Beike: "A Plum Blossom" in the Real Estate Winter?

Before the US stock market opened on the evening of November 8th Beijing time,$Kimball Electron(KE.US), the parent company of Beike, released its third-quarter earnings report for 2023. Due to a significant decline in the real estate market in the third quarter, market expectations were not high. However, Beike delivered much better-than-expected performance. The key points are as follows:

1. Strong performance against the industry downturn?

Despite the sharp decline in the transaction volume of second-hand homes in China since July, Beike achieved a transaction volume of 439 billion yuan for existing homes this quarter, only a 4% decrease compared to the previous quarter, far exceeding the sellers' expected 399 billion yuan. Looking at the breakdown, the GTV (Gross Transaction Value) led by Lianjia increased by 7% compared to the previous quarter, offsetting the 11% decrease in GTV from franchise stores.

Thanks to the strong transaction volume, the revenue from existing homes reached 6.31 billion yuan this quarter, which was almost unchanged compared to the previous quarter and significantly higher than the expected 5.91 billion yuan. However, despite the increase in the proportion of self-operated transactions, the overall commission rate remained at 1.4% compared to the previous quarter, indicating a slight decrease in the monetization rate of the business.

2. New homes show resilience despite greater impact

Compared to existing homes, the decline in the new home market in the third quarter was more severe. Beike's transaction volume for new homes also decreased by about 35% to 192.1 billion yuan compared to the previous quarter, but it still exceeded the market's expected transaction volume of 177.3 billion yuan by 8.4%. Despite the significant impact on the new home business, Beike's performance was still better than expected.

In a situation where it is difficult to realize returns, the value of Beike's channels becomes more apparent, with the commission rate increasing by 0.2 percentage points to 3.1% compared to the previous quarter. With this positive development, Beike's revenue from new homes reached 5.9 billion yuan, nearly 11% higher than market expectations.

3. Rapid growth in new business

In addition to the strong performance of the core brokerage business, the new business areas that the company has high hopes for also exceeded expectations this quarter. First, the revenue from the home decoration business increased from 2.63 billion yuan to 3.18 billion yuan, maintaining a high growth rate of 21% compared to the previous quarter.

The revenue from other innovative businesses also reached 2.43 billion yuan, an increase of nearly 39% compared to the previous quarter, mainly driven by the rapid growth of the housing rental business. In addition to the home decoration business, housing rental may also become one of the driving forces for Beike's growth.

4. Strong revenue and unaffected profits

Due to the higher-than-expected growth in new homes, existing homes, and emerging businesses, Beike's overall revenue this quarter reached 17.8 billion yuan, an increase compared to the same period last year and far exceeding the sellers' expected 16 billion yuan. At the same time, Beike's gross profit margin remained stable at 27.4% compared to the previous quarter. With the revenue exceeding expectations, the gross profit also exceeded expectations by nearly 33%, reaching 4.88 billion yuan.

In terms of expenses, all three operating expenses decreased compared to the previous quarter, with the largest decrease in management expenses, from 2.1 billion yuan to 1.86 billion yuan. However, due to a decrease in revenue, all expense ratios, except for management fees, "passively" increased, resulting in a slight decrease in operating profit margin from 5.5% to 5.1% MoM.

In the end, Beike's operating profit for this quarter was 910 million, only a decrease of about 15% MoM, which is a stark contrast to the market's expectation of a net loss. It can be said that Beike's profit was hardly affected in the face of a significant downturn in the real estate market.

5. Existing housing business turns the tide

Looking at the different segments, due to the increase in the proportion of self-operated properties in the existing housing business, the gross profit margin of this segment increased from 46% to 49% MoM. In the end, despite a decrease in revenue, the contribution of gross profit increased to 3.07 billion. At the same time, the rapid development of new businesses offset the decline in gross profit from new housing business, resulting in a slight decrease in the company's overall profit.

Dolphin Research's viewpoint:

Looking at Beike's performance this quarter, the company's performance truly demonstrates its strong ability to withstand industry headwinds as a market leader. Although the scale of the existing housing and new housing businesses declined MoM due to industry impact, they still exceeded market expectations by nearly 10%. At the same time, the home decoration and rental businesses have also grown rapidly, resulting in an increase in Beike's overall revenue YoY.

Due to a smaller-than-expected decrease in revenue, the profit was not significantly affected, and the company still achieved an operating profit of nearly 1 billion, which is a far cry from the expected net loss.

Although the company's revenue guidance for the fourth quarter (approximately 18.3 billion) is lower than the market's expectation of 19.5 billion, taking a longer-term perspective, in the core business of intermediaries, even though the future direction of the Chinese real estate market is difficult to predict, this performance once again proves that Beike has a strong ability to withstand shocks (i.e., alpha). At the same time, New Horizons' home decoration and rental businesses are steadily growing, so it is not a problem to generate substantial incremental profits for the company.

Therefore, Dolphin Research believes that as long as Beike is valued reasonably, it is a relatively high certainty target in the medium to long term.

Detailed interpretation of this quarter's financial report:

1. Existing housing: Market leader once again defies the trend

As shown in the sample second-hand housing transaction data in the following chart, the transaction volume has significantly decreased MoM since July, compared to the first and second quarters. It is an undeniable fact that the domestic real estate market has weakened in the third quarter of this year, so the market's expectations for Beike's performance in the third quarter were quite conservative.

However, in reality, Ke.com achieved a transaction volume of 439 billion yuan for existing homes this quarter, only a 4% decrease compared to the previous quarter, far exceeding the sellers' expected 399 billion yuan. It can be seen that Ke.com's performance is much better than the weak industry data suggests.

Looking at the details, the GTV (Gross Transaction Value) led by Lianjia increased by 7% compared to the previous quarter, offsetting the 11% decrease in GTV from franchise stores, indicating that the self-operated channel is the source of the better-than-expected performance.

Due to the strong transaction volume, the revenue from existing homes this quarter reached 6.31 billion yuan, which is almost unchanged compared to the previous quarter, significantly higher than the expected 5.91 billion yuan. However, despite the increase in the contribution of self-operated transactions by Lianjia, the overall commission rate remained at 1.4% compared to the previous quarter, which was slightly unexpected. This may indicate a slight decrease in Ke.com's actual realization rate, resulting in a lower-than-expected increase in revenue compared to the transaction volume.

Second, new home business: significant impact from industry downturn, but Ke.com still has alpha

Compared to existing homes, the decline in the new home market in the third quarter was more severe, and Ke.com's transaction volume for new homes also decreased by about 35% to 192.1 billion yuan compared to the previous quarter. Although Ke.com's absolute performance in the new home market was also poor due to the overall impact of the industry, it still exceeded market expectations by 8.4% compared to the expected transaction volume of 177.3 billion yuan. In terms of new home business, Ke.com's performance was still stronger than expected.

At the same time, during the industry downturn, Ke.com's commission rate for new home business increased by about 0.2 percentage points to 3.1% compared to the previous quarter. Dolphin Research believes that in the situation where the transaction volume for new homes has been significantly reduced and the turnover of funds is not easy, the value of intermediaries like Ke.com becomes more apparent, leading to an increase in the commission rate. With this positive development, Ke.com's revenue from new home business reached 5.9 billion yuan, exceeding market expectations by nearly 11%, which is higher than the increase in transaction volume.

III. Rapid Growth in New Business Areas

In addition to the strong performance of the core intermediary business, the company's second and third business areas, which have high expectations, have exceeded expectations this quarter.

Firstly, although the transaction volume of the home decoration business did not increase MoM, the revenue still increased from 2.63 billion to 3.18 billion, maintaining a high growth rate of 21% MoM.

Furthermore, the revenue from other innovative businesses reached 2.43 billion, showing a significant increase of nearly 39% MoM. According to the company's explanation, this is mainly due to the rapid growth of the housing rental business. It can be seen that in addition to the home decoration business, housing rental may also become one of the driving forces behind the growth curve of Beike's new additions.

IV. Strong Profits, not just Revenue

Overall, due to the growth of new houses, existing houses, and emerging businesses exceeding expectations, Beike's overall revenue this quarter reached 17.8 billion yuan, a YoY increase and far exceeding the expected 16 billion yuan.

At the gross profit level, Beike's gross profit margin remained stable at 27.4% MoM. Therefore, with revenue exceeding expectations, the gross profit also exceeded expectations by nearly 33%, reaching 4.88 billion yuan. Specifically, due to the increase in the proportion of self-operated properties by Lianjia and the decrease in the proportion of platform business, Beike's external commission expenses decreased significantly, but the internally increased commission expenses offset part of it. In addition, fixed store expenses also increased passively in the case of declining revenue, resulting in a constant gross profit margin QoQ.

On the expense side, all three operating expenses decreased QoQ, with management expenses showing the largest decrease from 2.1 billion to 1.86 billion. Although the absolute value of other expenses also decreased, due to the decrease in revenue, the expense ratio also "passively" increased, resulting in a slight decrease in operating profit margin from 5.5% to 5.1% QoQ.

Finally, Ke Holdings' operating profit for this quarter was 910 million yuan, a decrease of only about 15% compared to the previous quarter. This is far beyond market expectations of a net loss in operating profit. It can be said that despite the significant weakness in the real estate market, Ke Holdings' profit has been hardly affected.

V. Rescuing the situation in the stock housing business, profit increased instead of decreased

Looking at the different segments, 1) it can be seen that due to the increase in the proportion of self-operated properties in the stock housing business, the contribution of gross profit in this segment increased instead of decreased, with the profit margin increasing from 46% to 49%.

However, despite the increase in commission rates in the new housing business, the contribution of gross profit margin in this segment decreased from 27% to 25%. It can be inferred that a larger proportion of commission income was allocated to real estate agents.

As for the home decoration business and other emerging businesses, although the contribution of gross profit margin remained relatively stable compared to the previous quarter, the significant increase in revenue led to a noticeable increase in gross profit.