Beike has already felt the chill, but the "market rescue" has arrived!

On the evening of August 31st, Beijing time, Ke Holdings (KE.US) released its second quarter earnings report for 2023 before the US stock market opened. Although the domestic housing market cooled significantly in the second quarter, it is not unreasonable to have high expectations for Ke Holdings. However, the actual performance of Ke Holdings was disappointing. The key points are as follows:

1. Did Ke Holdings also fail to withstand the cold winter of the second-hand housing market?

Although the sharp decline in domestic second-hand housing transactions after April is already well-known, some securities firms and investors still have relatively high expectations for Ke Holdings' Gross Transaction Value (GTV) in the existing housing business, based on the "good vision" that Ke Holdings can further increase its market share.

However, the actual performance was far from satisfactory. Ke Holdings achieved a GTV of 456.5 billion yuan in the current quarter, a decrease of more than 30% compared to the previous quarter, significantly lower than the expected 562 billion yuan.

Looking at the details, the year-on-year growth rate of GTV dominated by Lianjia was only 9.7% (the base number was very low last year), while the growth rate of transaction volume dominated by franchise stores was 20.5%. Considering the high-frequency data, Dolphin Research believes that the deterioration of the second-hand housing transaction market in the core high-energy cities, where Lianjia has the largest market share, was the main reason for the decline in Ke Holdings' existing housing transactions.

Fortunately, the commission rate for this quarter remained stable at 1.4% compared to the previous quarter, resulting in a revenue of 6.42 billion yuan for the existing housing business, narrowing the gap with expectations to about 5%.

2. Strong performance against the trend, "high-quality" development of new housing business

Although the decline in new housing transactions in the second quarter was more severe compared to existing housing (sales of the top 100 real estate companies in the second quarter showed a significant decline both year-on-year and quarter-on-quarter), Ke Holdings' new housing transaction volume still grew against the trend, reaching 2.95 billion yuan (+6% MoM), which was quite strong and met the high expectations of the sellers, thanks to the "wise decision" of cooperating with leading state-owned real estate companies in the challenging market environment.

Although the overall commission rate for the existing housing business in this quarter decreased by 0.1 percentage points to 2.9% compared to the previous quarter, the decrease was minimal. Therefore, the revenue from the new housing business still reached 8.7 billion yuan, a year-on-year increase of 30%, meeting high expectations.

3. Rapid growth of the second channel business with promising prospects

First of all, the revenue from home decoration business increased by more than 85% to 2.6 billion yuan compared to the previous quarter, accounting for 40% of the core existing housing business revenue. After the normalization of consultations and construction in the second quarter, the revenue almost doubled. The revenue from other innovative businesses outside of home decoration also reached 1.75 billion yuan, an increase of nearly 37% compared to the previous quarter. According to the management, this was mainly due to the strong growth of rental and financial services.

Overall, when the growth prospects of the core intermediary business are dim due to market reasons, the rapid growth of the second channel business provides an opportunity to compensate for the slowdown of the first channel and gives the market a broader imagination.

4. Decrease in revenue and significant profit decline due to opening new stores against the trendAlthough the growth of new housing and innovative businesses is impressive, the overall revenue of Beike this quarter was barely in line with market expectations, due to the drag from its core existing housing business, but it still shrank by about 4% compared to the previous quarter.

The gross profit margin also decreased from 31.3% to 27.4% compared to the previous quarter, as the proportion of high-profit existing housing income decreased and the proportion of low-profit new housing and home improvement businesses increased.

While the company's revenue and gross profit declined compared to the previous quarter, Beike's marketing and management expenses increased significantly. Marketing expenses increased from 1.3 billion to nearly 1.65 billion, and management expenses increased from 1.62 billion to 2.1 billion. The total increase in both expenses was about 830 million.

With shrinking revenue and significant expense growth, Beike's operating profit this quarter was only 1.08 billion, nearly two-thirds lower than the previous quarter. It barely met the market's expected profit of 1.075 billion. Although it didn't miss the mark, compared to the habit of many Chinese concept stocks beating profit expectations by a large margin, Beike's performance this time can be described as "poor".

At the same time, the number of stores on Beike's platform increased by nearly 1,500 to 43,000 this quarter, against the industry's downward cycle, leading to increased expenses. This is also one of the reasons for the significant decline in the company's profit this quarter.

Is the third quarter the real challenge?

Beike's performance in the second quarter was not very satisfactory, but the company's guidance for the third quarter's total revenue is between 15.5 billion and 16 billion, a further decrease of nearly 20% compared to the previous quarter. Whether it is high-frequency data or the company's own expectations, Beike's performance in the third quarter is destined to further bottom out. The worst time is yet to come.

Longbridge Dolphin Research's view:

Looking at Beike's performance alone, the second-quarter revenue and profit barely met market expectations, but it is mediocre. However, upon closer inspection, several issues can be identified:

First, the core existing housing transaction volume (GTV) grew significantly lower than market expectations, which can be said to have shattered the market's "good vision" for Beike to outperform the market and increase market share. In the already difficult macro environment, this damages the market's faith in the company.
When business scale is declining, expenses are expanding. The number of stores on the platform grew against the trend, which may further concentrate market share. However, based on the second-quarter performance, market share does not seem to have increased, but it has led to a significant deterioration in operating profit. This will also damage the market's expectations for Beike's short- to medium-term profit.
Finally, the company's revenue guidance further confirms that the company's performance in the third quarter will continue to decline significantly. Therefore, in hindsight, Beike's fundamentals for both the second and third quarters are not good.

However, investment is not only about verifying past performance but more importantly, about expectations for the future. Tonight, relevant departments in China have successively announced major positive news, such as lowering the down payment ratio and allowing the replacement of existing housing loans (i.e., lowering interest rates) (specific details are not discussed here).But the magnitude of the policy is far beyond the original rumor of "recognizing houses but not loans". It helps significantly lower the funding threshold and debt pressure for residents to purchase houses.

Under this heavyweight policy, market expectations for the follow-up of the real estate market will inevitably improve significantly. From a valuation perspective, the company's market value, excluding net cash (before today's opening), corresponds to a PE multiple of only around 10x the net profit for 2023, which can be considered cost-effective.

Therefore, in the situation where improvement is expected and the valuation is also decent (before the rise), buying on dips is a good choice. However, it is not recommended to chase after high prices because the implementation of the policy, the intensity of execution, and the stimulation of housing and consumption demand are still uncertain at present.

Detailed interpretation of this quarter's earnings report:

1. Existing housing: Can Beike survive the harsh winter?

Although from high-frequency data, we already know that domestic second-hand housing transactions quickly cooled down after April. However, according to Dolphin Research, some foreign banks, based on the "good expectations" that Beike can further increase its market share, still have relatively high expectations for Beike's GTV (Gross Transaction Value) in existing housing business.

But the actual performance fell far short of expectations, and Beike's GTV in existing housing ultimately reached 456.5 billion yuan, a decrease of more than 30% compared to the previous month, and significantly lower than the expected 562 billion yuan.

Looking at the details, the YoY growth rate of GTV dominated by Lianjia was only 9.7% (still based on last year's extremely low base), while the growth rate of transaction volume dominated by franchise stores was 20.5%. Therefore, Dolphin Research speculates that the second-hand housing market in first- and second-tier high-energy cities, where Lianjia has the advantage, has the worst vitality and may be the main drag.

Normally, as the proportion of transaction volume dominated by franchise stores increases, it would lead to a decrease in the overall commission rate. However, fortunately, the commission rate for this quarter remained stable at 1.4%, and the revenue from existing housing business narrowed the gap to around 5% below expectations, reaching 6.42 billion yuan.

Overall, Beike's core existing housing business performance fell short of expectations, which is one of the main issues in this earnings report.

Second, new housing business: Beike remains strong and almost immune to industry downturns.

Compared to existing housing, the decline in new housing transaction volume in the second quarter was more severe, with the sales of the top 100 real estate companies continuing to decline on a year-on-year and quarter-on-quarter basis, despite the low base caused by special circumstances last year.

However, Beike's new housing transaction volume has increased against the trend, both on a month-on-month and quarter-on-quarter basis, reaching 2.95 billion yuan (+6% MoM), showing a strong performance. Dolphin Research believes that one reason is that the company's current cooperation partners are mainly top state-owned real estate enterprises, which have experienced a smaller decline in sales. In addition, under the frozen sentiment, developers' reliance on third-party channels for customer acquisition may have further increased.

However, due to the stronger bargaining power of state-owned enterprises, since optimizing cooperation partners, Beike's new housing business commission rate has continued to decline (there is also a possibility that the overall commission rate is decreasing). In this quarter, the commission rate for new housing business has once again decreased by 0.1 percentage points to 2.9%. However, the decrease in commission rate is very small, while GTV remains resilient. Therefore, the revenue from new housing business still reached 8.7 billion yuan, a year-on-year growth of 30%, meeting the market's high expectations.

Third, the second growth track continues to grow rapidly.

In addition to the core intermediary business mentioned above, the company's highly anticipated second growth track business continues to grow rapidly.

First, the revenue from home decoration business increased by over 85% on a quarter-on-quarter basis to 2.6 billion yuan, accounting for 40% of the core existing housing business revenue. As the consultation and construction work for home decoration normalized after the first quarter, the revenue nearly doubled.

The revenue from other innovative businesses outside of home decoration also reached 1.75 billion yuan, with a quarter-on-quarter increase of nearly 37%. According to management's explanation, this is mainly due to the strong growth of the rental and financial services businesses in the context of poor housing transactions.Four, mediocre revenue and significant expense growth drag down profits

Overall, due to poor performance in the existing housing business, Ke Holdings' overall revenue this quarter was nearly 19.5 billion yuan, barely meeting market expectations, but it still decreased by about 4% compared to the previous quarter.

At the gross profit level, Ke Holdings achieved a gross profit of 5.34 billion yuan this quarter. Although the overall gross profit margin decreased due to the decline in revenue from existing housing and the increase in the proportion of new housing and home rental businesses with lower profit margins, it still reached 27.4%. Specifically, this was mainly due to the increase in the proportion of commission sharing in the company's revenue, which led to a decrease in gross profit. However, despite this, the company's actual gross profit still exceeded market expectations of 4.83 billion yuan.

However, at the expense level, while Ke Holdings' revenue and gross profit both decreased compared to the previous quarter, its marketing and management expenses increased significantly. The marketing expenses increased from 1.3 billion to nearly 1.65 billion, and the management expenses increased from 1.62 billion to 2.1 billion. The combined increase in the two expenses was about 830 million.

According to the management, the significant increase in management expenses was mainly due to the provision for bad debt (in an extreme market, Ke Holdings still cannot avoid the problem of some developers' liquidity exhaustion). The increase in marketing expenses was mainly due to the promotion of home decoration services.

However, regardless of how the company explains it, the poor performance of the core and high-gross-profit existing housing business, the decrease in revenue compared to the previous quarter, and the significant increase in expenses resulted in Ke Holdings' operating profit this quarter being only 1.08 billion, a decrease of nearly 2/3 compared to the previous quarter. It barely met market expectations of 1.075 billion in profit. Although it didn't miss, considering that even significantly beating market expectations for Chinese concept stocks may not be rewarded by the market, the barely in-line performance can be described as "bad."

At the same time, Dolphin Research also noticed that the number of stores on the Beike platform in the second quarter increased by nearly 1,500 to 43,000, against the trend. Despite the downturn in the industry, expanding stores against the trend may help increase market share, but it also leads to increased expenses, which is one of the reasons for the significant decline in the company's profits this quarter.

5. Overcoming the most difficult period, is the company starting to reinvest?

Looking at the different segments, 1) it can be seen that the contribution margin of the existing housing business has decreased the most significantly, from 64% to 46%.

The contribution margin of the new housing business has remained stable at 27%, with little fluctuation.
In addition, the rapidly developing home decoration business, after a large-scale resumption of work, has maintained a profit margin of nearly 30%. The profit margin is even higher than that of the new housing business, which also enhances the imagination of incremental profits in the long-term home decoration business.

Dolphin Research's previous research on Beike:

Earnings Report Review

May 22, 2023, Earnings Report Review "Beike: Exploding Performance and Plummeting Stock Price, Where Did It Go Wrong?"

March 17, 2023, Conference Call "Beike: Outlook for the 2023 Real Estate Market and Company Development Direction"

March 17, 2023, Earnings Report Review "Real Estate 'Little Spring,' Is Beike's Spring Coming Too?"

December 1, 2022, Conference Call "Beike: No Significant Improvement in the Real Estate Market, Focusing on Improving Agent Efficiency and Income (Conference Call Summary)"

December 1, 2022, Earnings Report Review "Trimming Fat and Increasing Lean, Beike Is Also Striving to Squeeze Profits"

August 24, 2022, Conference Call "How Does Beike View the Real Estate Recovery in the Second Half of the Year? (Meeting Summary)"On August 24, 2022, Review of Ke.com's Financial Report: "It's Most Important to Grow"

Telephone Meeting on May 31, 2022: "Housing Transaction Business Suffers Huge Setbacks, Emerging Business Continues to Develop (1Q22 Ke.com Telephone Meeting Minutes)"

Review of Financial Report on May 31, 2022: "Deep Freeze in the Real Estate Market, Ke.com Can Only Hold on"

Telephone Meeting on March 10, 2022: "Beyond the Brokerage Business, Ke.com Wants to Strengthen Home Decoration and Home Services (Telephone Meeting Minutes)"

Review of Financial Report on March 10, 2022: "Escape from Real Estate? Ke.com is Defying the Trend"

In-depth

June 30, 2022: "The Real Estate Market is Coming Back to Life, Can Ke.com Take Big Steps Forward Again?"

December 27, 2021: "Is the Real Estate Market Recovering? Should We Invest in Ke.com? Let's Wait a Little Longer"

December 17, 2021: "Muddy Waters Shorting Ke.com? Their Brief Report is Not Carefully Written"

December 15, 2021: "From 'Revolutionizing the Industry' to Being 'Revolutionized', Can Ke.com Handle It?"

December 9, 2021: "The 'Rebellious' Ke.com: Whose Life Did They Revolutionize, and Who Is Their Savior?"

Risk Disclosure and Disclaimer for this Article: Dolphin Research's Disclaimer and General Disclosures