Pearl's view on real estate recovery in the second half of the year (Meeting minutes)

The following is the transcript of Beike's Q2 2022 conference call. Please refer to "Beike Favors the Bold, with Growth being the Key" for financial analysis.

I. Management Presentation

1. Q2 2022 GTV of the national second-hand housing market fell by 45% YoY; new national GTV fell by 36%; and the GTV of Top100 real estate developers fell by 43.4% YoY.
2. Beike's Q2 2022 second-hand housing GTV was RMB39.35 billion, down 39.6% YoY and down 17% MoM. The average GTV of key cities was higher than that of the same period last year. Second-hand housing GTV for Lianjia rose 33% YoY, and the proportion of unprofitable stores in Lianjia fell to 80% since January.
3. The GTV of new housing was RMB22.27 billion, a 37% YoY increase in sales with high-quality developers, and a 7% MoM increase. 22% of new housing transaction revenues came from prepaid commissions.
4. The GTV of home furnishings was RMB1.3 billion, up 26 times from RMB47 million in the same period last year. The flow contribution rate of second-hand housing and new housing businesses exceeded 25%, the per-customer price for branded finished home goods increased by 33% YoY, and the effect of acquiring Shengdu was significant.

5. Q3 2022 Outlook: The company is expected to earn RMB16.5-17 billion in revenue, down 6.1%-8.8% YoY, given relief in the internal and external environment. The company will continue to promote its one-body-two-wing strategy while focusing more on its second-hand housing business. Infrastructures agency for communities has been completed, and the company will grow into an industry leader in responding to complex environments with diversified businesses.

II. Q&A:

Q: What is the essence behind the relaxation of real estate polices? Will further easing measures be rolled out in H2?

A: We have noticed that the central bank is stepping up its support for liquidity, while local governments are continually easing policies. These include declining interest rates of mortgage loans, relaxation of purchasing restrictions on non-local residents, subsidies on talents and settlements, and housing upgrade policies. The large volume of transactions in June 2022 shows that the eased policies have indeed contributed to the steady recovery of the market. It's expected that further supportive policy measures will be rolled out in Tier 2 and Tier 3 cities in H2 2022.

Q: The sales volume of second-hand houses, especially in Shanghai and Beijing, has increased. Will performance continue to recover in H2?

A: Sales in Beijing and Shanghai were indeed hampered by the pandemic. The GTV of China's Q2 2022 second-hand housing market fell by 45% YoY and rose 9.8% MoM. House prices in many Tier 1 and Tier 2 cities increased by 5% YoY in June 2022, and in more than 20 Tier 2 cities, they gradually recovered to levels of the previous year. For example, Chengdu, Suzhou, and Hangzhou exceeded their 2021 averages in June 2022. Qingdao, Wuhan, and Hefei are also approaching their levels of the previous year. It's expected that key cities will rapidly recover growth in H2 2022. In the final week of June, the transaction volume in Beijing and Shanghai recovered to the average level of 2021, which is a good sign. Starting from Q4, the transaction volume in Beijing and Shanghai will enter a healthy and normal range.

Recently, a large amount of demand has shifted from the new housing market to the second-hand housing market. For example, in Wuhan, second-hand housing transactions accounted for 40% of the total transactions in the first half of the year. Some strong second-tier cities have gradually entered a recovery stage, and it may take more than 6 months for the market to fully recover. We expect that house prices in weak second-tier cities will stabilize in Q3, and house prices in third- and fourth-tier cities will stabilize before the end of this year.

Q: What is the impact of the suspension of loans on the company's business, the collection and provision of accounts receivable?

A: Most developers have been affected by the loans. Recently, local governments in some cities have implemented various measures to ensure project delivery, and multiple projects have started to resume construction.

In most cases, suspending loans will promote local governments to help the industry solve difficulties and stabilize consumer expectations, which will help the industry resume normal operations.

Second-hand housing business is not affected, and may even fill the demand gap in the new housing market, which may be beneficial for Beike to get more opportunities in the housing market and existing homes.

The accumulated provision balance is RMB 2.21 billion, which covers 31% of the corresponding total recoverable value, especially for 41 higher-risk developers, we made higher provisions up to 83% of the upper limit; at the same time, for a dozen developers, we made provisions for 49% of the accounts receivable, and for the remaining low-risk developers, we made provisions ranging from 10% to 20%. The company also continues to strengthen the management of accounts receivable collection. In the second quarter, the new housing transaction income of RMB 8.45 billion was collected, with a collection/revenue ratio of 1.27 times.

Q: What is your view on the trend of the new housing market?

A: There are some positive changes in the new housing market: continuous growth of 50% and 27% on a month-on-month basis in May and June respectively. The house price index in 52 cities is also constantly rising and gradually recovering. The opening clearance rate of second-quarter opening projects increased significantly from the first quarter.

However, there are still uncertain factors in the new housing market in the second half of the year, and there is great pressure on macroeconomic and income expectations: the overdraft of new housing demand in a certain area, and the recovery of the new housing market takes time. We will pay attention to the promotion and policy efforts in the future to judge the slope and sustainability of the new housing recovery. Starting in September, developers will enter a promotional cycle, and the market may enter a weak recovery zone.

Q: What is the strategic plan after completing the acquisition of Shengdu, and will the guidance be adjusted? Are there some strategic goals internally?

A: In Q2, the revenue of the head companies in the home improvement industry fell by more than 20% year-on-year, but Beike's home furnishings business increased by 10%.

The proportion of home decoration diversion has exceeded 25%, and in Beijing it has exceeded 80%. The considerations for the track include the following:

1. Policy: The action plan for promoting the high-quality development of the home furnishing industry has just been released, and the policy is positive.

2. Industry linkage, front linkage and back linkage. New housing development has begun to synchronize with second-hand housing, and back linkage with home furnishings, entrances, and common customers.

3. Customer demand - consumers hope to evolve from simple hard decoration to complete furnishing and ready to live in.

In the home furnishing industry, Beike has several quantitative expectations, including a scale of over 10 billion yuan, a traffic ratio of over 40 percent between online and offline retail channels, and a factor amplification coefficient of 1.5 based on a solid and stable business model. Whether the platform can be developed into a long-term home furnishing service provider model in the future remains to be seen.

Q: It was previously estimated that operating expenses would be reduced by approximately 300-400 million yuan each quarter during the second half of the year. Can you explain in detail the measures you will take to achieve this and how these measures will impact future performance?

A: The specific measures are as follows: 1. Organizational restructuring, adjusting junior and senior agents according to different city situations, and merging regional teams. 2. In terms of operations, adjusting the proportion of high-profit and low-profit businesses. 3. In terms of cost control, closing down unprofitable stores, and striving for rent reduction for stores and office spaces.

With a series of measures taking place, the balance point of fixed costs and profits in each city continues to decrease. In the second quarter, Lianjia's fixed costs decreased by more than 25% YoY. It is expected that the brokerage business will save 300-400 million yuan per quarter in the second half of the year, dropping to the level seen in the second half of 2019. Overall, the brokerage business can achieve higher operating leverage and profitability. With the market's gradual recovery, we believe that the brokerage business's profitability will gradually recover in the second half of the year.

(This concludes the article)

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