58.com:1Q17top-line and bottom-line beat;housing category exceeded expectation and job category maintained strong growth

Both top-line and bottom-line beat. WUBA has started to report financial
results in RMB termsto minimize the influence of exchange rate, and we
will use RMB terms in our analysisaccordingly. Total revenue in 1Q17 was
RMB1,988mn, down 5% QoQ and up 32% YoY, 10%higher than the high end of
management guidance and 9% higher than our estimate. Non-GAAPnet income
was RMB106mn, compared with RMB23mn/RMB347mn loss in 4Q16/1Q16, and
wasbetter than our estimate of RMB252mn net loss and consensus of
RMB247mn loss, due to itscontinuous cost control especially the sales
and marketing expenses during the quarter. Anotherreason for the margin
improvement in 1Q17 was that some costs, such as pre-installation cost
inAndroid system, were not accounted in 1Q as management expected. Gross
profit margin wasrelatively stable at 90%, flat on a QoQ basis and up 1
ppt YoY. Non-GAAP operating margin wasup to 11% from -14% in 1Q16 and
down 4 ppts compared with the previous quarter givenbetter-than-expected
revenue growth, thanks to the healthy increase of the housing

    With the climbing revenue base and relatively similar amount of
sales and marketing expense,bottom-line is expected to maintain steady
improvement. WUBA is also enhancing the efficiencyof its listing
business by providing more favorable recommendations to merchants and
users withAI and big data technology. This may result in decreasing
sales and customer service team sizeand improving margin in the future,
in our view.

    Membership revenue grew with the steady increase of paying members.
Online marketingrevenue was RMB1,137mn, down 4% QoQ and up 34% YoY, and
the contribution to totalrevenue was maintained at 57%. The YoY increase
was mainly driven by the improving averagespending per merchant,
especially the merchants in the job sector since 1Q is the usual
peakseason for blue collar recruitment. Membership revenue was RMB793mn,
accounting for 40% oftotal revenue, down 2% QoQ and up 32% YoY. The YoY
growth was mainly attributable to thehealthy increase in the number of
paying accounts in each category. During the quarter, the totalnumber of
paying membership accounts for 58 platform (including Ganji and Anjuke)
increasedby 39.4k to 2212k from 1Q16 and up 7% compared with the
previous quarter thanks to thesignificant growth of job sector.
E-commerce revenue dropped by 65%/58% on a QoQ/YoY basisbecause
tightening on the housing market had significant effect on the new house
market as wellas Anjuke’s new house business.

    Revenue growth in housing category was better than expectation; job
category maintainedstrong growth momentum. The Housing category’s
contribution to total revenue dropped toapproximately 40% from 45% in
4Q16, affected by property tightening. As the tightening hadmore impact
on the new home market than existing homes, Anjuke’s growth was affected
moresignificantly than 58.com. We believe the property tightening to
have impact on the marketduring 2017, so WUBA’s housing category will
still be under pressure in the following quarters. Inthe meantime, WUBA
shifted more attention to its house rental business as well as
expansioninto lower-tier cities with looser regulations to maintain the
growth of housing category. The Jobcategory accounted for about 30% of
revenue in 1Q17 and maintained nearly 50% YoY growth.

    WUBA benefited from the active blue collar recruitment market after
the Spring Festival andbecame the biggest online recruitment platform
for the first time in the quarter. With theimproving value recognition,
we believe WUBA’s job category to maintain strong growthmomentum and
drive the growth of the whole platform in 2017. The local service and
used carcategories grew steadily with increasing penetration. User
stickiness has been enhanced in thetransition from PC to mobile,
reflected by the rising number of average page views per user, andwill
lead the whole platform’s growth in the long run.

    Valuation. We lift 2017E revenue forecast by 1% given
better-than-expected housing categoryperformance in 1Q17. We expect the
impact of property tightening to last till 2018 and, to beconservative,
cut revenue forecast for 2018E by 4%. However, we think the housing
industry willeventually recover in the long run with improving margin
given its scalability of revenue as wellas headcount cut. We lift TP
from US$44 to US$48 based on 10-year DCF method, implying85x/29x
2017E/18E PE. Maintain LT Buy.

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