On April 28, E-House China Enterprise Holdings Co., Ltd. (HKG:2048) announced it had acquired an 85% stake in Tmall Haofang, through an issue of 248 million new E-House shares to Alibaba (NYSE: BABA; 9988.HK). At HK$ 7.50 per share, it was the equivalent to an acquisition at HK$ 1.86 billion.
At the same time, Alibaba, E-House founder and chairman Zhou Xin, and Alibaba’s Yunfeng Fund invested HK$ 990 million, HK$ 1 billion and HK$ 500 million respectively at the price of HK$ 7.50 per share to subscribe to 132 million, 133 million and 66.67 million new shares of E-House.
On completion, Tmall Haofang will become a wholly-owned subsidiary of E-House, while Alibaba will continue to grant exclusive Tmall permits to Tmall Haofang including the name, domain name, trademark and other brand attributes, and simultaneously provide technical, product, data, operational and other means of support.
In terms of shareholding ratio, Zhou Xin will hold 22.84% shares of E-House to remain its largest shareholder, while Ali with 22.57% becomes the second-largest shareholder, and Yunfeng Fund 2.86%. Zhou Xin, as Chairman of the E-House Board of Directors, officially wrote an open letter “Hello, Tmall Haofang!” A few words were highlighted for the outside world: “After cooperation and upgrading, E-House will emphasize the three pillar businesses of Tmall Haofang: new housing transactions, a new housing agency and Kerry Big Data.”
This means that E-House will venture into the Internet transaction platform as a new housing agency and real estate big data and consulting service. It isn’t an exaggeration to say Alibaba has provided E-House with more than support, not only in the transfer of Tmall Haofang, but also by increasing its E-House shareholding, and by providing exclusive authorization, technology, products, traffic and many other means of support. It is evidence of Alibaba’s belief in the prospects of E-House successfully transforming imagination into market reality.
In fact, we see from experience with Lianja’s Shell Search online real estate brokerage that platforms are valued against their potential to develop, as seen by higher valuations in the capital market. According to the data, Lianjia’s annual sales were RMB 1 trillion in 2017, but by 2020, sales with Shell’s ACN (Asian Cooperative Network) reached RMB 3.5 trillion, and Lianja’s market cap exceeded USD 60 billion.
Real estate transactions have exceeded 20 trillion yuan nationwide. Yet there remains much potential and opportunity for integration, and another big player is venturing in. Zhou Xin said in his open letter, “This is an important milestone for the domestic real estate service industry and E-House.” When “There are good houses on Tmall” has changed to “To buy good houses on Tmall”, E-House strategy has evolved into an online real estate transaction platform, and the digitalization of real estate has also accelerated.
01. Build a new digital infrastructure of real estate
Since its founding more than two decades ago, E-House has been deeply involved in the real estate industry, from a new housing agency service initially to a real estate big data consulting service and then to a real estate brokerage platform. For most of that time, E-House’s core business was traditional real-estate agency services. According to the 2020 financial report, 32.9 million sq.m were successfully brokered via E-House for sales of RMB 405.6 billion, accounting for about 40% of E-House revenues.
However, from 2016 it was gathering a large number of medium and small to micro brokerage firms on the Fangyou platform, while launching a series of products such as the Youfang market resources sharing platform and Youfangtong and E-House Fangyou Management System vigorously promoting online and interactive new and pre-owned housing brokerage business, stimulating a rapid increase in the proportion of e-revenue.
2020 was the turning point for E-House. With the COVID-19 pandemic, online real estate transactions were ascendant. In November 2020 E-House completed the acquisition of Leju Holdings Ltd (NYSE: LEJU), a digital real estate media and online transaction platform, which had become a key ecological link for E-House in building a closed loop in which to complete real estate transactions.
And then came Alibaba. Working together with deep cooperation for online and offline real estate transactions, digital marketing and post-transaction services, E-House and Ali jointly launched the “Real Estate Transaction Collaboration Mechanism” (ETC), which is equivalent to, but more open and efficient than ACN brokerage system of Shell. From the results of promotion and operation across China, a new win-win brokerage ecological system is growing rapidly.
According to statistics, during 2020 double eleventh festival, a total of 41,775 transactions were cumulatively achieved via the ETC collaboration mechanism with a transaction volume of 93.1 billion yuan in 236 cities nationwide.
It is understood that around real estate transactions, E-House faces real estate developers, intermediaries and asset proprietors, and promotes the digital upgrade of real estate transactions and operations with the help of Cree Big Data, Fangyou brokerage platform, Leju, etc. and strives to gradually build new infrastructure in the domain of real estate.
Under the background of “three red lines”, it is more difficult for developers to yield profits, and even the marketing expenses of some projects have been as high as 5%. The digital new infrastructures have brought a new possibility for the whole industry. All these are regarded as the efforts of E-House in real estate digitalization, and gradually reveal the unique value of E-House in the domain of real estate. The cooperation between E-House and Ali shows E-House’s professional and resource advantages in the domain of real estate transactions, which directly paves the way for E-House to acquire Tmall Haofang to venture into the real estate online transaction platform.
02. Layout of real estate internet transaction platform
The real estate transaction platform is a more valuable and imaginative domain. An evidence is the striking transformation from Lianjia to shell platform, which lays a direct foundation for a higher premium in the capital market.
From the perspective of industry scale data, the huge real estate transaction market will continue to grow up to approximately 25 trillion yuan in the coming three years according to the National Bureau of Statistics. If the marketing expenses of new and pre-owned housing is calculated at the rate of 2.5% and 1.5% of the transaction volume respectively, the overall market capacity of real estate marketing expenses will reach 500-600 billion or so.
The cooperation between Tmall Haofang and E-House marks that a new pioneer will be ushered to the broad market. The advantages of both sides open a window for complementary win-win cooperation to bring great expectations to the entire industry.
In fact, many intermediaries and developers expect to build their own real estate transaction platforms. However, due to the difficulty in seeking customers, insufficient housing resources, real and false housing resources, interest conflict among brokers and many other challenges, it is difficult for most of them to set up a large real estate transaction platform.
However, Tmall itself is a B2C mall, with monthly active users over 50 million. The sufficient traffic is helpful to alleviate the difficulty in seeking customers. From Ali’s practice in the vertical field, it has successfully built Ali Health and Tmall Haofang is regarded as another practice of Ali in the vertical field of real estate, attracting more optimistic expectations from the outside world.
Tmall Haofang has built a real estate transaction platform to address the problems that exist in the transaction process by using Ali’s system and technical solution. Small, medium and micro-stores, brand owners, property service providers, etc. can participate in the transaction service, chain commission sharing and fund supervision online, so that the transaction will be “simple, efficient, fair and open”.
While E-House gives full play to the advantages of housing and brokerage companies. For E-House, E-House has been dedicated to the domain of new housing service for many years, and established a good relationship with developers as well as vast small and medium-sized brokerage stores.
Among them, the close ties between E-House and real estate enterprises can be confirmed from the shareholders when E-House went public. As shown in the prospectus, 26 out of the top 100 real estate enterprises in China subscribed for their shares respectively. By the end of 2017, the first-hand housing sales network of E-House has covered domestic 186 cities, and entered into long-term strategic partnership with dozens out of the top 100 real estate enterprises.
Meanwhile, for medium, small and micro brokerage firms across China empowered by asset-light strategy, E-House has built an overall resource pool for 10,000+ stores, 30,000 channels and 10,000 communities. In addition, the E-House ETC model is more open and fair: customers can have access to the housing resources directly so efficiency can improve significantly; channel dealers expand customer resource channels and find solutions to lost orders, commission sharing and various other problems; and buyers will have improved efficiency of housing inspection and an optimized transaction process.
It is undoubted that the difficulties in building a large platform for real estate transactions have been solved little by little under the joint efforts of E-House and Ali. The prospects of this acquisition rely more on the capacity of implementation. As Zhou Wei said in his open letter, Tmall Haofang will “build a new digital infrastructure for real estate marketing, empower brokerage firms and millions of brokers, and contribute to promoting the digitalization and intelligence of the real estate industry in an all-round manner, so that no difficulties will exist in real estate transactions”.
For this reason, after reaching a deal with Ali, Zhou Xin set in his letter to employees the target of 3 million DAU, 2000 billion GTV2 and 50 billion yuan revenue in the next three years. From his target, Zhou Xin is confident in the prospects of Tmall Haofang.
As indicated in 2020 annual report of E-House, the GTV of real estate agency service and real estate brokerage network service reached 513.4 billion yuan, with a total income of 8.0515 billion yuan and a profit of 439.2 million yuan in 2020. GTV and revenue are expected to increase fourfold and sixfold respectively in the next three years. It means that the compound growth rate of E-House’s revenue in the coming three years will be 84.2%. Compared with this growth rate, E-House’s current estimated value of more than 40 times is obviously underestimated.
It is not difficult to imagine that with the investment and promotion on Tmall Haofang, the income composition and profit structure of E-House will change accordingly in future. And meanwhile, the valuation system will be reconstructed after the quantitative change finally leads to qualitative change.
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Haolu Wang, Peanutmedia
E: wanghaolu@czgmcn.com
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