KE: High-quality development of new business

Below is the summary of BEKE's Q4 2023 earnings conference call. For an interpretation of the earnings report, please refer to " Even if real estate is frozen, dividends provide support 》

1. Review of Key Financial Information:

2. Detailed Content of the Earnings Conference Call

2.1. Key Points from Executive Statements:

Growth in New Business: Contract sales of home improvement and furniture services surged by 93% YoY; the number of units managed in the large leasing service exceeded 210,000, showing rapid expansion in the leasing service sector.

The company significantly reduced costs, improved efficiency, controlled risks, and achieved record profitability.

The Days Sales Outstanding (DSO) for the whole year decreased by 50 days YoY to 55 days, indicating improved efficiency in asset management.

Shareholder Returns: KE implemented a share repurchase plan in 2023 and distributed a special cash dividend for the first time. The final cash dividend planned to be distributed will be around $400 million, demonstrating the company's commitment to shareholder returns.

2.2. Q&A Analyst Interactions

Q: My question is about home renovation and furniture business. I noticed a strong growth in this business line in 2023. Could the management further elaborate on what drove this growth and what are the key operating metrics you are focusing on? What are the operational priorities for this business in 2024?

A: In 2023, our home renovation and furniture business achieved significant milestones. Contract sales reached 30.3 billion RMB, a 74% YoY growth, with revenue increasing to 10.9 billion RMB. Operating profits were achieved in 11 cities, with 4 cities generating profits exceeding 100 million RMB. Approximately 43% of contract sales came from referrals by real estate agents, an increase of 9.9 percentage points from 2022. Contract sales of furniture and home goods reached 3.6 billion RMB, accounting for 27% of total contract sales, a 5.8 percentage point increase from the previous year. These achievements are the result of improvements in all aspects of our business operations, primarily driven by rapid expansion in core cities such as Beijing, Hangzhou, and Shanghai. Our home renovation and furniture business made significant progress in 2023, with contract sales exceeding 500 million RMB in six cities. This achievement is mainly attributed to three factors: efficient synergy between core and emerging businesses, a more diversified product portfolio, and enhanced delivery capabilities. Looking ahead to 2024, despite achieving a foundational breakthrough in 2023, we believe that the key to business success and customer recognition lies in quality. Therefore, we will ensure that quality becomes our top priority. We plan to take preventive measures to reduce construction delays and slow responses, and are committed to providing high-quality services. While continuously improving quality, we will also continue to steadily expand and replicate our successful model in more cities.

Q: What was Beike's market penetration rate in the existing housing market in 2023? Additionally, what is the overall focus of the company's existing housing business in 2024? I also noticed the company plans to expand its store network. Could you share more information on this? Can management provide insights on this year's strategy regarding connecting broker brands and stores?

A: In 2023, our single residential business performed quite well, with significant improvements in scale, efficiency, and profitability. Faced with a rapidly changing market, we managed to retain high-quality service providers, which was a key factor in our quick action during the market rebound early last year. Furthermore, in the second half of last year, we actively connected with more high-quality brands, stores, and brokers while continuously improving operational strategies and infrastructure, enhancing efficiency. In 2023, our single red GTV increased by 29% YoY, and revenue grew by 16%. In most cities including Beijing, Shanghai, Nanjing, Hefei, Hangzhou, and Jinan, our market penetration rate also significantly increased.

Our goal is to ensure quick sales and high customer satisfaction by establishing efficient matching tools and cooperation between brokers on both sides of the transaction, creating a virtuous cycle to gain more high-quality listings and improve efficiency. In 2023, the average GTV per store increased by 29%, GTV per broker increased by 25%, and average revenue per store increased by 31% YoY. In cities like Beijing and Shanghai, the closure rate of our brand "Lianjia" stores decreased by 34%, and broker turnover decreased by 21%.

In 2024, our focus is on growth and ecosystem development. Despite market uncertainties this year, we are confident in future growth. We expect to expand our network in many cities, connecting over 5,000 new stores. This year, we will expand our coverage to serve first-time homebuyers in urban areas while continuing to improve operations. To create a more harmonious ecosystem, we are shifting towards providing more targeted support to help lower-efficiency stores start closing deals and improve store returns. Additionally, we will promote cooperation and shared management with store owners to enhance the operating environment and increase their satisfaction with our platform.

Regarding Lianjia's self-operated business, we will expand through the large store model and open small stores in key areas to increase service coverage. For the Lianjia broker strategy, we have launched the "Veteran Plan" and recruited experienced agents in the industry to strengthen our team. In 2024, we will focus on improving broker professionalism through training and talent development to achieve our integrated business goals. In 2023, the real estate market is facing challenges and still undergoing a deep adjustment. Throughout the year, the national residential GTV increased by about 20% to 30% year-on-year, with lottery housing transactions accounting for nearly 40%, reaching a historical high. In comparison, the performance of the new housing market has been poor. Official data shows a 6% year-on-year decrease in national new home sales, with the top 100 real estate developers experiencing an 18% decline in new home sales. The dominant demand comes from home upgrades, accounting for 60% of total housing demand, while first-time homebuyers only make up 30%, and investment demand has reduced to about 10%.

For the new housing market, issues such as location, project quality, pre-sale models, and product design have led to insufficient demand. However, buyers are still interested in properties located in scarce areas and well-designed, especially stable demand for large and high-priced new homes. Overall, the demand shows some elasticity but has not fully translated into actual transactions. In 2023, the number of customers viewing properties on Beike platform exceeded the number of newly listed properties, indicating many potential buyers are observing the market. In some solid cities, despite existing demand, consumers are adopting a wait-and-see attitude, requiring confidence restoration in markets with sufficient housing supply or declining prices. Despite the decrease in house prices, buyers are still willing to transact, demonstrating the elasticity of demand.

On the supply side, investors are concerned about the quantity of self-occupied housing, fearing high inventory issues. In 2023, the number of self-occupied housing reached a historical high, reflecting the release of demand for home upgrades encouraged by policies. In first-tier cities, over 70% of sellers are also buyers, indicating an early sign of demand growth. However, not all listings are genuine supply, as some homeowners are just attempting to list their properties. In high-end cities, new housing supply is mainly concentrated in the outskirts, leading to mismatched supply and demand and an extended inventory clearance period.

Recent market updates indicate continued policy support for social diversity and cultural variety, with several cities optimizing relaxation of restrictions, such as today's news about Hong Kong and more financial support. This may improve the funding situation on the supply side, and mortgage rates may decrease. Although policy impacts are sometimes marginal, the massive easing policies since 2022 should enhance the relative stability of the current housing market.

In a specific market, since October 2023, the GTV of self-occupied housing has remained stable. During the Chinese Lunar New Year, the daily transaction volume of self-occupied housing on our platform increased by over 70% year-on-year. For example, after the Spring Festival, in second-tier cities like Xinjiang, as well as Chengdu, Chongqing, Hefei, Guiyang, and Nanjing, the average sales volume of self-occupied housing in the two weeks after the holiday exceeded the weekly average from December to January, aligning with future trends and indicating stable performance in recent leading indicators. The daily average of house showings and transactions showed parallel changes during the transition year, with the weekly average showings performing better compared to the same period last year. Based on the listing and pricing adjustments by homeowners on our platform, the Prosperity Index of Shell saw fluctuations at the beginning of the year. Recently, the Frontline Brokerage Managers Companies Index has been steadily recovering since February this year.

Regarding housing prices, from January to February 2024, the price index of 50 key cities continued to narrow its MoM decline, dropping to 1% in February. The number of cities experiencing price drops is also decreasing. According to CRRC data, the sales of the top ten developers decreased by 49% YoY from January to February, with a 6% drop in February alone. The sustained sluggish demand in the new housing market has led to a lack of enthusiasm among developers to promote projects. Looking ahead to 2024, the real estate market in second and third-tier cities will accelerate the transition to existing residential property transactions.

Q: Regarding our housing leasing business, it experienced rapid growth in 2023. Can the management team provide more information on the achievements in this business last year and how we managed risks while expanding the scale? What are the development plans for 2024?

A: In 2023, our worry-free leasing business experienced rapid growth, aiming to provide worry-free leasing services and reliable property management services for homeowners, offering tenants a safer and more reliable living experience. This was a crucial year for establishing our core capabilities. We cautiously expanded our operational scale, increasing worry-free leases from 70,000 units at the end of 2022 to 200,000 units by the end of 2023. We also enhanced asset, operational efficiency, and leasing service quality. By the end of 2023, our worry-free leasing occupancy rate increased by six percentage points compared to 2022, reaching 95.1%.

To address the new demands brought by increased sales and the operation of lifetime leasing property management, we made the following improvements in 2023: Firstly, we made significant upgrades to the worry-free leasing business model, greatly reducing seasonal fluctuations and unreleased risks, and better resisting the risk of continuous rent price declines. Secondly, we implemented refund operations by redefining the core roles in the entire leasing management cycle to ensure proper staffing to streamline our operations. Thirdly, we comprehensively strengthened service policies around the seven main pain points for tenants, continuously enhancing our standardized service capabilities. We improved the response time of the service team and encouraged proactive problem-solving.

Additionally, in 2023, our apartment business made significant progress, managing over 10,000 housing units in preparation for 2024. We set ambitious skill management goals, focusing on core cities such as Beijing, Shanghai, and Chengdu. Our goal is to achieve operational breakeven in these core cities and continuously improve overall operational efficiency and quality. In 2023, the average productivity of each manager's property center has reached 100 units. Our goal is to reduce capability differences and enable more leasing property managers to reach this level. We will also enhance quality by identifying potential risks in advance and establishing processing mechanisms to ensure safe selection lines. We are committed to standardizing and customizing services, defining different roles clearly, and strengthening online capabilities to make leasing services reliable and standardized.

Furthermore, we will focus on community and customer needs based on customer demographic characteristics to provide appropriate services. We will build technological and service capabilities around five key strategies, including unit registration, unit occupancy, leasing management and operations, and reputation, to ensure sustainable business growth.

Q: We have noticed that our new housing business has significantly outperformed the industry in performance. What are the reasons behind this? Considering that new home sales may become more challenging in the future, do we expect the penetration rate of brokerage channels to continue to rise? What are our strategies and outlook for the new housing business this year?

A: The new housing market in China faced challenges in 2023. In such a market environment, Beike's total transaction value of new homes increased by about 7% throughout the year, significantly exceeding the industry average. Our operational indicators also reached historic highs. Over the past year, as the market changed, we deepened our understanding of the new housing business, and our efforts in operational management have paid off.

Currently, the industry is moving towards greater specialization. Consumer demand for specialized services is increasing. In the past, as housing prices rose, agents tended to focus only on listings and then find suitable buyers. However, this approach is no longer effective as a lack of comprehensive understanding of customer needs can affect sales conversion rates. Therefore, agents need to think more from the buyer's perspective and identify their needs. At the same time, developers need to update traditional promotional methods as methods like price discounts are not effective in the current market.

There is a stronger demand from developers for both services. In the 20 first-tier cities where our projects are managed, the proportion of developers choosing to cooperate with brokerage sales channels reached 82% in the second half of 2023, an increase of 11 percentage points from the first half of the previous year. Based on the group's strategic judgment, we have shifted our new housing strategy from defensive to proactive, focusing on growth and quality. We have strengthened coverage and insights into online consumers, established better online models through initiatives like live streaming, and started building new partnerships with developers. We have introduced innovative marketing and sales services, significantly increasing our coverage of high-quality new housing projects in 2023.

The coverage rate of new housing cooperative projects reached 51% in the fourth quarter of 2023, an increase of 10 percentage points from the first quarter of the same year. We are committed to strengthening ecosystem development and have signed cooperation agreements with developers and suppliers for over 6,500 new projects in 2023 to achieve transparent operations. In addition, in the first half of 2023, over 3,500 operational new housing projects have adopted our private phone number protection service. In the second half of the year, we focused on risk control and profitability, strictly managing accounts receivable and financial security, with special attention to commission requirements and payment management from high-risk developers. These efforts have reduced our new housing DSO to 43 days in the fourth quarter of 2023. In the fourth quarter of last year, the prepayment commission model accounted for 53% of total revenue in our new housing business, with commission income from Chinese corporate developers reaching 43%. The new housing commission rate also saw a slight increase.

Looking ahead to 2024, we will take the following measures to improve operations: firstly, on the supply side, further promote cooperation with high-quality developers to ensure access to higher-quality new housing supply. Secondly, on the sales side, empower service providers to enhance their efficiency and satisfaction. Appropriately increase the commission ratio for downstream brokers and optimize the operation of new housing sales channels. Furthermore, strengthen infrastructure construction, including new housing source dictionaries, ecosystems, and online new housing content development, to provide richer, higher-quality new housing listings, enhancing customer understanding and sales capabilities. We believe these initiatives will keep our new housing business at the forefront of the market.

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