E-house—A Comprehensive Real Estate Service Provider with A Promising Future

E-House was founded in 2000 and listed on Hong Kong Stock Exchange in July 2018 (Stock code: 2048.HK). The market cap reached HKD 12.3 billion at market close on 14 Jan 2021.

Its core businesses comprise of Real estate agency service, real estate brokerage service, and real estate data consulting service. It is worth mentioning that E-house is the largest real estate agency service provider in China. The firm has business dealings with China's top 100 property developers. All top three property developers in China, namely Evergrande, Country Garden and Vanke, are shareholders of E-House. As at 30 June 2020, each of them owned a 12.39% stake in E-House.

Operation Highlight:

Revenue Expected to Improve in 2H20 despite the Plunge in 1H2020

Affected by the pandemic, E-House experienced a huge downturn in 1H2020 alongside the Chinese property market. Table 1 below shows that both its performance in agency service sector and real estate brokerage sector had weakened. The revenue from agency service declined by over 50%, and total revenue plunged by 34.3% despite the decent performance in real estate data consulting service, which rose by 7.4% to RMB 500 million (same currency below, unless otherwise specified). 

Table 1: E-House’s Revenue Breakdown

Sources: Interim Report, data as at 30 Jun 2020

As the property market recovered in 2H2020, we believe that E-House will likely pare the loss and see improvement in revenue. The real estate brokerage sector, in particular, might resume its high growth speed—in 2019, the growth rate reached 742.5%. As for data and consulting service, this part of revenue was mainly from CRIC, the big data service platform that is widely cited by research institutions. We believe both the revenue and growth rate of its data and consulting service will remain stable in the foreseeable future. 

The Collaboration with Alibaba for Online Real Estate Service

The agency service provided by E-House has been identified as a sunset industry which has been shrinking even before the pandemic. Therefore, E-House is actively developing new businesses apart from real estate brokerage.

At the end of July 2020, E-House announced its strategic partnership with Alibaba for the online real estate service platform “Tmall Good House”. According to the agreement, E-House will place 118 million company shares to Taobao China Holdings Limited at HKD 7 per share for a total amount of HKD 828 million. After the placement, Alibaba will own approximately 8.32% of E-House's shares. In addition, E-House also signed a convertible note subscription agreement with Alibaba. If all of these convertible notes are converted, Alibaba's ownership on E-House will increase to approximately 13.29%, becoming its second largest shareholder.

BEKE, which counts Tencent as one of its shareholders, became a US-listed company in August 2020.Its share price has doubled with the current market cap at USD 75 billion. Alibaba's investment in E-house, whose business nature is similar to BEKE, indicates that online real estate service will become a new battlefield for Internet giants. So what are the market prospects for online real estate service and real estate brokerage business?

A research report pointed out that China is the world's largest housing market. It is estimated that the total amount of housing sales and leasing transactions in China through real estate brokerage service will increase from ¥10.5 trillion in 2019 to ¥19.1 trillion in 2024. The penetration rate will increase from 47.1% in 2019 to 62.2% in 2024, indicating that the market has great potential and ample room for future growth. Therefore, we are optimistic about the future development of E-House, and the online real estate service is expected to become the company's major revenue driver in the future.

Credit Profile

Issued USD Bond Recently; Liquidity Seems to be Adequate

As at 30 June 2020, short-term debt and long-term debt amounted to ¥4.2 billion and ¥1.4 billion respectively. The debt structure is yet to be refined, as short-term debt currently consists of a large part of the total debt. Meantime, cash balance was ¥3.7 billion, slightly lower than its short-term debt. However, we still believe that liquidity seems to be adequate as the company has recently issued a USD bond with a principal of USD 200 million. Besides, its current ratio is 1.8x, suggesting that the company has a strong ability to monetize its assets to replenish liquidity.

Leverage-wise, gearing ratio (total interest-bearing debt/total equity) spiked to 70.7% as at 30 June 2020, up by 5.5 percentage points compared to end-2019, indicating that the current debt repayment pressure is limited with decent solvency.

Increased Cash Collection with Cash Flow from Operation Turning Positive

E-House has been criticized for its management in working capital. As cash was not collected on time, there was consecutive operation cash outflow. However, the situation has improved from ¥240 million cash outflow in 1H2019 to ¥830 million cash inflow in 1H2020 due to a decrease in receivable and note receivable. It indicates that E-House has higher operational efficiency and resilience.

Bond Investment

Currently, there are two bonds issued by E-House available on our platform:

Table 2: E-House Bonds

Sources: Bondsupermart, data as at 14 Jan 2021

From Table 2, the bond due Apr 2022 is trading at approximately 6.533% with 1.3 years to maturity. If we consider its peers with the same credit rating BB, nearly all bonds are trading below 5%. Overall, E-house's 2022 USD bond is giving a fair yield for investors.

Corporate Risks

Although E-House seems to have a promising future, investors should pay attention to the policy-related risks. We noticed that Tmall Good House is also involved in internet finance through its online lending to house buyers.

However, the compliance of this business model remains controversial. The halt of Ant Group's IPO and the newly-issued regulatory policy "Interim Measures for the Administration of Online Microfinance Business (Draft for Comment)” 《網絡小額貸款業務管理暫行辦法（徵求意見稿）》suggests that authorities will undoubtedly intervene in online lending. E-House's future development in internet finance might be adversely affected. 

Conclusion

Affected by the pandemic, E-House’s revenue plunged from ¥4.3 billion in 1H2019 to ¥2.9 billion in 1H2020, among which revenue from agency service plummeted by 50.7% to ¥1.3 billion. It is worth mentioning that Alibaba increased its ownership on E-House to 8.32% in September and they jointly founded the online real estate services platform “Tmall Good House”.

Credit-wise, gearing ratio reached 70.7% as at 30 June 2020, a 5.5 percentage-point increment compared to end-2019, showing that the current debt repayment pressure was limited as solvency was decent. Current ratio was close to 1.8x, reflecting good liquidity.

The newly-issued bond that matures in June 2023 is currently yielding 8.718%, offering an attractive choice for investors. Aside from that, EHOUSE 7.625% 18Apr2022 Corp (USD) is also now available on Bond Express, offering 6.619%  yield to maturity, at a price of 101.150, as of 21 January 2021. With Bond Express, you can invest in smaller lot sizes of 5,000, providing you with an easier way to invest and diversify! 

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