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E-House IPO: first look

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China. Hot. Housing market in China? Red hot. Put an “e” (hint: eBay) before that? Sizzling. So do we jump into this sizzling (hot) IPO, just by looking at its name and its business, the residential real estate brokage in China? The answer is obviously No.

First a little bit history on Chinese residential housing market. Like many things else, China’s housing market is not market-driven until middle 1990s. Before that most people in cities got assigned apartments by their “Danwei” (employer). Housing was part of the benefit, just like healthcare, provided by the goverment. So what’s the problem here? The housing market was vastly under-developed, and average people have small living spaces. I remember when I worked for a state owned manufacturing company in Shanghai after graduation from college (1993), it would take me 10 years in the waiting line to get “a small apartment” from my “Danwei”, if I’m lucky to get one at all. One of my coworker (and his wife, kid) lived in a 2 bedroom apartment with his bro’s family, his parents, i.e., totally 8 people shared the little 50 square meters (about 550 square foot).

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(Pic above: brokers near Zhongshan Park: Ji Feng Yi Ju and ColdWell Banker, the US chain)

It’s a totally different story now. In past 10 years, the real estate industry took off, and became a very important industry for the goverment revenue. Some national home builders emerged, such as Vanke. And people have better and bigger living spaces in general. E-House and many other brokers also emerged from this boom. But like many things else in the world, there is the upper side, and there is the down side. The down side of the recent real estate boom, in my humble mind, is “too much market force without proper regulation”. The consequence is, local goverment got more revenue from tax and land sale, developers made the money from building the houses and housing speculator made money by flipping the house. At the same time, many “average joes” still could not afford the house, especially at current market. There is a huge discotent among “the people who missed the boat”. According to Wang Jianshuo’s blog, some apartments in Shanghai went up 3 to 4 times in 4 years. Has the wage gone up that much? Definitely no.

How does this related to E-house’s business? I have no doubt the housing market in China will have a bright future. But in the near term, because of the fear of “housing market lose control”, the goverment may issue some dramatic measures. They are already collecting sales tax from the real estate sale: to punish the housing flippers and increase tax revenue at the same time. This will have big effect on consumer sentiment, and make E-house’s primary business (new home sales) less predictable.

On the competition side, I also see the competition is heating up in this area. As E-House admitted in its prospectus, it does not take much capital to start a business like real estate brokage. E-house’s advantage, is its centralized system, offices spread out some 20 cities (in east China), and a brand (questionable, I can elaborate if necessary). These are not huge competitive edges. For instance, the brand, when the market is good, the new home developers can market and sell the house directly, as people are waiting in lines to buy the houses lately.

Last but not least, the “Neil Shen” factor, Neil Shen is the co-founder of Ctrip (CTRP) and Home Inns (HMIN), both were successfully listed in the US market. He may help the Wallstreet warm up to this IPO, but we should be aware he is an investment banker, not an entrepreneur. We should look for E-house founder and CEO Zhou Xin, if we want to access the management.

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