Shell: No obvious improvement in the real estate market, focusing on promoting the efficiency and income of brokers (telephone conference summary)

Following is the telephone conference summary of Shell Q3 22. Please see Going from Fat to Lean, Shell is Fighting for Profit.

Management's presentation:

1. The number of active stores in nearly 30 cities, including Nanjing, Changsha, and Hefei, achieved continuous quarterly growth. The number of active agents in platform in 40 cities, including Shenzhen realized continuous quarterly growth.

2. The structure of stores and brokers on the platform continued to improve. The proportion of brokers with more than 3 years of industry experience increased by about 10% quarter-on-quarter in the second quarter. With the overall improvement of professional quality, the productivity of each store and broker also increased in the third quarter.

3. The average commission income of Denzhuo franchise stores and self-operated stores increased by 25% year-on-year and 30% quarter-on-quarter; the average commission income of each broker increased by 25% year-on-year and 9% quarter-on-quarter.

4. The productivity of individual brokers has not improved significantly in recent years, and the overall income level of each broker is relatively low. In the next stage, the industry will shift from pursuing skills to high-quality development, focusing on efficiency and quality.

5. Our existing real estate transaction services continue to be significantly better than the market. According to data from Shell Research Institute, the GTV of national second-hand housing sales in the third quarter increased by about 7% year-on-year, and the GTV of second-hand housing transactions on the Shell platform was 449 billion yuan, a year-on-year increase of 19%. Part of this strong performance comes from the release of pent-up demand in Beijing and Shanghai during the third quarter following the outbreak of the epidemic in the second quarter.

6. Second-hand housing sales and service businesses are becoming more and more important. We are closely following the proportion of new homes and second-hand homes in different cities and promoting the development of second-hand housing services. In many cities, local brands and shop owners have begun to be keen on organizing and adjusting personnel to shift towards second-hand housing business.

7. In terms of new home transactions, the GTV of national new residential buildings in the third quarter decreased by 21% year-on-year and 7% quarter-on-quarter, while the GTV of CRICS top 100 real estate companies decreased by 33% year-on-year and 22% quarter-on-quarter. Although the decline in the new home market narrowed in the third quarter, there is no obvious improvement in its basic performance, and it is still in a difficult downward channel.

8. Continue to implement the prepaid commission model. In September, the pre-sale commission accounted for 34% of the sales commission income of new homes nationwide, 44% for developers in cities other than Beijing and Shanghai, and 32% for state-owned and central enterprise developers under the pre-sale commission. In the third quarter, the proportion of new home sales from state-owned and central enterprise developers increased from 37% in the second quarter to 42%.

9. Home decoration business is progressing as planned. In the third quarter, according to data from the China Architecture Decoration Association, the income of home decoration and furniture companies decreased by 4% year-on-year and increased by 13% quarter-on-quarter. Our home decoration and furniture business continues to outperform the market, with a year-on-year growth of more than 40% and a quarter-on-quarter growth of 34%. A total of 2 billion yuan worth of contracts were signed in the third quarter, an increase of more than 60% year-on-year. Among them, the number of our housing decoration contracts increased by more than 50% year-on-year, and the average order value increased by more than 10% year-on-year.

10. In the third quarter, the proportion of home new retail in the total contract increased from 16% in the second quarter to 20%. The proportion of customized home decoration orders increased from one-ninth in the second quarter to one-sixth. Beijing Beiwuo and Shengdu achieved quarterly break-even in July and August, with monthly contracted sales exceeding 100 million yuan, becoming Beijing's largest full-service home decoration brand.

11. As for the housing rental service, as of the end of the third quarter, the number of contracted rental units doubled compared to the previous quarter, exceeding 85,000 sets. Among them, the number of units renting under decentralized leasing management reached 15,000, an increase of nearly 17% compared to the previous quarter. The occupancy rate and average rent in September have improved compared to the second quarter.

2. Q&A

Q1: What is the company's outlook for the first and second-hand housing markets in the fourth quarter? What is the company's view on the GTV of the first and second-hand housing markets in 2023?

A1: The slow recovery of the market in the third quarter was influenced by multiple macro factors such as the epidemic, and the trend of slowing supportive policies at the central and local government levels led to the slow recovery of the real estate market in the third quarter. However, despite the macro obstacles, the recovery speed of China's second-hand housing market has actually accelerated. China's second-hand housing market GTV increased by approximately 6.6% YoY and approximately 8.1% QoQ. The GTV index in July showed YoY growth for the first time in the past 12 months.

In terms of cities, first-tier cities benefited from the relaxation of epidemic policies, resulting in a significant QoQ increase in GTV, while the performance of second- and third-tier cities was basically the same as in the second quarter. Jinan and Suzhou, which have the most supportive policies, and Zhengzhou, which benefits from the transfer of demand for new homes, have steadily improved in the second-hand housing market in the third quarter. However, cities such as Chengdu were more heavily affected by the epidemic in the third quarter.

As for new home transactions, after the suspension of mortgage payments in July, our key indicator of the number of new home applications decreased by 42% WoW and 26% MoM, and continued to decline in August and September. In the first nine months of this year, the GTV of new homes in first-tier cities decreased by only 2% YoY, while the GTV of new homes in second- and third-tier cities decreased by 46% and 41% YoY, respectively. The prices of old houses in Beijing and Shanghai hit a new high in the third quarter and began to adjust slightly in October. The continuous outbreaks of the epidemic in many cities and the corresponding control measures continue to put tremendous pressure on the market's recovery and have a diluting effect on supportive measures.

Considering the current epidemic situation, we cautiously assume that about 25% of second-hand housing transactions in the fourth quarter will be affected by the epidemic. However, housing demand is basically rigid. Based on our experience, demand will rebound after the epidemic ends and will be supplemented to a certain extent. Beike's new home subscription data in October increased by nearly 35% compared to September.

We expect the performance of the existing and new housing markets in 2023. In the second half of 2022, most cities may be able to recover to the average monthly transaction level in the past five years. We expect that the stock residential market will moderately recover by about 5% next year as it benefits from the overflow of new residential market demand. Q2: What is the trend of the scale of stores and how is the performance of stores and agents improving?

A2: Since Q2, the number of active stores and agents has become stable. In Q3, the YoY decline of active stores and agents in 30 cities, including Nanjing, Changsha, and Hefei, has narrowed to 3% and 2%, respectively. There are also cities, such as Shenzhen, where the number of active stores has increased, and the number of active agents has also increased.

We believe that even if the market recovers, the effect of practitioners returning to the industry will be limited. We expect that the number of stores will not increase rapidly, and in the short to medium term, there will be a shortage of agents. We will also maintain a relatively stable number of stores and agents in the next few quarters.

We believe that increasing the income of each store and each agent is the key to organic growth. The industry has already shifted from a skill-oriented to a service-oriented approach, and has achieved economic benefits. However, the average income of Lianjia brokers in 2021 is still far below the local average wage level. While maintaining a relatively stable scale of stores and the number of agents, we hope to support every high-quality store and agent to increase their income and profits, thereby achieving high-quality and sustainable growth for the overall platform. Overall, productivity has improved, and we have implemented strict strategies, including internal reforms to reduce losses, expanding stores, and merging large stores.

Q3: Does the improvement in the company's profitability this quarter mean a decrease in the income of stores and agents? What is the situation with the participation of private and state-owned enterprises in the sale of new homes? Will there be bad debt risks resulting from this?

A3: First of all, I would like to emphasize again that maintaining cooperation with a certain scale of private enterprises has a very low risk. There are mainly three reasons:

First, we have continuously increased our cooperation with state-owned and centrally-owned enterprises, and the proportion of cooperation has been increasing. In Q3, the proportion of new home sales from state-owned and centrally-owned enterprises increased by 5% compared to the previous quarter, reaching 42%.

Second, news reports often make people feel that most private developers are subject to price controls, but in fact, a large number of local private developers maintain price freedom. Private enterprises are important partners for us. Among 1,000 private developers, only 6 developers have a sales volume of more than 1% of the total sales volume, so we will continue to expand our coverage. In terms of the proportion of private developers in the total revenue of urban new homes, Beijing and Shanghai have reached 32% in Q4, and 44% in September.

Third, even if the operation of private enterprises deteriorates, it will not have a significant impact on our accounts receivable collection. The collection of accounts receivable is the core KPI this year. The accounts receivable collection cycle in Q3 has been shortened by 30 days. Based on highly dispersed business and risk control, accounts receivable for new houses will be even more secure.

Q4: Regarding the second track, after the consolidation with Shengdu Home Decoration, what is the plan for the development stage of the entire home furnishing business in the future? How should the pace of business growth and investment balance?

A4: The home decoration industry is a capital-intensive industry facing consolidation opportunities. We cannot be too hasty. In order to achieve long-term growth, the following issues and challenges need to be addressed. Firstly, there are few online services in China that specifically target home decoration businesses.

Secondly, the production of localized home decoration and furniture products suitable for the Chinese market is relatively underdeveloped.

Thirdly, the standards for home decoration services urgently need to be regulated.

Fourthly, the professional skills of service personnel need to be improved.

Fifthly, we need to identify potential areas that may bring about innovation and innovate through structural changes, technology, materials, processes, and methods.

We will not establish large subsidiaries to stimulate sales, but will invest in system development, online content, and home decoration products. Looking to the future, we will carry out more redevelopment and operations to provide target products for different user groups, such as providing products for high-end residential communities.

As a participant in this industry, the financial benefits of short-term income growth are meaningless. Our investments need to drive better long-term development.

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