UPDATE: T.H. Capital Downgrades SouFun

Tian X. Hou of T.H. Capital downgraded SouFun Holdings Ltd (NYSE: SFUN) to Hold from Buy (with no assigned price target) ahead of the company's third quarter earnings report on Thursday.

“We believe the company may have to revise down its 2014 full year guidance as its primary housing business was impacted by the weak housing market and its listing business was impacted by the conflict between Soufun and agencies,” Hou wrote. “Accordingly, our propriety data shows that both the number of projects and developers in the e-commerce segment sector also declined in the third quarter.”

Hou believes that the Chinese real estate market is beginning to show weakness, after 20 years of growth. The weak market resulted in ongoing difficulties SouFun with offline real estate agencies that began nearly six months ago.

Nine agencies in Hangzhou stopped posting on SouFun's platform in May while several agencies in Beijing, Guangzhou and Chengdu announced an alliance against Soufun's in June. In August, 19 agencies in Shanghai demanded discounted rates from SouFun. Finally, SouFun lost approximately 10 percent of its total offline agencies following a break-up with HomeLink.

As a result of the company's difficulties in maintain viable relationships, it began focusing on its own offline transaction business. Hou notes that the company continues to operate its new venture under “such negative and difficult situations” resulting in downward adjustments to estimates.

Hou expects SouFun to report $32.0 million of revenue in the third quarter, less than the $38.9 million the analyst previously expected. Full year fiscal 2014 revenue has been revised to $140.8 million from $164.7 million while full year fiscal 2015 revenue estimates was lowered to $142.2 million from a prior $181.2 million.