Cut its target price from USD 17.8 to $16, down 10%

The following is a summary of the contents of the report:

The trough is expected to arrive in the second quarter;

-First-quarter earnings exceeded expectations;

SouFun's total revenue for the first quarter was $121 million (up 33% year-on-year and 44% per cent), in line with Wall Street analyst expectations, 6% per cent higher than Deutsche Bank analysts, and not in accordance with US GAAP Earnings per share in the first quarter were $0.1, up 4% and 14% above Wall Street analysts ' expectations and Deutsche Bank analysts ' forecasts, mainly because of rising interest income from corporate debt transactions.

While SouFun management maintained a 22.5% to 25% per cent year-on-year increase in revenue for fiscal 2014, we expect the company to face a severe macroeconomic headwind in the second quarter, with all performance indicators likely to hit a low point. In particular, we expect the deterioration in the housing market to continue to weigh on the SouFun's e-commerce sector and erode its house-search listings. But we also believe that price cuts and policy easing will bring an inflection point in the second half of 2014, assuming that the underlying market will be "soft landing".

We maintain the SouFun stock rating as "buy" and consider its valuation attractive because of its previous significant stock-price pullback.

-More drastic price cuts will drive sales growth faster:

SouFun's e-commerce sector slowed in the first quarter (revenues grew 12% per cent, to $29 million, compared with Deutsche Bank analyst expectations of 20%), while online marketing services fell 30% year-on-year. We note that China's housing market continued to show weakness in April, according to data from Deutsche Bank's property team (trading volumes in 40 large cities fell 40% per cent year-on-year).

Historically, only real price cuts can spur sales growth, so we expect housing inventories to not fall effectively until developers take aggressive price cuts over the next six to 3-6 months. With this in view, we will reduce the growth forecast for the 2014 fiscal year of the SouFun E-commerce department from 38% to 11%.

-Search room to help the housing publishing services will be affected; Network marketing services with resilience:

SouFun's first-quarter revenue growth in its e-commerce sector was weak, but it was partly offset by net marketing service revenue (up 31% per cent year-on-year, compared with Deutsche Bank analyst expectations of 16%) and the robust growth in home sales (up 57% per cent, compared with Deutsche Bank analyst expectations of 24%). But we expect that house-search services will face greater pressure from market conditions, as sales of real estate agencies have fallen.

But at the same time, we still expect the performance of SouFun Network marketing services to rebound (up 19% per cent year-on-year), the reason is that developers have begun to shift their marketing focus from E-commerce (3% to 4% of the developer budget) to Network marketing services (a share of 1% in the developer budget).

-Maintain a "buy" rating; target price cut by 10%:

We revised SouFun's revenue growth forecasts by 3% per cent for its fiscal 2014 and 2015 revenue growth forecasts, and we also lowered our earnings for the 2014 and 2015 fiscal year (not in accordance with US GAAP) by 9%.

The new target price we set for the SouFun stock is $16 (down 10%), it is based on the assumption that the peg value (the market growth ratio) is 1 times times (unchanged from previous assumptions), the composite annual growth rate of earnings per share between fiscal year 2014 and 2016 is 22% (previously expected to be 22.5%), In fiscal year 2014, earnings per share were $0.72 (previously expected to be $0.79). We keep the SouFun stock rating unchanged at "buy".

-Key risks:

The housing market has deteriorated further, with competition from other online real estate platforms.