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Life's not getting any easier for SouFun (SFUN +26.15%) investors. CLSA analyst Man Ho Lam is downgrading shares of the online housing portal this morning, slashing his firm's rating on the former dot-com darling from underperform to sell. He is lowering his price target from $6 to $4.50.
Yes, there are more than three levels of stock ratings at CLSA. Today's move is the equivalent of going from dislike to disgust.
The downgrade came despite SouFun seemingly posting better-than-expected quarterly results yesterday. Lam concedes that the report did top expectations, but his concerns stem from the slowing of secondary brokerage momentum. Gross merchandise value and volume have dipped sequentially, and that's a trend he sees continuing to play out through the second half of the year in the dicey and highly competitive Chinese real estate market.
Wild Fang
SouFun's portal -- Fang -- is a combination of several housing-related endeavors. Total revenue climbed 34% to hit $287 million, but it's feast or famine depending on what part of the business you're looking at. Revenue from e-commerce services soared 77%, largely as a result of the heady growth of brokerage services for secondary homes. This is now accounting for nearly 75% of SouFun's revenue, so the growth is impressive.
You don't need to be a math major to know what it means if the segment that kicks in three-quarters of your revenue soars 74.5% but your overall top line grows at a mere 34.2% clip. SouFun's other businesses are reeling. Revenue from marketing services and listing services plunged 15% and 22%, respectively. There was a 176% surge in revenue from internet financial services, but that's currently less than 4% of the business.
Most stateside real estate portals would love to be sporting SouFun's growth, but there's a price to pay in relying so much on its secondary home brokerage services. Margins aren't great there. Cost of revenue more than doubled at SouFun, resulting in a widening operating loss and quarterly deficit.
Finding a bottom
SouFun was praised as a thinking investor's growth stock a few years ago. It was riding high on China's real estate boom, and the stock was so hot that it declared a 5-for-1 split in early 2014. There have been too many stumbles along the way. It took a hit later in 2014 after announcing a 40% discount on its subscription fee to secondary listing customers, a sign that competition in its niche was intensifying.
Late last year it was hit with a scandal where several employees were caught inflating orders. SouFun has yet to truly recover, and clocking in with a lower quarterly loss than Wall Street was expecting yesterday is actually the first time that we've seen that happen in more than a year.
We still find ourselves with a stock that has been stuck in the single digits for more than a year. The once-profitable company has rattled off red ink for three straight quarters. Until SouFun can turn that around, or at the very least show improving margins, the market's not likely to pay attention. In real estate terms, SouFun has become a fixer-upper at a time when Mr. Market is a very patient shopper.
