KE Holdings Inc. (BEKE) on Q1 2023 Results - Earnings Call Transcript
Operator: Hello ladies and gentlemen. Thank you for standing by for KE Holdings Inc’s First Quarter 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. Today’s conference call is being recorded. I would 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 or Beike’s first quarter 2023 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 statements 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 first quarter 2023 earnings conference call. During the past quarter, we have witnessed the real estate market in China, along with various other industries, rebounding from the pandemic. GTV of existing home sales in China increased by 51%, while GTV on new residential home sales increased by 7%, with sales of the top 100 developers growing by 2%, all on a year-over-year basis. Existing home transactions GTV on our platform increased by 78% year-over-year in the first quarter, and our new home sales GTV increased by 44% year-over-year in the first quarter, outperforming the industry by a great extent. In the past few years, aimed the tremendous volatility in the market, our continued investment in our ACN network and infrastructure, our persistent support for quality service providers and our efforts to shift towards higher quality, more efficient development, have enabled our outstanding performance during the market recovery process. As the external market gradually stabilizes and our organization gets stronger, we face people’s questions such as: where we can find our more growth opportunities going forward? What are the drivers? And how much upside is there in the next 10 years? Will we play defense or continue to pursue high-speed growth? And how will we allocate our significant cash position? These questions are important to both our investors and our company. Having pondered these questions, today, I would like to take this opportunity to face the future together and share my thoughts on our costs over the next decade. Most importantly, we are an organization that always seeks development because we are committed to making the industry better. Our mission gives us a great cause. Beike was established to serve our mission of “admirable service, joyful living”. It has made us who we are rather than the other way around. So, we won’t stop. Of course, our business development and growth cannot be measured with high frequency data, but need to be viewed with a 3-year perspective. Sustainable growth is not an “expansion”, nor “scale”. Rather it arises from customers and their unmet needs. In the past, our initiatives such as transparent transactions, authentic listings, full commission refunds for failed transactions, and the protection of secured transaction were all originated from the question- “which needs in the housing industry have not been met? Meeting these needs requires us to think big and think far. At this point in time, customer demands in the housing industry are far underserved. Customers’ demands for better living, including the quality of homes, quality of home renovation and furnishing products and services, and a better home rental experience, remain largely unfulfilled. These are real needs, which will provide us with significant room to grow in the future. To achieve sustainable development and growth, the key is to improve our capabilities. First, our development will be built on our stronger agent collaboration network, which forms the foundation of our infrastructure, holding quality as a prerequisite and home listings at its core. A series of rules and mechanisms empowers seamless collaboration of brands, stores and agents within this network. Our ACN’s core underlying asset is our customers’ trust in agents. We believe that rule-based competition for quality service among service providers will offer customers higher transaction efficiency and enhance their service experience. In the future, our ACN can include additional roles and cover more links along the housing ecosystem value chain, which translates to a huge potential for innovation in the network. As such, the most critical foundation for our development is to establish and maintain the connection between the ACN and stores, as well as ensure collaboration quality while increasing customers’ trust in ACN, altogether making our ACN stronger. Second, development comes from rise of high-quality brands. Brands are built on commitment to customers and their trust, as well as an organization’s ability to create emotional connections with its customers. In the future, I believe virtuous competition will empower high-quality brands to connect and aggregate more outstanding stores and agents, which in turn will help foster stronger capabilities within the ACN network to improve service providers’ efficiency, thereby taking their incomes to the next level. Third, development is also propelled by the enhancement of service providers’ efficiency that centers around quality. For 20 years in the past, we benefited from the tailwind of rapid market growth. The main development course of the real estate brokerage industry was about achieving scaled growth with quality as prerequisite, whereas fundamental industry efficiency did not improve substantially given the average transaction per agent has been hovering at 0.3 per month. Looking at the next ten years, we think we will see a shift to enhanced efficiency with quality as a core focus. We firmly believe that this is the right path even though it is difficult, as quality improvement deliver a better customer experience, and efficiency gains drive agents’ success, ultimately resulting in the success of stores, brands, our platform and industry as a whole. On the store front, the trend toward large stores is inevitable going forward. Only large stores can bring high incomes to store owners and agents while raising the operational threshold. We need to invigorate store owners’ entrepreneurial spirits and furnish them with support to strengthen their multiple and large store management capabilities. Meanwhile, we will need to stimulate high-quality agents’ motivation to help them grow, as well as nurture and retain them, which also serves as a crucial measure to enhance store efficiency. On the service provider front, in the residential service industry where agents and stores are at the core, the rising personal value of service providers is also an irresistible trend. With the potential for lifelong careers, the value of service providers in our industry grows over time, and they deserve more in terms of income and rewards. Their growth and development also lead to better experiences for customers, which is why we are committed to prioritizing the rights and interest of service providers. Our next step is to improve the working environment and the mindset of service providers by committing to the institution of initiatives that ensure their well-being with the focus on areas such as rest and vacation time. There are many opportunities for improvement and progress in this industry, and we are determined to make that happen. In terms of efficiency improvement, the adoption of scientific management and technological applications have consistently driven progress in the industry, and we will continue to empower future efficiency gains. Scientific management has been a crucial component and way of thinking for Lianjia to overcome growth bottlenecks in the past. Through a series of tools and measures that we have accumulated, we can discover the laws dictating events, to guide our actions and ensure we achieve our goals. The ability to balance both long-term and short-term objectives is also crucial during the process of development. We believe that comparing “scientific management” with “care for people” will help us reach our next level of success. In addition, our organization has stemmed from a combination of service-oriented and engineering-oriented genes, and the integration of industry practice and technology application are the underlying driving forces for our continuous development. The emergency of new technologies, such as AIGC, is also poised to significantly improve industry efficiency and make high-quality service providers even more valuable, propelling us to new heights. Obviously, we do start with taking care of customers. Reflecting on our past success, we recognized that our ability to dedicatedly address customers’ pain points has been integral to our growth, and customer satisfaction is the foundation of our success. The optimal choice generally benefits both customers and service providers. Taking authentic home listing as an example, it’s clear that such listings are precisely what our customers need. As we persist in promoting these listings, customers gradually progress from doubt to belief, fueling our service providers with a tremendous sense of motivation that propels the entire team to improve their abilities. We apply this same mentality across our organization, from the existing home business, new home business, home rental business, and home renovation and furnishing business to broader housing sources. In each cases, this mindset has inspired us to develop our capabilities, earn customer recognition, and foster our own growth, opening vast possibilities for expansion. Every time we embark on a new venture we remain true to our original aspiration: we strive for development and growth in order to meet our customers’ needs and resist tendencies geared towards entropy increase; we reduced cost and increase efficiency to avoid large company syndrome and improve our operational capabilities. We’ll firmly invest in our foundational capabilities rather than make quick profits and expand our scale in a haphazard manner. All of these efforts are aimed at providing the best possible service to our customers and creating lasting value through transcending market cycle. We are also focused on shareholder returns to both rewards and align ourselves with like-minded investors who share our long-term vision and will stay with us through the market cycles. Finally, what makes our organization different is the cultural shaped of our group of great people, who have been inspired by customers and service providers. Behind this culture, there is a mission that drives us to keep motivated forward: “Admirable Service, joyful living”. We aim to help service providers understanding and pursue what is right and to have customers to give meaningful feedback to our service providers. Our value lies in harnessing “what is right” to motivate “positive feedback” and to have to reward “what’s right”. We are genuinely inspired and moved by this. We firmly believe that our presence in this industry represents a difference for industry practitioners and customers alike. This difference will spread and influence more people, and together, we will climb to the top of our next mountain. Next, I would like to turn the call over to our CFO, Xu Tao, to review our first quarter financials. Tao Xu: Thank you, Stanley. Thank you everyone for joining us. Before going into the detail of our first quarter financial results, I would like to provide a brief update on housing market in the first quarter. Since the beginning of this year, the real estate market has staged a significant recovery, bolstered by a favorable policy of “preventing risks and supporting demand”, coupled with the concentrated release of pent-up housing demand from the pandemic. Notably, the existing home market saw a strong pick-up with housing prices beginning to narrow their year-over-year decline and showed a return to quarter-over-quarter increase from the sequential decline in previous periods. The new home market also experienced a moderate recovery with the consumer confidence improving. As effects of the one-off release of pent-up demand and the seasonality wore off, starting in March, market transaction volume began to normalize from an excessively high level. Benefiting from relatively stable scale of our ACN network during the market’s protracted slump and the effective promotion of refined operations for stores and agents, we proactively capitalized the market recovery tailwinds and the seasonal dividend as the market rebounded at the beginning of the year. As a result, our GTV growth significantly outperformed the market. According to Beike Research Institute, in first quarter, GTV of existing new home sales in China increased by 51.2% year-over-year, while the existing home transaction GTV on Beike platform grew by 77.6% year-over-year. Data from National Bureau of Statistics also showed that the GTV of the new home sales in China increased by 7.1% year-over-year, while the new home transaction GTV on Beike platform rose by 44.2% year-over-year. Our net revenue in the first quarter reached RMB 20.3 billion, representing a 61.6% increase year-over-year, beating both the high-end of our guidance and the street consensus. The increase was driven by our highly efficient operations, stable monetization capability and organic growth in our home renovation and furnishing services. Our gains were further bolstered by the better-than-expected market recovery. Moreover, in the difficult environment since the second half of 2021, we implemented the staunch cost and the expense optimizations and consistently refined our operations, which made our organization more efficient and agile. Those effort empowers us to deliver strong performance in profitability during the market downturn. They have also allowed us to start this year in a position of the strength, gaining great benefit from our increased operating leverage. Therefore, we reported continued improvement in multiple financial metrics. Our Q1 gross margin was at 31.3%. GAAP net income reached RMB 2,750 million, while non-GAAP net income jumped to RMB 3,561 million in the quarter, compared with RMB 28 million in the same period of 2022, and an increase of 137% compared from the first quarter of 2021 with a similar revenue scale. By segment, our net revenue from existing home transaction services increased by 49.3% year-over-year to RMB 9.2 billion in Q1, primarily driven by a 77.6% increase in GTV. Among that, existing home transaction GTV from Lianjia rose by 43.2%, of which the revenue was recorded on a gross basis, while GTV by connected agents jumped by 117.9% year-over-year in Q1, fueled by the notable property market recovery in many Tier-2 cities, of which the revenue was recorded on a net basis, resulting in the slight smaller growth of the existing home revenue compared to GTV. Our net revenue from the new home transaction services increased by 42.2% year-over-year to RMB 8.4 billion in Q1, thanks to our outstanding sell-through capability, vast customer base from the existing home transaction and the operation integration of the new home and existing home business, faster new home settlement by Lianjia, and the targeted market coverage in first- and second-Tier cities that were first to recover at the beginning of the year. Particularly, cooperation with the state-owned developers account for 46% of our sales revenues. Benefiting from the effective coordination with home transaction services, the contracted sales of our home renovation and furnishing business totaled RMB 2.7 billion, up 108.2% year-over-year and the revenue amounted to RMB 1.4 billion, rising by 54.3% year-over-year both on pro-forma basis. Our net revenue from emerging and other services increased by 222.1% year-over-year to RMB 1.3 billion in Q1, primarily attributable to the increase of net revenues from rental property management services and financial services. Our most streamlined cost and expense structure has led to a significant increase in single quarter profitability amid the substantial recovery of the market. In particular, the contribution margin of existing home business jumped to 49.0% in Q1, up by 11.3 percentage points from the same period in 2022 and 11.9 percentage points from Q4, benefiting from the notable revenue increase, the year-on-year decrease in the fixed costs, and a relatively stable variable cost ratio. The contribution margin of the new home transaction services reached 27.0%, up by 8.8 percentage points from the same period of 2022, mainly driven by the increased percentage of the high-profitability projects and the more streamlined personnel structure. Therefore, driven by the higher margins from the existing and the new home business, increased proportion of home renovation and furnishing services with a higher margin, as well as a smaller percentage of the cost reached to store and other cost of the net revenues, gross profit increased by 186.1% to RMB 6.3 billion in Q1. Gross margin increased to 31.3% in Q1 from 17.7% in the same period of 2022. Our GAAP operating expenses increased by 7.5% year-over-year to RMB 3.4 billion. Among that, sales and marketing expenses increased by 50.3% to RMB 1,294 million, mainly due to the consolidation of Shengdu and the organic growth of home renovation and furnishing services. General and administrative expenses increased by 6.1% to RMB 1,621 million, mainly due to the increase of the share-based compensation expenses. Notably, with the healthy cash collection of the new home business, we have a bad debt provision written-back of RMB 127 million in Q1. Research and development expenses decreased by 39.0% to RMB 457 million, mainly due to the decrease of the personnel cost and SBC as a result of the decreased highcount. While maintaining our investments in the new business, including the home renovation and furnishing, our total non-GAAP expenses in Q1 was at RMB 2.61 billion, representing a notable decrease both year-on-year and quarter-on-quarter. Income from operations was RMB 2,987 million in Q1, compared to loss from operations of RMB 918 million in Q1 2022. The increase in gross margin and improved operating leverage have brought about the increase in operating margin to 14.7% in Q1 from negative 7.3% in the same period of 2022. Our non-GAAP income from operations was RMB 3,830 million in Q1, compared to non-GAAP loss from operations of RMB 450 million in the same period of 2022. Non-GAAP operating margin increased to 18.9% compared to negative 3.6% in the same period of 2022. Q1 net income was RMB 2,750 million, compared to net loss of RMB 620 million in the same period of 2022, and a net income of RMB 1,059 million in Q1 2021. Non-GAAP net income was RMB 3,561 million in Q1, compared to RMB 28 million in the same period of 2022. Our cash position and cash flow remained robust. As of end-March 2023, on the basis of one-time payment of bonus before the Spring Festival. The combined balance of our cash, cash-like items totaled RMB 85.3 billion, or $12.4 billion, up by RMB 7 billion from the end-December and RMB16.2 billion from the end of Q1 2022. Among which the combined balance of our cash, cash equivalents, restricted cash and short-term investments was RMB 66.6 billion. The balance of our long-term cash-like items, mainly included in the long-term investments amounted to RMB 18.7 billion. Our net operating cash inflow was RMB 7.6 billion in Q1, remaining positive for the 6th quarter in a row. Under our stringent receivable management, our cash collection from the new home business has exceeded new home revenue for 7 quarters in a row, totaling RMB 8.34 billion in Q1. New home DSO was at only 59 days in Q1, further shortening by 5 days from Q4, and 93 days from the same period of 2022. Turning to the guidance of the second quarter of 2023. We expect total net revenues to be between RMB 18.5 billion and RMB 19.0 billion in Q2, representing an increase of approximately 34.3% to 37.9% from the same period of 2022. This forecast considers of potential impact of the recent real estate-related policies and the macro economy recovery status. It constitutes the current and preliminary view of our business situation and the market conditions, which are subject to change. The past 3 quarters represents three distinct market conditions. In the third quarter of 2022, the market was on the path of the recovery, despite the impact of the unusually hot summer, recurring pandemic outbreak in sporadic cities, and the financial strains in the new home market. Based on historical trends, we believe the market has returned to 80% of its normalized level and we recorded a Non-GAAP net income of RMB 1,888 million during the quarter. The fourth quarter of 2022, nevertheless, was extremely difficult. The market was hit hard by the home buyers’ low purchase intentions, and the widespread pandemic outbreaks across the country. Facing these formidable challenges, we demonstrated resilient profitability with a Non-GAAP net income of RMB 1,547 million. Moving to the first quarter of 2023, the market become excessively heated driven by the 3 factors: the regular home purchasing demand, the concentrated release of pent-up demand has been suppressed by the pandemic, and some homebuyers’ early enter into the market for the fear of the rising prices. These led to the market’s rapid rebound at the start of this year. In this extremely hot environment, we recorded a Non-GAAP net income of RMB 3,561 million during the quarter. In these 3 consecutive neutral, extremely cold and hot markets, we maintained the remarkable profitability, which clearly demonstrates the value of our platform. We do not favor overheated markets, nor do we fear excessively cold ones. Rather, we prefer the markets that prioritize “housing is for living in, not for speculation” where supply and demand are balanced, enabling us to showcase our value and achieve sustainable development. Particularly, in the first quarter, Beike and the platform agents remained objective and rational, becomes a counterforce to the market boom. In terms of our financial strategy, building upon our core business’ fully optimized cost expense structure, we will continue to enhance the quality of our operations and the foster “effective” growth. Products non-industry capabilities that have survived the market’s deep adjustments, we will connect them via targeted the regional resources allocation, to improve the collaboration quality, attract the industry to compete for excellence, and improve the agents’ productivity and stores’ efficiency. Regarding the new home business, we will continue to strictly abide by our management bottom line and aim for appropriate scale expansion based on the balanced operations, financial health and risk control, and in accordance with the market conditions. Meanwhile, we will make reasonable and appropriate investments in sales and marketing based on the pace of markets’ recovery. We will also decisively invest in the application of cutting-edge technology. Regarding our two wings business- home renovation and furnishing, and the rental property management services, we are not in pursuit of fast scale expansion that can be done in the short-term. Rather, we expect to validate our unit economy model at some core cities this year and build the benchmark cases to replicate it in the larger scale. In addition, we are more determined than ever to invest in our long-term capabilities, including product development capability, supply chain, and the service cost improvement, as well as continuously enhance the service providers’ professional competencies and elevate customer satisfactory. Overall, we will be more proactive with our initiatives that contribute to long-term growth and a great vision, similar to what we did before with our commitment for the transparent pricing and authentic listing. We will adamantly invest in our people, our growth and our service quality. We will also endeavour to explore the application of new technologies, such as AI, to operational scenarios in order to tap into more productivity potential of the front-line service providers under the industry in general. The journey of 1,000 miles is made one step at a time. In vast market of residential services, we will fortify our foundation with quality at our core, make relentless efforts to improve the service providers’ working environment, and bring a better housing service experience to customers. With respect to recent government guidelines, we carried out studies right away and we’ll make unremitting efforts with all parties to serve customers for “joyful living”. This concludes my prepared remarks. Now we are open for questions. Operator: [Operator Instructions] If you’re going to ask the question in Chinese please follow with the English translation. Today’s first question comes from Harry Chen with Citigroup. Please go ahead. Harry Chen: This is Harry Chen from Citigroup. So thank you management for the opportunity and first of all, I want to congratulate on extremely solid results in the first quarter. So my question is regarding the general housing market. We see that as a housing market was in great shape in the first quarter of this year. Have there been any structural changing in the market? And a series of leading indicators since March seem to show both the existing and the new home markets are relatively soft. What are the company’s observations of the latest market conditions and how to interpret this leading indicator? What’s the company’s view about the future trends of the existing and the new home market and how will the market performance differ among different CPPs? Thank you. Tao Xu: Regarding your first question, in the first quarter, the release of pent-up home transaction demand, along with the support of easing policies, contributed to a significant rebound in China’s existing and the new home market, followed by a normalization of the market. Overall, the China housing market experienced moderate recovery, with new characteristics including: the demand for home upgrades becoming a solid driving force in the market, and existing home as the major market contributor, and the second-tier cities as the strongest players. In particular, in the first quarter, the GTV of existing home sales in China increased by 51% year-over-year, but was 25% lower than that in the first quarter of 2021. The GFA [gross floor area] of the new home sales grew by 1.4% year-over-year, the first year-over-year increase in past 6 quarters, while its GTV rose by 7% year-over-year, the second highest year-over-year growth in history. Price-wise, existing home price ended their 17 consecutive quarters of decline and they grew by only 0.4% quarter-over-quarter, with the year-over-year decline narrowing to 5.5%. New home prices increased by 0.7% sequentially in the first quarter, with year-over-year decrease narrowing to 1.4%. Home upgrade demand was the main contributor to the market for the recent round of recovery and future market growth. These demands comes from the people that already own at least one home and are looking for the upgrade. The proportion of the home upgrade demand exceeded 70% in the first quarter of this year, up 7 percentage points from 2019. Notably, over 45% of this demand was for the first-time upgrades. The implication of this increased demand of the market as follows: first, clients with the home upgrade demand are bound to enter the existing home market first. As most of the new home channel sales customers come from the existing home market, new home recovery is predicted on the rally of the existing home market. Sencond, for clients, especially for the home upgrade demand is rigid. They are usually time-sensitive, but they are facing the life-changing events, such as getting married, or have children, or for the children’s education. As such, that demand cannot be met by new homes, which are mostly for delivery housing. This is a positive for the existing home market and move-in-ready new homes. Third in the market donated by home upgrade demand -- supply and demand in the market changes simultaneously. Higher demand for the home upgrade naturally leads to more existing home listing without putting downward pressure on the housing prices, cities with the higher increase in the home listing, also have larger transaction volume and higher prices. For example, at the end of the first quarter, home listing in Shenzhen, Hangzhou, Changsha, Wuxi and Chengdu rose by over 20% quarter-over-quarter, and their transaction volume all grew at the higher rate, with a steady price increase. Forth is due to a longer decision-making process and the higher transaction complexity, home upgrade transaction have the higher requirement for the professional and quality housing services, which will promote industry upgrades. So in the most recent round of market recovery, the existing home market significantly outperformed to the new home market. The structural support of the home upgrade demand and delivery issue of the new home both made home buyers more inclined to purchase existing homes. As a consequence of this, the existing home market recovered in January, ahead of the rally in new home subscriptions in February. Existing home transaction in various regions also accounted for a rising share of the total housing transaction, up from 32% in 2020 to 38% in the first quarter of this year. The housing market recovery of the second-tier cities was more pronounced. In the first quarter, GTV of existing home sales in the second-tier cities on our platform increased by 120% year-over-year, far higher than the 40% and 105% in the first-tier and the third-tier cities, respectively. The greater rebound in second-tier cities is attributable to a low base in 2022, better local industry structure and infrastructure, stronger population appeal, and the more relaxed mortgage and home purchase restrictions. With the new home market, marginal sales recovery in the first quarter, high quality private developers have regained some of their enthusiasm for the land acquisitions in core cities. The proportion of land acquired by the private developers, in terms of value, recovered from 17% in 2022 to 32% in the first quarter of this year and the land auction premium rebounded to 3.2%. Regarding your second question, we would like to say that the market from January to May, we not only need to prevent selective blindness to the difficulties ahead due to our belief, but also prevent ourselves from closing our eyes to any improving business data right in front us due to the pessimism, lest we miss the opportunity of the market. Since March, the market has indeed experienced a certain degree of adjustment, but we need to remain calm during the significant market upswings, and refrain from being overly bearish during the market corrections. The market correction has partly returned to normalcy after the release of the pent-up demand. It also reflects the intensification of games and the bargaining between the homeowners and the buyers, which slows down the transaction pace. The market rebound in the first quarter quickly increased the homebuyers’ expectations for the higher housing prices, which are well ahead of the macroeconomic growth as the homebuyers expected income improvement. The disparity in price expectations combined with more listings in the market from relatively new houses intended for the home upgrades, reinforce the back and forth between the homeowners and buyers, slowing down the transaction pace. Nevertheless, we believe the current market adjustment is within the range of normal seasonal adjustment. The transaction volume after adjustment remained at a relatively higher level. In April, existing/new home subscriptions still grew by over 40% year-over-year. Meanwhile, the market stabilized beginning in May. Therefore, we are still in a stage of moderate recovery. We believe the future market will be generally stable, but it will take more time to determine the certainty around the pace and the magnitude of the market recovery. We continued with the positive policy environment, improved housing price expectations, and the recovery of the residents’ income expectations, as well as the progress on the timely delivery of the pre-sold homes will all provide support for the continuous market improvement down the road. On the policy front, a series of supportive policies that began at the end of 2021 has underpinned recovery of the housing market in the first quarter, which acts as an anchor of the China’s macroeconomic development. Policy relaxations, with the room for the improvement and the deepening, will drive further economic recovery. The easing policies have recently spread to the first-tier cities and core regions of the second-tier cities. Since March, cities and the districts of Shenzhen, Guangzhou, and Beijing have relaxed their policies, and the strong second-tier cities like Hefei have narrowed the scope of purchase restrictions. Targeted easing policies in the first-tier cities and an increasingly relaxed policies in the second-tier cities, and the third cities we’ll open up the home upgrade transaction channels to better fulfill home upgrade demands, further the lifting of market confidence. On the residence, the housing expectations need to continuously improve. According to survey data from the Beike Research Institute. In the first quarter, the share of respondents expecting housing prices to rise increased by 9 percentage points quarter-over-quarter, which may provide a support to subsequent market economy. And at the residents’ income expectations need to improve as well, just cannot be realized immediately after policies got relaxed. We have to take long time and with patience. The Central Bank’s first quarter data already shows the improvement in residents’ employment and income expectations. And also for the delivery issue of presold of new home and the developers’ debt default continued to exert pressure on the recovery of the new home market. But we did notice that deliveries of presold houses have been improved this year. As long as these factors continue to improve, the market’s moderate recovery momentum will be sustained. Going forward, the existing home market will continue to outperform the new home market, particularly in the first and the strong second tier cities. This is because the cities have greater room for the policy implementation and the higher proportion of existing homes, relatively limited the new home supply and inventory, as well as a stronger attraction for the population. Thank you, Harry Chen: Thank you, management. Operator: Thank you. And our next question today comes from Eddy Wong with Morgan Stanley. Please go ahead. Eddy Wong: Thank you, management for taking my question and congratulations on the very great results. So, my question is that Beike has significantly outperformed the market across different business lines in the first quarter. Could you please share how the company achieved this very strong results and performance, and how should we think about your performance relative to the overall market going forward? Thank you. Tao Xu: Thank you, Eddy. In first quarter, our company significantly outperformed the market across all of our business lines. Our GTV of existing home sales increased by 78% year-over-year in the first quarter compared with the market’s growth of 51%. And our market penetration rate increased by 6.6% quarter-over-quarter. And our GTV for new home sales increased by 44% year-over-year, compared with the market’s 7% increase, and our penetration rate increased by 1% quarter-over-quarter. Firstly, we need to oversize this our significant show-run outperformance, which is similar to what happened in 2 years ago. That is the second quarter of 2020 following the pandemic outbreak, and the way we expect a return to normal in this year as well. In Q2 2020, our market penetration of existing and the new home increased by 6% and 2%, respectively, both quarter-over-quarter. In the third quarter, as the market has normalized, our market gain has also returned to 1% increase quarter-over-quarter. Meanwhile, the difference in the sales recognition may also be one of the reasons why our data significantly exceeds market. The existing home market data is based on the online registrations when transactions are closed, while our data is based on the contract signing, which leads to the online closing date by around hald-a-month to one month. Excluding the above factors, our first quarter performance also demonstrate our strong ability to capture the market opportunities during the recovery cycle. Firstly, we supported and retained the high-quality service providers during the market downturn, which has enabled us to reap the benefit of the market economy. Our view on the future market is that those who can attract the existing and the high-quality service providers will be the ultimate winner. In the first quarter, we took advantage of the recruiting season and the exit of many other players in the industry to grow our coverage of existing stores and agents. As a consequence of this, we ended the 5 and the 6 consecutive quarter of decline in the number of stores in the agents, respectively. Our number of active stores increased by around 6% quarter-over-quarter to over 39,600, and the number of our active agents increased by as much as 18% quarter-over-quarter, crossing the number of agencies from 410,000 mark. Secondly, our service provider did not lie idle during the market downturn. They continued to improve our professional skills and the conducted to community-friendly services during the pandemic, which earned them into long-term trust of the current and potential customers. As the market recovers, those better-known professionals become customers’ go-tos. In two-year period of 2021 to 2022, 4,600 store owners completed courses in our Beike Huaqiao Academy, while agents on our platform completed over 24 million hours of professional training through various online and offline courses. Investments in enhancing the capability and accelerating the growth of both agents and the store owners will yield benefits that transcend the market segment. We also iterate and refined our business operation strategy. Before 2022, we focused more on growing our number of store agents. Beginning this year, we will limit a number of new stores and agents. leveraging our analysis of the different business districts, only allow the new addition in non-saturated areas. Meanwhile, we will identify the problem in different areas and operate in a profitable manner to better support and empower store owners and the agents. Our capabilities in this existing home market enable us to succeed in the new home market. More than 50% of our new home customers come from this existing home market. Our proficiency in existing home sales support our ability to better seize the business opportunities as the new home market recovers. In cities, where we hold advantage in the existing homes, we can expand our reach more significantly in the new home market. For example, in the first quarter, our new home sales market penetration in the cities such as Wuhan increased by more than 5% quarter-over-quarter. Finally, in the house ecosystem, in both existing home and new home markets will help establish a virtual business cycle, naturally leading to a sustained market penetration gains. Regarding our home renovation and financial services, the overall renovation market rebounded in the first quarter along with the real estate market. The contract sales of the Beike home renovation and furniture services grew by 108% year-over-year on a pro forma basis. In particular, referrals from our core business contributed to over 40% of total contract sales. Leading cities such as Beijing have been witnessing a continuous improvement in the single city operational ability, with an increase in the volume of the renovation orders surpassing that of the existing home transactions, setting the new record of market possibility along with emerging cities gradually gaining momentum, contributing more to our performance. In summary, while our market penetration will be normalized in the short-term, in the long run, we will consistently expand our reach to wider residential services, which provide ample for growth with high certainty. Thank you. Eddy Wong: Thank you, Tao Xu, and congratulations on the results again. Tao Xu: Thank you. Operator: Thank you. And our next question comes from Timothy Zhao with Goldman Sachs. Please go ahead. Timothy Zhao: Hi, Stanley, Tao Xu and team. Thank you for taking my question and congrats on the very strong results. My question is about the efficiency improvement, as you mentioned in your remarks. And just wondering if management see any opportunities for further efficiency improvement after very strong Q1 results, and how do you plan to achieve them? And additionally, are there any specific measures that management have in their mind for this year to further improve the quality of the services to customers? Thank you. Stanley Peng: Okay. Regarding efficiency improvements, we have already mentioned some idesa in our prepared remarks. The key to focus on customer experience and enhanced capabilities of stores and agents, while improving our platform ecosystem and mechanisms. We have implemented many initiatives to greatly enhance the customer experience over the past 20 years. This has helped us to win customer’s trust and become a top choice for both customers and service providers through initiatives such as transparent pricing, authentic listing, and housing dictionary. And our commitment to the protection of secure transactions through these efforts, we have addressed many key pain-points that customers face on the transaction side, and significantly improve the industry ecosystem as well as efficiency. As the market supply and demand gradually balance, pain points of owners become increasingly prominent. Their needs have undergone changes and ability to better meet these needs will be an important direction for enhancing customer experience in the next stage. Furthermore, this year, we will iterate our commitment system for housing transaction services, by enhancing the overall customer experience by addressing core pain points. At the end of 2022, our platform offered 56 service commitments to customers in our housing transaction services. The fulfillment of this commitment is far more important than their quantity. Therefore, we will prioritize our commitments to address our customers’ most relevant pain points and promote a high-quality management of our service commitments. Firstly, we will focus on more targeted brand level service commitments. Secondly, we will steadfastly improve the quality and the fulfillment of commitments that will cover key customers’ painpoints,such as compensation for damage caused by water leakage. Thirdly, we will provide commitment -- guarantees to both end customers and our business partners. For our home renovation and furnishing business, the key to success lies not in customers’ acquisition of our marketing, but in the quality of delivering, fulfilling commitments even more important and simply making promise. To address key pain points of our renovation services, we must set clear fulfillment, standards and responsibilities, enhance our fulfillment capabilities, and tackle industry-wide challenges. This is the next breakthrough that we are targeting. Meanwhile, the pain points for our core business customers arise more from the housing product side. For the transaction side, the key drivers for improving efficiency, lies with helping high-performance agents do better and earn more, and provided them with a clear career path to become experts in community and housing relative services. Only in doing so, the customer receive professional, quality, bespoke and diversified housing and related services. On efficiency enhancement for the long-term, we have put tremendous effort. First, the average income of agents in our industry still lags far behind the average wage in our society. Only when agents have a healthy income can maintain a long-term career, and achieve higher productivity. We establish and continue to healthy ecosystem and a competitive mechanism avoids cutthroat and inefficient competition. By providing long-term, high-performance practitioners with more resources and improving their income, we can retain them in the industry. This can be achieved through platform system refinement, adequate ACN network coverage, efficient cooperation, professional training for store owners and agents, as well as by adopting the cost-effective large store model. Secondly, technological advancements such as AIGC continue to present opportunities for service providers to improve their efficiency, exploring and effectively utilizing these products and tools will help unlock significant efficiency for our service providers in our core and emerging business, and that’s my answer. Thank you, Danny. Timothy Zhao: Thank you. Operator: Thank you. And our next question today comes from Xiaodan Zong with CICC. Please go ahead. Xiaodan Zhang: This is Xiaodan from CICC. Thanks, management for taking my questions, and congrats on another strong quarter. So my question is on the new home transaction services. As mentioned in the last quarter’s call, Beike plan to dynamically adjust the credit ranking of developers based on market conditions, which may in turn expand the addressable market. So could you please update us on the progress of that? Additionally, have you noticed any changes in the channel penetration rate, commission and split rate in the market? And what are the measures the company has taken in response to those market changes? Thank you. Stanley Peng: Beike is a company with a strategic focus. Regardless of market conditions, we know what to do and what not to do. And this is especially true for our new home business. Last year, we established a solid foundation for the safe operation and optimized business conduct of the new home transaction service industry. We have improved the service capability for the high-quality SOE developers. And in Q1, the proportion of the new home sales had increased to nearly 46%. Our cooperation with a larger number of SOE developers is also a validation of our ability to provide the high-quality service and our high sales efficiency. We have transformed the industry payment mechanism to protect the receivable security of the service providers. Projects with a commission in advance have higher sales efficiency than those without, which is a win-win situation for all parties involved. We have also established a safer working environment for both consumers and service providers. This is the right choice regardless of market environment. In this year, the overall market is experiencing moderate recovery. Strategic-wise, we will maintain consistent and stability without focusing on the short-term or being overly aggressive and blindly pursuing skill. We will focus on the better collaboration with upstream developers and further safeguard the interests of all of the service providers in Beike platform. And first, we have set minimum commission split with our channel partners to prevent the planned pursuit of profit, which would lead to a deterioration of downstream ecosystem. Second, we are strengthening the requirements of the reciprocal protection period, which extends our receivable requirements to ensure the equal protection of the agents and the developers. Third, the refined management, we are strengthening the management of the new home sales external Fangjianghu channel to achieve the tiered-management, further empowerment and to allocate the resources more efficiently to them. We also conduct the rating for the new home project in order to better organize and allocate our agents to accelerate the sales through of the high-quality listing, therefore improving the efficiency. And fourthly, we are enhancing our efforts in ecosystem governance with more than 5,000 cooperating new home projects implementing “private phone number protection services”, and more than 4,000 new home projects covered by a commitment from both the developers and the platform to transparent operations. Overall, with our four strategic initiatives and a stable market environment, we expect our new home business will achieve more win-win situation, greater safety, and a more dynamic growth in this year. Operator: Thank you. We’re approaching the end of the conference call. I will now turn the call over to your speaker host today, Miss Siting Li, for closing remarks. Siting Li: Thank you once again for joining us today. If you have any 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.BEKE Ratings Summary
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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.
