Last year, Soufun conducted one of the most successful IPOs by a Chinese business in the US. The company, whose real estate website drew more mainland visitors than any other in 2010, saw its shares surge 73% on its first day of trading as bankers touted its combined exposure to China’s fast-growing internet story and the property sector.
Since then, however, the stock has born little resemblance to other ¬Chinese internet companies whose valuations have been lifted by a wave of investor enthusiasm. Soufun’s stock price has swung between highs and lows in a classic “head and shoulders” pattern – its price slowly building, leveling out, soaring to new highs, and then retreating again in stages, before repeating the process again. The stock’s volatility stems from the company’s connection with an increasingly unloved segment: the property sector, where Beijing’s tough restrictions on property have spooked would-be investors.
Some argue that Soufun is more insulated to the downturn than your average property developer. Chen Jie, a professor with the Center for Housing Policy Studies at Fudan University, has said that Soufun faces lower risks from regulation because it provides information, rather than buying and selling property.
But a closer look at Soufun’s business suggests its risks are just as high, if not higher. The company makes most of its revenues (74.7% in 2010) by selling ad space on its website to property developers, agencies and home furnishings companies. That makes Soufun vulnerable: When companies meet hard times, ad spending is one of the first things to go.
Property developers may be cash-rich, but they are still likely to scale back on advertising in what is universally perceived to be a slow sales period. Rumblings among ad agencies support this outlook. Many industry professionals expect weak spending in 2012 from both real estate and auto advertisers, typically the two biggest customers for online advertising. Soufun has posted strong revenue growth – in the second quarter, its revenues nearly doubled year-on-year to US$80.6 million, while its profits jumped to US$22.9 million from US$2.9 million the previous year – but that clip will be hard to maintain in a downturn.