"Despite management's reaffirmation of turning breakeven in 4Q16, SouFun's margin recovery might not be as smooth as many would expect because its key initiative, secondary direct-sale agency business, has not achieved a leading position in first-tier cities," analyst Alex Yao wrote in a note.
As a result, Yao noted the headcount reduction and significant margin improvement in the second quarter are not sustainable.
For 2017, the analyst expects the company to ramp up investment in this business arm in first-tier cities, which should drive up headcount cost and weigh on margins.
SouFun raised its secondary direct-sales commission rate to 1.5 percent in June (from 1 percent), which led to an improvement in monetization of this business-line despite a moderate impact on volume.
"We believe the stabilizing headcount growth in conjunction with the commission rate increase should enable SFUN to achieve its year-end breakeven target, while we remain cautious on its FY17/18E margins given its continued efforts in competing for market share in highly competitive top-tier cities," Yao highlighted.
The analyst expects FY2016/2017/2018 adjusted EPS of $(0.31)/$0.09/$0.22 and net sales of $1.174 billion/$1.412 billion/$1.609 billion.
"Our 2017/18 EPS forecasts are 31 percent/31 percent lower than consensus due to our more conservative margin assumptions," Yao added.
At time of writing, shares of SouFun fell 3.75 percent to $4.49.
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