On the evening of November 21, Beijing time, Beike (KE.US) announced its Q3 2024 financial report before the US stock market opened. Looking solely at this quarter's financial report, the performance in terms of revenue and profit is not good. However, as a major target for market speculation on real estate policies, the transaction situation in the fourth quarter and beyond will be the key factor affecting the company's performance. The specific points are as follows:

1. The core of the core existing housing business had a GTV of 447.8 billion this season, with a year-on-year growth of only 2%, which is significantly lower than the market expectation of 15% growth (the company's previous guidance was around 10% growth), and it has also declined by about 21.5% compared to the previous season. According to the company, due to the support policies that started on May 17, housing transactions were concentrated between the end of May and June. Subsequently, as the effect of policy stimulus waned, the actual transactions in Q3 were not as good as expected.

Revenue from existing housing decreased by 1% year-on-year, which also significantly fell short of expectations. In addition to the nearly zero growth in GTV, Beike's existing housing business had a monetization rate of 1.39% this season, which decreased by about 5bps compared to the same period last year. In the trend of exchanging price for volume in the real estate market, the company may also have reduced commission fees to promote transactions.

Due to the transaction amount recovery being less than expected, and the monetization rate also slightly declining year-on-year, the contribution profit from the existing housing business this season was 2.54 billion, nearly 19% lower than expected. The contribution gross profit margin from the existing housing business this season was only 41%, a significant decline of 6.5 percentage points compared to the previous season, and clearly lower than the expected 45.5%, indicating a noticeable drop in profit margin.

2. In contrast, Beike's new housing business performed strongly this season. The transaction amount for new houses grew by 18%, a significant improvement compared to the previous season, and clearly higher than the market expectation of 12% growth. While the top 100 real estate companies in China saw a year-on-year decline of 29% in sales amount in Q3, it is evident that Beike has performed excellently against the trend. This is mainly attributed to the fact that nearly 60% of its partner real estate companies are leading state-owned enterprises, which are relatively resilient. Moreover, Beike, as a leading channel, plays a significant role in customer acquisition for real estate companies.

Revenue from the new housing business grew by 31% year-on-year, significantly outperforming the market expectation of 19% growth. The monetization rate of the new housing business remained flat at a historical high of 3.4% ( an increase of about 0.3 percentage points year-on-year), further validating Beike's importance as a channel.

The new housing business contributed a profit margin that remained stable at 24.8% this season due to its impressive growth and high monetization rate, with an actual contribution profit of 1.91 billion, clearly better than the expected 1.75 billion.

3. The second business line, focusing on home decoration, leasing, home services, and financial services, achieved total revenue of 8.64 billion this season. In this quarter, the second business line accounted for 38% of Beike's total revenue, a year-on-year growth of 54%, undoubtedly becoming a new main driver of the company's growth.

Among the second business line, the home decoration business contributed nearly half of the revenue with 4.24 billion this season. As the base increases, the year-on-year growth rate of this season continued to slow down to 33%, with a quarter-on-quarter growth of 4%. After the early rapid growth phase ended, the medium to long-term growth potential of the home decoration business still needs to be verified.**

The smaller leasing business contributed 3.94 billion in revenue, with a quarter-on-quarter growth rate of 24%, still in the growth phase, mainly benefiting from the growth of Beike's "Worry-Free Rental." However, the contribution profit margin of the leasing business has significantly declined by 1.4 percentage points to 4.4% quarter-on-quarter, and the profit performance is not good, possibly affected by the decline in rental prices in urban areas.

4. From the perspective of expense expenditure and profit, ① the overall gross profit margin this season is 22.7%, which has significantly dropped by more than 5 percentage points quarter-on-quarter, lower than the market expectation of 23%. As mentioned above, this is mainly due to the decline in profit margins of the existing housing business and the rental business this season.

In terms of expenses, although Beike's growth has rebounded this season, the overall scale is still shrinking quarter-on-quarter, Beike's marketing expenses increased by about 3% quarter-on-quarter, slightly higher than expected. R&D expenses also saw a significant quarter-on-quarter increase. Both categories of external expenses have risen, reflecting Beike's renewed confidence in the market after seeing numerous policy expenditures. Fortunately, the internal management expenses, which account for the largest share, have slightly decreased quarter-on-quarter, so overall expenses have slightly decreased by about 5 million.

The number of stores and agents on the Beike platform has also increased by 12% and 11% year-on-year, respectively, returning to store expansion and recruitment, reflecting the improvement in the company's confidence. However, attention should also be paid to the potential issue of expense expansion.

Overall, the expense-to-revenue ratio has remained roughly flat, with a slight increase of 0.3 percentage points, but due to the sharp decline in gross profit margin, Beike's operating profit margin this quarter is 3.2%, which has significantly decreased both year-on-year and quarter-on-quarter, achieving an operating profit of 730 million, a year-on-year decrease of 20%. Although better than expected, the year-on-year decline in profit performance is clearly not good.

Dolphin Investment Research Perspective:

Overall, Beike's performance in the third quarter is not considered good, with the key existing housing business growth falling short of expectations, leading to weak overall revenue and gross profit for the group. Although expenses are nearly flat quarter-on-quarter, in the context of declining revenue, this still results in an overall operating profit of less than 1 billion this quarter, actually 730 million. Both year-on-year and quarter-on-quarter comparisons show a decline.

However, since September, under the stimulation of a new round of support policies, Beike's current stock price trend is basically unrelated to the performance of the past three quarters. As the most directly benefited stock from the recovery of the real estate market in Dolphin Investment Research's view, Beike's stock price has risen over 40% since the end of September, and the pullback from the peak has been relatively small. It can be seen that the market has already factored in a considerable portion of the new policy effects into the company's valuation.

So what expectations does the current price reflect? Due to the significant volatility in the domestic real estate market, there is also considerable uncertainty regarding Beike's medium- to long-term profits. Therefore, we adopt a reverse deduction logic. The company's market value is currently about RMB 170 billion, and Dolphin Investment Research believes that even under optimistic expectations, a 20x PE valuation is already the upper limitThe implied demand for profit is 8.5 billion. We note that although the real estate market rebounded strongly in the fourth quarter, Beike also correspondingly increased its expenditures. The sellers' expectations for Beike's adjusted net profit in the fourth quarter are slightly above 2 billion, lower than the 2.7 billion in the second quarter. Therefore, based on the annualized profit in the fourth quarter, it barely meets the market capitalization's implied requirement of 8.5 billion in profit.

Thus, the market has fully reflected the currently foreseeable market recovery in its valuation. For the stock price to continue to rise, the company's actual delivered profit needs to exceed current expectations, or the duration of favorable policies must be longer. In this regard, Dolphin Investment Research believes that there may be more new policies announced to stimulate further warming of the real estate market. However, currently, it is a point that does not have a safety cushion or cost-effectiveness.

Detailed Interpretation of This Quarter's Financial Report:

1. Existing Housing: Weak Period After Strong Stimulus, Growth Below Expectations

The core of the core existing housing business, this quarter's GTV was 447.8 billion, a year-on-year increase of only 2%, which is significantly lower than the market expectation of 15% growth (the company's previous guidance was also around 10% growth). The transaction scale has also declined by about 21.5% compared to the previous quarter.

According to the company, due to several major national real estate policies starting from May 17, housing transactions concentrated between the end of May and June. Subsequently, as the effect of policy stimulus quickly faded, the actual transactions in the third quarter were not as good as expected. In detail, the GTV led by Lianjia and the GTV led by 3P stores both had year-on-year growth rates around 2%, which is not good.

From a revenue perspective, this quarter's existing housing revenue decreased by 1% year-on-year, which is also significantly below expectations. In addition to the GTV only growing by 2%, Beike's existing housing business's realization rate this quarter was 1.39%, which is about 5 basis points lower than the same period last year. Moreover, the growth rates of self-operated and platform 3P intermediary businesses this quarter were roughly equivalent, and the structural changes had little impact on the overall take rate. Therefore, the decline in the realization rate may be more the result of the company actively reducing commission fees, which aligns with the trend of exchanging price for volume.

2. New Housing: Strong Performance Against the Trend, Increasing Importance of Channels

Compared to the underperforming existing housing business, Beike's new housing business performed strongly this quarter. The new housing transaction amount increased by 18%, significantly improving compared to the previous quarter, and clearly exceeding the market expectation of 12% growth. In contrast, the top 100 real estate companies in the country saw a year-on-year decline of 29% in sales amount in the third quarter, making Beike's performance outstanding against the market** As before, Beike's ability to significantly outperform the industry is mainly attributed to the fact that nearly 60% of its partner real estate companies are leading state-owned enterprises, which are relatively resilient. Additionally, Beike's importance as a leading channel in new home sales is becoming increasingly evident.

On the revenue side, the revenue from the new home business has increased by 31% year-on-year, significantly outperforming the market expectation of 19% growth. Consistent with the previous quarter, the growth rate of new home revenue continues to significantly exceed the GTV growth rate. According to estimates, the monetization rate of the new home business remained flat month-on-month at a historical high of 3.4% ( an increase of about 0.3 percentage points year-on-year), confirming that Beike's importance as a channel for customer acquisition for real estate companies is growing.

Dolphin Investment Research believes that due to the increasing scarcity of land in key urban center areas and the difficulty in selling projects in the outskirts due to a lack of natural customer flow, the bargaining power of channel providers over developers is expected to trend upwards in the medium term.

3. The growth of new businesses remains impressive, but long-term growth potential still needs to be validated.

In addition to the housing transaction business of the first channel, Beike's total revenue from the second channel, which focuses on home decoration, leasing, home services, and financial services, reached 8.64 billion. By this quarter, the second channel's business accounted for 38% of Beike's total revenue, maintaining a year-on-year growth of 54%, undoubtedly becoming the main driver of the company's growth.

Specifically, the home decoration business, which contributes nearly half of the revenue in the second channel, generated 4.24 billion this quarter. With the year-on-year base increasing, the year-on-year growth rate for this quarter has continued to slow down to 33%, with a month-on-month growth of 4%. After the early rapid growth phase has ended, the medium to long-term growth potential of the home decoration business still needs to be validated.

The smaller leasing business contributed 3.94 billion in revenue, with a month-on-month growth rate still reaching 24%, remaining in a rapid growth phase. According to the company, this is mainly benefited from the growth of Beike's "Worry-Free Rental."

After aggregating all businesses, Beike's total revenue for this season is 22.59 billion, mainly driven by the new housing business, with a year-on-year growth rate increasing to 28%. However, due to the recovery of the existing housing business being significantly below expectations, total revenue is slightly lower than expected by about 0.8%.

4. Existing housing business drags down overall contribution margin

From a growth perspective, the recovery of the existing housing business in the third quarter was below expectations, while the new housing business was relatively strong. The initial explosive growth phase of innovative businesses is nearing its end. Corresponding to the above trends, the contribution gross profit by segment (excluding commission and other labor costs, close to the gross profit margin standard) is as follows:

The contribution profit of the existing housing business this season is 2.54 billion, nearly 19% lower than expected. Due to the transaction volume recovery being below expectations, it decreased quarter-on-quarter, and the realization rate also slightly declined year-on-year. The contribution gross profit margin of the existing housing business this season is only 41%, a significant decrease of 6.5 percentage points quarter-on-quarter, and clearly lower than the expected 45.5%. Under the dual pressure of scale decline, operational deleveraging, and commission concessions, the profit margin has significantly declined.
The new housing business this season benefited from significantly better-than-expected scale growth and a high realization rate. The contribution profit margin for this quarter remained stable at 24.8%, with an actual contribution profit of 1.91 billion, significantly better than the expected 1.75 billion.
The total contribution profit of all new businesses in the second channel has also reached 1.88 billion this season, accounting for 30% of the overall, with a contribution ratio increasing by 1 percentage point compared to the previous season. In detail, the contribution profit margin of the home decoration business has reached 31.2%, remaining basically stable quarter-on-quarter.

However, the contribution profit margin of the rental business has significantly declined by 1.4 percentage points to 4.4% quarter-on-quarter, possibly due to the drag from declining rental prices in urban areas.

5. Gross profit plummets, dragging down profits instead of increasing

The above outlines the revenue and profit situation of each segment, and from the overall expense and profit perspective:

1) Overall gross profit margin this season is 22.7%, a significant drop of over 5 percentage points quarter-on-quarter, lower than the market expectation of 23%. As mentioned above, this is mainly due to the decline in profit margins of the existing housing business and rental business this season.

In terms of expenses, although Beike's revenue growth rebounded in the third quarter, the revenue scale is lower than the previous quarter, Beike's marketing expenses increased by about 3% quarter-on-quarter, with spending slightly higher than expected. R&D expenses also saw a significant quarter-on-quarter increase. The expenditures on these two external expenses have risen, reflecting Beike's renewed confidence in the market after seeing numerous policy expenditures.

Fortunately, the largest internal management expenses saw a slight decrease quarter-on-quarter, so overall expenses decreased slightly by about 5 million.

However, under the dilution of stronger revenue growth, all expense ratios still showed a significant decline, with the combined expense ratios decreasing by 6 percentage points quarter-on-quarter. Coupled with a gross profit margin that increased by about 2 percentage points quarter-on-quarter, compared to nearly zero profit in the previous quarter, the operating profit margin this quarter rebounded directly to 8.6%. Ultimately, the operating profit for this quarter was 2.02 billion, far exceeding the expected 950 million.

Even after adding back stock-based compensation, credit impairment, amortization, etc., the adjusted net profit for this quarter was 2.64 billion, also nearly 800 million more than expected.

In addition, the number of stores and agents on the Beike platform also increased by 12% and 11% year-on-year, respectively, returning to store expansion and recruitment, which reflects the improvement in the company's confidence. However, attention should also be paid to the potential issue of expense expansion.

Overall, the expense-to-revenue ratio remained roughly flat, slightly increasing by 0.3 percentage points, but due to the sharp decline in gross profit margin, Beike's operating profit margin for this quarter was 3.2%, which is significantly lower compared to both year-on-year and quarter-on-quarter, achieving an operating profit of 730 million, a year-on-year decrease of 20%. This is clearly a poor performance. The adjusted net profit for this quarter was 1.78 billion, also down about 14% year-on-year.