Beke: Outlook for the real estate market in the second half of the year & future strategic direction

Below is the summary of the conference call for Beike 2Q23. For a review of the earnings report, please refer to "Beike Feels the Chill, But a Major Market Rescue is Coming".

I. Management Overview

Our property management services for leased properties made good progress in the second quarter, with significant growth in worry-free rent and a total of 120,000 units under management, achieving an occupancy rate of 94.5%.

We have upgraded our corporate strategy to "One Body, Three Wings" and established four business segments: residential transaction services, home decoration and furnishing services, property management services for leased properties, and our latest business segment, "Beihaojia" (Good Home).

The first wing: home decoration and furniture. When consumers seek a better living experience, home decoration and furniture are often their top choices. To address pain points, we are transitioning from an assembly model to a product-centric approach that can help consumers complete the entire decoration process and provide one-stop services. In addition to construction and installation, our refined capabilities, facilities, and smart homes can maximize the use of residential space and provide designs that align with customer preferences.

The second wing: rental services. We are shaping the market dynamics and the growing supply and demand for rentals present a historic opportunity for us to expand our rental services. More and more homeowners desire better management for their properties, and property management services for leased properties can be simplified and made more convenient. We aim to enhance the rental experience through customer-centric products and services, making renting an attractive choice and promoting a balance between renting and buying.

The third wing: Beihaojia. As housing prices stabilize, new consumer trends emphasizing quality and durability are emerging. Market differentiation in the future may come from variations in the quality of constructed houses, which means that suppliers need to improve the new housing market.

The development of large-scale store models. As more commissions flow directly to agents who provide value to customers, the profitability of store owners may decrease. Large-scale stores with higher income potential are crucial for improving efficiency and achieving greater returns. By the end of June this year, we effectively restructured 4,500 stores on our platform, achieving an 80% annual efficiency improvement in the first half of this year. The large-scale store model has fostered new relationships between our store owners and agents, evolving from simple employee relationships to partnerships.

II. Q&A Analyst Questions

Q: What is the volatility of the real estate market in the first half of this year? Has there been a change in the supply and demand structure of the housing transaction market? Outlook for the second half of the year considering recent positive policy statements?

A: We believe that the housing market has shown improvement this year and is recovering from the extreme conditions at the bottom of the cycle in 2022.

The new housing market faces the risk of a year-on-year decline, considering the current economic pressures, unemployment rate, and resident expectations. The need for further improvement remains, and the ongoing debt crisis is increasingly impacting developers. In the first half of this year, we experienced a surge and subsequent decline in the market. There are three reasons for this decline. First, the market is returning to normal. Second, the market's previous expectations were too high, and the gap between reality and expectations weakened market confidence during the process of returning to normal. Third, the market has been under pressure since the second quarter of this year, as reflected in employment rates and import/export data. The three-year-long pandemic has had a lasting impact on the economy, and it will take time and effort to further eliminate these long-term effects.

In the first half of the year, there was a significant divergence in market trends, even within different regions of the same city. Taking Beijing and Shanghai as examples, the housing price indices in the core areas and suburbs of these two cities have shown significant differences over the past five years, with the former being 40% to 50% higher than the latter. In terms of supply and demand structure, the proportion of new and old houses over the past five years and houses over 20 years old has increased the most. From a demand perspective, the proportion of transactions involving population and housing units related to home upgrading needs has further increased in the first half of the year. Compared to 2022, the proportion of customers aged 35 to 44 has increased by 2% to reach 35%, and the proportion of houses with an area of approximately 90 square meters has reached 37%. Housing in key urban areas and housing catering to upgrading needs remain the main focus of the market. In the new housing market, it will still take time to digest the accumulated risks associated with developers, and the effective supply in core areas is also limited.

We are in a market where existing housing performs strongly, and the demand continues to shift towards the existing housing market. The comparative advantages of existing housing are still significant and relatively stable. According to our research, the number of residents planning to purchase a house in the second quarter even increased by 1% compared to the first quarter.

With the implementation of relevant supportive policies, we expect the existing housing market to bottom out in June and recover in the second half of the year, while the new housing market will experience some fluctuations in the third quarter. We have observed that in Beijing and Shanghai, the number of property viewers, new customer demands, and transaction volumes are the first to recover. The potential introduction of policy improvements related to demand is expected to activate more than 50% of the population in the demand structure, further amplifying and activating the replacement chain.

Q: Can you share your views on the long-term growth prospects of core residential transaction businesses (including new and second-hand housing transactions)? Where is the space for further improving the efficiency of core businesses? Are there any specific strategic actions?

A: Regarding core businesses, in cities where the scale of existing chain stores is insufficient, we aim to strengthen cooperation with high-quality stores while supporting store recruitment of brokers and providing appropriate training and management. In the first half of this year, our number of stores increased by nearly 10% compared to the end of last year, and the number of brokers increased by 17%.

In cities that have reached a certain scale, we are committed to improving efficiency and quality. In terms of stores, we are promoting a competition mechanism based on store rankings. At the same time, we are promoting the "large store strategy" and creating dedicated homepages for store owners to facilitate more intuitive interaction with the platform. The next step is to help store owners better understand the business and improve management methods through online products and dedicated operational support personnel. In terms of housing customer matching, we have launched a product called "Point-to-Point" as a channel for brokers to circulate listings, which has improved the efficiency of housing customer matching and listing liquidity. Through this tool, the sales rate of our listed properties within 14 days has increased from 6% to approximately 12%. In terms of matching brokers with customers, we have comprehensively optimized the allocation of online sales leads for existing and new property transactions, taking into account fairness and efficiency, and supporting the growth of junior brokers.

Regarding ecosystem governance, in order to address the issue of off-market transactions faced by the entire industry, we have created digital tools and promoted closed-loop management awareness to identify risks and solve the problems identified.

As of the end of June, over 5,000 cooperative real estate projects have participated in the "Sunshine Commitment". Against the backdrop of increased cross-regional new housing projects and existing property transactions, we hope to further improve our customer targeting capabilities to match customers with various new housing projects and enhance our understanding of customer needs in a more systematic way.

For our direct-operated Lianjia business, we will continue to use a large-scale model to increase the income level of brokers. This year, the average number of brokers per Lianjia store has reached 18, an increase of about 16% compared to the previous year. The average income of Lianjia brokers has also increased by 40% compared to the social average income index. We will continue to pilot innovative broker incentive mechanisms. We will continuously improve our service capabilities, increase investment in traffic acquisition, and promote the momentum of the brand to revitalize the Lianjia brand.

Q: How is the progress of the home decoration and furniture service business? Are there any updates on the development of core capabilities? Can you share some key operating indicators and unique economic models of benchmark cities such as Hangzhou and Beijing?

A: The progress of the home decoration and furniture service business has exceeded expectations. The second-quarter contracted sales reached approximately 3.4 billion yuan, with a year-on-year growth rate of over 100%, resulting in contracted sales of over 6 billion yuan in the first half of the year.

Beijing and Hangzhou are the cities where we entered early and led the establishment of a virtuous cycle. Taking Beijing as an example, our contracted sales in the city exceeded 600 million yuan in the second quarter, with contracted sales exceeding 200 million yuan for two consecutive months. We expect the annual contracted sales in Beijing to exceed 2 billion yuan this year. For Hangzhou, the second-quarter contracted sales also exceeded 500 million yuan, and we expect the annual contracted sales to reach 1.8 billion yuan this year.

In terms of profitability, the operating costs in Beijing reached 50 million yuan, with monthly operating profits exceeding 10 million yuan for five consecutive months. Taking Beijing and Hangzhou as guiding examples, we are replicating this experience and model nationwide. Shanghai is expected to surpass the milestone of 1 billion yuan in annual contracted sales and contribute approximately 700 million yuan in annual revenue this year, meaning it will reach a scale comparable to Beijing one year ahead of schedule. We expect cities such as Wuhan, Ningbo, and Suzhou to reach the same scale as Beijing and Hangzhou in our third wave of expansion. As of the mid-year, after nine months of integration in Wuhan, Chengdu, and Beikou, we achieved contracted sales of 214 million yuan and revenue of 120 million yuan, with year-on-year growth rates exceeding 120%. In terms of customer acquisition, over 45% of home decoration customers are referred by our core business. At the same time, the home decoration business has contributed to the growth of housing transactions and leasing services. We invest resources in training service providers and define, to some extent, how to participate in the industry and generate revenue through systematic ordering, inspections, and timely settlements.

In terms of delivery capability, we have established a system that covers design, construction, materials, and the supply chain by enhancing progress management through system reliance and rules. We have implemented AI-driven technology to improve customer acquisition and efficiency, enabling Longbridge to go beyond traditional project management and conduct scientific and efficient timeline management and service governance online. Our products are based on in-depth user insights and cover a wide range of SKU supplies to meet specific user needs.

Q: What recent strategic optimizations, upgrades, and structural changes have been made? What is the thinking behind these optimizations and upgrades?

A: We have established a new architecture to help achieve strategic goals, upgrading the strategy to "One Body, Three Wings." The new organizational structure, centered around customers, consists of four business lines, including home transaction services, home decoration and furniture, rental property management services, and "Longbridge Home," as well as nine functional lines, including finance, research and development, strategy, quality assurance, human resources, user experience, compliance, public affairs, and collaboration.

The adjustment of the organizational structure lays the foundation for consensus across the entire company and invites everyone to participate in co-creation. It will help unify goals, enable us to grasp the essence during industry cycles, and return to the essence of providing affordable housing and serving people, meeting everyone's needs for a better life.

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