Leju(LEJU) - 2020 Q4 - Annual Report

PART I ITEM 3. KEY INFORMATION This section presents Leju's selected consolidated financial data for the fiscal years 2016 through 2020, including both U.S. GAAP and non-GAAP measures, and details a comprehensive list of risk factors related to its business, corporate structure, operations in China, and its American Depositary Shares (ADSs) Selected Financial Data The company provides selected consolidated financial data for the years 2016 to 2020, prepared in accordance with U.S. GAAP, showing total net revenues grew from $462.0 million in 2018 to $719.5 million in 2020, and a shift from a net loss of $13.5 million attributable to shareholders in 2018 to a net income of $19.3 million in 2020, also including non-GAAP financial measures indicative of operating performance Selected Consolidated Statements of Operations Data | Indicator | 2018 (in millions) | 2019 (in millions) | 2020 (in millions) | | :--- | :--- | :--- | :--- | | Total net revenues | $462.0M | $692.6M | $719.5M | | E-commerce | $320.3M | $547.2M | $547.9M | | Online advertising | $138.4M | $143.8M | $170.8M | | Income (loss) from operations | ($11.0M) | $17.7M | $24.1M | | Net income (loss) attributable to Leju | ($13.5M) | $11.5M | $19.3M | | Basic EPS ($) | ($0.10) | $0.08 | $0.14 | | Diluted EPS ($) | ($0.10) | $0.08 | $0.14 | Selected Consolidated Balance Sheet Data | Indicator | As of Dec 31, 2019 (in millions) | As of Dec 31, 2020 (in millions) | | :--- | :--- | :--- | | Total assets | $524.5M | $642.0M | | Cash and cash equivalents | $159.0M | $284.5M | | Total liabilities | $272.1M | $347.2M | | Total Leju Holdings Limited shareholders' equity | $255.4M | $295.9M | Selected Non-GAAP Financial Measures | Non-GAAP Measure | 2018 (in millions) | 2019 (in millions) | 2020 (in millions) | | :--- | :--- | :--- | :--- | | Adjusted income (loss) from operations | $6.1M | $33.9M | $38.3M | | Adjusted net income (loss) | $1.0M | $23.9M | $32.4M | | Adjusted net income (loss) attributable to Leju | $0.4M | $24.6M | $30.7M | Risk Factors The company identifies significant risks across four main categories: business operations, corporate structure, the Chinese operating environment, and its ADSs, including dependency on the volatile Chinese real estate market, intense competition, reliance on a VIE structure subject to PRC regulatory scrutiny, uncertainties in PRC law, and potential delisting from U.S. exchanges under the HFCA Act - The business is highly susceptible to fluctuations in China's real estate industry, which is influenced by government policies aimed at regulating the market, potentially impacting Leju's revenue[31][32][33] - The company faces significant competition from established real estate internet portals like fang.com and anjuke.com (operated by 58.com), as well as mobile-based news providers like toutiao.com for its advertising business[34] - A substantial portion of revenues (38% in 2020) is derived from major urban centers like Beijing, Hainan, Guangzhou, and Ningbo, creating market risk due to geographic concentration[45] - The COVID-19 pandemic had a severe negative impact in 2020, causing a slowdown in real estate transactions as developer clients closed sales centers, which adversely affected e-commerce services and online advertising expenditures[93][95] - The company operates its internet and advertising businesses through a VIE structure due to PRC restrictions on foreign investment, relying on contractual arrangements which may be deemed non-compliant by PRC authorities, potentially leading to severe penalties[111][112][115] - The Holding Foreign Companies Accountable Act (HFCA Act) poses a significant risk, as the company's ADSs could be delisted from U.S. exchanges if the PCAOB is unable to inspect the company's auditor for three consecutive years[187] ITEM 4. INFORMATION ON THE COMPANY This section details Leju's history, corporate development, and key relationships with E-House Enterprise, SINA, and Tencent, providing a comprehensive overview of its business, including its O2O platform, service offerings (e-commerce, online advertising, listing), operational aspects, and organizational structure, particularly the reliance on VIEs History and Development of the Company Leju Holdings Limited was incorporated in 2013 by E-House and went public on the NYSE in 2014, with E-House (China) Enterprise Holdings Limited acquiring a controlling stake in November 2020, making Leju its subsidiary, while maintaining strategic relationships with SINA and Tencent for real estate website operations and advertising partnerships - In November 2020, E-House Enterprise acquired a controlling stake in Leju, becoming its parent company, and as of March 31, 2021, E-House Enterprise owned approximately 56% of Leju's total outstanding ordinary shares[226] - The company operates SINA's real estate and home furnishing websites under agreements extending through 2024, making it the exclusive agent for selling real estate advertising on these platforms[229] - Tencent became a significant shareholder in 2014 and maintains a strategic partnership, with Leju acting as an exclusive or primary real estate advertising agent for Tencent in various regions across China[231][233] Business Overview Leju is a leading O2O real estate services provider in China, offering e-commerce, online advertising, and listing services through its platform, which includes local websites covering 391 cities, mobile apps, and operation of SINA's real estate sites, with e-commerce being the largest revenue source at 76.2% of total revenues in 2020, facing competition from major players like fang.com and anjuke.com Revenue Breakdown (in millions) | Revenue Stream | 2018 | 2019 | 2020 | | :--- | :--- | :--- | :--- | | E-Commerce | $320.3M (69.3%) | $547.2M (79.0%) | $547.9M (76.2%) | | Online Advertising | $138.4M (30.0%) | $143.8M (20.8%) | $170.8M (23.7%) | | Listing | $3.4M (0.7%) | $1.6M (0.2%) | $0.8M (0.1%) | | Total Revenues | $462.0M | $692.6M | $719.5M | - The company operates an extensive O2O platform that includes its own websites (leju.com), SINA's real estate and home furnishing sites (e.g., house.sina.com.cn), and a suite of mobile applications like "Leju Home Purchase" and "Leju Finance"[241][242][245] - Key competitors include leading real estate internet portal fang.com and major online listing platform anjuke.com (operated by 58.com)[273] Organizational Structure Leju Holdings Limited is a Cayman Islands holding company that conducts its PRC operations through wholly-owned subsidiaries and consolidated variable interest entities (VIEs), utilizing contractual arrangements to control its VIEs (Beijing Leju, Leju Hao Fang, and Beijing Jiajujiu) which generate substantially all of its revenue, due to PRC restrictions on foreign investment in internet and advertising services - The company utilizes a VIE structure to conduct its internet information and advertising services in China, which are restricted for foreign investors, with the VIEs being Beijing Leju, Leju Hao Fang, and Beijing Jiajujiu[338] - Substantially all of the company's revenues are derived from its consolidated VIEs, contributing 99.5%, 99.9%, and 99.9% of total net revenues in 2018, 2019, and 2020, respectively[118][340] - Control over the VIEs is established through a series of contractual arrangements, including Exclusive Call Option Agreements, Loan Agreements, Powers of Attorney, Equity Pledge Agreements, and Exclusive Business Cooperation Agreements, which collectively allow Leju to direct activities and consolidate the VIEs' financial results[339][342] ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS This section provides a detailed analysis of Leju's operating results for the fiscal years 2018, 2019, and 2020, discussing key factors affecting performance, such as the PRC real estate industry and competition, highlighting a 4% revenue increase in 2020 to $719.5 million and a rise in net income to $21.0 million, while also outlining critical accounting policies, liquidity, capital resources, and R&D efforts Operating Results Leju's total revenues increased by 4% to $719.5 million in 2020 from $692.6 million in 2019, driven by a 19% growth in online advertising revenue, with net income growing to $21.0 million in 2020 from $10.9 million in 2019, reflecting performance significantly influenced by the PRC real estate industry, government policies, and innovation, with critical accounting policies including revenue recognition under ASC 606 and the consolidation of its VIEs Operating Performance Summary (in millions) | Metric | 2019 | 2020 | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $692.6M | $719.5M | +4% | | E-commerce Revenues | $547.2M | $547.9M | +0.1% | | Online Advertising Revenues | $143.8M | $170.8M | +19% | | Income from Operations | $17.7M | $24.1M | +36% | | Net Income | $10.9M | $21.0M | +93% | Operating Performance Summary (in millions) | Metric | 2018 | 2019 | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $462.0M | $692.6M | +49.9% | | E-commerce Revenues | $320.3M | $547.2M | +70.9% | | Income (Loss) from Operations | ($11.0M) | $17.7M | - | | Net Income (Loss) | ($12.9M) | $10.9M | - | - The company's VIEs contributed 99.9% of total revenues in 2020, with total assets held by the VIEs amounting to $527.3 million as of December 31, 2020[432][434][435] - The company adopted ASC 606 (Revenue from Contracts with Customers) on January 1, 2018, recognizing revenue from e-commerce discount coupons at a point in time when the coupon is used, while online advertising and listing services revenue is recognized over time[420][422][426] Liquidity and Capital Resources The company's primary sources of liquidity are cash from operations and existing cash balances, with net cash from operating activities increasing significantly to $108.5 million in 2020 from $19.7 million in 2019, and cash and cash equivalents standing at $284.5 million at the end of 2020, though PRC regulations restrict the ability of its Chinese subsidiaries to transfer net assets, with $35.5 million being restricted as of December 31, 2020 Consolidated Cash Flow Data (in millions) | Cash Flow | 2018 | 2019 | 2020 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | $1.7M | $19.7M | $108.5M | | Net cash from (used in) investing activities | $0.8M | ($5.6M) | $0.1M | | Net cash from financing activities | $0.0M | $0.0M | $0.5M | | Cash and cash equivalents at end of year | $147.3M | $159.0M | $285.7M | - As of December 31, 2020, the net assets of the company's PRC subsidiaries and VIEs that were restricted from distribution amounted to $35.5 million due to statutory reserve requirements and other regulations[468] - Capital expenditures were $0.9 million, $8.0 million, and $1.6 million in 2018, 2019, and 2020, respectively, consisting mainly of purchases of property, equipment, and intangible assets[470] ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES This section provides information on the company's leadership, compensation, board practices, and employee base, highlighting key figures like Executive Chairman Xin Zhou and CEO Yinyu He, aggregate cash compensation for executive officers of $2.4 million in 2020, the board's three committees, the company's qualification as a "controlled company" under NYSE rules, and a total of 2,251 employees as of December 31, 2020 Leadership Team | Name | Position/Title | | :--- | :--- | | Xin Zhou | Executive Chairman | | Yinyu He | Chief Executive Officer | | Charles Chao | Director | | Canhao Huang | Director | | Juhong Chen | Director | | David Jian Sun | Independent Director | | Min Fan | Independent Director | | Winston Jin Li | Independent Director | | Hongchao Zhu | Independent Director | | Qiong Zuo | Chief Operating Officer | | Li-Lan Cheng | Acting Chief Financial Officer | - For the fiscal year 2020, the company paid approximately $2.4 million in aggregate cash compensation to its executive officers and $0.2 million to its directors[496] - As of December 31, 2020, the company had 2,251 employees, with the largest groups in Corporate Offices (30.3%) and Sales (24.7%)[525][526] - As of March 31, 2021, the three principal shareholders were E-House Enterprise (56.0%), SINA Corporation (12.9%), and Tencent (16.5%)[533] ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS This section details Leju's major shareholders and extensive related party transactions, primarily with E-House Enterprise, SINA, and Tencent, with E-House Enterprise as the controlling shareholder, and numerous ongoing agreements including a master transaction agreement with E-House, licensing and advertising agreements with SINA, and strategic cooperation and advertising agreements with Tencent, forming a critical part of Leju's operations - Leju became a subsidiary of E-House Enterprise in November 2020, and in 2020, Leju recognized $21.4 million in expenses for marketing channel services provided by E-House Enterprise[542] - The company has a series of foundational agreements with SINA, including an Advertising Inventory Agency Agreement and a Domain Name and Content License Agreement, extending through 2024, with the cost for advertising resources purchased from SINA being $29.3 million in 2020[565][566][567][572] - Leju has strategic advertising agency agreements with Tencent, acting as its real estate advertising agent in many areas of China, with the cost for advertising resources purchased from Tencent being $17.8 million in 2020[573][575] ITEM 8. FINANCIAL INFORMATION This section confirms that the consolidated financial statements are appended to the annual report, states that the company is not currently involved in any material legal proceedings, and notes that the dividend policy is at the discretion of the board of directors, with a cash dividend of $0.20 per share last paid in May 2015 - The company is not currently involved in any material legal or arbitration proceedings[589] - The company's dividend policy is discretionary, with the last dividend paid being $0.20 per ordinary share in May 2015[590][591] ITEM 10. ADDITIONAL INFORMATION This section provides details on the company's memorandum and articles of association, material contracts, exchange controls, and taxation, including the rights of ordinary shareholders, board of director powers, anti-takeover provisions, and tax implications in the Cayman Islands, PRC, and for U.S. holders, noting the assessment that the company was not a Passive Foreign Investment Company (PFIC) for the 2020 taxable year - The company is a Cayman Islands exempted company, and its articles of association grant the board of directors the authority to issue preferred shares without shareholder approval, which could act as an anti-takeover measure[595][619] - The company believes it was not a Passive Foreign Investment Company (PFIC) for U.S. federal income tax purposes for the taxable year ended December 31, 2020, but notes that the determination is a factual one made annually and is subject to change[218][637] - If the PRC tax authorities determine Leju is a PRC resident enterprise, dividends paid to non-resident enterprise shareholders (including ADS holders) may be subject to a 10% withholding tax, and gains on the sale of ADSs may also be subject to a 10% PRC tax[630] ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company's primary market risks are interest rate risk and foreign exchange risk, with interest rate risk relating to income from bank deposits, and foreign exchange risk arising because revenues are denominated in Renminbi (RMB) while ADSs are traded in U.S. dollars, making the investment's value sensitive to fluctuations in the USD/RMB exchange rate - The company's main market risk exposures are interest rate risk on its cash deposits and foreign exchange risk related to the fluctuation of the Renminbi against the U.S. dollar[657][658] - As of December 31, 2020, the company held $283.8 million in RMB or HKD-denominated cash balances and $1.9 million in USD-denominated cash balances, meaning a 1% appreciation or depreciation of the RMB against the USD would have a corresponding impact on the value of these holdings when converted[660] ITEM 15. CONTROLS AND PROCEDURES Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of December 31, 2020, also assessing the internal control over financial reporting using the COSO framework and concluding it was effective, and as a "non-accelerated filer," the company is not required to have an attestation report on internal control from its external auditor - Management concluded that as of December 31, 2020, the company's disclosure controls and procedures were effective[670] - Based on an assessment using the COSO framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2020[672] - The company is a "non-accelerated filer" and is therefore not required to provide an auditor's attestation report on its internal control over financial reporting[672][673] Other Corporate Governance and Disclosure Items This section covers various corporate governance matters, including the board's determination that Winston Li and Min Fan are audit committee financial experts, the adoption of a code of ethics applicable to all directors, officers, and employees, details on fees paid to its principal accountants, Deloitte and Yu CPA, for 2019 and 2020, and the company's status as a "controlled company" under NYSE rules due to E-House Enterprise's majority ownership - The board of directors has identified Winston Li and Min Fan as audit committee financial experts[677] - In May 2020, the company appointed Yu Certified Public Accountant, P.C. as its independent registered public accounting firm, replacing Deloitte Touche Tohmatsu Certified Public Accountants LLP[679][682] - The company is a "controlled company" under NYSE rules because E-House Enterprise holds more than 50% of the voting power, exempting it from the requirement to have a majority of independent directors[683] PART III ITEM 18. FINANCIAL STATEMENTS This section contains the consolidated financial statements of Leju Holdings Limited for the fiscal years ended December 31, 2018, 2019, and 2020, including reports of the independent registered public accounting firms, consolidated balance sheets, statements of operations, comprehensive income, changes in equity, and cash flows, along with detailed notes to the financial statements prepared in accordance with U.S. GAAP - The financial statements include reports from two independent registered public accounting firms: Yu Certified Public Accountant, P.C. for the 2019 and 2020 fiscal years, and Deloitte Touche Tohmatsu Certified Public Accountants LLP for the 2018 fiscal year[710][723] - The notes to the financial statements confirm that on November 4, 2020, E-House Enterprise acquired a controlling stake, making Leju its subsidiary[747] - The company adopted new accounting standards, including ASC Topic 326 (Financial Instruments-Credit Losses), effective January 1, 2020[711][828]