Beike: Progress of home decoration and leasing businesses

The following is a summary of Beike's second quarter 2024 earnings conference call. For an interpretation of the financial report, please refer to " "Can 'One Body, Three Wings' Help Beike Soar Again?" 》

I. Review of Core Financial Information:

II. Detailed Content of the Earnings Conference Call

2.1. Key Points from Executive Statements:

1) Business Progress

① Store Network a. Since the end of 2023, the platform has added 2,400 active stores, a 6% increase; and 40,000 active brokers. b. Strengthened property management and customer conversion rates, improving coverage through community promotion and key project management.

② Existing Home Transaction Business a. Existing home transactions on the Beike platform saw year-on-year positive growth in May, with nearly a 70% increase in June. b. Based on housing data from four first-tier cities, the total number of online transactions for existing homes in the second quarter of 2024 increased by 16% year-on-year, with online transactions on the Beike platform increasing by 40% year-on-year.

③ New Home Transaction Business a. Expanded cooperation with new housing projects, with the year-on-year decline in new home contract value narrowing to 25% in May and turning into a 12% year-on-year increase in June. b. Implemented sales process reforms, customer-oriented, to improve sales conversion rates and establish end-to-end monitoring processes.

④ Home Decoration and Rental Business a. Revenue from home decoration and home furnishing business increased by nearly 60% year-on-year, while revenue from housing rental services increased by 177% year-on-year, with continuous improvement in gross profit margin. b. Promoted the Home Saas 2.5 system to enhance comprehensive one-stop service capabilities, supporting up to 5,000 simultaneous construction orders.

⑤ Other Businesses a. Launched community convenience service stations in cities such as Shanghai and Chengdu, integrating home decoration and rental services into Lianjia stores to enhance market coverage. b. The listing coverage of existing homes in Shanghai increased from 76% last year to 87%, with home decoration and worry-free rental businesses growing by 63% and 140% respectively in the second quarter.

⑦ Future Outlook a. Faced with external macroeconomic challenges in the second half of the year, the focus is on balancing growth speed, scale, quality, and efficiency to drive ongoing success for the organization. b. Further optimize one-stop services and new business integration to enhance overall growth potential.

⑧ Cash Flow and Shareholder Returns a. Net operating cash flow in the second quarter was RMB 4.8 billion. b. As of now, the company's total cash liquidity is RMB 75.5 billion, excluding customer deposits. c. The company has repurchased approximately USD 480 million in shares, accounting for approximately 2.7% of the total outstanding shares at the end of 2023. d. Since initiating the share buyback program in September 2022, the company has repurchased approximately USD 1.39 billion in shares, accounting for approximately 7.5% of the total outstanding shares before the program started

2.2 Analyst Q&A

Q: What changes have occurred in the real estate market since the new policy was introduced on May 17th? Has there been a differentiation in performance between the new and existing home markets? Is the trading post-policy sustainable? What are the prospects for transactions in the second half of the year?

A: In the second quarter, with the introduction of the new policy on May 17th, the real estate market gradually improved, especially with a significant increase in transaction volume in the existing home market. Specifically, the proportion of GTV in existing home transactions increased from about 40% last year to about 44% in the first half of this year. In comparison, the performance of the new home market was slightly weak, although the year-on-year decline in new home sales in June narrowed month by month, with market transactions gradually shifting from new homes to existing homes. The continued advancement of loose policies, especially the start of the inventory reduction policy cycle and the policy package on May 17th, focused on reducing housing inventory, reviving the existing home market, and relaxing mortgage conditions. The implementation of the policies has brought significant market recovery effects in first-tier cities, especially in Shanghai, where transactions grew by nearly 80% from April to June. In contrast, the policy response in second and third-tier cities was relatively limited.

The market recovery is mainly driven by housing upgrade demand, especially in first-tier cities, where this type of demand accounts for 60% to 80% of transaction volume. With falling house prices, the proportion of first-time homebuyers has increased. For example, in Shanghai, the proportion of non-local homebuyers increased from nearly 30% to close to 40% in June, and the proportion of single homebuyers increased by 6 percentage points. Although prices in the existing home market are still falling, we have seen positive signals. The month-on-month decline in national existing home prices narrowed from -1.7% in May to -1.2% in June. Prices in Beijing and Shanghai increased by 0.4% and 1.2% respectively in June. At the same time, the willingness of sellers to reduce prices has eased, with a decrease of 8% in the proportion of properties sold at significant discounts.

Looking ahead to the second half of the year, starting in July, due to the weakening impact of policies and seasonal factors, transaction volume in the existing home market has decreased. However, July's transaction volume is still about 5% higher than April, with a significant year-on-year growth. Existing home prices continue to fall in first-tier cities, but the decline has narrowed. Overall, the existing home market is expected to remain stable in the second half of the year, with transaction volume in first-tier cities likely to stabilize after a rapid recovery, providing some support to prices. However, expectations of further price declines and cautious buyer sentiment may limit market recovery. Future policy adjustments and relaxation of home purchase restrictions will be key factors influencing market trends.

Q: Regarding the new home business. Can you explain why our new home business performance is better than the industry average? Could you also discuss the "alpha" of new homes and the trend of monetization rates?

A: In the first half of this year, our new home business significantly outperformed the industry, mainly due to our strong operational and execution capabilities. Our housing transaction business not only exceeded market targets but also consistently generated excess returns. In the second quarter, our new home GTV (Gross Transaction Value) reached RMB 235.3 billion, a 20% year-on-year decrease but a 55% increase compared to the previous quarter In contrast, the GTV of the top 100 developers in CRIC decreased by 35% year-on-year in the second quarter. Especially in June, our new home contract volume increased by 12% year-on-year, while the industry as a whole declined by 22%. Furthermore, our revenue in the second quarter exceeded our GTV growth, indicating that while maintaining market share, we did not sacrifice monetization capabilities, and the stable monetization capabilities were validated. At the same time, by providing better incentives for downstream agents in new home sales, we more effectively drove liquidity in the current market.

The certainty of our business mainly comes from two aspects: the breadth and depth of our channel service coverage and the enhanced sales conversion capability. As the new home market gradually shifts to a buyer's market, the role of sales channels in the industry is transitioning from simple transactions to providing in-depth customer insights and collaborating with developers to address pain points of new home buyers. This year, we further expanded cooperation with top developers and increased the depth of cooperation. By the end of the second quarter, the number of strategic cooperating developers increased from 13 in the same period last year to 25. The sales of these cooperating developers accounted for 26% of our new home GTV in June, an increase of 11 percentage points from the same period last year. In terms of sales conversion capability, we continued to improve the conversion rate of new home sales through empowered technical tools and refined operations. This year, the number of new home agents on our platform has significantly increased, and the role of comprehensive agents has been expanded to involve more agents in both new and existing home businesses. For example, the number of new home agents in Zhengzhou in the second quarter was three times that of the same period last year. In addition, we further iterated on potential customer products to help agents better identify high-potential customers, who contributed about 70% of new home sales. Meanwhile, through innovative service solutions such as trade-in, worry-free repayment, and worry-free decoration, we effectively addressed various needs of customers in the new home purchase process, further enhancing the efficiency of new home sales.

Q: Regarding the growth strategy for housing transaction services. What is your view on Lianjia's activities? So far, what is the feedback at the store level? What innovative measures do you have in these stable cities?

A: This year, our core strategy for housing transaction business is to promote growth and establish a harmonious ecosystem. In the first half of this year, we made significant progress in expanding chain stores and exploring innovative models. Firstly, in terms of expanding agents and store networks, by the end of the second quarter, the total number of active non-Lianjia stores on our platform increased to 38,900, and the number of active non-Lianjia agents increased to 308,000, growing by 6% and 2.8% respectively compared to the end of 2023. We added 48 major brands, and during this period, over 6,500 new stores signed up to join our platform, with an average of about 1,200 new stores added per month, and a six-month retention rate of 93%. In terms of efficiency, the productivity of new store agents signed since September last year has exceeded 80% of the productivity of existing store agents on the platform within three months after signing Through refined operations such as property inspections, key property audits and maintenance, we have helped improve efficiency for some key city stores, supported by technical tools such as AI property indicators and intelligent property maintenance assistants. These investments in store functionality improvements have also yielded good returns, with newly opened stores in the fourth quarter of last year achieving positive investment returns by June this year.

In terms of innovative initiatives at Lianjia, the large store model has achieved significant success, with about 51% of stores having more than 18 agents by the first half of this year, an increase of 5.4 percentage points from last year. This strategic advancement has also reduced the turnover rate of Lianjia agents to below 4%. Additionally, we have implemented a low-cost community convenience store model to increase service density and investment returns. For example, in Shanghai, through this model, property coverage has increased from 76% last year to 87%. We have also introduced more home-related elements into stores, making them a one-stop residential service entrance, and enhancing community connections through brand cross-border cooperation. For instance, in Lianjia stores, we have launched a team composed of home decoration experts and designers to showcase the decoration process and technology, which not only promotes early customer acquisition in the home decoration business but also strengthens community ties.

In terms of talent development, Lianjia divides recruitment into three key areas: college graduates, professionals, and community experts, providing various support programs for newcomers to help them through the initial growth stage and build a high-quality service team. Furthermore, Lianjia has launched a leadership program designed for store owners to cultivate comprehensive management talents skilled in residential services, promoting long-term career development for service providers.

Q: Regarding non-housing businesses, especially in the home decoration and furniture business, there has been an increased contribution rate in the second quarter. What are the key operational focuses in the home decoration business this year? What is the current progress?

A: Last year, our home decoration business revenue exceeded RMB 10 billion, and the outstanding performance in leading cities validated our business capabilities and model. This year, our operational focus is on establishing key infrastructure and capabilities, mainly including digital upgrades, optimizing construction delivery, and custom furniture delivery.

Firstly, we have iterated on the Home SaaS system, upgrading it to version 2.5, and promoting it nationwide. This system covers five main areas: customer sales system, central control system, construction delivery system, and supply chain system. Major upgrades in the new version include the Beam shared service center middle platform module and comprehensive material fulfillment module. Through these upgrades, designers' efficiency has been improved, and the certainty of material delivery has also been enhanced. Secondly, we have significantly shortened the construction period, from about 111 days last year to about 100 days in the second quarter of this year. At the same time, we have introduced proactive maintenance services, providing customers with free house maintenance and repair services for 5 months and 22 months after construction. Additionally, we have strengthened the construction of the sales team, increasing the team size from over 200 people at the end of last year to over 400 people, with plans for further expansion. Through standardization and training, we have significantly improved the success rate of custom furniture delivery, with a success rate of about 80% in the first half of this year The transformation of the home decoration industry is very complex, involving the continuous development of multiple areas, including mid-end digitalization, project delivery, and product development. We believe that these ongoing efforts will ultimately bring about high-quality changes.

Q: In terms of the housing rental business, could you share your views on the baseline unit economics? What are the key drivers behind the improvement in profitability?

A: In the second quarter, our Ke.com rental service revenue reached RMB 3.19 billion, a year-on-year increase of 167% and a quarter-on-quarter increase of 21%. This growth mainly stems from the rapid increase in the number of housing units under the worry-free rental model that we manage and operate. By the end of the second quarter, the number of units we manage has exceeded 300,000 sets, a significant increase compared to 240,000 sets in the previous quarter and 120,000 sets in the same period last year. Regarding the worry-free rental model, we have significantly improved the business unit economics by addressing tenants' major pain points such as property maintenance and lease changes. These measures have enhanced service quality, with customer complaints decreasing by about 20% in June compared to the beginning of the year.

We have significantly improved leasing efficiency and reduced vacancy costs through the following measures: First, in terms of products: Since last year, we have been expanding the coverage of new product models and extending the rent-free period. In the second quarter, the proportion of such product models increased by about 6 percentage points compared to the first quarter, reaching 26%. This effectively reduces vacancy costs and enhances our ability to withstand rent changes. Second, leasing success rate: The success rate of initial leasing increased from 82.2% in the first quarter to 86.6% in the second quarter, with a reduction in the amortized compensation cost per unit. Third, operational focus shift: We have shifted the operational focus from initial leasing to re-leasing of the same property, focusing on lease renewals and pre-sale rates. By proactively intervening before the end of the lease, the leasing turnover rate increased from 3.1% in the first quarter to 3.9% in the second quarter, the leasing period shortened from 9.8 days to 7.5 days, thereby accelerating leasing efficiency and reducing vacancy costs. Fourth, dedicated position enhancement: By strengthening dedicated leasing agents and leveraging top agents to establish stable leasing channels, and setting up a dedicated customer manager team for high-rise residential occupancy rates, we further improve the utilization of business leads, focus on leasing key properties, and reduce vacancy rates. In the second quarter, the joint leasing ratio of dedicated leasing agents and customer managers reached 6%, an increase of 6 percentage points compared to the first quarter.

In Beijing, we achieved city-level breakeven in the first half of the year. By June, the number of units managed by Ke.com in Beijing approached 76,000 sets, with an occupancy rate of 98.2%. Despite the increase in the number of managed properties, leading to some upfront cost investments, our team in Beijing has still achieved significant performance, greatly enhancing our confidence in this business.

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