A Spinoff Tests Investor Appetite For Chinese Real Estate Market

• Amy Reeves
• On 5:24 pm EDT, Monday October 12, 2009

China Real Estate

Information Corp.

Shanghai, China

(86-21) 6086-8099

cric.com

Lead underwriters:

Credit Suisse and UBS

Offering price: $12-$13

Expected date: Oct. 15

Ticker: CRIC

THE BUZZ

The sluggish U.S. IPO market has been made more interesting this year by China's spinoff fever.

So far Changyou.com (NasdaqGS:CYOU - News), CDC Software (NasdaqGM:CDCS - News) and Shanda Games (NasdaqGS:GAME - News) have all partly separated from the parents, with varying degrees of success. Now, real-estate broker E-House Holdings (NYSE:EJ - News), currently No. 14 on the IBD 100, is preparing to sell off part of its information and consulting business this week. But the deal is a little different because it's doing a merger at the same time.

Last year, the firm formed a joint venture with Sina Corp. (NasdaqGS:SINA - News), one of China's leading Internet portals. In July of this year, Sina agreed to sell its real estate division to E-House, which is combining it with the spun-off data business. The IPO, then, will consummate the merger.

David Menlow, president of IPOfinancial.com, admits that the complicated nature of the deal might deter U.S. investors, along with shivers that the words "real estate" send down Americans' spines these days. But he also believes they should eventually come around.

"We are positive on this," he said. "We're looking for a premium that may end up being 5% over the actual price. The issue is that investors will probably confuse what's happening with the U.S. market in real estate vs. the growing real estate information and consulting market that is completely different in China."

THE COMPANY

E-House started developing its database in 2002, and incorporated CRIC as a subsidiary in 2006. In 2008, it bought Tian Zhou Advertising, which brought it into the real-estate advertising business. Also last year, it formed a joint venture with Sina called China Online Housing Technology in order to build a real estate Web site. E-House currently owns 34% of the JV, which will be merged into the new company after the IPO.

Currently, the CRIC System has information on developments in 56 Chinese cities.

The data cover some 32,300 residential developments, 3,700 office buildings, 2,200 commercial developments and 24,200 parcels of land for development, according to the prospectus. The system also has more than 29,200 real estate-related news articles, and some 10,800 research reports written by the in-house staff.

A basic subscription gives clients the right to access the information in the CRIC System. If they pay extra, CRIC will integrate the data in the form of custom-made reports and analysis for the particular client's needs.

CRIC also offers consulting services on the acquisition, development and marketing of real estate. The firm offers analyses of market risks, development potential, the competitive environment, pricing and so on. Since its Tian Zhou merger, it's offered real estate ad design services in 10 cities, and also buys ad space wholesale to resell to clients.

Sina, meanwhile, operates several Web sites covering 48 Chinese cities. The sites offer searchable real estate listings, industry news and online communities. It gets just about all its money from ads on the sites.

RISKS/CHALLENGES

The new, combined CRIC has no history as its own company, with even the joint venture going back only 18 months. Even CRIC as a unit of E-House has a limited history, since as recently as 2006 it pulled in just $5 million in revenue. The prospectus warns not to expect the firm to keep growing at the ramp-up speed it's seen so far.

The customer base is highly concentrated, with one client, Evergrande, providing about half of all revenue this year and last. Meanwhile, two other big clients from last year have not sought business this year, showing how unreliable the business can be.

The real estate market in China is rebounding this year, but it got hit by the financial crisis like everybody else. Chinese bank regulators are already worrying that cheap credit is creating another bubble. This carries a default risk for CRIC since more than 40% of its revenues are accounts receivable.

Despite the risks, the firm is planning to expand fairly aggressively after the IPO, including possibly through more buyouts. This carries significant risks and expenses.

E-House will continue to own a controlling share of CRIC, limiting the power of other shareholders.

THE RESULTS

The merger makes precise comparables impossible, but CRIC without the Sina unit has been growing rapidly. Revenue in the first half of the year jumped 62% over the year-ago period to $31.2 million. Profit rose 50% to 15 cents a share.

Combined, CRIC and China Online Housing drew $48.4 million in the first half with earnings of 8 cents a share.

USE OF PROCEEDS

CRIC expects to raise $209.7 million for its 18 million shares, or $241.9 million if the underwriters exercise their options in full.

It will use $30 million for capital expenditures, $20 million to expand sales and marketing, and the remainder for general corporate purposes.

THE MANAGEMENT

Xin Zhou

Chief executive and co-chairman

Co-founded E-House and was CEO there from 2003 until last month, when he moved to CRIC. From 1997 to 2003, he was general manager at Shanghai Real Estate Exchange. From 1994 to 1997 he was chairman and general manager at Shanghai Wanxin Real Estate Investments Consulting. He holds a bachelor's degree from Shanghai Industrial University.

Bin Laurence

Chief Financial Officer

Joined in August from SuttonBrook Capital Management, where she had worked as a research analyst since 2005. From 1996 to 2004 she worked at BMO Financial Group, and before that she spent two years as a media analyst at Lehman Bros. She holds an MBA from Columbia University.

Zuyu Ding

President (co-president)

Joined E-House as technology director in 2001 and became president in 2006. After the IPO, he'll be co-president with Jun Luo, general manager at Sina. From 1997 to 2000, he managed the research and development department at Shanghai Real Estate Exchange. He holds an MBA from the Macau University of Science & Technology.

Buzz up!