KE Holdings Inc. (BEKE) on Q1 2022 Results - Earnings Call Transcript
Operator: Hello, ladies and gentlemen. Thank you for standing by for KE Holdings, Inc.'s First Quarter 2022 Earnings Conference Call. Today's conference call is being recorded. I will now turn the call over to your host, Mr. Matthew Zhao, IR Director of the company. Please go ahead, Matthew. Matthew Zhao: Thank you, operator. Good evening, and good morning, everyone. Welcome to KE Holdings, Inc. or Beike's First Quarter 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. For today's call, we have Mr. Stanley Peng, our Chairman and Chief Executive Officer; and Mr. Tao Xu, our Executive Director and Chief Financial Officer. Mr. Peng will provide an overview of our strategy and business developments and Mr. Xu will provide additional details on our financial results. Before we continue, I refer you to our safe harbor statement in our earnings press release which apply 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 all this GAAP financial information as well as audited non-GAAP financial measures. Please refer to our press release, which contains a reconciliation of all these non-GAAP measures to comparable GAAP measures. Lastly, unless otherwise stated, all figures mentioned during this conference call are in renminbi. With that, I will now turn the call over to our Chair CEO, Mr. Stanley Peng. Please go ahead, Stanley. Stanley Peng: Thank you, Matthew. Hello, everyone. Thank you for joining Beike's first quarter 2022 earnings conference call. Looking back on the first quarter, we were confronted with tremendous challenges, mostly arising from short-term uncertainties. Now these uncertainties have not shaken out in this market. We are now more convinced than ever of the positive long-term market outlook, the prospect of achieving our goal and the paths together. We believe take care of customer and helping service providers, take care of customers is at the center of everything we do. We are resolved to choose the difficult led right paths while placing multiple options. The market activities have made our -- more real, more certain and it is by us to reflect on ourselves and more importantly, given us the tenacity to survive during the cold winter. Meanwhile, we must stay optimistic. In the long term, our target addressable market in the region of new home net sales will continue to grow steadily and the broad living sector will – offer new great opportunities, which is mainly upstream, only the brave will succeed. In the recent long or massive industry projections, we have united and actually embraced changes. Only the fittest will survive and with impending capabilities, accelerated speed and a strong mind-set. Our confidence is growing knowing that we have all attached to win when the market recovers. This year, as the market finally is broadened and a path to recovery, our one body housing transaction services needs to overcome the mounting difficulties in the short run and focus on resolving problems for customers and service providers as well as improving efficiency. Our total wins, home renovation and furnishing and home rental services need to take root and make its primary thing integration and rapid development with especially now that we have completed our Shengdu acquisition. We are pleased that we have already realized strong synergies, delivering initial results out of the announced our one body to win strategy at the end of last year. The powerful growth of our home renovation and furnishing services and home rental services against the big market trends further strengthens our belief that we are headed in the right direction by executing our strategy. Let's move to the details of our progress with our housing transaction services in the fourth quarter of 2022. Our housing transaction services is still undergoing a challenging time. During the first quarter, the new home market remain sluggish due to the strength of private developers due to crisis, relating impacts from governments by our policies and low consumer confidence. Meanwhile, a sign of bottom out recovery in the existing home market were interrupted by the Omicron outbreaks across various regions toward the end of the first quarter, faced with the turbulence of this external environment. We must review the market, take quick action and stay focused. Last focus on our business and organizational planning. Experience tells us that our strong strategy exists. We concentrate on the most fundamental issues, including the efficiency of our agents, making their services more professional and their retention rate higher, improving customer experience by protecting them against risks and uncertainties and accelerating receivable collections, leveraging our data strengths to optimize our services to developers and enhancing their understanding of the end users. By streamlining our operations and reducing discretionary investments, we aim to boost our efficiency and profitability. The massive market correction has impacted everywhere in the industry but also changed the overly competitive. As the battlefields becomes less crowded, we are now standing with a war chest to return to our original aspirations. We will take the time and the passions to further refine customer experience and service providers' capabilities and build upon our strengths to achieve sustainable development. At the end of the first quarter, the number of Beike’s connected stores were over 45,700, down 10% quarter-over-quarter. The number of actual stores were alone 33,000, declined 5% quarter-over-quarter. As the market continues to fund its product, we added a few new stores on our platform and strengthened existing stores while mergers. The number of industry practitioners continue to fall rapidly. At the end of the first quarter, the number of agents on our platform was 427,000 and the number of actual agencies was 381,000, both decreased by approximately 6% quarter-over-quarter. The number of active stores and agent dropped 30% and 24%, respectively, from respective peak level in mid-2021, which is in line with our penetrations, recording ‘19 resurgence in the second quarter may result in a further decline of the number of stores and agents on our platform. In addition to Lianjia, we will continue to optimize low productivity and the loss-making stores and steady fastly execute our big store model. This will also play on the number of Lianjia stores and agents and at the same time, drive a notable increase in per agent productivity serving to reduce the agent the true rates. In the first quarter, total MAUs of Beike’s app plus mini program reached approximately 39.7 million, up 6% quarter-over-quarter. We expected online traffic to grow as the market recovers. Regarding existing home transaction sources, according to Beike Research Institute, nationwide GTV of existing home sales dropped 52% year-over-year in the fourth quarter, and the GTV of existing home transaction of Beike's platform were RMB 374.1 billion, down 55% year-over-year, for which existing home sales declined 46%, outperforming the overall market. The existing home transaction volumes in some key cities were starting to bottom out in the first quarter, and the market rebound was interrupted by COVID-19 resurging in mid-March. Confronted with a series of external uncertainties we are adhering to the principle of efficiency first in our existing home business. First, we will reduce the size of the managing units of our stores and agents through more refining and a grade based management. We aim to optimize efficiency and better manage key operating metrics such as collaboration indicators. Second, we will enhance our capabilities in existing home sales with a focus on critical notes in the transaction, including the home listings, customer leads and home tools. We will leverage our Big Data and technical capabilities to find the best listing that we call Beike's pit and do our outmost maintenance, home showing and sales to -- of best listings. We will also reconstruct our best leads distribution to improve homebuyers' coverage and sales conversion. From the technical point of view and broad-view application during the pandemic boosted our efficiency after the lockdown in Shanghai since mid-March due to the COVID-19 resurgence. The weakly online leads generated in -- via streams and via home tools increased by more than 70% and 130%. Behind these achievements, with immersive virtual home tools in business and possible by our VR Technology, which transcends the limits of time and expense -- space. It has supported real-time interaction between customers and agents with sales and sales consultants on our shared screen throughout the tool, providing a more intuitive and rich experienced compared with photos, texts or videos. VR is a efficient substitute to a pile of offline operations and is a ability our peers do not have. This year, Lianjia will spearhead productivity and quality enhancement. First, we will be efficiently oriented and improve agents' per head productivity. In addition, we will optimize and discontinue low-performing stores. Senior management must personally walk into each store and engage in store level operations. For customers, we will emphasize our “Anxin” service commitments and fulfillments. Our efficiency-oriented strategic choices do not mean that we are diluting our beliefs. Transactions in Shanghai have been suspended for more than two months due to the pandemic. Faced with many choices at this difficult time, we did not waver and insisted on guaranteeing the full base pay and welfare for agents in Shanghai. Putting “admirable services, caring for agents” into action, we will brace ourselves through the low return period to reduce agent turnover, which will bring high returns in the future. We believe this is the right choice and what we consider an essential investment. Most importantly, we will uphold, as always, our business philosophy of “community friendly” and devote more in community outreach and engagement, to do what is within our capabilities for those in need. During the COVID-19 outbreaks since March, our agents have served the communities and become a key team among community volunteers. Beginning on April 23rd, volunteers from Beijing Lianjia alone provided pandemic prevention and control services 26,500 times. More than 3,000 agents in Shanghai Lianjia volunteered to combat COVID-19 on the frontlines of 1,854 communities during the lockdown. In cities such as Suzhou, agents from connected brands and Lianjia actively participated in voluntary services more than 1,900 times, helping in community pandemic prevention, testing, necessities delivery, and other services. These volunteers’ work reflects our strong bond with the community. We believe that community services will infinitely fuel our future, as more frequent touch points allow our stores and agents to truly integrate into the communities. More importantly, this is how we turn our belief of "taking care of customers" into more practical actions. Turning to new home transaction services, according to National Bureau of Statistics, in the first quarter, the overall market GTV of new residential home sales was down 26% year-over-year, marking the second largest single-quarter decline since 1999. Meanwhile, the GTV of CRIC’s top 100 real estate developers fell by 47.6% year-over-year. Against this backdrop, the GTV of new home sales on Beike’s platform was RMB192.7 billion, decreasing by 44% year-over-year. The new home market continued to decline with no signs of recovery in the first quarter, a trend delivering from that of the existing home market. The ongoing debt crisis that developers faced has made home buyers increasingly risk-averse, and slow sales lead to the further deterioration of developers’ liquidity condition. On the other hand, land auction prices fell, and the percentage of state-owned developers increased consistently. In the current period of market correction, we will strike a balance between scale expansion and risk management. First, we motivated agents to focus on low-risk projects and reduce high-risk project collaborations in the short term, while advancing the “Commission in Advance” model to ensure the collection of receivables, and accelerate sell through of high-quality projects, all together fostering a virtuous business cycle. In addition, we refined our Corporate-to-Corporate Collaboration with state-owned developers and high-quality developers to explore good incremental sales opportunities. As we boost sales standardization and scientific and refined management capabilities with our partners, we endeavor to jointly build a healthy ecosystem. On top of that, leveraging our advantage with our unique comprehensive residential housing data, we are extending our reach to the front-end of the industry value chain, to develop more services and products to help developers effectively enhance their customer research, project assessment and sales conversion. Next, moving to our progress and plans for our “two wings” business. Despite the market headwinds, our home renovation and furnishing services achieved remarkable growth in the first quarter. We also completed the acquisition of Shengdu at the end of April. The synergies created between Shengdu and Beike are clearly reflected in the significant improvements in traffic sharing, and in supply chain, delivery, and operational management. Propelled by these improvements, on a pro forma basis, assuming Shengdu was fully consolidated, home renovation and furnishing revenue in the first quarter would show a 54% increase year-over-year to RMB 860 million. Contracted sales would have increased by 63% year-over-year, driven by an 8% increase in average contract price, in addition to 50% growth in the number of contracts, which reached close to 6,500 in the first quarter. In stark contrast, the total output value of the home decoration and renovation industry declined by 25% to 30% year-over-year in the first quarter, according to China Building Decoration Association. This year, our overall strategy remains focused on building a one-stop solution for home furnishing, as we continue to leverage traffic directed from housing transaction services, innovate new retail models, and build a better place for home furnishing sales. Our core business transaction services provided strong support for home renovation and furnishing services. In the first quarter, referral customers from our core business contributed roughly 23% of home renovation and furnishing’s contracted sales, almost all will add incrementally to our top line. We expect this ratio to reach over 30% in the second half of the year. In Shanghai and Beijing, such referrals accounted for a remarkable 77% and 75% of all its contracted sales, respectively. Our progress in major cities has been especially exciting. Contracted sales in Shanghai, Wuhan, Shengdu, and Beijing increased by approximately 550%, 290%, 100%, and 130% year-over-year, respectively, in the first quarter. Shengdu’s more comprehensive supply chain and massive SKUs under management also further boosted our product diversity and scale, assisting us in achieving higher customer satisfaction and average contract price. In the future, we will leverage our Home SaaS system as a supply chain management tool, to expand the scale of bulk procurement and further reduce procurement costs while ensuring supply. With respect to project delivery, we enhanced the quality and craftsmanship of our products, and at the same time shortened the construction and delivery cycle by utilizing our online Home SaaS system in conjunction with offline management. Through systematic and scientific project management, Beiwoo’s delivery cycle has reached an industry-leading level of 98 days in the first quarter. We aim to shorten our overall delivery cycle from 130 days at the beginning of the year to 120 days at the end of the year. Meanwhile, we strive to consistently enhance customer satisfaction through ‘construction service’, smart construction site, customer NPS management and compensation measures. Moreover, our home furnishing revenue is consistently growing. In the short-run, we will continue to deliver to drive back-end sales of customized furniture, appliances and other categories with higher gross margins through our home renovation services. In the first quarter, thanks to our rich SKUs and improved sales tie-ins, Shengdu and Beiwoo’s average contract price increased by 7% and 21% year-over-year, respectively. Home furnishing accounted for 10% of total contracted sales in the first quarter, and made up 30% of contracted sales in Hangzhou flagship store. With the full integration of Shengdu, our home furnishing and renovation services have entered a more rapid development phase. We target its monthly contracted sales to exceed RMB 1 billion, and the monthly contracted sales in Beijing, Shanghai and Hangzhou to surpass 100 million each, sometime in the second half of the year. During the first quarter, our development approach to Beike home rental services became increasingly clear. Our lite rental property management services, Carefree Rent achieved ground-breaking progress with over 5,000 units acquired in the first quarter. During the first quarter, our units under management have expanded from 3 cities to 8 cities, and by 37% quarter-over-quarter increase to reach nearly 17,000. By the end of this year, we aim to have more than 50,000 units under management in our Carefree Rent model. We believe that our Carefree Rent model can transform the disperse rental properties in the market into high-quality, reliable, professionally managed, and institutionalized long-term rental properties. Meanwhile, with respect to centralized apartments, our first youth apartment project that we participated in using a “light” custodial operations approach, Beike New Youth Apartment, launched in Shanghai, Xuhui district in the first quarter. The project has a total of 2,978 apartment units, a monthly rental as low as RMB2,700, and its occupancy rate has reached 98% today. In March, we launched our Twilight service guarantee program to protect the rights and interests of both tenants and home owners. The system provides loss compensations, covers the most concerning issues such as commission, rent, and property and personal safety, thoroughly allowing quality and worry-free rental services to be truly accomplished. In the first quarter, Twilight commenced operations in Shengdu, and Shanghai, followed by deployments in more cities. Finally, I would like to thank all investors for their support. Beike was successfully listed on the main board of Hong Kong Stock Exchange by way of introduction on May 11th. This represented the sound of horns for our journey forward, and empowered us for our next destination. The substantial uncertainty we face right now reflects the challenges our business has always faced. From Lianjia to Beike, all our efforts have been centered on reducing the uncertainty of our business and providing value to the industry with sureness. We fought against the uncertainty of information with authentic listings, against the uncertainty in cooperation through our agent cooperation network, and against the uncertainty in customer choice through the optimization of our products. We reduced uncertainty in service providers’ capabilities through training, certification, and examination, and combatted the uncertainty in services through a steadfast commitment to service qualities. Our organization has a spirit, it grows more united when the challenges are greater, and at the same time more confident about the future. Therefore, the recent market changes, unprecedented though they may be, do not change who we are as an organization, and even serve to strengthen our faith to accelerate in our set direction. There is no doubt that we are being tested this year on multiple fronts. Our housing transaction services must brave the many challenges in its operations, while our two wings must build solid underlying capabilities and collaborate. Decisive actions are a must for our whole organization to streamline costs and get leaner while maintaining our vitality. Fear not the strong pass, iron-clad on all sides! We uphold our belief that as we overcome these obstacles, we will emerge stronger, with new capabilities and lower structural costs. The steps we are taking today will solidify our concrete foundation, empower our development for the next decade and sustain value creation for our customers, service providers and shareholders. With that, I would like to turn the call over to our CFO, Xu Tao, for a closer review of our first quarter financials. Tao Xu: Thank you, Stanley, and thank you everyone for joining us. Before discussing more details about our first quarter of 2022 financial results, I would like to provide a brief update of the recent housing market. During the first quarter, more and more cities have eased curbs on home purchases to support the ailing property market, after a variety of policies, with unprecedented frequency and intensity that pushed the sector into a deep chill in the second half of 2021. Those measures to boost demand include subsidies, smaller down payments, reductions in mortgage rates and relaxed rules for home purchases. The easing steps have brought some signs of recovery. According to Beike Research Institute, the decline of GTV of existing home sales narrowed to 16% QoQ in Q1, compared to 21% and 32% in the 2021 Q4 and Q3, respectively, while new home transactions remain soft, as many developers are still facing liquidity challenges. The first quarter also saw the resurgence of COVID-19 variants in many cities in China, including mounting infections in Shanghai, which went into a city-wide lockdown. With varying mobility restrictions and other local-level control measures in place, our operations in those areas have been adversely affected, under which our local stores have been closed temporarily and transactions have been disrupted. However, as we experienced in the first half of 2020, consumers are increasingly demanding higher standards of living conditions. After the outbreak of COVID-19, the demand has become even stronger. Therefore, we believe that the pent-up demand will be released in subsequent periods with the re-opening of the economy in the foreseeable future. At the end of April, China’s top leaders signaled more loosening in a bid to lift the economy. The Politburo meeting expressed support for refining of local property policies and optimizing developers’ presales funding regulations. We believe those supportive policies will revive housing market sentiment and buying demand, and home sales should be gradually rebounded. To summarize, although the market recovery was still fragmented and temporarily disrupted by COVID-19 in Q1 with muted overall transaction volume, we were able to utilize the opportunity to further optimize our execution, and lay the ground work to be better positioned for further market recovery. Turning to our financial details in Q1. Our net revenues decreased by 39.4% to RMB12.5 billion in Q1 from RMB20.7 billion in the same period of 2021, in line with the high-end of our guidance and exceeding the street consensus. The decrease was primarily attributable to the decline in total GTV of 45.2% to RMB586.0 billion in Q1 from RMB1,069.6 billion in the same period of 2021, due to the continuing downtrend of the GTV of the market for existing home transactions and new home transactions since the second half of 2021, the emergence of COVID-19 in certain regions and the corresponding restrictive measures in Q1, and a relatively high base of the same period of last year. In particular, our net revenues from existing home transaction services were RMB6.2 billion in Q1, compared to RMB10.2 billion in the same period of 2021, primarily due to a 44.5% decrease in GTV of existing home transactions to RMB374.1 billion in Q1 from RMB673.4 billion in the same period of 2021. Our net revenues from new home transaction services decreased by 40.5% to RMB5.9 billion in Q1 from RMB9.9 billion in the same period of 2021, primarily due to a 43.9% decrease in GTV of new home transactions to RMB192.7 billion in Q1 from RMB343.4 billion in the same period of 2021, which was partially offset by a moderate increase of the commission rate of the new home transactions. Our net revenues from emerging and other services were RMB0.5 billion in Q1, compared to RMB0.6 billion in the same period of 2021, primarily attributable to the decrease of net revenues from financial services, which was partially offset by the increase of net revenues of home renovation services. Cost of revenues decreased by 35.0% to RMB10.3 billion in Q1 from RMB15.9 billion in the same period of 2021. Gross profit was RMB2.2 billion in Q1, compared to RMB4.8 billion in the same period of 2021. Gross margin was 17.7% in Q1, compared to 23.3% in the same period of 2021. The decrease in gross margin was mainly due to: one, a lower contribution margin of existing home transactions resulted from a relatively higher percentage of fixed compensation costs for Lianjia agents; and two, a relatively higher percentage of costs related to store of net revenues as a result of the decrease of net revenues in Q1 compared to the same period of 2021. Operating expenses decreased by 17.5% to RMB3.1 billion in Q1 from RMB3.8 billion in the same period of 2021. General and administrative expenses were RMB1,528 million in Q1, compared to RMB2,108 million in the same period of 2021, mainly due to the decrease of provision for credit losses and personnel costs. Sales and marketing expenses were RMB861 million in Q1, compared to RMB1,057 million in the same period of 2021, mainly due to the decrease of the brand advertising and promotional marketing activities. Research and development expenses were RMB749 million in Q1, compared to RMB638 million in the same period of 2021, mainly due to increased personnel costs. Loss from operations was RMB918 million in Q1, compared to income from operations of RMB1,013 million in the same period of 2021. Operating margin was negative 7.3% in Q1, compared to 4.9% in the same period of 2021, primarily due to one, a relatively lower gross profit margin; and two, an increase of the percentage of total operating expenses of net revenues as a result of the decrease of net revenues in Q1 compared to the same period of 2021. Excluding non-GAAP items, our adjusted loss from operations was RMB450 million in Q1, compared to adjusted income from operations of RMB1,564 million in the same period of 2021. Adjusted operating margin was negative 3.6% in Q1, compared to 7.6% in the same period of 2021. Adjusted EBITDA was RMB341 million in Q1, compared to RMB2,015 million in the same period of 2021. Net loss was RMB620 million in Q1, compared to net income of RMB1,059 million in the same period of 2021. Excluding non-GAAP items, adjusted net income was RMB28 million in Q1, compared to RMB1,502 million in the same period of 2021. Net loss attributable to KE Holdings Inc.’s ordinary shareholders was RMB618 million in Q1, compared to net income attributable to KE Holdings Inc.’s ordinary shareholders of RMB1,059 million in the same period of 2021. Adjusted net loss attributable to KE Holdings Inc. was RM29 million in Q1, compared to RMB1,502 million in the same period of 2021. For the first quarter of 2022, diluted net loss per ADS attributable to KE Holdings Inc.’s ordinary shareholders was RMB0.52 compared to diluted net income per ADS attributable to KE Holdings Inc.’s ordinary shareholders of RMB0.88 in the same period of 2021. Adjusted diluted net income per ADS attributable to KE Holdings Inc.’s ordinary shareholders was RMB0.02, compared to RMB1.25 in the same period of 2021. Next, I will talk about recent updates regarding our capital markets and operation initiatives, as well as our near-term focus on corporate financials. Firstly, Beike successfully dual-primary listed on the Main Board of the Stock Exchange of Hong Kong by way of introduction on May 11. The dual primary listing -- unlike a secondary listing, which has been adopted by many other U.S.-listed Chinese firms, requires a higher threshold and stricter procedures. It also allows us to maintain our primary listing status on HKEX even under the most extreme cases, if our Company delists from the New York Stock Exchange two years later. Meanwhile, unlike a typical IPO, we didn’t issue new shares or raise additional capital by the way of introduction, enabling us to avoid dilution to our shareholders’ interests. The home-coming listing is a solution from us with full responsibility to tackle the external uncertainties and risks, and to protect the best interest of our stakeholders. Secondly, for one of our ‘two wings’ business, home renovation and furnishing services, we successfully completed the acquisition of Shengdu in late April. The combination will further leverage respective advantages from both sides, which will allow us to replicate our model more rapidly at scale to empower the industry. Shengdu will be consolidated into our financial statements since May of this year. With Shengdu gaining traction from Beike’s strong resources and support, revenues of our home renovation and furnishing services are expected to grow more rapidly in the future. Thirdly, we recently carried out personnel restructuring in early May, with a focus on middle and back offices. We executed similar initiatives for our financial service business back in Q3 of 2021 in order to be more focused on the development of our core business, incurring approximately RMB250 million in severance provisions for that period. This time, we made the really difficult choice due to the uncertainties associated with the recovery of the new home market, and the reemergence of COVID-19 outbreaks in certain cities, and based on our predictions on the mid-term market dynamics. It was a deep change that we made in a preemptive manner, and we expect around RMB430 million severance provisions may be incurred in Q2. By doing this one-off adjustment, we believe our personnel structure will be further optimized and we’ll be able to better carry on our business during the tough market. Fourthly, we believe our strong cash generation capability and sufficient liquidity will ensure the Company can navigate through market cycles and cope with fallout from the COVID-19 outbreaks and the uncertain impact from the relatively slow recovery of the housing market. As of March 31, 2022, our cash, cash equivalents, restricted cash and short-term investments were RMB50.2 billion, or $7.9 billion. The balance of our long-term cash items, mainly including long-term investments, amounted to RMB18.9 billion, or $3.0 billion. In addition, we also announced today that we propose to establish a share repurchase program under which we may repurchase up to $1 billion of our ADSs over a 12-month period, subject to obtaining of a general mandate from our shareholders at a general meeting to be convened by the Company. The move underscores our confidence in the fundamentals and long-term growth of our business. Turning to guidance for the second quarter of 2022: considering the housing transaction market is still at the early stage of recovery, and the potential negative impact of COVID-19 containment measures in certain regions, as well as the high base effect of the same period in 2021, we expect the overall market GTV of existing home sales to fall over 60% year-over-year in Q2, and the overall market GTV of new home transactions to decrease over 50% year-over-year in Q2, according to Beike Research Institute. Based on all of the above considerations, looking forward to Q2 2022, we expect total net revenues to be between RMB10 billion and RMB10.5 billion, representing a decrease of approximately 56.6% to 58.6% from the same period of 2021. This forecast considers the potential impact of the recent real estate-related policies and measures, the emergence of COVID-19 in certain regions and the corresponding restrictive measures, which remain uncertain and may continue to adversely affect our business, the Company’s current and preliminary view on the business situation and market condition, all of which are subject to change. Today, I’d like to reiterate our consistent beliefs, while we focus on weathering short-term turbulence, we are devoting more effort to developing and investing in our long-term capabilities, even if it might take time to achieve financial returns on these investments. In fact, the longer it takes and the more difficult it is, the more excited we become. Although China’s housing market has undergone deep adjustments last year and is facing uncertainties from the COVID-19 outbreaks in the first half of this year, we believe that China will eventually win the battle against COVID. In the long-run, we also believe, with the establishment of a long-term housing market mechanism, the ongoing urbanization trend, the changes in family structure, the resource mobility among city clusters, as well as the government’s emphasis on the improvement of people’s living conditions, there is a tremendous potential for us to explore, transform and upgrade in the thriving sector of better living. Starting with vertical penetration to standardize industry practices and protocols, followed by horizontal expansion to integrate the entire industry, has been our proven path to success. It may not be a shortcut, but it is a path that’s rooted in our culture of doing the right things over quick type of things. We lay full faith in it as we ignite our One body, Two wings strategy, and believe we will bring long-term benefits to the industry and our customers. All in all, we fully embrace the challenges and changes, and cope with them with determination and responsibility. We will always be self-motivated, driven by our long-pursued goal to create indispensable value for the industries. To that end, we will never stop. That concludes our prepared remarks. We would like now to open the call to your questions. Operator, please go ahead. Operator: Our first question is from Steven Tsai with Morgan Stanley. Steven Tsai: Thank you, management for taking my questions. My question is regarding the outlook. Could management share with us your view on the current market conditions and the sales trends on your platform for both existing homes and new homes in the quarter to date? Also, the pandemic has brought impact to not only just the property and essential market, but also impacting the overall employment and the consensus sentiment. In that context, how should we think about the timing and the trajectory of post-lockdown recovery? In the first quarter earnings call, you mentioned that you were expecting the new home market to decline 5% to 10%, and the existing home market to decline over 10% year on year in the full year of 2020. I'm just wondering if there are any changes to that expectation? Thank you. Tao Xu: Thank you, Steven, let me address your question. Since the beginning of this year, public policy signals have been released continuously from the top down, especially for the mortgage rate, which have fallen for nine consecutive months. In April, Nationwide first setting home mortgage rate reached lowest level since 2019. LPR and first home purchase mortgage rate has lowered to around the 4.25%. Mortgage origination cycle runs has also dropped from 73 days at its peak to 29 days in April, making the shortest mortgage approval cycle since 2009. Restrictive measures continue to be implemented at city level. From our observation I believe the major cities, tier 2 cities, including , Suzhou, etc, have all released the easing policies. The policies have been levelling up. The easing steps include relaxing the purchases restriction, reducing the down payment ratio and the issuance of home purchasing subsidies. These easing policies have been created partly below in promoting market different section, but in fact relatively limited. I would like to take Chengdu as the showcase. The lengthy measures to stabilize the market were instituted on 1 March, this means the restrictive policies imposed in the past two years all at once. That demonstrates the government's significant determination to boost the market. As a result, home sales marketing transaction volume rebounded in multiple. Nevertheless, in April due to the continuous liquidity crisis faced by the developers and the impact of the pandemic, existing and new home sales markets both began to weaken. Looking more broadly, while the easing policies were implemented as decided, the market remains sluggish for the following reasons. For example, the restrictive policies have not been loosened in cities with the greatest demand such as Shenzhen, Beijing and Shanghai. At the moment importantly, the series of market policy measures in 2021 brought about unprecedented results with mainly one thing lost, that is confidence. It depicts that crisis faced by developers has made homebuyers increasingly risk aversed. The severity and the momentum of the current downturn has ultimately affected the homebuyer's situation, with respect to the future income as well as their risk appetite. The evolving pandemic situation and the respective normalized control measures further aggravated homebuyers' feeling of affinity and made the transaction more difficult. Specifically, as the new home sales market began to pick up after Chinese New Year and the market broadened out in the first quarter, but further subsequent recovery was interrupted by the pandemic. According to Beike Research Institute, in the first quarter, the GTV of new home sales market in China fell by 50% year over year and 60% quarter over quarter. The price trend shows divergence at city level, rising steadily in first tier cities and evaporating in the second-tier cities and the third-tier cities. Beike's existing home transactions GTV dropped by 44.5% year over year in Q1. Our existing home sales volume rebounded in February and March, with month over month growth rate in March reached 45% and the sales returning to the level of gradually ‘21. The COVID outbreak since mid-March interrupted the case of the housing market recoveries as well. Regarding the new home sales market trend this is divergent from that of the existing home market. The sales momentum beginning to be lackluster and anticipated short builds didn't materialize post the . In first quarter, the GTV of top 100 real estate companies fell by 47.6% year over year. According to data from National Bureau of Statistics, the GTV of residential home sales across country were down 56% year over year, making the second largest single quarter decline since 1999. So, year over year decline in lower tier cities has been significantly larger than that in the high tier cities. Among the same trends, the GTV of the new home sales on Beike platform decreased by 44% year over year. Looking ahead, in the short run -- there are still many uncertainties in the short term, which transpire to the new home market, due to the following reasons. The first is the of cash crunch of private developers and secondly it will take more time for the easing policy to take effect and thirdly, we saw the consumers are more concerned about whether these cash strapped developers can deliver houses and the quality of these newly built houses. Number 4 is the evolving pandemic following the responsive control measures. However, in the long run we still remain quite confident because the residual demand for quality of living remains very strong. We believe that there is still and as the easing policy takes effect and the pandemic closed, the market is rebounding to recover and the transaction and will return to normal. Regarding, so your second question is actually, so resurging pandemic in many cities seems a bit this year. Although, we’ll make a significant impact on the Company's performance in the first half of this year, at the same time, we will all continue to monitor the evolving situation of the pandemic to extract the impact to our full year's performance. Since March, the COVID outbreak resurgence in most of top tier cities and the pandemic containment measure were put forward. Roughly, 60% of the existing home sales were impacted by the pandemic in Q1 and the at least 25% existing home sales are expected to be affected in Q2. As such, the pace of market recovery was delayed. In Shanghai and its neighboring cities in the Yangtze River Delta, the transaction nearly about half of one month in Q1 were affected and the transaction being at least 2.5 months are expected to be 5 in Q2. In April, 100% of the stores in Shanghai were closed. According to our conservative estimates, transactions in Shanghai will come nearly to a standstill throughout Q2. In Beijing at least 30% of transactions are expected to be impacted by the pandemic in Q2. More than 505 store are temporarily closed and more than 50% of stores temporary closed in May, which is in areas where we operate approximately 130 communities are under he pandemic lockdowns or restrictions. 50% of our new home sales project are suspended for the on-site tools. However, we'd like to reiterate the housing demand with the original demand, which will only be delayed rather than disappear as the booming market right after the post-pandemic. Based on our experience in early 2020 as well as more recently, transactions suspended during the lockdown will be completed after the pandemic subsides. Locking in this pent-up demand during the pandemic period will help us grow rapidly when the pandemic is over, which means that with the longer time horizon, the pandemic's impact on our business is relatively small. I'd like to take Shenzhen as a showcase, which went under lockdown, beginning on 13 March. In the two weeks that followed, Beike's weekly new home sales in Shenzhen experienced sequential decline of 65%. However, during the two weeks after lockdown ended in April our weekly volume increased subsequently by 400%. It was also 75% higher in the two weeks pre-lockdown, making up for almost all transactional losses incurred during the lockdown season. The decrease of demand that will be released post-pandemic will also depend on the extent of the local easing policies in various cities. This is the fact. As well the home buyer's income is sufficient and other factors. Thank you, Steve. Operator: Our next question comes from Timothy Zhau with Goldman Sachs. Your line is now open. Timothy Zhau: Thank you, management and congrats on the very solid result. My question is regarding the new home transaction business. Could management provide any breakdown between SOEs versus private developers in terms of GTV and any difference in terms of commission rate and what is the impact of SOE's concentration rate increase on your business and how its base model is going to change along with that. Also, on account receivables, also related to the new home business, does management see further need to book provisions as we see the decrease in the provision actually has a policy impact on the G&A cost in the first quarter. Thank you. Tao Xu: Thank you, Timothy. Let me address your question. Regarding first question, the state and the central government owned developers concentration ratio has been increasing, this is actual. From the land auction perspective in the first quarter, state and central government owned developers bought 71% of all auctioned land. And in terms of the sales, according to Beike Research Institute, of the top 100 developers' GTV in Q1, city owned developers accounted for 28%, representing an increase of 2% quarter over quarter and 5% year over year. Of the top 10 developers' sales, city owned developers accounted for 37%, representing an increase of 7% year over year. On the bigger platform, the percentage of the state and the central government owned developer has increased as well. The state and central owned developer’s GTV as a percentage of Beike new home sales has increased to more than 25% in Q1, from year-over-year around 28% into early of , representing a 1.3% quarter over quarter increase and about 3% year-over-year increase. From the impact of the Beike due to the increased concentration of the state and the central owned developers, we want to emphasize that regardless, whether the developer is state owned or private, there are only two factors that could impact Beike. The first is the relative commission rate and the second is better risk, these two factors largely offset one another. The trend of the increasing brokerage service penetration rate will remain unchanged. I want to emphasize on this, in the long run, regardless of whether developer is state owned or private, that face the same pinpoints in customer acquisition and have the same strong dependency of the sales channels. As such, the continuous increase in the Beike service penetration rate is certain and it will not change. Based on Beike’s data, both service penetration rate of the state-owned and the private developer are also at the same level of the rise every year. The key factors determining the Beike's service penetration rate and the commission rate is the differing of the new home project and the separation. As the cities continue to expand, new land will become increasingly distinct from the city center, which forces increased separation between the new home projects and end user. As a result, whether a developer is state owned or private, the lack of concentration and connection to the end user will continue to grow. Self-built, the sales channel have become our under the new investment norm of the so-called right arm branch of the real estate. Beike's services still are a necessity. Beike, , when it becomes collaboration with the sales channel, we are the brand of choice. This is the goal and recognition from more than 100 million families in China. It will truly help developers to effectively connect and use it and increase the sales lead, which gives us unrivaled competitive advantage under the new industry law. For the commission rate, state-owned developers commission rate is relatively lower. Similarly, there are bad debt ratio. Therefore, the impact of the higher concentrate of the state-owned developer are either problematic or is neutral. State-owned developers average commission rate is 28% lower than that of private developers owing to state-owned developers the project, they are being closed linked with the city center resulting in a low degree of separation between the project and end user. At the same time the presenting costs for state-owned developers is relatively low; hence, their requirement for the selling fees are not asurgent. However, from an operating profit point of view, I believe the accounts receivables from state-owned developers are quite low. The increase of state-owned developers will help to lower our bad debt ratio partially offsetting the impact of the reduced commission rate on the operating profit. Generally speaking, the impact of the higher percentage of state-owned developers on our profit margin is relatively neutral. Regarding your second question, we, as always, we perform very prudent accounting treatment and also book the profit position for all agent receivables and the timely effect in intellectual effort. So, in the past quarters we almost book all of sufficient provision for all of the potential risks from developers who have negative public opinion or who have some financial crisis. One more thing to mention is RMB drops. announced that the increased outflow of the US dollars- denominated senior loans was passive. Based on the principle for the prudency in accounting, we may make a bad debt provision on receivable, with the highest provision ratio. At end of Q1, the balance of account receivable and other receivables of was RMB1.2 billion, of which RMB790 million was fully covered by collection. For the remaining RMB450 million without collateral we increased bad debt provision from 20% to 85% in Q2. As a consequence of this, the new halves of senior bad debt provision adjustment of -- in Q2 could be RMB250 million. Operator: Our next question comes from Peilin Zhou with CICC. You're with us now, Peilin. Peilin Zhou: Thanks, management, for taking my question. Since Shengdu started to consolidate in April this year earlier than previous expectations, could you please share the integration process and is there any updates on this year's revenue contribution considering the tightened Covid control in certain cities in the second quarter. Thanks. Stanley Peng: Yes, this is Stanley let me quickly address your question. I actually has been mentioned a couple of the metrics as well the update during my prepared remarks and later I will give you more details. I want to just give you more details in terms of the fundamental thinkings and we truly believe all those kind of operational results based on those kinds of business philosophies as well as the thinking behind that. We truly believe between our one body housing transaction business and the two wings, new business, there are a lot of synergies between that, especially the results is sharing. For example, in the homes and transaction business, we actually had a very strong potential to continue provide a bigger potential customer referral into the housing decoration as well as other services. Secondly, in the past two decades, experience from the Lianjia to the Beike Europe, we actually has made accumulated a series of the methodologies. Especially if you look at the nature for the home decoration and finishing business, there are a couple of the features such as a extremely prolong. The participated rules are very complicated, as well as the customer's decision-making procedures are very heavy. So, all those kind of features, which we believe our experience and methodology accumulated from the housing transaction business, we can replicate those kind of experience into the new business. Meanwhile, we also accumulate a bunch of the know-how, in terms of the systematic management, data management, as well as the service commitment. We do believe by all those kinds of empowerments, we can provide a different kind of services into the housing decoration business in the future. Meanwhile, we truly believe our new business, also is which annotates -- which is used by us. We always answer questions by ourselves. If not us, who will be change of the industry. So, we do believe -- as I mentioned in the second part -- all those kind of expertise, as well as the inspiration, could be help us to continue bringing a better role in the home decoration, as well as the home rental new business part. So, we strongly recommend you, when you look at all those datas, similar like what we're sharing internally, is we want to make a balance between the speed of the growth as well as quality of the growth. We are an organization always focused on the long term. For example, for the home decoration business, we want to make a balance among the quality, efficiency, as well as the scalability. So, we look at the data. Such as for example, one per month, the overall contract revenue could surpass RMB1 billion. So, we do believe by all those kind of effort, in the foreseeable future, we can reach to all those kind of goal. In summary, in the long-term, from myself as well as the team, we are not worried about the growth for the business. But beyond that, we more look at the customer satisfaction and we look at how we can using the online substitutes as well as other technical ways to continue bring the difference into the industry. That's my answer. Thank you for your question. Back to you, Operator. Operator: We are now approaching the end of the conference call. I will now turn the call over to your speaker host today, Mr Matthew Zhao, for closing remarks. Matthew Zhao: Thank you, Operator. 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. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.BEKE Ratings Summary
BEKE Quant Ranking
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.
