KE Holdings Inc.
Q3 2022 Earnings Call Transcript

Published: 30 Nov 2022

[Operator:]

Hello, ladies and gentlemen. Thank you for standing by for KE Holdings, Inc.'s Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a 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 for Beike's third 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. On today's call, we have Mr. Stanley Peng, our Co-Founder, Chairman and Chief Executive Officer; and Mr. Tao Xu, our Executive Director and Chief Financial Officer, Mr. Peng will provide an overview of our strategies and business developments, and Mr. Xu will provide additional details on the Company's financial results. Before we continue, I refer you to our safe harbor statement in our earnings press release, which applies to this call as we will make forward-looking statements. Please also note that Beike's earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Please refer to the Company's press release, which contains a reconciliation of the unaudited non-GAAP measures to comparable GAAP measures. Lastly, unless otherwise stated, all figures mentioned during this conference call are in RMB. With that, I will now turn the call over to our Chairman and CEO, Mr. Stanley Peng. Please go ahead, Stanley.

[Stanley Peng:]

Thank you, Siting. Hello, everyone. Thank you for joining Beike's third quarter 2022 Earnings Conference Call. Against the many uncertainties in the real estate market, we achieved a series of breakthroughs in the third quarter. We have supported our stores and agents’ network to consistently outperform the market and achieved steady efficiency and profitability improvements in each business line on our platform. This was thanks to the initiatives we implemented beginning last year to enhance efficiencies. I believe ultimately, these achievements stemmed from the enterprising spirit of the organization, from the perseverance of each one of us on the platform in the face of external challenges. November 12 marked the 21st anniversary of our organization's founding. To celebrate this momentous occasion, we organized a “homelinker” event, witnessed online by over 7,000 “homelinkers” who have stayed with us for more than 10 years, spreading in more than 80 cities across China.Homelinkers are employees who have been with our organization, share the same experience and collective memories and have learned the same methodologies. Moreover, they believe in the same values and make similar choices.They shape the resilience of the organization. We are not only practitioners, but also disseminators of our spirits. We carry the same mission and responsibilities to influence more people, cementing their convictions during down times and keeping them grounded in the upcycle, while always striving for growth, virtue and positivity. Moving on to our progress in the third quarter of 2022, in our “one body” -our existing and new home transaction services. We have prominent advantages in our “one body”business thanks to our years of efforts and investments in the initiatives to enhance efficiency. Now, our “one body” has entered the development stage, where deepened operations are vital for incremental improvements. These strategic measures may look small to outsiders, but only by finding every core area of inefficiency and working on it every day can we continue making our business better. The store and agent count on our platform have been stabilizing or even growing in some cities. As of the end of the third quarter, the number of connected stores and active stores on our platform reached over 41,300 and 39,700 both about 3% lower quarter-over-quarter. The number of agents and active agents on our platform surpassed 400,000 and 370,000, respectively with quarter-over-quarter decreased narrowed to 3% and 2%, respectively. The number of active stores grew quarter-over-quarter in nearly 30 cities, including Nanjing, Changsha and Hefei. And the number of active agents increased quarter-over-quarter in 40 cities, including Shenzhen. The composition structure of stores and agents on our platform has been improving. We now have a higher percentage of agents with longer track records and higher performance results. The proportion of agents with over three years of industry experience rose by about 10 percentage points in the second quarter compared with the first quarter, along with the overall improvement in professional qualifications. Per-store and per-agent productivity also increased. In the third quarter, the average store commission income of Deyou-franchised stores and connected stores on our platform grew by 25% year-over-year and 13% quarter-over-quarter. Average commission income per agent rose by 25% year-over-year and 9% quarter-over-quarter. The continued improvement in our new home receivables collection also further ensured the certainty of income for store owners and agents. Our agents are increasingly identifying with their profession. This year, we conducted two nationwide market surveys participated by a total of over 80,000 real estate agents on our platform. Survey results showed that despite a decline in confidence due to major market corrections, agents have developed a greater pride in their profession, supported by the growing acceptance of their profession by family and society, along with its elevated social status. In terms of the store-agent network and industry development, efficiency and quality need to be improved. Second, the productivity of a single agent has not improved much over the years and the overall income level of agents is low and their churn rate is high. In the next stage, the industry will shift from the pursuit of scale to high-quality development with an accelerated pace, focusing on efficiency and quality. This will undoubtedly force us to grow more and better abilities from inside. Our existing home transaction services continued to significantly outperform the market. According to data from the Beike Research Institute, nationwide GTV of existing home sales climbed by about 7% year-over-year in the third quarter, while GTV of existing home transactions on Beike's platform was RMB449 billion, up 19% year-over-year, of which existing home sales GTV rose by more than 20% year-over-year. The strength was partly due to the release of pent-up demand in the third quarter in Beijing and Shanghai after the pandemic flares-ups in the second quarter. In the meantime, our operational and management initiatives have been paying off, giving the industry's service providers a stronger determination to work with us. Our existing home services, including existing home sales and rental are, becoming increasingly important in terms of both business growth and risk control. We have made efforts on various fronts to accelerate the growth of this business. For instance, we have been closely watching the proportions of new and existing homes in different cities’ strategic goals and driving the development of our existing home services through KPI requirements and so on. We also allocated more to-B personnel to support the existing home business, fortifying system development and ecosystem governance. Meanwhile, in many cities where new home sales previously dominated property transactions, local brands and store owners have become keen to make organizational and personnel adjustments to shift to the existing home business. Turning to new home transaction services, according to data from the National Bureau of Statistics, in the third quarter, the nationalwide GTV of new residential home sales was down 21% year-over-year and 7% quarter-over-quarter. The GTV of CRIC's top 100 real estate companies fell by 33% year-over-year and 0.2% quarter-over-quarter. Although the year-over-year decline in the new home market narrowed in the third quarter, there was no obvious sequential improvement. The new home market is still in a trough, weighed down by a range of factors, including ceased mortgage payments on unfinished projects, pandemic resurgences and fewer developer promotions. In the third quarter, GTV of new home sales on our platform was RMB261 billion, down 36% year-over-year and up 17% quarter-over-quarter. While the market remains under pressure, we have consistently improved the health of our business operations across the board, as well as gained further market recognition with our efficient sell-through capabilities and our efforts to build a healthier industry ecosystem. On the consumer side, we mobilized our resources to collect and provide construction progress updates to customers. Our city-based operations and photographer teams collect accurate, comprehensive project updates on construction progress from multiple site locations monthly for ongoing cooperation projects and quarterly for other unfinished projects. Updates are provided to customers and agents on our apps. This practice also kept us fully informed on the latest construction progress of different developers.As of November 15, we have covered 32,442 housing projects in this initiative. Operationally, we continued to strengthen our “Commission in Advance” model. In September, Commission in Advance accounted for 34% of our nationwide new home sales commission revenue, 44% for private developers in cities excluding Beijing and Shanghai, and 32% for state and centrally owned developers.On top of the commission in the advanced model, we promoted our strategy of focusing on selected high-quality projects and key new home projects. On the developer side, we collaborated with more high-quality developers and projects. During the quarter, the proportion of new home sales from state and centrally owned developers expanded to 42% from 37% in the second quarter.To really accelerate sell-through in the current market, effective leads generation from brokerage channels and promotional conversion from developers must join forces. We are proud to stand out from other brokerage channels with our exceptional existing home transaction service capabilities and add many new home customers leveraging our existing homes customer base. In addition, our continuous undertakings to improve the new home industry ecosystem, have helped to reduce the ingrained problem of good industry players being driven out by subpar practitioners. This has further garnered the respect and support of high-quality developers for us. In the future, I look forward to providing an overall review of the efforts we have made to improve the health of the new home ecosystem. Next, moving to our two wings businesses. Our full-service home renovation and furnishing business is progressing as planned. In the third quarter, the industry started to recover as pandemic resurgences in Beijing and Shanghai subsided. According to data from the China Building Decoration Association, the revenue of leading home renovation and furnishing companies in the third quarter decreased by 4% year-over-year and increased by 13% quarter-over-quarter. Our home renovation and furnishing business continued to outperform the market , rising more than 40% year-over-year and 34% quarter-over-quarter, generating revenue of close to RMB1.85 billion.Contracted sales in the third quarter reached close to RMB2 billion, an increase of more than 60% year-over-year. Among these, the number of our home renovation contract volume increased by more than 50% year-over-year with average order value up by more than 10% year-over-year. The percentage of total contract volume attributable to our core business traffic referrals increased from 25% in June to 43% in the third quarter. We have replicated the technological capabilities accumulated in our core business, such as the AI assistant - "Xiaobei",into our home renovation and furnishing business. As of October 31, more than 9,500 service providers, including home renovation and furnishing designers, engineers, foremen, as well as agents from our core business had participated in the "Xiaobei" training and testing. Our home furnishing, new retail sales accounted for 20% of the total contracted sales in the third quarter, up from 16% in the second quarter. The ratio of home renovation orders that came with needs for customized furniture increased to one out of six from one out of nine in the second quarter. In the third quarter, Beijing Beiwoo reached quarterly breakeven and monthly contracted sales of over RMB100 million in July and August, becoming the largest full-service home renovation brand in Beijing. This is a significant breakthrough and achievement amid the current headwinds.The underlying capabilities we accumulated in the past have propelled the Beijing business into a positive cycle. We did this by first establishing from the ground up,large-scale home renovation delivery management capabilities; second, our scale and more complete supply chain created a virtuous cycle that has won additional suppliers and enabled consumers to select from a greater choice of better quality products. Third, our proven competencies in delivery management and business operation have become better recognized among service providers. Agents started to actively recommend our home renovation services to customers and accompany them on visits, whereas designers, workers and foremen are proud to join us as they feel confident in their professional development with increased belonging to the platform. Only by attracting and assembling high-quality service providers in the industry can we provide consumers with a superior service experience. With Beijing as an example, we aim to continue to iterate and manifest our capabilities in more cities, bringing better living services to more consumers. Next, moving to our home rental services, which continued to expand in scale and improve efficiency in the third quarter. In terms of scale, as of the end of the third quarter, the number of contracted rental units managed by our rental services doubled quarter-over-quarter to over 85,000. Among them, the number of units under the decentralized leasing management, "Carefree Rent," reached over 50,000 units, an increase of nearly 70% quarter-over-quarter.The Carefree Rent service is currently available in 13 cities. To improve our efficiency, we continued to develop and iteratively optimize our sign-up and occupancy models, as well as refine our operational capabilities. In September, both our occupancy rate and average sell-through period improved compared to the second quarter. It is particularly worth mentioning that this July, we were selected as part of the first group of affordable rental housing operation service enterprises in Chengdu, and we were the only private enterprise among the four selected. Thanks to this opportunity, we were able to become more deeply involved in the improvement and operation of local affordable rental homes. As of November 21, we have provided high-quality leasing operation services, including leasing brokerage to more than 1,000 rental homeowners and tenants in Chengdu. In the future, we will also strive to participate in the planning and operation of more affordable rental housing, and contribute to the development of a housing system that ensures supply through multiple sources, provides housing support through multiple channels and encourages both housing purchase and renting. In conclusion, our business performance this quarter demonstrated great vitality and resilience of our organization. Internally, this is due to the people we have and the organizational culture we have formed. We have an unshakable insistence on technology for good, quality service and utmost operation efficiency, which has won us the affirmation of customers and service providers. Externally, it comes from the solid economic foundation of our nation from the desire of each small family for "joyful living", which together have mounted to the tremendous demand in China's “living” sector.There have been a series of favorable policies unveiled recently to support the future release of rigid and upgrade housing demands,help high-quality developers restore liquidity and boost market confidence. We will also do our best to make our network of store and agents the warm connect of "homes", to bring better quality and more diversified housing and related services to customers, and play our part to promote the stable and healthy development of the real estate market, as well as to better satisfy the housing needs of all people. Thank you. Next, I would like to turn the call over to our CFO, Tao, to review our third quarter financials.

[Tao Xu:]

Thank you, Stanley and thank you, everyone, for joining us today. Before discussing more details about our third quarter of 2022 financial results, I'd like to provide a brief update on the recent housing market. In the third quarter of this year, policymakers maintained relatively easy credit conditions, and local governments continued to introduce city-specific measures to better satisfy demand for housing and home upgrades. Overall, however, the frequency and intensity of supportive policies throughout Q3 weakened compared to Q2. And we also saw some strong relaxations reversed in some several key cities. Meanwhile, a number of factors disrupted China’s housing market recovery in Q3. These included heatwaves that ravaged a vast swathe of the country, COVID-19 flare-ups, the slowdown in developers’ sales promotions, and the fact that some buyers ceased mortgage payments on unfinished new home projects. The existing home market maintained a moderate recovery, with GTV ticking up slightly on a year-over-year basis. The new home market also saw a decrease in GTV contraction, but still remained soft. Despite the macro headwinds, our operating efficiency and profitability improved significantly in Q3. The profitability of our new home transaction services, and the Company's gross margin both reached new highs since our IPO in 2020, whereas our DSO and Non-GAAP operating expenses fell to record lows since IPO. These results did not come about overnight. They are the result of our rapid and resolute implementation of a series of cost management and efficiency enhancing measures launched a year ago in the face of market adjustment. They also embody our courage against setbacks. Our management team’s humility and involvement in the frontline operations and our decisive will to never give up. These achievements further motivate us to respect the laws of the market, return to the essence of the operation, seek improvement from the refined management and continue to implement our series of efficiency, risk control and the cost management measures. Against this backdrop, let's turn to our financial details for Q3. Our net revenues were RMB17.6 billion during the quarter, representing a narrowed year-over-year decline of 2.8% and a 28% increase compared with Q2 2022. This quarter-over-quarter revenue improvement was primarily due to increased revenues from existing home transactions as pent-up demand in the mega cities of Beijing and Shanghai translated into higher sales volume at the beginning of Q3 after COVID-battered Q2. Meanwhile, other factors also helped drive total net revenues. These included more new home revenue recognized in Q3 following a jump in subscriptions in May and June. Our “Commission in Advance” model that drove faster new home subscription to sales conversion as well as our stable monetization ability. In particular, our net revenues from existing home transaction services increased by 16.6% to RMB7.2 billion in Q3, compared to RMB6.1 billion in the same period of 2021, primarily due to a 18.7% increase in GTV of existing home transactions to RMB449.0 billion in Q3 from RMB378.2 billion in the same period of 2021. Our net revenues from new home transaction services decreased by 31.3% to RMB7.8 billion in Q3 from RMB11.3 billion in the same period of 2021, primarily due to the decrease of GTV of new home transactions of 36.2% to RMB261.5 billion in Q3 from RMB410.1 billion in the same period of 2021. Our net revenues from home renovation and furnishing were RMB1.8 billion in Q3 compared to RMB60 million in the same period of 2021 primarily because the Company completed the acquisition of Shengdu Home Renovation Co., Ltd and began to consolidate its financial results during Q2 2022, and the organic growth of the GTV for home renovation and furnishing business. Our net revenues from emerging and other services increased by 45.8% to RMB801 million in Q3 from RMB550 million in the same period of 2021, primarily attributable to the increase of net revenues from rental property management services, which was partially offset by the decrease of net revenues from financial services. Cost of revenues decreased by 16.3% to RMB12.8 billion in Q3 from RMB15.3 billion in the same period of 2021. Gross profit increased by 72.8% to RMB4.8 billion in Q3 from RMB2.8 billion in the same period of 2021. Gross margin was 27.0% in Q3, compared to 15.2% in the same period of 2021. The increase in gross margin was primarily due to

[Operator:]

Thank you. The first question comes from Steven Tsai with Morgan Stanley. Your line is open.

[Steven Tsai:]

Thank you management for taking my question, my question is on market outlook. Could you share with us your view of fourth quarter outlook for each of new home and existing home market? And what are the underline consumption behind your Q4 revenue guidance? Also, I know it's a bit too early, but could you also share with us on the market recovery path next year, if you look through the short-term pandemic impact in the quarter? I'm asking this because on the one hand, we have seen a lot of supporting policies in the past few weeks. But on the other hand, some of the existing home sales have seen some slowdown in sales recovery, while existing home supply seems increasing fast, but price is also trending down. So just wondering how we should think about the path next year?

[Tao Xu:]

Thank you, Steven, it's Tao. Let me talk about the third quarter review first. For the macro perspective, the real estate market in the third quarter was affected by multiple factors, including an unusually hot summer across country. The pandemic flare-ups in some high-tier cities and new home mortgage payment suspensions, slowdown in developers’ sales promotions as well as households’ concerns about geological tensions, economic downturn, and uncertainty for the income expectations. At the same time, the frequency and magnitude of supportive policies slowed down in Q3 from both the central and local government levels. In the second quarter, the central and local governments introduced close to 100 measures and policies to support market recovery. But in this Q3, there's only 70. And we also saw some strong relaxation reversing in some several key cities. The reduction of the positive factors and the increase of inhibitive factors both contributed to the recovery slowdown in the housing market in Q3. In terms of the existing home market. Despite the macro headwinds, in third quarter the recovery of the existing home market quickened. The GTV for China’s existing home market increased by 6.6% year-over-year and 8.1% quarter-over-quarter.The GTV in July recorded year-over-year growth for the first time in the past 12 months. Specifically, the existing home market hit a high July and moderated month-over-month afterwards. This trend is consistent with the monthly trend in the third quarters of 2018 to 2021. City-wise, the first-tier cities benefited from the pent-up demand after pandemic restrictions were lifted, resulting in a significant GTV growth quarter-over-quarter, while the performance in the second and third-tier cities was basically flat versus the second quarter. Among them, cities such as Jinan and Suzhou, which have more supportive policies, and Zhengzhou, which benefited from the demand shift from the new homes, saw steady improvement in the existing home market in third quarter, while cities such as Chengdu were more affected by the pandemic at the end of Q3. In terms of the new home market affected by multiple macro factors, the new home market’s recovery trend in May and June did not extend to the third quarter. Following the mortgage payment suspension incidents in July, our leading indicator, the number of new home subscriptions plummeted, down 42% week-over-week and 26% month-over-month, and continued to drop in August and September. According to the data of the National Bureau of Statistics, third quarter new residential housing sales fell by 21.3% year-over-year and 7.1% quarter-over-quarter. CRIC's data on the top 100 developers showed a 33% year-over-year drop in the period, and a slight downward trend month-over-month. City wise, according to Beike Research Institute, in the first nine months of the year, new homes GTV was down merely 2% year-over-year for first-tier cities, but dropped 46% and 41% for second-and third-tier cities, respectively. As the end of September, regarding the home price, the 50 key city existing home price has fallen for 13 consecutive months and is still showing a downward trend. It further fell 1% in September from August, taking cumulative decline to 9%. Existing home prices in Beijing and Shanghai hit a new high in Q3, and began to adjust slightly in October, while in most other cities, the price declined more notably. Cities with more significant home price adjustments are mostly cities that saw large price increases in the past, like Shenzhen and Dongguan.In summary, there were many unexpected factors in the market during the Q3. It will require additional observation to tell how the market will perform. Regarding for the Q4 outlook, since the fourth quarter, favorable policies have been introduced continuously. On demand side, policies, including lowering the mortgage rates, tax refunding, and relaxed the first-home recognition to ease down payment for the home upgrade demand have all played a role in promoting market recovery. To address the liquidity crisis of developers, several ministries of the central government have introduced tools to support credit, debt and equity financing of developers, including the famous ‘16 measures from the Central Bank’. The path to credit restoration for developers is getting clearer, and it will help restore market confidence, the ongoing COVID outbreak and the corresponding control measures in many cities still bring great pressure on the market recovery and have a dilutive effect on supportive measures. For existing home market, at present, among our top 32 cities, over 95% of the stores in Beijing, Zhengzhou, Chongqing and Shijiazhuang are affected and unable to operate normally due to COVID-19 and the related containment measures. More than 60% of our stores in Guangzhou are affected, and the pandemic situation in Chengdu, Tianjin, Xi'an and Suzhou is also intensifying. During the previous severe flare-ups in Shanghai, Shenyang, Zhengzhou and other cities. The transaction volume was close to zero for about four to eight weeks. Therefore, we prudently assume that roughly 25% of our existing home transactions in the fourth quarter will be affected by the pandemic. However, unlike the discretionary consumption, housing demands are largely rigid. Based on our experience, the demand will be bounce back and be replenished to a certain extent after pandemic resurgence is over. New home market is more notably driven by the developers' active promotions, easing policies and the National Day holidays, and is expected to see a narrowed year-over-year decline in Q4. In October, Beike new home subscription data rose sharply, by nearly 35% compared with September. The subscription data usually leads the online contract signing by about a month, and the recovery of the leading indicator supports overall the new home market in Q4. Despite the private developers might still experience debt defaults, relentless efforts are being made in debt relief for the industry in the fourth quarter. Regarding the Company's view for the year of 2023, I would like to say the market trend will be affected by multiple factors, but it is unlikely for the market to weaken further. There's a room for the real estate policies to further relax

[Operator:]

The next question comes from Timothy Zhao with Goldman Sachs. Please go ahead.

[Timothy Zhao:]

I have two questions here. First, could management share some outlook on how our Lianjia store and network store expansion plan in next year? And what is the operating efficiency and net income level of the stores and agents at this moment? And in the third quarter, we achieved very strong profitability and that means the income level of the stores and agents is coming up. And secondly, it's related to the SOE versus private developers breakdown with new home sales, as I noticed private developers still accounted for over 50% of new home sales on Beike platform. May I check what are the top customers in the private developers? We are seeing ßprivate developers also default on bonds and delayed the interest payment? Are we expecting more risk related to the current account receivables?

[Tao Xu:]

Thank you, Timothy. Regarding your first question, store and agent numbers are stabilizing and even starting to grow in some cities. We see stabilizing store and agent network scale. Since the second quarter, the number of active stores and agents have started to stabilize, and in the third quarter, the quarter-over-quarter decrease in active stores and agents narrowed to 3% and 2%, respectively. Among then, in nearly 30 cities, including Nanjing, Changsha and Hefei, the number of active stores grew quarter-over-quarter and the number of active agents increased quarter-over-quarter in 40 cities, including Shenzhen. There's no significant network expansion needed going forward in short run

[Operator:]

The next question comes from Liping Zhao with CICC. Please go ahead.

[Liping Zhao:]

So since the consolidation of Shengdu in second quarter, the Company has achieved many progresses in terms of home renovation and furnishing capabilities and also the enhanced cooperation with transaction business line. Looking ahead, what's your development strategy of this business? And how will you balance the growth and investment of this sector?

[Stanley Peng:]

Okay. I'm Stanley. Thanks for your question. The home renovation and furnishing industry is relatively capital intensive and faces many iteration opportunities, we have our understandings to such industry that requires high standardization and transformation through technology, our understandings are

[Operator:]

We are now approaching the end of the conference call. I would now like to turn the call over to your speaker host today, Ms. Siting Li for closing remarks.

[Siting Li:]

Thank you once again for joining us today. If you have 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.

[Operator:]

Thank you. The conference has ended. You may now disconnect your lines.