property market struggles. As to Renren, I really do expect a buyer to bid for the company for its cash pile, and could even end up paying below its current stock price due to the dubious value of its few remaining operating assets.