"Strong medicine for a serious illness", can Beike be saved?

Before the U.S. stock market opened on the evening of May 23rd Beijing time, Beike (KE.US) released its financial report for the first quarter of 2024. Due to the poor performance of its new housing business, Beike's overall revenue showed a significant downward trend. However, thanks to its leading position in countercyclical measures and internal cost control, the profit was slightly better than the pessimistic expectations. The specific key points are as follows:

1. Existing housing - Beike still manages to move forward: In this quarter, Beike's existing housing Gross Transaction Value (GTV) was 453.2 billion, in the context of a deteriorating real estate market compared to last year, only a 3% decrease from the previous quarter, exceeding market expectations by 7%, still demonstrating stronger countercyclical capabilities as a market leader.

However, as more transactions were completed by affiliated intermediaries rather than Beike's self-operated channels (the decline in transactions in first-tier and second-tier cities in the first quarter was more severe), the confirmed revenue was relatively low, resulting in a revenue increase of only 2% compared to expectations. Correspondingly, the comprehensive realization rate of existing housing decreased slightly by 0.03 percentage points compared to the previous quarter. During a downturn in the industry, there is still some pressure on the realization rate.

The profit contribution from existing housing business was 2.55 billion, with a slight decrease in profit of 150 million compared to the previous quarter despite a 3 billion decrease in revenue, maintaining a stable profit contribution rate compared to revenue. The existing housing business remained stable in terms of revenue and profit.

2. Even high-quality real estate companies are facing challenges: In the context of a more severe downturn in the new housing market, Beike's new housing transaction volume decreased by as much as 36% compared to the previous quarter, 10% lower than market expectations. In comparison, the first quarter trading volume of the top 100 real estate companies decreased by approximately 38%. Even when cooperating only with high-quality real estate companies, Beike no longer has a significant advantage compared to the industry average.

Due to the relatively stable comprehensive realization rate of the new housing business, the revenue from the new housing business was also 10% lower than expected. However, the profit contribution rate decreased by 4 percentage points, resulting in a nearly halving of the profit contribution to 1 billion compared to expectations, a decrease of nearly 19%. The new housing business experienced a greater deterioration in profit under the decline in revenue.

3. New growth in New Horizons, but profit contribution is still small: The revenue of the home decoration business in the second channel decreased by 34% compared to the previous quarter, indicating that the demand for home decoration has also declined due to the impact of the real estate market transactions, even with the seasonal impact of the construction ban during the Spring Festival. However, the profit margin of the home decoration business is still in an upward cycle, with a nearly 3 percentage point increase in profit contribution rate, resulting in a smaller decrease in profit contribution.

The newly disclosed housing leasing business generated revenue of 2.6 billion in this quarter, making it the third largest revenue source outside of existing and new home sales. However, despite the revenue, the profit contribution was only 150 million. Therefore, the leasing business is still in a state of generating revenue without making profits.

4. Internal cost control offset external pressures, achieving expected profits: Due to the drag from the new housing business, Beike's total revenue was approximately 800 million less than expected (-4%), with a 19% decrease from the previous quarter to 16.3 billion. It is gratifying that despite the pressure of shrinking revenue, the gross profit margin only slightly decreased by 0.3 percentage points. The gross profit margin decreased by 20% compared to the previous period, which did not significantly expand with revenue, and basically met market expectations.

From the perspective of expenses, both management and sales expenses in this quarter decreased by over 20% compared to the previous period, and research and development expenses also decreased by about 12% compared to the previous period, a reduction greater than 19% of total revenue. Therefore, despite the unfavorable external environment, Beike still managed to offset some of the profit erosion through internal cost control.

Ultimately, Beike's operating profit margin under GAAP increased by about 1 percentage point compared to the previous period (excluding impairment drag from the previous quarter), maintaining a positive value of 0.12 billion.

However, excluding the impact of equity incentives, credit impairments, amortization, etc., the adjusted net profit for this quarter was 1.39 billion, slightly over 3 billion lower than the previous quarter. In other words, Beike's actual profit for this quarter still declined, but it exceeded market expectations by 3 billion.

Dolphin Research's viewpoint:

Overall, under the drag of poor new home sales business, Beike's revenue and profit for this quarter both showed further decline compared to the previous quarter. In the adverse external environment, as a leading company, Beike failed to maintain revenue, falling 4% below market expectations, relying solely on internal cost control to offset external pressure and barely maintain profits above market expectations.

In the existing home market, Beike still demonstrates significant resilience with its platform model, able to hedge against different trends in the real estate market in high-tier and low-tier cities through self-operated and franchised stores. However, in the new home business, due to significant downward pressure, even top real estate companies (such as Vanke) are not spared, and Beike's model of cooperation with top real estate companies is no longer sufficient.

In the secondary business sector, the sluggish housing transaction market seems to have also affected the demand for home decoration, leading to a significant sequential decline in home decoration revenue for the first time. Another separately disclosed leasing business is still in the stage of revenue without profit, with limited overall impact. Therefore, Beike's performance fluctuations are still dominated by the macro real estate market and are unable to move against the trend.

Regarding shareholder returns, the company only repurchased about $1.2 billion in the first quarter, which is better than nothing. If the performance of this quarter is considered not good but within expectations, after various supportive policies were introduced, Beike's stock price briefly rose to over $20, nearly reaching the highest point since the second half of 22, but the reality is that the fundamentals from 24 onwards are weaker than in 23, not to mention 21. Pushing the stock price to near highs in recent years based solely on a "beautiful vision" before the effects of policies are evident clearly lacks performance support.

Therefore, the decline after the performance is announced, rather than being due to poor current performance (which is not much worse than expected), is more because the stock price has been pulled back from "vision" to the "reality" of fundamentals. After the correction, if the subsequent policy effects turn out to be good, driving an increase would be a reasonable path Detailed Analysis of This Quarter's Financial Report:

I. Existing Homes: Leading Against the Wind

Despite the supportive policies in many regions this year, the transaction volume of second-hand homes nationwide in the first quarter still decreased year-on-year, with the decline in first and second-tier cities higher than that in lower-tier cities. Coupled with a significant price decline, the decrease in transaction amount is even greater.

This quarter, Beike's Gross Transaction Value (GTV) for existing homes was 453.2 billion, with a year-on-year decrease of 32%. However, this is mainly due to a high base from the previous year when restrictions were just lifted, and it does not have much reference significance. Compared to the previous quarter, it only decreased by 3%, exceeding market expectations by 7%, once again demonstrating the leading position's countercyclicality.

In detail, GTV led by Lianjia decreased by 38% year-on-year, while GTV led by 3P store partners decreased by 27%, consistent with the situation where transaction declines in first and second-tier cities are higher than in third and fourth-tier cities.

However, because revenue from store partners is recognized based on net income, it may result in a lower revenue scale. Therefore, this quarter's revenue from existing home business decreased by 38% year-on-year, only slightly higher than expected by 2%.

When calculated by revenue/GTV, the comprehensive realization rate of existing homes decreased slightly by 0.03pct compared to the previous quarter, indicating pressure on realization rate during industry downturns.

However, with the recent consecutive announcements of multiple significant supportive policies by the government in May, the market's focus has evidently shifted to the current and second-quarter transaction situation. However, the company has not disclosed performance guidance for the next quarter this time, and we can only look at the company's statements in small-scale conference calls.

II. New Homes: When Will the Bottom be Reached in the Bottomless Pit

Compared to existing homes, the downturn in the new home market is more severe, with even leading developers like Vanke rumored to have default risks. The month-on-month decline in Beike's new home transaction volume is as high as 36%, indicating that it is 10% lower than market expectations. In contrast, the month-on-month decline in sales of the top 100 real estate companies in the first quarter was 37.5%. In other words, in the new home market, Beike no longer has much advantage compared to the industry average, and even top-quality developers partnered with Beike can no longer stand alone.

New Home Revenue Decline in Line with Transaction Volume, Reflecting Stable Sales Rate

The decline in new home revenue is roughly equivalent to the transaction volume, at about 35%, indicating that the sales rate of new homes remains relatively stable (slightly increasing by nearly 0.1 percentage points) on a month-on-month basis. The more difficult it is to sell new homes, the more it reflects the value of intermediary channels for developers.

III. New Track: Rental Business Revenue Ranks Third, But Profit Contribution is Still Small

Overall, the housing transaction business in the first channel still follows the trend of the property market, making it difficult to achieve significant alpha.

As an incremental source, the company's other business income, mainly from home decoration, leasing, home services, and financial services, grew by 159% year-on-year this quarter.

Among them, the company's revenue from home decoration this quarter decreased by 34% compared to the previous quarter. Even with the seasonal impact of the construction ban during the Spring Festival, a 34% decline is relatively large, indicating that the demand for home decoration may have been affected by the sluggish property market transactions.

Additionally, the company started disclosing financial data for the housing rental business separately this quarter, with revenue reaching 2.6 billion, making it the third largest in terms of revenue scale after existing stock and new home sales. However, although the revenue is substantial, most of it needs to be transferred to landlords, leaving the profit margin negligible. Its impact on the overall company remains minimal.

Overall, due to the drag from the new home business, Beike's total revenue fell short of expectations by about 800 million (-4%).

IV. With Revenue Contraction, Profits Also Decline, But Better Than Expected

In terms of gross profit, this quarter amounted to 4.12 billion, a decrease of nearly 20% compared to the previous quarter. Encouragingly, despite the pressure from revenue contraction, the gross profit margin remained stable, decreasing slightly by 0.3 percentage points. The actual gross profit is generally in line with expectations.

On the expense side, both management and sales expenses have decreased by more than 20% compared to the previous period, and research and development expenses have also decreased by about 12% compared to the previous period. Compared to the 19% decline in total revenue, it can be seen that the company still managed to offset some external pressures by controlling costs.

Therefore, despite a slight decrease of 0.3 percentage points in gross profit, with cost control offsetting it, the operating profit margin under Beike's GAAP criteria has increased by about 1 percentage point (mainly due to the drag of accounts receivable impairment in the previous quarter), maintaining a positive value of 0.12 billion. It seems to be better than the operating loss in the previous quarter.

However, after adjustments for equity incentives, credit impairments, and amortization, the net profit for this quarter is 13.9 billion, slightly more than 3 billion lower than the previous quarter. In other words, this quarter's actual profit also decreased under the decline in revenue, but it still exceeded expectations by 3 billion.

In terms of contribution to gross profit by segment (excluding labor costs such as commissions, close to the gross profit margin criteria), 1) the contribution profit of the existing housing business is 25.5 billion, slightly down by 1.5 billion compared to the previous period, which is less than the 3 billion decrease in revenue. The profit-making ability of the existing housing business remains stable.

The new housing business, while experiencing a 10% decline in revenue year-on-year, also saw a 4-percentage-point decrease in contribution profit margin, leading to a nearly halving of contribution profit to 10 billion compared to the previous period, nearly 19% lower than expected. The profit-making ability of the new housing business has significantly decreased.

Although the revenue of the home improvement business has decreased significantly compared to the previous period, the contribution profit margin has increased by nearly 3 percentage points, so even though the scale has temporarily decreased, the profit margin of the home improvement business is still improving.

Despite having 26 billion in revenue, the leasing business only contributed 1.5 billion in profit. Therefore, the leasing business is still in a state of generating volume but not making money.