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E-House China Holdings Limited (EJ) is in one of the riskier sectors of China's economy: housing. While the company has surprised on the Zacks Consensus 4 quarters in a row, the outlook for the second quarter is a bit more dicey as the Chinese government tries to cool down a building housing bubble.

Is it crazy to even think of investing in a Chinese real estate company right now?

E-House offers a range of services to the Chinese real estate industry including acting as the primary sales agent, the secondary broker, consulting, advertising and investment management. E-House has an extensive geographic coverage, operating in more than 100 cities across China through a network of real estate professionals.

The company's proprietary real estate information database and analysis system, called "CRIC", was merged with SINA Corporation's online real estate business and spun-off in an IPO on the NASDAQ in October 2009 (under the ticker CRIC.)

What Happens to E-House Now that the Chinese Government is Slowing Property Purchases?

The big elephant in the room with E-House is what happens to its business now that the Chinese government has put into place restrictions that are designed to slow the number of property transactions and keep prices from escalating.

E-House has admitted recently that the measures have had an immediate impact on transactions and volume in China's housing market.

"We therefore expect market transaction volume to remain depressed over the next one to three months and transaction prices to show signs of softening," Mr. Xin Zhou, E-House's executive chairman.

"Following that, we believe market transactions should return to a more normal and rational level, as was the case before. We also believe it is the government's consistent goal to support and maintain long-term and stable growth of China's real estate industry," he added.

E-House said in its first quarter results that the slowdown in the market will affect E-House's transaction volumes and financials in the near term. However, the company also has its CRIC segment which is less impacted by short-term market volatilities and can provide some revenue stability.

How Bad Could it Get Going Forward?

Analysts are still bullish on E-House for the full year, despite the government tightening. The 2010 Zacks Consensus is up a penny to $1.02 per share in the last week and 7 cents in the last 30 days.

The analysts also see better days in 2011 as the 2011 Zacks Consensus has gained 15.6% in the last month. They now expect earnings growth of 45% in 2011.

But the tightening on the housing market is reflected in slightly weaker estimates for the second quarter. 90 days ago, analysts had expected 36 cents per share but now they are looking for just 19 cents. That is down 3 cents in the last week.

Conclusion by the analysts: some short term pain but more long term gain.

E-House Surprised by 375% in the First Quarter

On May 13, E-House reported its first quarter results and easily beat the Zacks Consensus Estimate by 15 cents. Earnings per share were 19 cents compared to the consensus of 4 cents.

Revenue rose 118% to $71.4 million from $32.8 million a year ago. Total gross floor area ("GFA") climbed 85% from the first quarter a year ago.

All of its segments saw revenue increases led by the primary real estate agency services which jumped 143% to $42.4 million from $17.4 million in 2009. This was due to an increase in the total GFA of new properties sold, an increase in the total transaction value of new properties sold and a rise in the commission rate from 1.2% to 1.3%.

CRIC's revenue jumped 99% to $24.2 million from $12.2 million a year ago. Its secondary real estate brokerage services also increased by 46% to $4.4 million due to higher total secondary real estate transaction volume.


E-House has value characteristics. It is trading at 13.7x forward earnings. I wouldn't call that necessarily "cheap", especially for a company with the unknown risks of the Chinese housing market, but that's slightly under the industry average of 13.8 and well within the value parameters.

The company also has a price-to-book ratio of just 0.9 which puts it squarely into "value" territory. Additionally, it is under the industry average of 1.4.

Its return on equity is also solid at 14.6%, well above the industry average of 3.3%.

E-House is a Zacks #1 Rank (strong buy) stock.

Tracey Ryniec is the Value Stock Strategist for She is also the Editor in charge of the market-beating Zacks Value Trader service.

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