KE Holdings Inc.
Q4 2020 Earnings Call Transcript

Published: 16 Mar 2021

[Operator:]

Hello, ladies and gentlemen, thank you for standing by for KE Holdings Inc.'s Fourth Quarter and Fiscal Year 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. Today's conference call is being recorded. I will now turn the call over to your host, Mr. Matthew Zhao, IR Director of the company. Please go ahead, Matthew.

[Matthew Zhao:]

Thank you, operator. Good evening and good morning everyone. Welcome to KE Holdings Inc. or Beike's fourth quarter and fiscal year 2020 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, www.investors.ke.com. On today's call, we have Mr. Stanley Yongdong Peng, our Co-Founder and Chief Executive Officer, and Mr. Tao Xu, our 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 and discuss the financial outlook.

[Stanley Peng:]

Thank you, Matthew. Hello, everyone, and thank you for joining us today on our fourth quarter and fiscal year 2020 earnings conference call. We achieved exceptional growth in 2020, closing the year with strong fourth quarter operational and financial results. Our massive scale, operating efficiency, and quality services combined with a strong network effects, have created a self-reinforcing virtuous cycle. It drove our full-year GTV to increase by 64.5% to reach a historical high of RMB3.5 trillion and helped us solidify our leadership position as the largest housing transaction and services platform in China and the second largest commerce platform across all industries in China. 2020 marked the 19th anniversary of Lianjia's operations and three year since Beike platform's inception. The ground we have covered over the past two years as well as our outstanding results in 2020 have provided further affirmation of our belief that the path we are taking in doing the right thing, even if it is difficult, is the right path. It also brings us closer to our vision of providing comprehensive and trusted housing services to 300 million families in China. I would now like to provide you with a closer look at exactly what we accomplished over the past year. Looking back, 2020 was a challenging year for our business and for the world. Facing the COVID-19 pandemic, we worked hand in hand with the connected brands, stores, agents, developers and other platform participants to overcome these tremendous obstacles stakeholders emerge stronger. We carried out a series of measures to have our own and connected agents persist during this difficult period. This included fee waivers, timely payments, supporting brand owners and store owners to ensure their agent continued to be paid . With offline activities severely hampered by the pandemic, we promoted online agent training, online VR property showing and online property sales when the pandemic just broke out. These initiatives supported agents' capabilities to continue to push forward online, lock in sales opportunities and build out the inventory of potential buyers during the period.

[Xu Tao:]

Thank you, Stanley. Thank you everyone for joining us. I would like to provide a brief overview for our fourth quarter and fiscal year 2020 financial results. We're pleased to deliver another strong quarter of financial results marked by high revenue growth and strong possibility. Our net revenues reached a historical high for the fourth quarter of 2020, driven by strong GTV growth. Our net revenue increased by 57.6% year-over-year to RMB22.7 billion in Q4, exceeding both high end of our guidance and the Street consensus. The growth of net revenue was driven by solid GTV growth of 65.4% year-over-year to RMB1.12 trillion, along with the increased productivity and continuously improved service quality of our platform. In particular, our net revenue from these new home transaction services increased by 56.1% year-over-year to RMB9.2 billion in Q4 mainly due to 69.8% year-over-year increase in GTV of new home transaction to RMB584.7 billion in Q4. Our net revenue from new home transaction services increased by 58.8% year-over-year to RMB12.9 billion in Q4, primarily to a 55.5% year-over-year increase in GTV of new home transaction to RMB469.2 billion in Q4. Our net revenue from merchant and office services increased by 58.1% year-over-year to RMB0.6 billion in Q4. The increase was primarily due to the increase of penetration level in the company's financial services around our housing transaction services as well as increased number of home decoration units completed through the company's platform. Cost of revenues increased by 48.2% year-over-year to RMB17.2 billion in Q4. Gross profit increased by 97.4% year-over-year to RMB5.4 billion in Q4. Gross margin increased to 23.9% from 19.1% in the same period of 2019. The increase of gross margin was mainly due to the decrease of the internal commission and compensation as a percentage of net revenue from these new home transaction service completed through Lianjia brand as well as the decrease of commission split as a percentage of net revenue from new home transaction services completed through connected agents and other sales channels. Operating expenses were RMB4.2 billion in Q4 compared to RMB5.9 billion in the same period of 2019. General and administrative expenses were RMB1.88 billion compared to RMB4.56 billion in the same period of 2019 mainly due to the decrease of share-based compensation expenses. Sales and marketing expenses were RMB1.32 billion compared to RMB831 million in the same period of 2019 mainly due to the increase of brand advertising and promotional and marketing activities. Research and development expenses were RMB714 million in Q4 compared to RMB478 million in the same period of 2019, mainly due to the increase of share-based compensation expenses. Income from operations was RMB1.27 billion in Q4 compared to loss from operations of RMB3.12 billion in the same period of 2019. Operating margin was 5.6% in Q4 compared to negative 21.7% in the same period of 2019, primarily due to the decrease of share-based compensation expenses. Excluding non-GAAP items, our adjusted income from operations was RMB2.23 billion in Q4 compared to negative RMB80 million in the same period of 2019. Adjusted operating margin was 9.8% in Q4 compared to negative 0.6% in the same period of 2019, mainly attributable to increased gross margin and improvement of operating leverage. Adjusted EBITDA increased by 2,183.9% year-over-year to RMB2.9 billion in Q4. Net income was RMB1.1 billion in Q4 compared to net loss of RMB31 billion in the same period of 2019. Excluding non-GAAP items, our adjusted net income increased by 4,424.8% year-over-year to RMB2 billion in Q4. Net income attributable to KE Holdings Inc.'s ordinary shareholders was RMB1.1 billion in Q4 compared to negative RMB3.7 billion in the same period of 2019. Adjusted net income attributable to KE Holdings Inc. increased by 4,508.2% year-over-year to RMB2 billion in Q4. For the fourth quarter of 2020, diluted net income per ADS attributable to KE Holdings Inc.'s ordinary shareholders was RMB0.93 compared to negative RMB7.99 in the same period of 2019. Adjusted diluted net income per ADS attributable to KE Holdings Inc.'s ordinary shareholders was RMB1.71 compared to negative RMB1.15 in the same period of 2019. As of December 31, 2020, the combined balance of our cash, cash equivalents, restricted cash and short-term investments amounted to RMB65.2 billion or $10 billion. And for the full year of 2020, our business achieved robust operational and financial growth and our GTV increased by 64.5% year-over-year to historical high of RMB3.5 trillion from RMB2.13 trillion, enabling us to remain the second largest commerce platform across all industries in China and the third market expanding platform globally. Our net revenue increased by 53.2% year-over-year to historical high of RMB70.5 billion from RMB46 billion. Our net income reached historical high of RMB2.78 billion compared to net loss of RMB2.18 billion in 2019. Our adjusted net income increased by 245.4% year-over-year to historical high of RMB5.72 billion from RMB1.66 billion. Looking forward to our first quarter of 2021, we expect our net revenue to be between RMB18.5 billion and RMB19.5 billion, representing an increase approximately of 159.8% to 173.9% from the same quarter of 2020. The rapid high year-over-year growth of our revenue guidance is mainly due to the significant negative impact of COVID-19 for our business in the same period last year, which resulted in a meaningful portion of transaction shift from Q1 to Q2 last year. The business outlook reflects the company's current and preliminary view of the business situation and market conditions, which is subject to change. Last but not least, we believe in the long run under the principle housing for living, not for speculation, the real estate market in China will continue to shift toward a more stable and steady growth. This in turn will create a more favorable environment for us to carry out our commitment to reinvent industry and deliver the highest quality service to 300 million families in China. Going forward, we will remain to focus on taking better care of the consumer and several platform participants such as brokerage brands, store owners, agents, and real estate developers to take better care of the consumers, while continuously strengthening our competitive moat and growing business at a fast pace. As we continue to reinvent our agent cooperation network infrastructure, user based function and innovative AI technologies, we're confident we will further enhance our capability and deliver sustainable growth. That concludes our prepared remarks. We would like to now open the call to questions. Operator, please go ahead.

[Operator:]

Thank you so much. Ladies and gentlemen, we will now begin the question-and-answer session. And your first question comes from the line of Elsie Cheng from Goldman Sachs. Elsie, your line is now open.

[Elsie Cheng:]

Thank you management for taking my questions and congratulations on the strong results again. I have three questions here. One is really about the changing macro environment and tightening regulation. In housing industry in China, how does it impact Beike and its operations in major cities and how should we think about its impact to our full year results? And the second is on the comparative landscape. It's been a while since got privatized and we also observe some developers are proactively building their own digitalized team. So can management share a little bit more color on your observation in the key trends in the industry and Beike's strategy in sustaining the competitive moat? And the last one is about emerging businesses. We continue to see the GTV and revenue scale robustly in the segment. Can the management share a little bit more color into the progress of operations, home decoration and financial services? Thank you.

[Xu Tao:]

Thank you, Elsie. This is Xu Tao. Let me address your first question. Let me talk about some policy changes recently. So over the China housing policies promote housing for living, not for speculation while preventing financial systemic risk arising from the real estate market with layered matter specific policies. So in Chinese, we call this as . The stable real estate market is beneficial for the sustainable development for Beike and the industry as a whole. The policy we saw to slow the market from our overheating by using a relatively mild regulation and implement the management to prevent more severe regulation matters and greater market fluctuations . As part of long-term mechanism to maintain housing market, it also volatility of the real estate market that was in the past and made the competitive landscape more about this capability, quality and efficiency and create a favorable environment for Beike and the whole industry. From our observation, the recent housing policy has no significant or direct impact on the national real estate transaction momentum, nor brought significant changes in overall market price or the transaction volume. Since the policy has implemented to some over 50 cities like Shenzhen and Shanghai, but the housing is still necessary and related demand in China. So let me talk about Shenzhen. In Beike, actually we have a bit of presence for 102 cities and all of our incremental revenue was mainly coming from our newly connected platform business. So Shenzhen is the star city of Beike. Its market share improved from 17% in 2018 when we launched Beike to 29% in 2020. That still comes low single digit percentage of Beike total GDP in 2020. So we would like to say at present that we do have centralization program for specific cities and Beike is a platform company and our nationwide platform is able to mitigate the downside risk of the valuation from any particular cities. And also for Shanghai and Shanghai is the largest existing home sales market in China with the market's housing stock over 2 million. Measures in Shanghai are relatively mild with the limited impact on the transaction volume and we believe the city will return to a housing market with active trading in due time. The recent measures in Shanghai are not as strong as Shenzhen and the impact on the transaction volume and the price will be relatively mild. This is your first question. Regarding strong competition, yes, we do notice some peers step into this area. So normally we don't comment on other peers' performance directly, but two things are very certain. First, Beike's IPO has inspired so many people and there will be more players and capital step into the residential real estate market. The second, Beike is very confident and is very happy to see new industry entrants to step into this area and allowing us to further enhance our capability to be the leader of the industry of Internet and think deeply about our strategy, that is how to take care of our clients and our platform participants to take better care of our clients. Regarding the market conditions, I would like to say directly there are still some competition among the industry or among the developers. The developers may be hesitant to use somebody's -- one developer as their broker channel due to the competition or might worry about the customer long-term, the cooperation mechanisms even likely. Beike will hold the different value proposition against to start target or make promise on the future valuations at the beginning of the entrepreneurship. Beike's business strategy has never been changed and I'd just reiterate again, our strategy is to take care of customers and help the service providers to take care of the customers. So from the financial number and the business performance perspective, no impact to Beike. If you look at the GTV, our take rate and the contribution margin and DSO in the past three years, the GTV increased around RMB200 billion to RMB747 billion and last year, we further increased RMB1.38 trillion, and the take rate for the new home sales will have a modest increase. So our take rate increased from 2.66 to 2.71 and last year increased to 2.74 and the contribution margin for the new home continuously improved and improved from RMB3 billion to RMB4.9 billion and the last year is RMB3.2 billion. And the DSO, also owing our stability, doubled year-over-year, but our DSO improved. In 2018, 117 days, and 2019, 96 days. Last year, we have slightly increased 103 days just as a combined impact of COVID-19. If you look at the Q3 and Q4 number, we have reduced to 87 days. There is no impact . So last question regarding our business strategy for the new business, I would like to invite our CEO Stanley to give the answer.

[Stanley Peng:]

This is Stanley. Let me address your question in terms of the emerging services development. So the next month, we will enter three years of anniversary for the Beike's platform as well as Lianjia's almost like 20 years of anniversary. So in the past 20 years, we actually accumulated a lot of experience, especially during our procedures to restructuring of the housing transaction industries. So we're really focused on how we can be with overall standard to the industry. What we got take from the past 20 years of experience is we need to doing the business horizontally firstly, right? So then after that, when we get to know the know-how of the industry, we can start doing the platform business vertically. So that's also what we got to take. And we noticed a lot of different kind of business such as housing transaction or the decoration as well as the furnitures. Each of them has a significant of the potential market size. So we will continue to develop the opportunities there. We are looking for the opportunities in the industrial Internet going forward. When we look at the potential sectors to develop, we always look at the following of the characteristics. Firstly, the industry should be very big enough. Secondly is we also look at how we can our capabilities from the past years of the operational experience. And firstly -- and thirdly, we also look at the potential opportunities within that track. So from that perspective, I can give you two examples going forward in terms of our continued development. So first is about the decoration business and the secondly is about the financial business. For the decoration business, we will -- in the year of 2021, as I described in our -- in the prepared remarks, so we'll continue to focus on the Beijing market. We will focus on to build up the SOP for this industry and build up the SaaS system as well as continue the systems capabilities. So we will focus on the workers' management as well as the overall industrial chain management in order to further build up our capability within the decoration business in Beijing. In terms of financial business, for this year, we'll continue to improve our capability to promote the online process. We are trying to build up a system for financial advisors to ensure the working procedures can be complete online. And meanwhile in terms of the customer side, we're also trying to promote the products such as the safeguard products for the home sellers -- for home sellers' mortgage redemption needs, so in order to connect the buyers' mortgage with the seller together to further improve the user experience. So in the future, as I mentioned, so looking into 2021, we will continue to explore the good practice as well as other explorations within the financial services. Thank you.

[Elsie Cheng:]

[Operator:]

Thank you so much. And your next question comes from the line of Binbin Ding from J.P. Morgan. Binbin, your line is now open.

[Binbin Ding:]

So my question is about the pricing strategy. You noticed that recently Beike has gradually raised the secondary home transaction commission rate to 3% in some cities. So I was wondering number one, in how many cities have they started to adopt the 3% commission rate? And second is, in each city, how do we differentiate the pricing of our in-house Lianjia stores versus third-party connected stores? The third one is, are we going to further expand the 3% price into more cities in China and how should we look at the secondary home commission take rate in the rest of the year? And a related question is, do we have any plan to increase the commission rate in new home transactions in the near future? Thank you very much.

[Xu Tao:]

Okay, thank you. It's Xu Tao. Let me address your question. So for our commission rate for this new home, actually we want to clarify the level of commission rate actually reflects the service quality and the transaction efficiency. The market of new home sales is a market with full competition and a balanced supply and demand market. Rising commission, we felt, being justified by service quality or transaction efficiency. It's just like water without force and tree without roots, in other words, just not sustainable. So with a neutral market view, our platform will actively explore bilateral commission model to balance the financial burden between the buyers and sellers whilst striving to improve the overall service quality, commitment coverage and the ability to identify customers with strong purchase power in order to support local brand to improve their power. So, the business infrastructure of Beike is community-centric store network. So to balance our existing home and the new home sales is very crucial and we encourage our agents to take part in the company's services and client better and serve clients better and build up long-term commitments and professional dignity to continuously improve their service quality efficiency and offers most of guarantees. So, if you look at our take rate for our existing home sales, in past three years, so there is still a modest increase for our brand of Lianjia in past three years, commission rate from 2.32 to 2.38 and the last year is 2.4, And for our franchise brand of Deyou, the commission rate up and down in a very limited range, so it's varied from -- it's changed from 2.15% and 1.99% and last year is 2.00%. And for our connected brands, in Beike platform for 278 brands, so we can average the take rate to have a modest increase from 1.89 to 1.92 and last year, 2.07%. So in conclusion, for our existing home commission rate, we expect a steady growth in both Lianjia, Deyou and our connected stores. The new home sales commission rate, more commitment are covered and the quality of service are improved and this will be the benefit from our platform. And for the new home commission rate, actually for new home sales market, it's also a to-be market, in which we play an important and equal role with the developers. This is a perfect market and high in commission rate with high efficiency, fast cash collection as well as high level of customer commission. So it's a long run for the new home commission rate. In order to maintain a mutual and beneficial and a sustainable relationship with the real estate developer, we expect commission rate to remain stable and at around 2.77%. Thank you.

[Binbin Ding:]

Thank you very much.

[Operator:]

Thank you so much. And your next question comes from the line of Steven Tsai from Morgan Stanley. Steven, your line is now open.

[Steven Tsai:]

Thank you management for taking my question. My question is related to the sales efficiency improvement for the connected stores. You previously mentioned that on a core basis, the third-party stores improved GTV per store by 100% and 26% in their first and second year respectively on the platform. So just wondering if there is any difference for the stores that joined later in the second half of ' 19 or first half of '20 in terms of the sales improvement trend that you have observed so far. Thanks.

[Xu Tao:]

Okay, thank you. Actually in -- we would like to see in 2020, Beike connected more than 47,000 stores and 493,000 agents and our GTV year-over-year, as I mentioned just now, increased 64.5%. Among this incremental effect, we always understand potential for our operating system, namely the ACN, the agent cooperation network, to promote healthy platform development and prevent virtual competition through the equal system governance. So, in 2020 Beike applied for more than 81.5% listing actually come from third-party stores and more than 75% is cross-store transaction and more than 36% is cross-brand collaboration. So as a consequence of this, so if you look at our number, just efficiency, namely the annual GTV per store in 2020 just the total number, the big picture, for our brand of Lianjia year-over-year increased 21.2% and for our franchise brand of Deyou year-over-year increased 18.7%. For our connected brand in Beike platform, year-over-year the efficiency increased by 17.2%, just the big picture. If you look at the cohort base, at the cohort base, their efficiency year-over-year increased over 26%. Thank you.

[Steven Tsai:]

Thank you. It's very clear.

[Operator:]

Thank you so much. And your next question comes from the line of John Lam from UBS. John, your line is now open.

[John Lam:]

Thank you, management. So my -- there are two questions from me. Number one is about what do we see in terms of the GTV trend for the primary and also secondary transactions. And also, do we have the guidance for 2021 GTV? And my second question is regarding the margins. We see that during the fourth quarter, adjusted net margin is about 8.8%. And which city has the highest adjusted net margin and what is the level of that margin? Thank you.

[Xu Tao:]

It's Xu Tao. me to answer your question. So we see a steady growth especially for this new home sales sector. This will be different in our outlook for the first quarter. As I mentioned just now, we expect revenue for the first quarter of 2021 will be reached RMB18.5 billion to RMB19.5 billion. So we cannot give very detailed number for the Q1 because Q1 is still in progress. So regarding your second question, where cities' margin is high, so let me clarify, internally we do not measure our financial performance by cities. We -- just as a consolidation of the -- so -- and also we just kind of come in and say, internally we have a measurement, the major measurement is like the store efficiency. As I just talked with the last analyst, we measure the store efficiency by different city, different brand. So this is our internal measurement. And so far we -- we can see the Shanghai leading the store efficiency, it's very good because where we have our business, we stepped into Shanghai for three years and we continue to recruit new graduate from the colleges and also in Shanghai our local management team issue so many service guarantee and so many business contact for the agents. So overall, the client satisfaction has improved. The API has continuously improved. So the efficiency of our store, as a consequence, continuously improved as well. Thank you.

[John Lam:]

Okay, thank you.

[Operator:]

Thank you so much. And our last question comes from the line of Thomas Chong from Jefferies. Thomas, your line is now open.

[Thomas Chong:]

Thanks management for taking my questions and congratulations for a strong set of results. My question is more about the long-term outlook. Can management talk about how we should think about the long-term trend in terms of the GTV and profitability? Are we getting a bit even more optimistic about the outlook in the next few years? And on the other hand, can you comment about any type of a logical upgrade that we should be aware with regard to our back-end ecosystem? Thank you.

[Xu Tao:]

Thank you for the question. This is Xu Tao. Let me address your first question. Regarding our long-term GTV, revenue and the profitability projections, actually last year when we prepared the IPO, we had this IPO model and released it to the market. So we still keep our IPO model as unchanged. So in that model, in 2024, we see the GTV will be RMB7.6 trillion and revenue will be over RMB161 billion and net profit will be -- adjusted net profit will be RMB18 billion. So far we will not change this projection because we need to balance our investment in future and also our profitability and the -- but the management of Beike will have strong confidence to beat any risk on this. So regarding your second question, I will invite our CEO to give some further information.

[Stanley Peng:]

This is Stanley. Let me address your second question. So since we actually have been accumulated huge amounts of data in our operating of history, so in terms of the ACN evolution this year, we will continue using the technology to -- as well as the AI capability to continue iterate our products and to further help the agents to get better services as well as serve better to our customers. So we are using a lot of different types of tools, as I mentioned before such as Beike's as well as our AI assistant Xiaobei, which has helped the agents -- agent people to continue optimize as well as improve their efficiency as well as productivity. So in the following -- in the previous of the experience in terms of the industrial Internet, we truly believe the engineer's capability definitely can help of the service as well as the service providers within the industry kind of bring better. So definitely in the future, we will compound the two part of the culture and the capability together to continue to improve the efficiency and the productivity for the ACN network. Thank you.

[Thomas Chong:]

Thank you.

[Operator:]

Thank you so much. And due to the time limit, I will now turn the call over to your speaker host today, Mr. Matthew Zhao for closing remarks.

[Matthew Zhao:]

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

[Operator:]

And that does conclude our conference for today. Thank you for participating. You may all now disconnect.