Real Estate:Solid e-commerce performance priced-in; Leju/EJ down to Neutral

Downgrade Leju/E-house to Neutral from Buy on limited upside.

    We downgrade Leju and E-House (EJ) to Neutral from Buy as we believestrong e-commerce outlook has been largely reflected at current levels.

    Since initiating with a Buy on Leju on May 23, 2014, its share price hasrisen by 39.0% vs MSCI China +10.7% and our offshore China propertycoverage avg +10.9%. Since upgrading EJ to Buy on November 12, 2013,its share price has risen by 18.9% vs MSCI China +9.3% and our offshoreChina property coverage avg -10.9%. Post their in-line 2Q14 results, weraise our 12-month PEG/SOTP-based target prices for Leju/EJ by 16%/11%to US$19.9/US$14.1, implying limited upside potential at 14%/18% vs ouroffshore China property coverage avg 20%.

    Leju: Solid e-commerce performance amid rising competition.

    Real estate e-commerce penetration further rose by 40bp qoq to 5.5% in2Q14 for Leju, with competition for market share still intense. Meanwhile,with 22mn new followers on Weixin/Weibo accumulated since June 28,according to the company, Leju should see incremental revenuecontribution on the mobile side. We raise our 2014-17E revenue for Leju by8-20% but cut margins by 1-3pp. As a result, our 2014-16E EPS are largelyunchanged, while 2017E is up 14%. We introduce 2018E EPS of US$2.08.

    Leju currently trades at 16X 2015E non-GAAP P/E vs Soufun at 14X.

    EJ: Waiting for new initiatives to develop in the next 1-2 years.

    EJ’s primary agency sales rose +11% qoq/+3% yoy to Rmb47bn in 2Q14,with nationwide market share up to 3.2% from 2.9% in 2013. Commissionrate declined 20bp qoq to 0.88%. Ex-Leju, operating margins fell qoq to 0%,likely due to initial investments made on two new initiatives in order tofurther expand its real estate-related business. In our view, these initiativescould take 1-2 years to develop. Specifically, its online real estate financeplatform would need to be rolled out on a broader scale (not limited to EJ’sprimary agency projects and Leju’s e-commerce projects) to generatesizeable earnings contribution. Further, its business model and competitionlandscape for community-based local service platform remains unclear atthis stage. Our Leju estimate changes lead us to raise our 2014-17Erevenue for EJ by 8-13% but cut margins by 1pp, thus driving our 2014-17EEPS revisions of -2% to 13%. We also introduce 2018E EPS of US$1.56. EJcurrently trades at 14X 2015E non-GAAP P/E.