KE Holdings Inc.
Q4 2022 Earnings Call Transcript

Published: 16 Mar 2023

[Operator:]

Hello ladies and gentlemen. Thank you for standing by for KE Holdings Inc’s Fourth Quarter and Fiscal Year 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. Today’s conference call is being recorded. I will now like to turn the call over to your host, Ms. Siting Li, IR Director of the Company. Please go ahead, Siting.

[Siting Li:]

Thank you, Operator. Good evening and good morning, everyone. Welcome to KE Holdings Inc. or Beike’s fourth quarter and fiscal year 2022 earnings conference call. The company’s financial and operating results were published in the press release earlier today and are posted on the company’s IR website

[Stanley Peng:]

Thank you, Siting. Hello everyone. Thank you for joining Beike’s fourth quarter and full year 2022 earnings conference call. Over the past two years, the industry has faced unprecedented challenges, but every winter will pass, and spring will come as promised. In January and February, people around the country quickly emerged from the pandemic. At the same time the real estate market began to recover. By the end of February, existing home sales on our platform had rebounded sharply, reaching a level close to the same period in 2021, the most active year for existing home transactions. Sales of new homes have also increased significantly year-over-year, returning nearly to the post lockdown level in 2020. As we transcend this round of market correction, our firmly-held views have been proven correct and our underlying capabilities have been validated. First, our market-neutral view and persistence in that view has been proven. As part of our digital service platform for the housing industry, professional agents must act as the counterbalance of herd mentality in up- and down- market cycles. This means, they must not blindly follow the crowd or engage in hype. Rather, they must evaluate the market objectively, multi-dimensionally and rationally. They must be stabilizers for the market and never magnifying anxiety. The market has been in a downward trend since the middle of 2021. But through it all we’ve always believed that consumers' desire for better living will not change, and the market will return to normalized level. We also see opportunities in the market recovery. Therefore, with a stable state of mind, we quickly made a series of internal adjustments to cope with short-term fluctuations and prepare for market recovery. We launched our “one body, two wings” strategy, transformed from scale expansion to quality growth, and implemented a series of measures to reduce costs and enhance efficiency. We protected the commission collection and operation security of service providers on our platform, providing them with tools and capabilities, in order to support them through the trough of the cycle. In addition, hundreds of our management members went to the front line to help win battles. A market-neutral view has allowed us to strengthen our muscles and watch for recovery when the market was in a downturn. Facing the current market in recovery, we will continue practicing our market-neutral view, acting as a counterbalance against market chasing behaviors, since significant market volatility harms the industry in the long run. We hope to facilitate a healthy and orderly market recovery. Second, the capabilities of Beike as a platform have been further validated during the large market fluctuations. We established the Beike platform in 2018, in order to open up the capabilities we have accumulated nearly 20 years to the industry. We have constantly refined our protocols, ecosystem, and digital infrastructure to further unlock the ACN network effect and the scale effect of our platform, providing support for customers, service providers, and industry partners such as developers, helping them to better interact, cooperate, learn from one another, and achieve win-win results. This round of market volatility is the first major test we have experienced as a platform. We have delivered more stable profitability than before and proven our ability to expand our business, which demonstrates our strength as a digital service platform for the housing industry. We have also prepared the momentum needed for the industry’s long-term development - high-quality industry supplies have been protected and stabilized, and the low-quality and inefficient supplies, not only on our platform, but also outside our platform, have accelerated their exits, which is a good thing for the entire industry. We proved our more stable profitability. In 2022, the national existing home market GTV fell by 31% year-over-year, and sales of the top 100 new home developers fell by 42% year-over-year. However, our annual non-GAAP net profit bucked the trend and achieved a year-over-year increase of 24%. Our operating cash inflow grew by 135% in 2022. Against the significant fluctuations in the external market, we have demonstrated the stability of profitability empowered by our platform model. We also tested out our platform’s extensibility. In 2022, the first year for us to advance our “one body, two wings” strategy, our home renovation and furnishing’s contracted sales reached RMB6.9 billion, increasing 31% year-over-year on a pro forma basis, also bucking the market trend. This result benefitted from our network infrastructure of stores and agents, our digital transformation capabilities for low-frequency, complex and heavy-decision-making industries, and our full integration with Shengdu. In Beijing, two wings accounted for more than 10% of our revenues in 2022, increasing from less than 3% in 2021, while our “one body” provided more than 90% of their customer leads. The ability of our platform to extend to a wider range of services around the sector of “living” has been initially validated, showcasing the high replicability of our industrial capabilities and our ability to meet more and more complex needs of our customers. This represented a solid step in our never-ending innovation and development. Third, our view on the accelerated arrival of the era of agent empowerment and quality service has been validated. With the accelerated exit of low-quality and inefficient supply in the industry, we expect an increase in unit store productivity in the future. The trend of large stores will become more pronounced given their wider coverage of both home listings and community customer leads, and more diversified business operations, leading to stronger risk resistance. As such, store efficiency has become a key management variable, and high-quality agents are crucial to our operations. Store owners’ abilities in store operations, team management, as well as recruiting and energizing agents have become differentiating factors in successful operations. With respect to agents, the industry will not and should not be flooded with excess capacity. In the future, the industry will enter the era of efficiency improvement of existing capacity, and agent empowerment. The productivity of higher-level agents is 2 times the industry median, which shows that the mid-level group of agents will become the most vital force in the industry in the future. We have always been and will continue to be committed to helping agents improve efficiency, obtain a decent and stable income, realise long-term employment, and pride themselves of their professionalism on our platform. Therefore, we have been firmly moving forward with our large store strategy. In 2022, we supported and empowered the reorganization of over 3,000 stores on our platform. We also consistently strengthened the professional competencies of store owners. By the end of 2022, more than 6,900 store owners completed the study in our Beike Huaqiao Academy. Moreover, we built out the store and agent ranking infrastructure with competency rating standards, which improved the management and operation capabilities of the platform and store owners, and assisted in building an agent talent pipeline. We also advanced the governance of existing and new home business conducts, resolutely cracking down on incidences of wrong behaviors. We set up a comprehensive monitoring mechanism to encourage customers, business partners and platform employees to supervise and report violations such as off-platform transactions. We also fully implemented and jointly promised with new home developers that there will be no customer information leakage, customer poaching and so on, and promoting the customer contact information to be private throughout the showing process. All these worked to enhance security in agents’ operations. While the store and agent count on our platform declined in 2022, with the number of active stores and active agents at around 37,400 and 350,000, respectively, the structure and efficiency of stores and agents on our platform continued to improve through our efforts. In the fourth quarter, the proportion of A-rated stores in cities excluding Beijing and Shanghai increased by 5.5 percentage points year-over-year, and the monthly agent churn rate dropped to less than 5% for non-Lianjia stores, and only 3.1% for Lianjia stores. Together as a group, we have gone through a difficult winter, and this experience has given us a lot of strength. Our team will be more determined than ever and become the backbone of the industry. It is also the most valuable "assets" of Beike – “one who possesses a piece of land shall have his peace of mind ". Turning to our “one body” - our existing and new home transaction services. In 2022, we transitioned to a stage of quality growth from one of scale expansion. We quickly adjusted our operations to improve efficiency and cut expenses, scaling down the P&L units for operations and management. With digital tools, we can check gross margin on a per order and personnel basis, as well as profit for each store, which encourages business teams to focus on profitability indicators as well as cultivate cost-effective mindsets among managers at all levels. Driven by these initiatives, we significantly enhanced our platform’s operational efficiency and optimized costs and expenses. Moving to existing home transaction services. According to data from the Beike Research Institute, full-year GTV of existing home sales in China were RMB4.83 trillion in 2022, dropping by about 31% year-over-year and declining by about 3% year-over-year in the fourth quarter; whereas existing home transactions GTV on Beike’s platform fell by only 23% year-over-year in 2022 and rose by 1.5% year-over-year in the fourth quarter. We outperformed the industry amidst challenges, thanks to our empowerment and retention of high-quality store owners and agents, enhancement of the ACN network effect, continuous deepening platform operations and increased user value delivered to end-customers and business partners. For example, we rebuilt our platform’s leads allocation mechanism for existing homes in 2022. The new mechanism allocates leads based on stores’ performance scores, raising the percentage of agents matched with familiar home listings by 10%. This reduced the number of unproductive actions agents took to acquire leads, allowed them to be more focused, and as such, agents provided customers with more professional services. Next moving to new home transaction services. On the market front, according to data from the National Bureau of Statistics, GTV of new residential home sales in China amounted to RMB11.7 trillion in 2022, down 28% and 27% year-over-year for the full year and the fourth quarter, respectively. GTV of CRIC’s top 100 real estate companies fell by 42% and 30% year-over-year in 2022 and the fourth quarter, respectively. In comparison, GTV of new home sales on our platform declined by 42% year-over-year in 2022 and by 26% in the fourth quarter. While our full-year GTV performance was in line with the market, we realized a write-back of our new home bad debt provisions for the year, and our DSO hit the lowest while our profitability reached a record high since our listing. These represent the excellent results of our core strategy, which is not compromising agents’ and consumers’ interests in exchange for expansion. At the same time, we proactively strengthened our risk controls, security and profitability. Specifically, we consistently iterated our developer risk evaluation system to manage business risks in a preemptive way. In the fourth quarter, Commission in Advance model accounted for 44% of our total commission, doubling from the beginning of the year. It ensured the security of agents’ receivable collection. Moreover, the average number of homes sold from projects under the Commission in Advance model was 35% higher than general new home projects, reflecting that developers’ sell-through were also accelerated. The proportion of state-owned developers continued to rise, with their projects accounting for 45% of our new home revenues in the fourth quarter. Next, moving to our “two wings” businesses. Over the past year, we validated the authenticity of our strengths and capabilities in the “two wings” industries, and further demonstrated that our “two wings” businesses are not only natural fits for our core business, but also feedback to it. 2022 was also a challenging year for the home renovation and furnishing industry. According to data from the China Building Decoration Association, the total revenue of leading home renovation and furnishing companies in 2022 decreased by about 9% year-over-year. Our home renovation and furnishing business generated contracted sales of RMB6.9 billion in 2022, rising by 31% year-over-year on a pro forma basis. Among our contracted sales, 33% was attributable to core business customer referrals. On top of this, in April 2022 we launched our new retail sales of home furniture and furnishing strategy, which leverages our full-service renovation offerings. New retail home furnishing’s contribution to our total contracted sales grew from 12% in the first quarter to 26% in the fourth quarter of 2022, further extending the platform’s business beyond low-frequency transactions. With respect to our rental services, in 2022, the number of rental units managed by our home rental services exceeded 120 thousand, with over 70 thousand units under decentralized leasing management, or “Carefree Rent”. More than 90% of this was contributed by core business customer referrals. Clearly, the mobilization and empowerment of our core business has enabled our "two wings” businesses to substantially outperform the market. Meanwhile, the broad market space of the “two wings” businesses, as well as the recognition from consumers and society, greatly boosted agents’ professional value, and more importantly, breathed fresh, enduring vitality into our organization, setting the stage of boundless possibilities for us to unleash our potential. Leveraging our digitalized transformation experience in decision-heavy industries with low transaction frequencies, complex processes and a focus on offline operations, we have been working to reshape the home renovation and furnishing industry. Through digitalization and online operations, we strove to standardize construction practices, while restructuring the home renovation construction and customized furniture delivery processes. We established a quality-based service provider management and incentive mechanism, as well as an order dispatching system, as part of our scientific management capabilities. Additionally, our Home SaaS 2.0 will also take part in these initiatives to lead and implement the industry’s digital transformation. In December 2022, 80% of our orders in key cities were automatically dispatched, our renovation delivery cycles were shortened by 5 days from previous year, and our A-rated service providers’ retention rate reached 97%. These capabilities will help us to grow with quality. In 2022, we worked even harder to fulfill our social responsibilities and be “an enterprise of the era”. As the only private enterprise selected among the first group of affordable rental housing operation service enterprises in Shengdu, we have provided more than 1,700 rental homeowners and tenants with superior leasing operation services, including leasing brokerage services as of the end of 2022. Leaving behind a year of challenges but also rewards, we are ready to embark on a new journey. In 2023, facing the recent notable market recovery, we will maintain a consistent strategy for our core business based on our market-neutral view. That is, on top of cost reductions, efficiency enhancements and risk controls, we will continue to deepen our operations and improve our ecosystem to capture high-quality growth opportunities. In 2023, we will work to enhance our long-term capabilities, which requires persistent and continuous investments in areas such as business conduct governance, services and products delivery of home renovation, and incremental efficiency enhancement of our existing pool of agents. Through these efforts, we will seek and fill the gaps between our capabilities and the needs of consumers and service providers, fulfilling our social responsibilities to be a great company in the hearts of the society and the people. Next, I would like to turn the call over to our CFO, Tao to review our fourth quarter and full year financials.

[Tao Xu:]

Thank you, Stanley, and thank you everyone for joining us. Before discussing more details about our fourth quarter and full-year 2022 financial results, I would like to provide a brief update on the housing market in 2022. In 2022, China’s housing market encountered unprecedented challenges. Affected by frequent disruptions from the pandemic, macro economy softened, and consumers’ uncertainties around future expectations heightened. These factors dampened buyers’ home purchase willingness and their ability to pay, while also impeding transaction processes. Additionally, in the new home market, consumers’ confidence in housing projects delivery hit a trough given the spillover risks among real estate developers. All of the above have greatly diluted the positive effects of favorable policies, resulting in a profound and sustained market correction. Facing the predicament, we took decisive actions and seek answers from the frontline operations, sharpening our focus on the essence of business, risk control and efficiency enhancement. We managed to achieve a strategic transformation in 2022 to "high-quality growth" from "scale expansion". Particularly, we reported a smaller contraction in net revenues compared with the market adjustment, realized significant year-over-year gross margin increase and a trend-bucking non-GAAP net income growth, effectively mitigating the impact of macro conditions especially in profitability and cash flow, further strengthening our leading position in the industry. Now let's turn to our financial details for Q4. Our net revenues were RMB16.7 billion in Q4, exceeding both the high-end of our guidance and street consensus, mainly because

[Operator:]

[Operator Instruction] Today’s first question comes from Timothy Zhao with Goldman Sachs. Please go ahead.

[Timothy Zhao:]

Thank you management for taking my question and congratulations on the strong results for the year. My question is on the industry outlook. Could management share your updated outlook for the existing home and new home market in 2023? Especially related to the strong growth of the existing home volume in China over the past two months, can you share some colour on how much is the rebound from pent-up demand? And how the tenable do you think is the growth rate in the existing home market?

[Tao Xu:]

Recent market performance, as the uncertainty caused by COVID-19 recedes, Chinese residents’ mentality has shifted back to the pursuit of wealth security and growth from precautionary savings and risk aversion. In terms of real estate policies, there were over 1,000 stimulus policies released across the country in 2022, compared to roughly 450 tightening policies in 2021. As a result, support for a market recovery is accumulating. We saw increased policy support in December and January, when almost all the strong second-tier cities loosened their home purchase and mortgage restrictions. Among these cities, for example, Dongguan and Foshan implemented full relaxation. To some extent, these policy changes have supported a bottoming-out in the market. According to recent real estate market data, consumer sentiment toward the housing market also has significantly improved on the demand side. For existing home sales

[Operator:]

Thank you. And our next question comes from today [indiscernible] with Citigroup. Please go ahead.

[Unidentified Analyst:]

Thanks management for the question opportunity and congratulations on the very solid results for the fourth quarter and also for the whole year. So my question would be that both the new home and existing home markets will be entering a healthier and more stable development stage in 2023. Can management share with us whether the company will dynamically adjust its strategies in response to changing market conditions, such as channel expansion and gaining more market share? Where are your target markets this year? Will you expand through Lianjia or non-Lianjia stores? What is the expansion strategy in markets where you have relative low market share such as Shanghai, Guangdong, and Fujian? How will you deal with competition with local leaders?

[Tao Xu:]

Our view on market share：We don’t operate with a market share as our KPI, the management has always been adhering to the core principle of “taking care of customers and helping service providers to be good to customers”. However, we must reach a certain scale threshold city-wise to realize the network and scale effects of our core business, and to fully benefit from the extensibility of our agents and store network as infrastructure around living services. Therefore, we need to pay attention to scale, and need to achieve sufficient scale through connecting and empowering connected stores and agents. Existing home transaction services

[Operator:]

Thank you. And our next question today comes from Jiong Shao with Barclays. Please go ahead.

[Jiong Shao:]

Thank you very much for taking my question. And let me add to my congratulations on the very strong results and guidance. You talked about improving efficiency of your agents and of your stores, I was just wondering, could you talk about your target, if you have any, for the stores and agents this year? And you have already improved their productivity quite a bit last year, how can you improve their productivity further from here, while not losing your strong culture and performance elements? Thank you.

[Tao Xu:]

Overall, we have no plans for significant expansion of our stores and agents. As we mentioned last quarter, our focus is on improving per store and per agent efficiency while enhancing agent income, rather than pursuing large-scale expansion. This approach will not change. Only when the income of stores and agents increase steadily can the industry retain high-quality people and achieve healthy development. Furthermore, given the current trend of a balanced supply and demand market, and the broader emphasis on “housing is for living in, not for speculation”, we do not anticipate a significant increase in industry capacity following this market recovery. Our plans for agents and stores this year include the following

[Operator:]

Thank you. And our next question today comes from John Lam with UBS. Please go ahead.

[John Lam:]

Thank you, and also congratulation for the result, so my question is regarding on the on the cost optimizations in the third quarter last year were very effective. Is there any more room for further improvement? And can the expense ratio from the third quarter of 2022 be used to infer subsequent profitability? Thank you.

[Tao Xu:]

Thank you John, for costs and expenses for “the one-body” business, we quickly implemented a series of cost reduction and efficiency enhancement initiatives in 2022. As a result, the costs and expenses for our “one-body” business were optimized to reach the 2019 level, which we believe is relatively sustainable. In terms of cost control, in the fourth quarter of 2022, the fixed costs of our “one-body” business fell by 36% year-over-year and its variable costs as a percentage of revenue dropped by 5.6 ppts year-over-year. In terms of expenses, the total amounts of non-GAAP operating expenses declined by 17% year-over-year to the same level as in 2019. The expense reduction will be more significant if we exclude the impact of the consolidation of Shengdu. Commission in Advance accounted for 44% of total new home commission in the fourth quarter, up from 20% in the first quarter. This ensured the collection of new home receivables, mitigating the negative impact of new home bad debt provisions on our expenses. In 2023, our platform’s agent productivity will see even greater improvements, and we will implement incentives to develop and retain our existing employees. We also hope to offset the costs of such incentives through continuous control of non-personnel expenses. In addition, we hope to improve agents’ productivity via technology investments to reduce their time spent on low-productivity matters, hence allowing them to get off work earlier, spend more time with their family, and contributing to further industry optimization as well as potential platform profitability improvement. All in all, our finance strategy for our “one-body” business will remain focused on efficiency. With optimized cost and expense level in 2022, we will support quality growth cost-effectively. Meanwhile, we will continue to strictly control risks and strike a balance between efficiency, receivable collection speed and scale expansion, with ensured security of account receivables, we will enhance our cooperation with partners in the upstream and downstream. For two wings business, regarding our home renovation and furnishing business, in addition to making sure its total loss ratio will not further expand, we will capture opportunities to reinforce our foundational capabilities including product, supply chain and service delivery ability, and invest in high-quality service providers. On the whole, we will reflect on some of the redundant investments we made during the last round of market growth, and while continuing to promote our business growth, strictly control costs and expenses to balance growth and profitability.

[John Lam:]

Thank you, can I have one more question, you also mention about two wings, what’s your plan regarding scale expansion and efficiency improvement for your two wings? Strategy for expansion and scale of investments? Full-service home renovation and furnishing achieved the 0 to 1 in 2022, is 2023 the critical year to go from 1 to 10? Please share with us key focuses and goals in 2023?

[Stanley Peng:]

Okay. I will answer your question, 2022 was the year our two wings were born and took root. We have taken a solid step forward in both our home renovation and furnishing business and our rental business. It was still a baby step, though, from 0 to 0.1 in most cities. On the home renovation and furnishing side, our total contracted sales bucked the trend and increased by more than 30% year-over-year, with total revenue exceeding 6 billion. In both Beijing and Hangzhou, we reached the first milestone of over 1 billion in annual contracted sales. As for rental services, we entered 13 cities in 2022, and the total number of rental units under management exceeded 120,000. In 2023, we will establish benchmark cities, achieve the breakthrough from 0.1 to 1, and make committed investments to build long-term capabilities. In 2023, our two-wing businesses will build on the current momentum in the cities we enter. We will not be pursuing comprehensive and rapid scale expansion. First, instead of focusing on short-term and rapid scale expansion, we will continue to decisively invest in our long-term capabilities, including the ability to standardize services and provide better online experience, as well as online operations of the supply chain, digitalization capabilities, product specialization for Chinese consumers, and professionalism of service providers. Second, based on these capabilities, we hope to achieve comprehensive scientific management, business leads conversion and operating efficiency improvement for home renovation and furnishing. We also expect to reduce the vacancy period for our rental units, improve consumer satisfaction, and enhance the efficiency of our service providers and our business. Our 2023 goal is to penetrate several key cities deeply and establish them as benchmarks, enabling our two wings to truly complete the breakthrough from 0.1 to 1. In 2024, we will replicate and promote these benchmarks to more cities. That’s my answer, thank you.

[Operator:]

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

[Siting Li:]

Thank you once again for joining us today. If you have further questions, please feel free to contact Beike’s investor relations team through the contact information provided on our website. This concludes today's call, and we look forward to speaking with you again next quarter. Thank you, and goodbye.