E-House Builds Momentum in China

There is growth in real estate. You just need a passport -- and a shovel -- to find it.

Shares of China's E-House (NYSE: EJ  ) rose 13% yesterday, after the real estate specialist posted better-than-expected first-quarter results, drumming up a healthy near-term outlook along the way.

You wouldn't know any of that from the actual financials, though. Revenue fell by 1% to $32.8 million, and net income clocked in 18% lower at $7.1 million, or $0.09 a share. Wall Street was only expecting a profit of $0.05 a share.

That may not seem like growth, but get out your shovels and start digging. Beneath those disappointing numbers, you'll find brisk activity throughout the company. On the agency side, the company helped broker $1.5 billion in real estate transactions, 88% ahead of last year. The math begins to fall apart when you factor in that E-House only generated an average commission rate of 1.2% during the period, well shy of its year-ago 2.8% rate.

It seems the company didn't generate the kind of bonus commissions that it has in the past. E-House expects that rate to improve as it hits sales targets with certain developers, triggering those bonus payouts. During the conference call, the company revealed that it hopes to nudge commissions back toward 2% by the fourth quarter.

In sum, the company's flagship agency business suffered a 20% revenue hit. Thankfully, strength in the company's consulting and new advertising business helped offset the agency decline.

E-House's recent foray into advertising merits a little elaboration. The company's not simply slapping ads on realty signs, and this won't be China's next hot marketing platform, like Focus Media (Nasdaq: FMCN  ) or SINA (Nasdaq: SINA  ) . E-House is simply providing advertising design and consulting services, a logical expansion outlet.

So E-House is growing nicely, even if its top and bottom lines say otherwise. This should be evident during the current quarter, for which E-House expects $49 million to $51 million in revenue. (That's a 14% to 19% improvement over last year's showing).

You definitely won't see that kind of growth in stateside companies tethered to the real estate market. Analysts see companies like Move (Nasdaq: MOVE  ) , Market Leader (Nasdaq: LEDR  ) , and Tree.com (Nasdaq: TREE  ) posting year-over-year dips this quarter. Wall Street only expects a 5% advance from Zip Realty (Nasdaq: ZIPR  ) .

So don't wait for the domestic turnaround. All you need is a passport, a shovel, and a fond appreciation for what will happen as E-House fortifies its share of commissions.