SouFun, NetEase: Slowing Growth Stories 搜房网、网易：增长放缓

By newsdoug on February 16, 2012

SouFun in danger of slipping into the red The latest earnings results from real estate and online game bellwethers SouFun (NYSE: SFUN) and NetEase (Nasdaq: NTES) are showing a broader story of slowing growth, with the former in danger of slipping into the red while the latter needs to rein in its rapidly rising costs. Let’s look at SouFun first, which is taking a hit from China’s stagnating real estate market. Despite rapidly falling prices and anemic transaction volumes, SouFun managed to post 18 percent revenue growth for the quarter, which was sharply lower than its 53 percent growth for the year. (results announcement) In a cautiously positive sign, the company said revenue would grow 10-15 percent this year, meaning growth will slow but should still remain positive. One bright spot for SouFun was its listing services revenue, which makes up about 20 percent of its total and was up 38 percent in the fourth quarter. I suspect this figure will continue to be strong and perhaps even accelerate this year, as transaction volumes finally start to grow when people start to sell their homes after realizing Beijing has no plans to relax its strict restrictions on the market anytime soon. That said, the company still faces the very real prospect of joining rival E-House (NYSE: EJ) in the net loss column, which investors seem to realize, bidding SouFun stock down 9 percent after the results came out. Turning to NetEase, the company’s results look a bit stronger, with revenues up 32 percent, led by strong growth for its core online games business. (results announcement) I like the fact that the company is returning to its strength as a developer of its own games, which are more profitable than licensing titles from third-party developers, which is what most of NetEase’s rivals do. The company’s profits also posted a relatively strong 26 percent gain, though they were up just 8 percent quarter on quarter. The most worrisome sign is the company’s operating expenses, which jumped 65 percent year-on-year. It blamed that jump on marketing for new self-developed games, which is a fair enough explanation. But that kind of rapid acceleration of expenses is clearly unsustainable over the long term, and could easily kill the company’s profit growth if NetEase isn’t careful.

Bottom line: SouFun is in danger of slipping into the red as China’s real estate market stagnates, while NetEase could see profit growth stall unless it gets its expenses under control.

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