KE Holdings Inc. (BEKE) on Q4 2022 Results - Earnings Call Transcript

Operator: Hello ladies and gentlemen. Thank you for standing by for KE Holdings Inc’s Fourth Quarter and Fiscal Year 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. Today’s conference call is being recorded. I will now like to turn the call over to your host, Ms. Siting Li, IR Director of the Company. Please go ahead, Siting. Siting Li: Thank you, Operator. Good evening and good morning, everyone. Welcome to KE Holdings Inc. or Beike’s fourth quarter and fiscal year 2022 earnings conference call. The company’s financial and operating results were published in the press release earlier today and are posted on the company’s IR website: investors.ke.com On today’s call, we have Mr. Stanley Peng, our Co-Founder, Chairman and Chief Executive Officer, and Mr. Tao Xu, our Executive Director and Chief Financial Officer. Mr. Peng will provide an overview of our strategies and business developments, and Mr. Xu will provide additional details on the company's financial results. Before we continue, I refer you to our safe harbor statement in our earnings press release, which applies to this call as we will make forward-looking statements. Please also note that Beike’s earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Please refer to the company’s press release which contains a reconciliation of the unaudited non-GAAP measures to comparable GAAP measures. Lastly, unless otherwise stated, all figures mentioned during this conference call are in RMB. With that, I will now turn the call over to our Chairman and CEO, Mr. Stanley Peng. Please go ahead, Stanley. Stanley Peng: Thank you, Siting. Hello everyone. Thank you for joining Beike’s fourth quarter and full year 2022 earnings conference call. Over the past two years, the industry has faced unprecedented challenges, but every winter will pass, and spring will come as promised. In January and February, people around the country quickly emerged from the pandemic. At the same time the real estate market began to recover. By the end of February, existing home sales on our platform had rebounded sharply, reaching a level close to the same period in 2021, the most active year for existing home transactions. Sales of new homes have also increased significantly year-over-year, returning nearly to the post lockdown level in 2020. As we transcend this round of market correction, our firmly-held views have been proven correct and our underlying capabilities have been validated. First, our market-neutral view and persistence in that view has been proven. As part of our digital service platform for the housing industry, professional agents must act as the counterbalance of herd mentality in up- and down- market cycles. This means, they must not blindly follow the crowd or engage in hype. Rather, they must evaluate the market objectively, multi-dimensionally and rationally. They must be stabilizers for the market and never magnifying anxiety. The market has been in a downward trend since the middle of 2021. But through it all we’ve always believed that consumers' desire for better living will not change, and the market will return to normalized level. We also see opportunities in the market recovery. Therefore, with a stable state of mind, we quickly made a series of internal adjustments to cope with short-term fluctuations and prepare for market recovery. We launched our “one body, two wings” strategy, transformed from scale expansion to quality growth, and implemented a series of measures to reduce costs and enhance efficiency. We protected the commission collection and operation security of service providers on our platform, providing them with tools and capabilities, in order to support them through the trough of the cycle. In addition, hundreds of our management members went to the front line to help win battles. A market-neutral view has allowed us to strengthen our muscles and watch for recovery when the market was in a downturn. Facing the current market in recovery, we will continue practicing our market-neutral view, acting as a counterbalance against market chasing behaviors, since significant market volatility harms the industry in the long run. We hope to facilitate a healthy and orderly market recovery. Second, the capabilities of Beike as a platform have been further validated during the large market fluctuations. We established the Beike platform in 2018, in order to open up the capabilities we have accumulated nearly 20 years to the industry. We have constantly refined our protocols, ecosystem, and digital infrastructure to further unlock the ACN network effect and the scale effect of our platform, providing support for customers, service providers, and industry partners such as developers, helping them to better interact, cooperate, learn from one another, and achieve win-win results. This round of market volatility is the first major test we have experienced as a platform. We have delivered more stable profitability than before and proven our ability to expand our business, which demonstrates our strength as a digital service platform for the housing industry. We have also prepared the momentum needed for the industry’s long-term development - high-quality industry supplies have been protected and stabilized, and the low-quality and inefficient supplies, not only on our platform, but also outside our platform, have accelerated their exits, which is a good thing for the entire industry. We proved our more stable profitability. In 2022, the national existing home market GTV fell by 31% year-over-year, and sales of the top 100 new home developers fell by 42% year-over-year. However, our annual non-GAAP net profit bucked the trend and achieved a year-over-year increase of 24%. Our operating cash inflow grew by 135% in 2022. Against the significant fluctuations in the external market, we have demonstrated the stability of profitability empowered by our platform model. We also tested out our platform’s extensibility. In 2022, the first year for us to advance our “one body, two wings” strategy, our home renovation and furnishing’s contracted sales reached RMB6.9 billion, increasing 31% year-over-year on a pro forma basis, also bucking the market trend. This result benefitted from our network infrastructure of stores and agents, our digital transformation capabilities for low-frequency, complex and heavy-decision-making industries, and our full integration with Shengdu. In Beijing, two wings accounted for more than 10% of our revenues in 2022, increasing from less than 3% in 2021, while our “one body” provided more than 90% of their customer leads. The ability of our platform to extend to a wider range of services around the sector of “living” has been initially validated, showcasing the high replicability of our industrial capabilities and our ability to meet more and more complex needs of our customers. This represented a solid step in our never-ending innovation and development. Third, our view on the accelerated arrival of the era of agent empowerment and quality service has been validated. With the accelerated exit of low-quality and inefficient supply in the industry, we expect an increase in unit store productivity in the future. The trend of large stores will become more pronounced given their wider coverage of both home listings and community customer leads, and more diversified business operations, leading to stronger risk resistance. As such, store efficiency has become a key management variable, and high-quality agents are crucial to our operations. Store owners’ abilities in store operations, team management, as well as recruiting and energizing agents have become differentiating factors in successful operations. With respect to agents, the industry will not and should not be flooded with excess capacity. In the future, the industry will enter the era of efficiency improvement of existing capacity, and agent empowerment. The productivity of higher-level agents is 2 times the industry median, which shows that the mid-level group of agents will become the most vital force in the industry in the future. We have always been and will continue to be committed to helping agents improve efficiency, obtain a decent and stable income, realise long-term employment, and pride themselves of their professionalism on our platform. Therefore, we have been firmly moving forward with our large store strategy. In 2022, we supported and empowered the reorganization of over 3,000 stores on our platform. We also consistently strengthened the professional competencies of store owners. By the end of 2022, more than 6,900 store owners completed the study in our Beike Huaqiao Academy. Moreover, we built out the store and agent ranking infrastructure with competency rating standards, which improved the management and operation capabilities of the platform and store owners, and assisted in building an agent talent pipeline. We also advanced the governance of existing and new home business conducts, resolutely cracking down on incidences of wrong behaviors. We set up a comprehensive monitoring mechanism to encourage customers, business partners and platform employees to supervise and report violations such as off-platform transactions. We also fully implemented and jointly promised with new home developers that there will be no customer information leakage, customer poaching and so on, and promoting the customer contact information to be private throughout the showing process. All these worked to enhance security in agents’ operations. While the store and agent count on our platform declined in 2022, with the number of active stores and active agents at around 37,400 and 350,000, respectively, the structure and efficiency of stores and agents on our platform continued to improve through our efforts. In the fourth quarter, the proportion of A-rated stores in cities excluding Beijing and Shanghai increased by 5.5 percentage points year-over-year, and the monthly agent churn rate dropped to less than 5% for non-Lianjia stores, and only 3.1% for Lianjia stores. Together as a group, we have gone through a difficult winter, and this experience has given us a lot of strength. Our team will be more determined than ever and become the backbone of the industry. It is also the most valuable "assets" of Beike – “one who possesses a piece of land shall have his peace of mind ". Turning to our “one body” - our existing and new home transaction services. In 2022, we transitioned to a stage of quality growth from one of scale expansion. We quickly adjusted our operations to improve efficiency and cut expenses, scaling down the P&L units for operations and management. With digital tools, we can check gross margin on a per order and personnel basis, as well as profit for each store, which encourages business teams to focus on profitability indicators as well as cultivate cost-effective mindsets among managers at all levels. Driven by these initiatives, we significantly enhanced our platform’s operational efficiency and optimized costs and expenses. Moving to existing home transaction services. According to data from the Beike Research Institute, full-year GTV of existing home sales in China were RMB4.83 trillion in 2022, dropping by about 31% year-over-year and declining by about 3% year-over-year in the fourth quarter; whereas existing home transactions GTV on Beike’s platform fell by only 23% year-over-year in 2022 and rose by 1.5% year-over-year in the fourth quarter. We outperformed the industry amidst challenges, thanks to our empowerment and retention of high-quality store owners and agents, enhancement of the ACN network effect, continuous deepening platform operations and increased user value delivered to end-customers and business partners. For example, we rebuilt our platform’s leads allocation mechanism for existing homes in 2022. The new mechanism allocates leads based on stores’ performance scores, raising the percentage of agents matched with familiar home listings by 10%. This reduced the number of unproductive actions agents took to acquire leads, allowed them to be more focused, and as such, agents provided customers with more professional services. Next moving to new home transaction services. On the market front, according to data from the National Bureau of Statistics, GTV of new residential home sales in China amounted to RMB11.7 trillion in 2022, down 28% and 27% year-over-year for the full year and the fourth quarter, respectively. GTV of CRIC’s top 100 real estate companies fell by 42% and 30% year-over-year in 2022 and the fourth quarter, respectively. In comparison, GTV of new home sales on our platform declined by 42% year-over-year in 2022 and by 26% in the fourth quarter. While our full-year GTV performance was in line with the market, we realized a write-back of our new home bad debt provisions for the year, and our DSO hit the lowest while our profitability reached a record high since our listing. These represent the excellent results of our core strategy, which is not compromising agents’ and consumers’ interests in exchange for expansion. At the same time, we proactively strengthened our risk controls, security and profitability. Specifically, we consistently iterated our developer risk evaluation system to manage business risks in a preemptive way. In the fourth quarter, Commission in Advance model accounted for 44% of our total commission, doubling from the beginning of the year. It ensured the security of agents’ receivable collection. Moreover, the average number of homes sold from projects under the Commission in Advance model was 35% higher than general new home projects, reflecting that developers’ sell-through were also accelerated. The proportion of state-owned developers continued to rise, with their projects accounting for 45% of our new home revenues in the fourth quarter. Next, moving to our “two wings” businesses. Over the past year, we validated the authenticity of our strengths and capabilities in the “two wings” industries, and further demonstrated that our “two wings” businesses are not only natural fits for our core business, but also feedback to it. 2022 was also a challenging year for the home renovation and furnishing industry. According to data from the China Building Decoration Association, the total revenue of leading home renovation and furnishing companies in 2022 decreased by about 9% year-over-year. Our home renovation and furnishing business generated contracted sales of RMB6.9 billion in 2022, rising by 31% year-over-year on a pro forma basis. Among our contracted sales, 33% was attributable to core business customer referrals. On top of this, in April 2022 we launched our new retail sales of home furniture and furnishing strategy, which leverages our full-service renovation offerings. New retail home furnishing’s contribution to our total contracted sales grew from 12% in the first quarter to 26% in the fourth quarter of 2022, further extending the platform’s business beyond low-frequency transactions. With respect to our rental services, in 2022, the number of rental units managed by our home rental services exceeded 120 thousand, with over 70 thousand units under decentralized leasing management, or “Carefree Rent”. More than 90% of this was contributed by core business customer referrals. Clearly, the mobilization and empowerment of our core business has enabled our "two wings” businesses to substantially outperform the market. Meanwhile, the broad market space of the “two wings” businesses, as well as the recognition from consumers and society, greatly boosted agents’ professional value, and more importantly, breathed fresh, enduring vitality into our organization, setting the stage of boundless possibilities for us to unleash our potential. Leveraging our digitalized transformation experience in decision-heavy industries with low transaction frequencies, complex processes and a focus on offline operations, we have been working to reshape the home renovation and furnishing industry. Through digitalization and online operations, we strove to standardize construction practices, while restructuring the home renovation construction and customized furniture delivery processes. We established a quality-based service provider management and incentive mechanism, as well as an order dispatching system, as part of our scientific management capabilities. Additionally, our Home SaaS 2.0 will also take part in these initiatives to lead and implement the industry’s digital transformation. In December 2022, 80% of our orders in key cities were automatically dispatched, our renovation delivery cycles were shortened by 5 days from previous year, and our A-rated service providers’ retention rate reached 97%. These capabilities will help us to grow with quality. In 2022, we worked even harder to fulfill our social responsibilities and be “an enterprise of the era”. As the only private enterprise selected among the first group of affordable rental housing operation service enterprises in Shengdu, we have provided more than 1,700 rental homeowners and tenants with superior leasing operation services, including leasing brokerage services as of the end of 2022. Leaving behind a year of challenges but also rewards, we are ready to embark on a new journey. In 2023, facing the recent notable market recovery, we will maintain a consistent strategy for our core business based on our market-neutral view. That is, on top of cost reductions, efficiency enhancements and risk controls, we will continue to deepen our operations and improve our ecosystem to capture high-quality growth opportunities. In 2023, we will work to enhance our long-term capabilities, which requires persistent and continuous investments in areas such as business conduct governance, services and products delivery of home renovation, and incremental efficiency enhancement of our existing pool of agents. Through these efforts, we will seek and fill the gaps between our capabilities and the needs of consumers and service providers, fulfilling our social responsibilities to be a great company in the hearts of the society and the people. Next, I would like to turn the call over to our CFO, Tao to review our fourth quarter and full year financials. Tao Xu: Thank you, Stanley, and thank you everyone for joining us. Before discussing more details about our fourth quarter and full-year 2022 financial results, I would like to provide a brief update on the housing market in 2022. In 2022, China’s housing market encountered unprecedented challenges. Affected by frequent disruptions from the pandemic, macro economy softened, and consumers’ uncertainties around future expectations heightened. These factors dampened buyers’ home purchase willingness and their ability to pay, while also impeding transaction processes. Additionally, in the new home market, consumers’ confidence in housing projects delivery hit a trough given the spillover risks among real estate developers. All of the above have greatly diluted the positive effects of favorable policies, resulting in a profound and sustained market correction. Facing the predicament, we took decisive actions and seek answers from the frontline operations, sharpening our focus on the essence of business, risk control and efficiency enhancement. We managed to achieve a strategic transformation in 2022 to "high-quality growth" from "scale expansion". Particularly, we reported a smaller contraction in net revenues compared with the market adjustment, realized significant year-over-year gross margin increase and a trend-bucking non-GAAP net income growth, effectively mitigating the impact of macro conditions especially in profitability and cash flow, further strengthening our leading position in the industry. Now let's turn to our financial details for Q4. Our net revenues were RMB16.7 billion in Q4, exceeding both the high-end of our guidance and street consensus, mainly because: First, people’s day-to-day lives, as well as existing home transactions normalized after the pandemic’s peak in some of the core Chinese cities at the end of December. Second, the existing home market in Chengdu and some cities in the Yangtze River Delta performed well in Q4, leading to a year-on-year increase of non-Lianjia existing home revenues from their low base in 2021. Third, new home sales settlement performed well in Beijing and Shanghai in Q4 under our sales conversion initiatives. In particular, our net revenues from existing home transaction services decreased by 11.8% year-over-year to RMB5.3 billion in Q4. Our GTV of existing home transactions actually increased by 1.5% year-over-year in Q4, with GTV by connected agents increased by 24.3% year-over-year in Q4, however, they were recorded on a net basis in revenues. While GTV from Lianjia decreased, as top-tier cities took a heavier blow of COVID in Q4, and they were recorded on a gross basis in revenues. Our net revenues from new home transaction services decreased by 26.8% year-over-year to RMB8.3 billion in Q4, primarily due to the decrease of new home GTV of 26.1% to RMB263.5 billion in the period. Net revenues from home renovation and furnishing were RMB2.1 billion in Q4, compared to RMB58 million in the same period of 2021, primarily because we completed the acquisition of Shengdu, as well as the organic growth of this line of business. Our net revenues from emerging and other services increased by 152.0% year-over-year to RMB1.1 billion in Q4, primarily attributable to the increase of net revenues from rental property management services and financial services. Gross profit increased by 40.4% to RMB4.1 billion in Q4. Gross margin increased to 24.4% in Q4 from 16.4% in Q4 2021. The increase was primarily due to: A, a shift of revenue mix towards the existing home transaction services and home renovation and furnishing, with relatively higher contribution margins than new home transaction services; B, a higher contribution margin for both existing and new home transaction services, as a result of effective cost control, and C, a relatively lower percentage of costs related to stores and other costs of net revenues in Q4. Operating expenses decreased by 9.6% year-over-year to RMB3.7 billion in Q4. General and administrative expenses decreased by 18.6% to RMB1,792 million, mainly due to the decrease of provision for credit loss, and personnel costs and overheads. Sales and marketing expenses were RMB1,333 million in Q4, compared to RMB809 million in the same period of 2021. The increase was mainly due to the consolidation of Shengdu. Research and development expenses decreased by 31.1% to RMB509 million, mainly due to the decrease of personnel costs and share-based compensation as a result of decreased headcount. Income from operations was RMB387 million in Q4, compared to loss from operations of RMB1,184 million in Q4 2021. The increase in gross margin and decrease in operating expense have brought about the increase in operating margin to 2.3% in Q4, from negative 6.7% in Q4 2021. Our non-GAAP income from operations was RMB1,339 million, with non-GAAP operating margin reaching 8.0% in Q4, compared to negative 2.2% in the same period of 2021. Adjusted EBITDA was RMB2,164 million in Q4, compared to RMB484 million in Q4 2021. Net income was RMB372 million in Q4, compared to net loss of RMB933 million in Q4 2021. Non-GAAP net income was RMB1,547 million in Q4, compared to RMB42 million in the same period of 2021. Turning to our financial details in fiscal year 2022. Our net revenues decreased by 24.9% year-over-year to RMB60.7 billion, while total GTV declined by 32.3% to RMB2,609.6 billion due to soft market sentiment and COVID-19 disruptions. Our gross profit reported a narrower decrease of 12.9% year-over-year to RMB13.8 billion. Gross margin increased by 3.1 percentage points to 22.7% in 2022. Our loss from operations was RMB833 million in 2022, compared to loss from operations of RMB1.4 billion in 2021. Operating margin was negative 1.4% in 2022, compared to negative 1.7% in 2021, primarily due to a relatively higher gross profit margin, which was partially offset by the increased spending in home renovation and furnishing and emerging and other services in 2022 compared to 2021. Non-GAAP income from operations was RMB2.3 billion in 2022, compared to RMB1.4 billion in 2021. Non-GAAP operating margin was 3.8%, compared to 1.7% in 2021. Our net loss was RMB1,397 million in 2022, compared to RMB525 million in 2021. Non-GAAP net income was RMB2,843 million in 2022, compared to RMB2,294 million in 2021. Now I would like to highlight the following financial highlights for the full year: Firstly, China’s real estate market experienced a severe adjustment in 2022. According to Beike Research Institute, existing housing market fell 31% in the year, while data from CRIC showed new home sales from the country’s top 100 developers tumbled 42%. However, due to our diversified business structure and better retention of high-quality service capacity, our annual GTV saw a milder fall of 32%. Thanks to the stronger monetization ability of our new home and existing home businesses, as well as the increase in the proportion of home renovation and furnishing services with a high monetization rate, our revenues declined by only 25% year-on-year, a much smaller contraction compared with the market adjustment. More encouragingly, our non-GAAP net profit saw a trend-bucking growth of 24% for the whole year of 2022 under a series of cost optimization measures. The value of the platform has supported us in achieving impressive results in profit quality management. Secondly, our “one body” business, which is the home transaction services, delivered strong performance in profitability and financial health, and achieved remarkable results in cost and expense optimization. In terms of cost control, the fixed costs of our “one-body” business fell by over one-third year-over-year in Q4, and the variable costs as a percentage of revenues dropped by around 6 percentage points year-over-year. In face of the market downturn, we also made forceful measures to scale down the P&L units for operations management, encouraging business teams to focus on profitability indicators through performance evaluations. For Lianjia, we made considerable efforts in 2022 to deepen its operations and achieved notable results. Proportion of loss-making stores declined by 7 percentage points in 2022 from 2021, and Lianjia to connected stores agent productivity ratio in cities excluding Beijing and Shanghai increased to 1.3 in 2022 versus 1.2 in 2021. Lianjia’s improvement in agent composition and efficiency also helped reduce our costs. In addition, in 2022 we continued to expand strategic collaborations with state-owned developers, with projects from these partnerships accounting for 45% of our sales in Q4, rising from 28% in Q1. The proportion was 41% for the full year of 2022. On top of this trend, we still managed to have new home monetization rate increase moderately in 2022. Although the profitability of our existing home transaction services fluctuated quarter-over-quarter due to the pandemic impacts, on a full-year basis, the contribution margin of existing home business reached 39.8%, up 2.8 percentage points from 2021, driven by stronger operating leverage due to fixed cost optimizations and higher revenue contribution from platform services. As our revenues from existing home services continue expanding, we expect this business will improve further in profitability. In the full year of 2022, contribution margin of new home transaction services reached 23.6%, up 4.4 percentage points from 2021, mainly driven by increased percentage of high-profitability projects and significant fixed-cost reductions, validating our strategy of strictly balancing risks and profits in a high volatile market. In particular, new home contribution margin climbed to 26.2% in Q4, hitting another record high since our listing, supported by incremental improvements in the new home market in some higher-tier cities. With the increases in existing home and new home contribution margin, our gross margin for the full year of 2022 expanded notably to 22.7%, up 3.1 percentage points year-over-year. Thirdly, in terms of operating expenses, while maintaining our investments in new businesses including home renovation and furnishing, our total non-GAAP expenses in 2022 declined by 20% year-over-year to RMB11.8 billion. The productivity of platform operation teams in terms of their support to front-line agents increased by 20% year-over-year by end-2022. For new home business we continued promoting “Commission in Advance” model, to ensure more secure commission collection by platform and agents, and speed up projects’ sell-through. Commission in Advance accounted for 44% of our total commission in Q4, up from 20% in Q1. In Q4, Commission in Advance accounted for over 36% of commission from state-owned developers, and 49% of that from private developers. Under such efforts, in 2022, we have a bad debt provision written-back of RMB206 million for new home business, and RMB21 million for the whole group, compared with bad debt provisions of RMB1.3 billion in 2021. This reflected our principle of adopting the most prudent accounting treatment, while emphasizing the achievements under a risk control management with a sharp focus on receivable collection and improving the sense of security of agents. Fourthly, our home renovation and furnishing business has gained considerable traction, benefiting from powerful synergies between Beike and Shengdu. Our pro-forma revenues for 2022 amounted to RMB6.2 billion. Revenues totaled RMB2.1 billion in Q4, up 13% quarter-on-quarter. Specifically, full-year contracted sales in Hangzhou and Beijing exceeded RMB1 billion each, with Hangzhou achieving city-level profitability and Beijing breaking even in the second half of 2022. Our leading growth in these top cities demonstrated our ability to achieve fast breakthroughs in scale during the direct sales stage while making notable improvements in profitability. Aided by our further supply chain build-out, quality delivery, and digitalization capabilities, we are confident that we will accomplish high-quality expansion in more cities. Fifthly, our cash position and cash flow remained robust and sufficient, and we have sound capital management. As of end-2022, the combined balance of our cash, cash-like items totaled RMB78.3 billion, or US$11.4 billion, up by RMB 1.1 billion from end-September and RMB 7.3 billion from end of 2021. Among which the combined balance of our cash, cash equivalents, restricted cash and short-term investments was RMB61.1 billion. The balance of our long-term cash-like items, mainly included in long-term investments, amounted to RMB17.2 billion. Our net operating cash inflow was RMB2.6 billion in Q4, remaining positive for the fifth quarter in a row. Moreover, we have zero deposit in the Silicon Valley Bank and Credit Suisse. We have maintained a steadfast commitment to risk control and receivable management. Cash collection from new home business has exceeded new home revenues for 6 quarters in a row, totaling RMB 35.9 billion for the whole year, with cash to revenue ratio at 1.25. New home DSO was at 64 days in Q4, shortening by 14 days from Q3, and 28 days from same period in 2021. Turning to guidance for the first quarter of 2023: We expect total net revenues to be between RMB18.0 billion and RMB18.5 billion in Q1, representing an increase of approximately 43.4% to 47.4% from the same period in 2022. This forecast considers the potential impact of the recent real estate related policies, the macro economy recovery status, as well as release of pent-up demand in 2022. It constitutes current and preliminary view on our business situation and market condition, which are subject to change. Entering Q4 of last year, policy relief initiatives were rolled out on a larger scale on both supply and demand side. In early December, COVID-19 curbs were optimized, and since then infections have quickly peaked out, driving an upturn in property market. Notably, since the beginning of this year, home prices ended sequential decline, transactions started to rebound. We think this should be viewed rationally and objectively. The recent uptick can be attributed to two factors. One is the higher sales volumes partly generated by released pent-up demand once the pandemic situation eased, which further illustrated that housing demand can only be deferred, not eliminated. The other reason is that market expectations have gradually improved against the backdrop of macroeconomic recovery and the successive introduction of supportive policies. As an eventful 2022 passed in the wake of numerous unexpected shocks, the main policy theme this year will be to press forward with a pragmatic approach to promote economic recovery and revive market confidence. Supporting for housing upgrades is one of the top initiatives for expanding domestic demand. As an enterprise, we will remain equally practical and rational, and always uphold a market-neutral view, that is, steady long-term market development is aligned with the fundamental interests of consumers, the government, and the industry. It has been and will continue to be our belief that the industry’s enduring value is built upon stable transaction volumes and prices, rather than fluctuations, as market stability leads to sustainable transactions, which accentuate the value of agents. Agents should be the counterforce to the market's ups and downs. This is our social responsibility, as well as our professional dignity. In 2023, our “one body, two wings” strategy will drive more diversified development and continued scale expansion, which pose higher requirements for our operational stability, resource allocation, and profitability. As such, our finance strategy will remain focused on the essence of business operations. On the basis of optimized costs and expenses structure in 2022, this year, we will reap profits from efficiency, support business growth, and continue to improve service quality. At the same time, we will continue to strictly control risks, balance the relationship between efficiency, receivable collection and scale growth, and promote cooperation with upstream and downstream under the condition of safe accounts receivable. Under the neutral market view, we are fully confident in the housing market’s stable development in the long run. This not only provides a stable environment for our long-term development but also offers a great opportunity for us to further elevate the quality of our operations. Going forward, we will continue to forge ahead with enduring strengths in our hearts, and face headwinds with tenacity and optimism, powered by our relentless pursuit of creating indispensable value for the vast living services sector and our society. That concludes my prepared remarks. We would like now to open the call to your questions. Operator, please go ahead. Operator: Today’s first question comes from Timothy Zhao with Goldman Sachs. Please go ahead. Timothy Zhao: Thank you management for taking my question and congratulations on the strong results for the year. My question is on the industry outlook. Could management share your updated outlook for the existing home and new home market in 2023? Especially related to the strong growth of the existing home volume in China over the past two months, can you share some colour on how much is the rebound from pent-up demand? And how the tenable do you think is the growth rate in the existing home market? Tao Xu: Recent market performance, as the uncertainty caused by COVID-19 recedes, Chinese residents’ mentality has shifted back to the pursuit of wealth security and growth from precautionary savings and risk aversion. In terms of real estate policies, there were over 1,000 stimulus policies released across the country in 2022, compared to roughly 450 tightening policies in 2021. As a result, support for a market recovery is accumulating. We saw increased policy support in December and January, when almost all the strong second-tier cities loosened their home purchase and mortgage restrictions. Among these cities, for example, Dongguan and Foshan implemented full relaxation. To some extent, these policy changes have supported a bottoming-out in the market. According to recent real estate market data, consumer sentiment toward the housing market also has significantly improved on the demand side. For existing home sales: Weekly transactions on our platform before the Chinese New Year holiday in January were close to those in July 2021. And the monthly existing home GTV on our platform in February was close to a historical high in March 2021. Among that, GTV of tier-1 cities in February was just 8.6% lower than the peak of March 2021, while GTV for stronger tier-2 cities and weaker tier-2 cities plus tier-3 and 4 cities grew 11.3% and 5.5% from the 2021 peak, respectively. Particularly, stronger tier-2 cities showed strong momentum, with Chengdu, Suzhou, Nanjing, Zhengzhou and Tianjin all exceeded the high point of March 2021 by 20%. The strength was partly due to one-time release of pent-up demand accumulated during the pandemic. For new home sales: It also demonstrated a notable recovery trend. Our new home subscription growth turned positive in January, growing 20% year-over-year. In February, our new home subscriptions increased by 148% year-over-year from their low base in 2022, reaching the level of June 2021, driving year-over-year new home sales growth since February of this year. Housing prices: Despite very strong momentum in transaction volume, fortunately, we haven’t seen significant fluctuations in housing prices. In January, prices for both existing and new homes ended a long streak of monthly declines across the country, and in February, existing home prices grew 1.6% quarter-over-quarter and still posted a year-over year decline of 5%. As an increasing number of customers listed their homes for upgrade demands amid relaxed government policies this year, the number of listed existing homes nationwide grew 10% year-over-year, the ample existing home listings kept the market’s supply and demand relatively balanced. Neutral market views: The recent rebound in transaction volume demonstrated the housing market’s high resilience and elasticity on the demand side. This short-term rebound was driven by several factors, including normalized transaction demand, one-time covering of accumulated pent up demand during the pandemic’s flare-ups, and even early release of future purchasing needs from customers who were concerned with potential housing price rise. These factors led to sales volume being built up within a very short time. Sticking to a market-neutral view, we believe the market will gradually normalize, and will enter a more stable growth stage over the long term. Since March, we have also noticed that the weekly transaction volume of existing and new home subscriptions on the platform begun to steadily normalize. About the future market: In terms of the market sustainability: Based on our analysis of top 30 cities, we expect the market to be relatively stable in the future for first-tier cities. The average floor space of houses transacted, and homer buyers’ demographics since this year were very similar to the prior three years. These transactions have been driven mainly by home upgrade and rigid demand for properties within floor area of 90 square meters. In addition, the distribution of purchases by local and non-local residents has also been stable. For second-tier cities, home upgrade demand was significantly stimulated. This drove a 3% increase in the share of transacted houses above 90 square meters, a 5% increase in the percentage of customers aged over 35, and a 4% increase in the percentage of non-local home buyers. Going forward, such market might experience volatility in the short term due to structural changes. However, with non-locals taking root in these cities, more supportive policies, and stabilizing housing prices, home upgrade demand from local residents might follow-up, and might bring solid demand support and help the market stabilize in the long run. For existing home market in 2023: Based on our neutral market views, we prudently believe that the existing home market will grow by over 15% year-over-year in 2023, with prices remain relatively stable. We believe that there is plenty of upside for the market given that transaction units of existing and new homes in China accounted for only 3.5% of total number of existing homes in 2022, and that the turnover rate for existing homes was only 0.7%, versus the normal rate of at least 1% historically. Meanwhile, we need to consider potentially unfavorable factors, such as the impacts from the global economic slowdown, growing geopolitical tensions and muted export growth on the macro-economy and housing demand. For new home market in 2023: We expect the total GTV of the market in 2023 to remain at the same level as in 2022. Housing project delivery has become less of a concern for consumers with the deployment of financing policies for developers and the improvement of their funding status, as well as the gradual resumption of project construction. In the meantime, with prices stabilizing, home upgrade demand will return back to the new home market. The new home market’s recovery will further ease real estate developers’ cash flow constraints. Recently, land auctions went well in cities like Hangzhou and Suzhou, where several private developers appeared on the land buyers’ list. Private developers’ renewed enthusiasm for land auctions in more areas is also a critical indicator. Over the past few years, China's housing market has seen great highs and lows. Looking back, short-term uncertainties are inevitable, and one mustn't be overly optimistic or pessimistic about such trends. Yet, as we navigate through the tides of market volatility and cycles, our unwavering belief in the long-term outlook for China's housing market remains steadfast. We firmly believe that against the backdrop of “housing is for living in, not for speculation,” the existing home market will increasingly take center stage, while new home operations demand a more refined approach and quality services will come to the forefront. The time for these changes is rapidly approaching. Operator: Thank you. And our next question comes from today with Citigroup. Please go ahead. Unidentified Analyst: Thanks management for the question opportunity and congratulations on the very solid results for the fourth quarter and also for the whole year. So my question would be that both the new home and existing home markets will be entering a healthier and more stable development stage in 2023. Can management share with us whether the company will dynamically adjust its strategies in response to changing market conditions, such as channel expansion and gaining more market share? Where are your target markets this year? Will you expand through Lianjia or non-Lianjia stores? What is the expansion strategy in markets where you have relative low market share such as Shanghai, Guangdong, and Fujian? How will you deal with competition with local leaders? Tao Xu: Our view on market share：We don’t operate with a market share as our KPI, the management has always been adhering to the core principle of “taking care of customers and helping service providers to be good to customers”. However, we must reach a certain scale threshold city-wise to realize the network and scale effects of our core business, and to fully benefit from the extensibility of our agents and store network as infrastructure around living services. Therefore, we need to pay attention to scale, and need to achieve sufficient scale through connecting and empowering connected stores and agents. Existing home transaction services: This round of massive market corrections has presented us with opportunities to scale faster, and we anticipate a greater number of customers will enjoy the quality service offered by Beike this year. In the past two years, the market’s correction was long and deep, resulting in significant industry supply side reductions in various regions. Still, we have better capacity retention: The number of active agents in 25 key cities even increased year-over-year at the end of 2022. Moreover, we have focused on retaining high-quality agents, which allows us to benefit more from the market’s rebound during the recovery cycle. Specific initiatives in different cities For our top-performing cities, we will continue to explore opportunities in specific market segments such as mid-to-high-end markets, suburban markets, etc. In cities with a competitive environment, we saw our business expand at a relatively fast pace starting in the second half of last year, as our better capacity retention, our business conduct governance such as customer poaching rectification, our focused operations, and our community expert training generated remarkable results. We have even bigger opportunities in cities where there is still a lot of room for improvement in our scale market share and the market is relatively fragmented. For example, in Shanghai, a trillion RMB market, our market penetration is still significantly lower than in Beijing. To expand our business in these cities, we will actively implement a series of initiatives, such as establishing more connections with high-quality service providers, investing in our brand and service quality, and strengthening operational efficiency. New home transaction services: This year we will consistently emphasize “risk aversion” as top priority as we did last year. We will not proactively loosen our risk controls or compromise business security, especially the security of agents’ receivable collection, in exchange for platform scale expansion. But we will also make dynamic adjustments depending on the market and the recovery of developers. As developers’ cash flow situation improves, their receivable payments to us will improve as well, which will lead to upgrades of their ratings in our internal system. Their improved risk ratings will allow us to expand our cooperation, and the addressable markets for our new home transaction services may also expand. Meanwhile, new home channel sales market has seen significant increase in concentration in the recent round of market correction. Our better and safer receivable collection and healthier new home business conducts gained trust from a large number of service providers and agents on the sector. They connect with us through ACN and the Fangjianghu channel, becoming the cornerstone of the continued expansion of our new home transaction services as the market recovers. Operator: Thank you. And our next question today comes from Jiong Shao with Barclays. Please go ahead. Jiong Shao: Thank you very much for taking my question. And let me add to my congratulations on the very strong results and guidance. You talked about improving efficiency of your agents and of your stores, I was just wondering, could you talk about your target, if you have any, for the stores and agents this year? And you have already improved their productivity quite a bit last year, how can you improve their productivity further from here, while not losing your strong culture and performance elements? Thank you. Tao Xu: Overall, we have no plans for significant expansion of our stores and agents. As we mentioned last quarter, our focus is on improving per store and per agent efficiency while enhancing agent income, rather than pursuing large-scale expansion. This approach will not change. Only when the income of stores and agents increase steadily can the industry retain high-quality people and achieve healthy development. Furthermore, given the current trend of a balanced supply and demand market, and the broader emphasis on “housing is for living in, not for speculation”, we do not anticipate a significant increase in industry capacity following this market recovery. Our plans for agents and stores this year include the following: Regarding to Scale. Store-wise: We plan to focus on large and high-quality stores and drive the onboarding of Fangjianghu stores for new home sales to our platform as connected stores. Agent-wise: We plan to recruit agents during the spring recruiting season in 2023, after which we expect to maintain a stable agent count. This includes increasing the proportion of mid-level agents and increasing the number of agents in a few cities with a need for scale expansion. Quality and efficiency. Store productivity: In 2023, we expect to see a significant improvement in store productivity as a result of our ongoing efforts in large stores, store and agent rankings, business conduct governance, and Huaqiao Academy. We are committed to improving management on loss-making and inefficient stores, and we believe that the inefficiencies could be temporary. Agent productivity. The general agent productivity has a huge room to improve in the long run. Beijing could be a benchmark, where our agents’ productivity is 3-4 times higher than the industry average. Lianjia: In 2022, excluding Beijing and Shanghai, Lianjia agents' productivity was 1.3 times that of connected agents, and our target for this year is to increase the ratio to 1.4 times. For Deyou and connected stores: Although we will not set a specific target for agent productivity this year, we will improve a range of operating metrics, to improve agent productivity, such metrics include: cross-store, cross-brand cooperation ratio, accompanied home tours by home listing agents, price differences between listing and transaction prices, and ACN role split ratio of one transaction. In term of Culture: We believe in the value of taking good care of the consumers. We believe in the value of sharing successful experience and infrastructure to the industry, to empower and enhance industry efficiency. We believe in the value of protecting the interests of service providers, paying commission timely. We believe in the value of improving the industry code of conduct, and help developers and all participants to work with a sense of security and fairness. We believe in the value of our hundreds of thousands of excellent service providers, who have been serving the communities for many years and established this unique moat in home services. And, we believe in the value of time. This is what we have been doing, not perfectly, but we are on our way. Operator: Thank you. And our next question today comes from John Lam with UBS. Please go ahead. John Lam: Thank you, and also congratulation for the result, so my question is regarding on the on the cost optimizations in the third quarter last year were very effective. Is there any more room for further improvement? And can the expense ratio from the third quarter of 2022 be used to infer subsequent profitability? Thank you. Tao Xu: Thank you John, for costs and expenses for “the one-body” business, we quickly implemented a series of cost reduction and efficiency enhancement initiatives in 2022. As a result, the costs and expenses for our “one-body” business were optimized to reach the 2019 level, which we believe is relatively sustainable. In terms of cost control, in the fourth quarter of 2022, the fixed costs of our “one-body” business fell by 36% year-over-year and its variable costs as a percentage of revenue dropped by 5.6 ppts year-over-year. In terms of expenses, the total amounts of non-GAAP operating expenses declined by 17% year-over-year to the same level as in 2019. The expense reduction will be more significant if we exclude the impact of the consolidation of Shengdu. Commission in Advance accounted for 44% of total new home commission in the fourth quarter, up from 20% in the first quarter. This ensured the collection of new home receivables, mitigating the negative impact of new home bad debt provisions on our expenses. In 2023, our platform’s agent productivity will see even greater improvements, and we will implement incentives to develop and retain our existing employees. We also hope to offset the costs of such incentives through continuous control of non-personnel expenses. In addition, we hope to improve agents’ productivity via technology investments to reduce their time spent on low-productivity matters, hence allowing them to get off work earlier, spend more time with their family, and contributing to further industry optimization as well as potential platform profitability improvement. All in all, our finance strategy for our “one-body” business will remain focused on efficiency. With optimized cost and expense level in 2022, we will support quality growth cost-effectively. Meanwhile, we will continue to strictly control risks and strike a balance between efficiency, receivable collection speed and scale expansion, with ensured security of account receivables, we will enhance our cooperation with partners in the upstream and downstream. For two wings business, regarding our home renovation and furnishing business, in addition to making sure its total loss ratio will not further expand, we will capture opportunities to reinforce our foundational capabilities including product, supply chain and service delivery ability, and invest in high-quality service providers. On the whole, we will reflect on some of the redundant investments we made during the last round of market growth, and while continuing to promote our business growth, strictly control costs and expenses to balance growth and profitability. John Lam: Thank you, can I have one more question, you also mention about two wings, what’s your plan regarding scale expansion and efficiency improvement for your two wings? Strategy for expansion and scale of investments? Full-service home renovation and furnishing achieved the 0 to 1 in 2022, is 2023 the critical year to go from 1 to 10? Please share with us key focuses and goals in 2023? Stanley Peng: Okay. I will answer your question, 2022 was the year our two wings were born and took root. We have taken a solid step forward in both our home renovation and furnishing business and our rental business. It was still a baby step, though, from 0 to 0.1 in most cities. On the home renovation and furnishing side, our total contracted sales bucked the trend and increased by more than 30% year-over-year, with total revenue exceeding 6 billion. In both Beijing and Hangzhou, we reached the first milestone of over 1 billion in annual contracted sales. As for rental services, we entered 13 cities in 2022, and the total number of rental units under management exceeded 120,000. In 2023, we will establish benchmark cities, achieve the breakthrough from 0.1 to 1, and make committed investments to build long-term capabilities. In 2023, our two-wing businesses will build on the current momentum in the cities we enter. We will not be pursuing comprehensive and rapid scale expansion. First, instead of focusing on short-term and rapid scale expansion, we will continue to decisively invest in our long-term capabilities, including the ability to standardize services and provide better online experience, as well as online operations of the supply chain, digitalization capabilities, product specialization for Chinese consumers, and professionalism of service providers. Second, based on these capabilities, we hope to achieve comprehensive scientific management, business leads conversion and operating efficiency improvement for home renovation and furnishing. We also expect to reduce the vacancy period for our rental units, improve consumer satisfaction, and enhance the efficiency of our service providers and our business. Our 2023 goal is to penetrate several key cities deeply and establish them as benchmarks, enabling our two wings to truly complete the breakthrough from 0.1 to 1. In 2024, we will replicate and promote these benchmarks to more cities. That’s my answer, thank you. Operator: We are now approaching the end of the conference call. I will now turn the call over to your speaker host today, Ms. Siting Li, for closing remarks. Siting Li: Thank you once again for joining us today. If you have further questions, please feel free to contact Beike’s investor relations team through the contact information provided on our website. This concludes today's call, and we look forward to speaking with you again next quarter. Thank you, and goodbye.
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Related Analysis

Barclays Analyst Sets New Price Target for KE Holdings 

  • Jiong Shao of Barclays has set a new price target for KE Holdings at $30, indicating a bullish outlook with a potential upside of approximately 76.78%.
  • Recent positive trends in the company's earnings estimate revisions and a strong consensus among Wall Street analysts suggest a significant 27.4% upside for BEKE.
  • BEKE's recent stock performance and its substantial market capitalization of approximately $20.95 billion underscore its potential for growth and resilience in the market.

Jiong Shao of Barclays has recently made headlines by setting a new price target for KE Holdings (NYSE:BEKE) at $30, significantly higher than its current trading price of $16.97. This bold move indicates a bullish stance on BEKE, suggesting a potential upside of roughly 76.78%. Such optimism from a reputable analyst at Barclays, as reported by TheFly, underscores a strong confidence in the future performance of KE Holdings. This company, known for its leading role in the Chinese real estate market through its online platform, has been a subject of keen interest among investors.

The upward revision in BEKE's price target is not without foundation. Recent developments, as highlighted by Zacks Investment Research, point towards a positive trend in the company's earnings estimate revisions. This optimism is further supported by a consensus among Wall Street analysts predicting a significant 27.4% upside for BEKE. This collective anticipation of growth is a testament to the confidence in KE Holdings' operational and financial health.

The stock's recent performance adds a practical dimension to the analysts' optimism. BEKE's shares have been trading with positive momentum, marked by a recent increase of $0.31 or 1.86%. The stock has experienced fluctuations within a day, ranging from $16.62 to $17.08, reflecting the dynamic nature of the market. Over the past year, the shares have navigated through lows and highs, from $12.44 to $20.48, showcasing resilience and potential for growth.

The company's market capitalization, standing at approximately $20.95 billion, coupled with a trading volume of 12.02 million shares on the NYSE, underscores its significant presence in the market. This financial stature, combined with the recent positive earnings estimate revisions, provides a solid foundation for the bullish outlook presented by analysts like Jiong Shao of Barclays.

In summary, the adjustment of BEKE's price target to $30 by Barclays, supported by solid earnings estimate revisions and a strong consensus among Wall Street analysts, paints a promising picture for KE Holdings. The company's recent stock performance and its substantial market capitalization further bolster the case for potential growth, making BEKE a stock to watch in the near term.

KE Holdings’ Upcoming Q1 Earnings Preview

Citi raised its price target for KE Holdings (NYSE:BEKE) to $25.20 from $24.50, while reiterating its Buy rating ahead of the company’s upcoming Q1/23 earnings, scheduled to be released on May 17.

The analysts expect the company's earnings to be revised upward due to several factors: successful execution of their strategy, changes in the housing market that favor existing home listings, and being well-positioned in the property agency services sector.

The analysts highlighted the growth in new homes and existing homes, with the latter showing significant year-on-year growth. Additionally, they expect revenue from renovation and refurnishing services to contribute positively. The company's adjusted net profit margin is expected to be strong due to reduced operating expenses.

KE Holdings’ Upcoming Q1 Earnings Preview

Citi raised its price target for KE Holdings (NYSE:BEKE) to $25.20 from $24.50, while reiterating its Buy rating ahead of the company’s upcoming Q1/23 earnings, scheduled to be released on May 17.

The analysts expect the company's earnings to be revised upward due to several factors: successful execution of their strategy, changes in the housing market that favor existing home listings, and being well-positioned in the property agency services sector.

The analysts highlighted the growth in new homes and existing homes, with the latter showing significant year-on-year growth. Additionally, they expect revenue from renovation and refurnishing services to contribute positively. The company's adjusted net profit margin is expected to be strong due to reduced operating expenses.