SouFun Up on Deals with Premier Chinese Real Estate Firms

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SouFun Holdings Limited (SFUN) has entered into strategic cooperation agreements with Shenzhen World Union Properties Consultancy Co., Ltd. and Hopefluent Group Holdings Limited, the leading new home agency companies in China. Shares of the leading real estate Chinese Internet portal jumped 6% to close at $10.07 yesterday, following the announcement.

This arrangement brings together three prominent players, with one online and two offline entities collaborating to not only serve China's growing new home and resale market but to also give a boost to the platform.

SouFun - World Union Strategic Cooperation Agreement

World Union, a Chinese agency company, operating for over two decades, plans marketing programs and related consultancy services for property sales. China Real Estate Index System ranks World Union #1 among the top 50 real estate agencies in China.

Apart from other activities, the two companies will jointly work on advertising, e-commerce, listing service, new home agency and consultancy. The companies might also partner in Internet and real estate financing businesses. Additionally, SouFun will also have a 10% stake in World Union following a private placement for new shares.

The agreement involves a total cash consideration of $120 million.

The transaction will see the light of day upon approvals from World Union's shareholders and the China Securities Regulatory Commission.

SouFun - Hopefluent Strategic Cooperation Agreement

Hopefluent provides services spanning from planning of marketing programs and related consultancy services to handling of property sales and mortgage arrangements. It is predominantly engaged in real estate agent business of the primary and secondary property markets in China.

China Real Estate Index System ranks Hopefluent at #3 on the list of the top 50 Chinese real estate agency companies.

Per the agreement, the two companies will come together for advertising, e-commerce, listing service, new home and resale agency, consultancy and property management, among other work. The entities intend to form a joint venture in Internet and real estate financing businesses mainly to cushion Hopefluent's core new home agency business. Here also, SouFun will own a 17% stake in Hopefluent following a private placement for new shares.

This agreement involves a total cash consideration of $91 million.

The transaction will culminate upon approvals from Hopefluent’s shareholders and the Hong Kong Stock Exchange.

Rationale of the Strategic Cooperation Agreement

Collaborating with World Union and Hopefluent will help SouFun, which provides online information regarding real estate development in China, to be more conversant with real estate transactions. World Union and Hopefluent, on the other hand will benefit from enhanced operations as these would integrate their operations with an online platform.

The Chinese real estate market has lately been experiencing a slowdown. As per China Index Academy, an independent property research organization owned by SouFun, housing prices in 100 cities declined 0.5% sequentially in June, worse than the 0.32% sequential decline in May (the first price downturn in 23 months).

As per SouFun’s data, transactions across major cities witnessed a 19% year-over-year downturn in the first half of 2014. New home transactions in Beijing and Shanghai also experienced a sharp downfall of 48.6% and 32.8%, respectively.

As per the Global Economic Data, the Chinese GDP is forecast to decline over the next decade. Nonetheless, it will be better than global GDP and top the chart among the emerging economies. It seems that the slowdown is a strategic initiative to drive growth by luring consumption spending, which is a more sustainable way out than other macro factors.

China being the most populated nation with the world’s second biggest economy, will always see demand building up for properties. In March, China announced its goal to reach a 60% urbanization rate by 2020, implying another 882 million people move into cities from rural areas.  Hence, through this collaboration, wherein three premier entities join forces, buyers will be better served and the real estate market will see more opportunities to gain momentum.

Zacks Rank and Other Stocks

SouFun presently carries a Zacks Rank #3 (Hold). Better-ranked business service providers include Avis Budget Group, Inc. (CAR), ExamWorks Group, Inc. (EXAM) and Iron Mountain Inc. (IRM). While Avis Budget and ExamWorks sport a Zacks Rank #1 (Strong Buy), Iron Mountain carries a Zacks Rank #2 (Buy).

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