Earnings in 2019 fell short of market expectations

Yiju Enterprise Holdings' net profit fell 9.4% year-on-year to 861 million yuan in 2019, falling short of unanimous expectations, mainly because first-hand housing agency service business performance fell short of expectations. The company plans to pay a year-end dividend of 0.155 yuan/share, corresponding to a dividend yield of 2.7%.

Affected by business transformation, the growth of first-hand housing agency service business has weakened. Commission revenue fell 3.9% year over year to $4.57 billion. In the second half of 2019, the company worked to optimize the customer structure and service contracts (such as revenue payment terms and profitability, etc.), limiting saleable resources ($1.2 trillion, which is basically the same as year over year) and GMV growth ($532.4 billion, which is basically the same as year over year). Furthermore, the commission rate declined from 0.9% to 0.86%, mainly dragged down by the Weijia sector (commission rate 0.6-0.7%).

The roommates platform is growing strongly. The platform GMV increased from 34.7 billion yuan in 2018 to 138.2 billion yuan. The sector's revenue increased 743% year-on-year to 3.55 billion yuan, and the platform was profitable for the first time in four years since its establishment (57.9 million yuan).

Development trends

A return to steady growth is expected in 2020. We expect the saleable resources of the first-hand housing agency service business to increase 20% year over year in 2020, thereby supporting a 10-15% increase in GMV and commission revenue over the same period last year. Affected by the “COVID-19” pandemic, we expect developers to rely more on channels such as houseguests to provide sales opportunities, so we expect the GMV of the Roommate Platform to double in 2020. We expect the commission rate to remain at 2.5%, boosting platform revenue.

Profit forecasting and valuation

We lowered our 2020 profit forecast by 32% to $1.02 billion (corresponding to an 18% year-on-year increase) to reflect the adjustment of the GMV forecast for the first-hand housing agency service business. We introduced a profit forecast of $1.24 billion for 2021 (corresponding to a 22% year-on-year increase). Maintaining an outperforming industry rating is mainly due to low valuations (7.8 times and 6.4 times the price-earnings ratio of 2020-2021).

The target price was lowered 26% to HK$8.29 (corresponding to 10 times the price-earnings ratio in 2020, with 28% upside from the current stock price) based on the earnings forecast per share.

risks

First-hand housing agency services and renter platform GMV fell short of expectations.