INTERNET: Online Real Estate, Video Struggle For Profits

By newsdoug on May 21, 2015

Bottom line: Online real estate stocks could resume their rebound if their latest forecasts are accurate, while Youku Tudou shares are holding steady despite widening losses on hopes for a merger deal with iQiyi.

This week marks the height of earnings season for US-listed Chinese stocks, prompting me to look at a quartet of struggling companies in the real estate and online video spaces that have just reported results. The former category has seen the trio of SouFun (NYSE: SFUN), E-House (NYSE: EJ) and Leju (NYSE: LEJU) all release their earnings over the last 2 days, revealing gloomy results as an ongoing correction shows no signs of easing in China’s real estate market. Meantime, former online video leader Youku Tudou’s (NYSE: YOKU) latest results also look weak, showing the company’s losses ballooned as it continues to search for an elusive model for long-term profitability.

While none of the results for these 4 companies looks extremely promising, the reaction in their stocks tells a slightly different story. Shares of all 3 real estate companies were down sharply, with E-House and its partly owned Leju unit each dropping 9 percent in the latest session, while SouFun was down 4 percent. But Youku Tudou’s shares actually rose 2 percent in after-hours trade after it released its results, as investors hope the company will soon find a merger partner to help improve its prospects.

Let’s start with the online real estate companies, whose shares had plunged to multi-year lows on concerns about China’s real estate market, before embarking on a mini-rally starting in mid-March. The concerns are clear, as China’s real estate market is probably due for at least a 2-3 year correction following years of explosive growth that has pushed local property prices well above affordability levels for most average Chinese.

But most of these online real estate companies are less vulnerable to the downturn than actual property developers, since they rely mostly on transaction volumes rather than housing prices for their profits. Still, the correction has also sharply reduced transaction volumes for now, pushing both E-House and its Leju unit into the loss column for the latest quarter. (E-House announcement; Leju announcement) SouFun managed to still report a net profit, though that figure was down by 85 percent to $6.1 million, meaning the company is also fast approaching the loss column. (company announcement)

Revenue growth at all 3 companies was also quite weak, at less than 5 percent for both E-House and SouFun. SouFun provided a bit of upbeat guidance, raising its full-year revenue forecast to 15 percent growth for 2015 from a previous 10 percent. E-House and Leju maintained their full-year revenue forecasts for 10-15 percent and 20-25 percent growth, respectively. That means all 3 expect to see improving performance for the rest of the year, hinting at a potential resumption in the rebound for their stocks.

Next let’s look at Youku Tudou, whose quarterly net loss skyrocketed to 517 million yuan ($83.5 million), about triple its loss from a year earlier. (company announcement) Revenue rose by nearly 50 percent and Youku Tudou forecast similar growth in the current quarter. But at this point those figures don’t seem like much consolation for a company that shows no signs of becoming profitable anytime soon.

Instead, investors are probably holding out increasing hopes that Youku Tudou is closing in on a deal to merge with iQiyi, another one of the industry’s leading players that is controlled by leading search engine Baidu. (Nasdaq: BIDU) Reports last week said talks for such a merger were ongoing, even though iQiyi’s chief later denied any such plan. (previous post) I gave my own view that the talks were probably happening and the denial was insincere, and the fact that Youku Tudou’s shares have held on to their gains from a sharp rally last week shows that investors also believe such a deal is in the pipeline.