Crumbling Foundations? E-House Paints Grim Picture in Delayed Earnings Report

The real estate services provider’s first-half results highlight its dire situation as it fights for survival in China’s deeply slumping property market

Key Takeaways:

• E-House’s first-half net loss increased about 18% from a year earlier despite significant cost cuts, as its revenue plunged more than 60%
• The company warned the rapid deterioration of its finances could threaten its survival

By Warren Yang

Much has been written about China’s struggling property developers, which are suffering as the market grapples with its first major downturn after years of breakneck growth. But the slump is also dragging down an adjacent industry of related service providers, many depending on home sales that have slowed to a trickle as buyers stay away from the market.

One such service provider, E-House (China) Enterprise Holdings Ltd. (2048.HK), has just confirmed how dire the situation is with the release of its long-delayed earnings report for the first half of 2022. The report shows its fate remains very much up in the air, with the company admitting the downturn could threaten its very survival.

E-House, which pulled off a splashy Hong Kong IPO less than five years ago with backing from e-commerce giant Alibaba (BABA.US; 9988.HK) and a large group of real estate developer customers, including the now-struggling China Evergrande (3333.HK), is one of many casualties of China’s deep property slump. The sharp downturn is quickly chilling demand for E-House’s auxiliary offerings, such as agency services, consulting and digital marketing.

Questions about E-House’s solvency have grown since it failed to repay nearly $300 million worth of dollar bonds that matured in April, sparking a wave of defaults on other connected debt securities. In October, the company filed for protection under Chapter 15 of the U.S. bankruptcy code in New York, which shields its U.S. assets from seizure by its creditors while a debt restructuring plan works its way through a Cayman Islands court. 

The financial turmoil caused the company to delay release of its results for the first half of 2021, which led the suspension of trading in its stock at the start of September. It finally reported its results for the first half of 2022 last Wednesday, which, unsurprisingly, revealed red flags everywhere.

E-House’s net loss for the six months widened about 18% to about HK$1.8 billion ($232 million) from a year earlier, even as the company slashed costs for everything from personnel to distribution. The reduced costs also included sharply lower provisions for unpaid bills from struggling developer customers, after the company set aside major funds for that purpose last year.

E-House’s failure to stop its loss from growing despite the sharp cost reductions was the direct result of a 60% year-on-year revenue plunge for the latest six-month period, showing just how badly its transaction-dependent business is drying up. An even larger 84% plunge in accounts and bills receivable makes that clearer.

As E-House’s revenue shrinks, its balance sheet looks increasingly fragile. Its current assets – or assets it can liquidate quickly – were down about 40% at the end of June from a year earlier, with cash and cash equivalents shrinking nearly as much.

The company significantly reduced its bank borrowings in the first half. But its short-term liabilities still grew, primarily due to a sharp increase in “other” borrowings, which probably refers to bonds. As a result, E-House’s current assets covered just about half of its short-term liabilities.

Matter of survival

In its earnings announcement, E-House warned that the rapid deterioration of its finances makes it uncertain whether the company can continue as a going concern – a boilerplate phrase that means its very survival could be threatened.

It may be an understatement to say the company’s outlook is uncertain. If E-House continues to burn cash from its operations, which it probably will unless China’s property sector miraculously recovers, it will need to raise more funds by issuing new shares or bonds. But investors are highly unlikely to line up to provide new funds for such a troubled business. Even if E-House does raise some fresh funds, the money won’t last too long at its current cash burn rate.

As recently as two years ago, E-House raised more than HK$1.8 billion by selling new shares and convertible notes to Alibaba. But the e-commerce titan is unlikely to be so generous anymore, given that E-House nearly defaulted on its convertible notes after a delay in the implementation of the restructuring program in the Cayman Islands.

E-House originally planned to let creditors vote on the restructuring plan in October. But it pushed the date back to early November after the bondholders requested more time to better understand details of the plan.

That restructuring plan now appears set for implementation after being approved last month by the Cayman Islands court overseeing the case. But that advance just means E-House temporarily dodged a bullet. The bigger problem haunting the company — the property slump in China — doesn’t look set to go away, at least not anytime soon.

Another major real estate services company, KE Holdings (BEKE.US; 2423.HK), operator of the Lianjia brokerage chain, reported similar though less extreme trends last week, saying its revenue fell 2.8% in the third quarter, as it slashed its vast store network by 23% to save costs. Unlike E-House, however, KE is still profitable – at least for now.

Chinese authorities are taking growing steps to aid property developers. Under one of the latest measures unveiled last month, Beijing asked banks to provide funding for developers so they can complete construction of pre-sold residential properties. Regulators also lifted a ban on new share sales by developers that had prevented them from raising new funds in equity markets.

Property-related stocks have jumped following the steady stream of policy assistance announcements. The same optimism may be behind a 35% rise in E-House shares since trading in them resumed last Thursday, despite the company’s dismal earnings report.

Regardless, a quick, major recovery of China’s real estate market seems unlikely as home buyers have little reason to suddenly start spending, especially during the current economic slowdown when consumers are increasingly cautious. Plus, their confidence in property developers’ abilities to actually complete construction of new apartments is running low these days.

Even after the mini rally following the earnings release, E-House shares are worth a fraction of their IPO price, which valued the company at more than $3 billion. The company’s current market capitalization of a little more than $200 million translates to a price to sales (P/S) ratio of just 0.15. By comparison, KE Holdings trades at a much higher P/S ratio of 2.23.

E-House’s low valuation, even after the recent rally following its trading resumption, shows the company has a lot of work to do to rebuild its house if it hopes to someday return to its former glory days.   

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