Beke: A marvelous performance yet plummeting stock prices, where go wrong?

Before the US stock market opened on the evening of May 18th, BEKE-W (KE.US) released its Q1 2023 financial report.

Due to the rapid release of pent-up demand, the real estate market was hot in the first quarter. In the context of high market expectations for BEKE-W's performance, the company still exceeded expectations by a large margin. The key points are as follows:

1. Second-hand housing transactions are hot, and performance is explosive: First, let's look at the core second-hand transaction business. In the first quarter, BEKE-W achieved GTV of 665.3 billion yuan, a year-on-year increase of 78%, far exceeding the market's expected 562 billion yuan. Although the hot property market in Q1 was obvious, compared with the overall growth rate about 50% of the whole second-hand market, BEKE-W's growth far exceeds the industry, reflecting the company's operational advantages rather than just riding on the cycle.

Looking at the details, the transaction volume of third-party intermediaries in this quarter skyrocketed by 118% to 375.5 billion yuan, far exceeding the 43% growth rate of Lianjia's self-operated transaction volume. It can be seen that the performance of self-operated business is actually comparable to the industry, and the real surprise came from the company's third-party business. Dolphin Analyst believes that the main reason for the explosive growth of third-party business is the hot second-hand housing market in second- and third-tier cities during the first quarter (looser policies and lower bases), whose performance was stronger than the first-tier cities where Lianjia has high exposure.

Due to the explosive growth of GTV, revenue and gross profit growth have accelerated significantly. This quarter, the stock business achieved revenue of 9.2 billion yuan, far exceeding the expected 8.2 billion yuan. Under the scale effect, the gross profit contribution rate of the second-hand business also skyrocketed to 63.8%, far exceeding the 37.8% of the same period last year, making the final profit contribution 5.86 billion yuan, exceeding expectations by more than 55%.

2. The clever move of "binding state-owned enterprises" in new housing:

If the cooperation partners of BEKE-W's new housing business were contracted by the company in 21-22 as defensive choices for receivable security, it now reflects the company's forward-looking strategic vision.

In the first quarter of this year, the overall sales growth rate of the top 100 real estate companies was only 3%, while the growth rate of the company's new housing transaction volume this quarter was as high as 44%. It can be seen that under the not-so-good market conditions, the company has an alpha advantage that far exceeds the industry. The management stated that the main reason why the company outrun the industry is that the company had accumulated many high-quality projects before and released them in a concentrated manner this time.

However, Dolphin Analyst believes that the company's proactive contraction of cooperation partners to state-owned real estate enterprises is also the main reason for this unexpected performance. During the contraction period, state-owned real estate enterprises with stronger financing capabilities and stable balance sheets delivered sales growth far exceeding the industry average. The sales growth rate of state-owned real estate enterprises in April was as high as 57%, while the average was only 28%. Therefore, the new housing business ultimately achieved revenue of 8.4 billion yuan, far exceeding the market's expected 7 billion yuan.

3. Leverage release, significant improvement in gross profit: Due to the explosive performance of revenue scale far exceeding expectations, fixed costs were significantly diluted, and BEKE-W's gross profit also improved significantly. The overall gross profit margin reached 31.3%, far exceeding the expected 26%. Specifically, it was mainly driven by the significant improvement in gross profit of the second-hand business. In the end, driven by the resonance of exceeding both revenue and gross profit margin expectations, BEKE-W's total gross profit for this quarter reached 6.4 billion, nearly one-third higher than market expectations.

4.Strong growth, but spending remains relatively conservative: Although BEKE-W's growth was quite strong this quarter, the company did not become overly optimistic and continued its conservative expense allocation since last year. The overall expenses ratio for this quarter was 17.7%, lower than the market's expected 19.8% and the 21.7% in the fourth quarter of last year. With the explosive revenue and conservative spending resonating, the company's final operating profit margin reached 14.7%, far exceeding the expected 6.6%.

Finally, the operating profit reached 2.98 billion, a new historical high, and close to 1.5 times the market's expected profit.

Dolphin Analyst's Viewpoint:

Overall, BEKE-W's performance this quarter is impeccable. Due to the company's excellent layout and strategic choices, it has achieved alpha growth far beyond the industry in both the new and second-hand housing markets. At the same time, the management's valuable strategy of maintaining a cautious investment strategy and continuing to reduce expenses has resulted in the company far exceeding expectations in both revenue and profit.

However, in response to this excellent results, the company's stock price fell instead of rising after hours. Dolphin Analyst believes that there may be several reasons for this: 1) the market may have already known about the hot domestic real estate market in the first quarter and may have already positioned themselves and realized profits when the performance was announced; 2) since April and May, the real estate market has clearly cooled down month-on-month, and regulatory authorities have repeatedly voiced their consideration of limiting property agency commission rates, causing doubts and concerns about whether BEKE-W's performance can maintain its recovery trend in the second half of the year. The first quarter may have been the highest point of this year's business climate.

Dolphin Analyst cannot predict the trend of China's real estate market in the second half of the year, but the company's current valuation is relatively undervalued compared to its fundamentals. Keep a close eye on the trend of the domestic real estate market. If there are signs of a travel recovery, it may be a good opportunity.

The following are key charts:

1. Existing Housing Business

2、New Property Business**

3、Home Decoration Business**

** 四、Overall Revenue and Gross Profit**

** 五、Expenses and Profits**

Dolphin's Previous BEKE-W Research:

Earnings Season

March 17, 2023 Conference Call "BEKE-W: Outlook on the 2023 Real Estate Market and Company Development Direction"2023 March 17 Financial Report Review "Real Estate "Little Spring", Will BEKE-W's Spring Come Too?"

2022 December 1 Telephone Conference "BEKE-W: No Significant Improvement in Real Estate Market, Focusing on Promoting Broker Efficiency and Income (Telephone Conference Minutes)"

2022 December 1 Financial Report Review "BEKE-W is Fighting for Profit by Losing Weight and Gaining Thin"

2022 August 24 Telephone Conference "How Does BEKE-W View the Real Estate Recovery in the Second Half of the Year? (Conference Minutes)"

2022 August 24 Financial Report Review "BEKE-W is Only Important When There is Growth"

2022 May 31 Telephone Conference "Housing Transaction Business Suffers Huge Blow, Emerging Business Develops Steadily (1Q22 BEKE-W Telephone Conference Minutes)"

2022 May 31 Financial Report Review "BEKE-W Can Only Hold On When the Real Estate Market is Deeply Frozen"

2022 March 10 Telephone Conference "Beyond Brokerage Business, BEKE-W is Going to Focus on Home Decoration and Home Services (Conference Minutes)"

2022 March 10 Financial Report Review "Escaping from Real Estate? BEKE-W is Fighting Against the Trend"

In-depth

2022 June 30 "Real Estate Market Comes Alive, Can BEKE-W Take Big Steps Again?"

2021 December 27 "Real Estate Market Warms Up? Buy BEKE-W? Wait a Little Longer"

2021 December 17 "Muddy Waters Shorts BEKE-W? The Short Essay is Too Unprofessional"

*Risk Disclosure and Statement for this Article:** [**Dolphin Analyst Disclaimer and General Disclosure**](https://support.longbridge.global/topics/misc/dolphin-disclaimer)