Can the "Three Wings" strategy help Beke holdings soar again?

Before the US stock market opened on the evening of August 12th Beijing time, Beike (KE.US) released its financial report for the second quarter of 2024. Boosted by the heavyweight new real estate policies, the housing transaction business showed a significant recovery, delivering results that exceeded expectations in terms of revenue and profit. The specific key points are as follows:

1. Stimulated by the new policy on May 17th, the second-hand housing transactions saw a significant rebound in the second quarter. Beike's second-hand housing GTV increased by 25% year-on-year, significantly higher than the expected 15% growth rate. Although slightly lower than the 33.4% growth rate of second-hand housing transactions in 74 cities during the same period, considering the impact of price declines, Beike's second-hand housing business is at least as strong as the overall market, if not stronger.

However, due to the continued pressure on inventory turnover, the realization rate of Beike's second-hand housing business declined by about 0.11 percentage points year-on-year, resulting in a revenue growth rate of 14% year-on-year, significantly lower than the GTV growth rate. Nevertheless, benefiting from the market improvement in the second quarter and stronger performance in top-tier cities, the realization rate increased by 0.03 percentage points on a quarter-on-quarter basis.

The rebound in transactions also drove the contribution profit margin of the second-hand housing business to increase by approximately 3 percentage points to 47.5%, resulting in a contribution profit of 3.483 billion this quarter, nearly 21% higher than expected, with the profit exceeding expectations more than revenue.

2. The improvement in the new housing market was relatively smaller (partly due to the crowding-out effect of second-hand housing). Beike's new housing transaction volume in this quarter still decreased by about 20% year-on-year, which is almost in line with the 21% decline in sales amount of the top 100 real estate companies in the second quarter. It neither outperformed nor underperformed.

However, as the realization rate of the new housing business continued to increase by 0.2 percentage points on a quarter-on-quarter basis (accumulating a 0.5 percentage point increase year-on-year), the year-on-year decline in new housing business revenue was only 9%, significantly lower than the market's expected 16% decline and the GTV decline. Dolphin Research believes that as land in key city centers becomes increasingly scarce and suburban projects lack natural foot traffic, with the overall challenging inventory turnover situation, channel partners are gaining more bargaining power over developers in the medium term.

However, the improvement in the profit margin of the new housing business was lower than the market's expectation by about 3 percentage points, standing at 25% this quarter. Despite higher revenue than expected, the contribution profit of the new housing business was 4% lower than expected.

3. In addition to the recovery of intermediary services, Beike's second channel, mainly focusing on home decoration, leasing, home services, and financial services, has already achieved a total revenue of 8.1 billion this quarter, maintaining a high growth rate of 85% year-on-year. As of this quarter, the second channel business accounts for 34.7% of Beike's total revenue, showing close to a doubling growth rate year-on-year. Undoubtedly, the second channel has become the main driving force behind the company's revenue growth.

Not only in terms of revenue, the total contribution profit of the second channel this quarter has also reached 2.24 billion, accounting for 29% of the company's overall, proving that it is not just inflating revenue but also making solid contributions to profits. Specifically, the contribution profit margin of the home decoration business has reached 31.3%, ranking above average among all segmented businesses of the company.However, the profit contribution margin of the leasing business is only 5.8%, which is relatively "bloated". Although the revenue has exceeded 3 billion, the profit contribution accounts for less than 3% of the company's overall.

4. From the perspective of expenses and profits, ① firstly, the gross profit this quarter reached 6.52 billion, nearly 1 billion higher than expected. Due to the recovery in revenue, the gross profit margin for this quarter increased by 2.7 percentage points compared to the previous quarter. Looking into details, the gross profit margin of the two new businesses, home decoration and leasing, increased by less than 1 percentage point, mainly due to the significant improvement in the gross profit margin of the first channel (benefiting from the market recovery).

On the expense side, with the market recovery, all operating expenses of Beike have rebounded, among which marketing expenses increased most significantly (+16% QoQ), and it was the only expense item that exceeded expectations.

However, under the dilution of revenue growth, all expense ratios have significantly decreased, the combined three expense ratios decreased by 6 percentage points compared to the previous quarter, coupled with the approximately 2 percentage point increase in gross profit margin, the operating profit margin for this quarter directly rose to 8.6%. Finally, the operating profit for this quarter was 2.02 billion, far exceeding the expected 0.95 billion. The adjusted net profit for this quarter was 2.64 billion, also exceeding the expected amount by only 0.8 billion.

Dolphin Research Viewpoint:

Overall, stimulated by the new policies, there are some expectations that were not updated in time, but Beike's performance in the second quarter is obviously stronger than expected. Both the existing and new housing businesses have shown significant improvements, with the existing housing sector performing better, exceeding revenue and profit expectations. At present, the revenue and profit contributions of the new housing sector already account for around 30%, no longer just a supplement to the housing intermediary business, but actually becoming the main source of incremental revenue and profit for the company.

In the short term, after this excellent performance, it is highly likely to support the company's stock price to strengthen for a period of time. However, since August, there has been a significant month-on-month decline in existing housing transactions. As the stimulus from the new policies stabilizes, the market's medium-term focus will still be on the future trends of the real estate market. It is recommended to pay attention to the guidance provided by the management in the conference call for the next quarter.

Looking at the long term, we believe that although the total transaction area of the real estate market will likely shrink slowly for a long time, with the gradual increase in the proportion of existing housing transactions, we believe that in this process of mutual substitution, the long-term impact on Beike may not necessarily be negative. At the same time, we can also see that in order to gradually reduce its heavy reliance on the macro environment in the first channel business, Beike's new businesses have already accounted for a considerable proportion of revenue and profit. In the medium to long term, the factors that will have the greatest impact on Beike's performance and valuation will gradually shift from the first channel to the second channel. Therefore, the judgment on the medium to long-term revenue and profit of the home decoration and leasing businesses will be the key to whether to be bullish on Beike in the long term.

In the short to medium term, Beike's clear market leading position in the first channel has already established a relatively solid valuation foundation for the company. Even if there are fluctuations in the real estate market transactions in the future, as long as the entry point is reasonable, it is an investment target that does not need to worry about "permanently losing capital.

"Detailed interpretation of this quarter's financial report:

I. Existing homes: Major policies boost market recovery, leading Beike acts as a "harbinger"

Following the most significant national real estate policy on May 17 in recent years, as well as subsequent support policies in major cities, the domestic existing home market saw a clear recovery in the second quarter. Reflected in the company's performance, the GTV of existing homes this quarter reached 570.7 billion, a 25% year-on-year increase, significantly higher than the market's expected growth rate of 15%. In comparison, statistics from securities firms show that the transaction area of existing homes in 74 cities increased by 33.4% during the same period. Considering the impact of the average unit price decline, Beike's growth in existing home transactions should be at least not weaker than the overall market.

Looking into details, the GTV dominated by Lianjia increased by 30% year-on-year, while the GTV dominated by 3P stores within the platform increased by 21% year-on-year. It can be seen that the performance of Lianjia's self-operated business is relatively stronger than the franchise, which is consistent with the greater relaxation of policies towards core cities in this round.

However, the year-on-year revenue growth of the existing home business this quarter was 14%, significantly lower than the GTV growth, reflecting the increasing difficulty in clearing existing homes and a decline in the realization rate of Beike's existing home business year-on-year, dropping by approximately 0.11 percentage points. Nevertheless, with the market improvement in the second quarter, and the stronger performance of high-tier cities benefiting Lianjia's self-operated business (income calculated on a gross basis), the realization rate increased by 0.03 percentage points compared to the previous quarter.

II. Although new homes have not stopped declining, the value of channels becomes more apparent

In contrast, due to the crowding-out effect of the recovery in existing homes and the lack of elasticity in the recovery of new home supply compared to demand, Beike's new home transaction volume still decreased by about 20% year-on-year this quarter, which is almost consistent with the 21% decrease in sales amount of the top 100 real estate enterprises in the second quarter. While there may be some nitpicking, Beike's performance in new homes did not show any advantage compared to the industry.

However, on the revenue side, the realization rate of new housing business continued to increase by 0.2 percentage points compared to the previous quarter (a cumulative increase of 0.5 percentage points year-on-year), and the year-on-year decline in revenue from new housing business was only 9%, compared to the expected -16% decline, which is also quite impressive in terms of exceeding expectations.

Dolphin Research believes that as land in key urban central areas becomes increasingly scarce, and with suburban projects lacking natural customer flow and the overall environment being difficult to digest, channel partners are showing an upward trend in bargaining power over developers in the medium term.

III. New track revenue contribution has exceeded 30%

In addition to the first track's housing transaction business, Beike's second track, mainly focused on home decoration, leasing, home services, and financial services, has generated a total revenue of 8.1 billion this quarter, maintaining an 85% year-on-year high growth rate. By this quarter, the second track business accounts for 34.7% of Beike's total revenue. With a substantial volume and nearly doubling year-on-year growth rate, it is undoubtedly the main driver of the company's revenue growth.

Specifically, the home decoration business contributed about half of the second track's revenue - 4.04 billion, making it the most important new business. However, the year-on-year growth rate has slowed to 54%, a significant 17 percentage point decline in growth rate. It is necessary to pay attention to the management's explanation of this, as the market may be concerned about the future growth trend of the home decoration business. The slightly smaller leasing business contributed 40% of the second track's revenue, with a year-on-year growth rate as high as 167% on a lower base.

After summing up all businesses, Beike's total revenue this quarter is 23.37 billion, significantly higher than the market's expected 21.8 billion (although there is still the old problem of market expectations not being updated in a timely manner). However, regardless, the revenue year-on-year growth rate has improved from -19% in the previous quarter to a remarkable +20%.

IV. Existing housing income and profit both exceeded expectations, while leasing business still appears "bloated"

In terms of contribution to gross profit by segment (excluding only labor costs such as commissions, close to the gross profit margin basis):

1) The contribution profit of the existing housing business this quarter was 3.483 billion, which is 21% higher than expected, with the degree of exceeding expectations magnified compared to income. The main reason is that, with a significant rebound in transactions, the contribution profit margin of the existing housing business also increased by about 3 percentage points to 47.5% on a quarter-on-quarter basis. This reflects that once the market rebounds, the elasticity of profit will be significantly higher;

2) The new housing business, on the other hand, had a slightly lower contribution profit margin this quarter of about 3 percentage points to 25% due to the continued decline in transaction volume and income. Despite higher than expected income, the contribution profit of the new housing business was 4% lower than expected.

3) The total contribution profit of all new businesses in the second channel this quarter has reached 2.24 billion, accounting for 29% of the overall. New businesses are not just "boosting" income, they also contribute nearly 30% to profit. In detail, the contribution profit margin of the home decoration business has reached 31.3%, which is above average among all segmented businesses of the company. However, the contribution profit margin of the leasing business is only 5.8%, in other words, although this business also accounts for 40% of the total revenue of the second channel, it is relatively "bloated," with its contribution profit amount accounting for less than 3% of the company's overall.

V. Increased revenue, decreased expenses, significant profit recovery

Above, we discussed the income and profit situation of each segment, looking at overall expense and profit perspectives:

1) In terms of gross profit, it reached 6.52 billion this quarter, nearly 1 billion higher than expected. Driven by strong growth, the gross profit margin this quarter increased by 2.7 percentage points on a quarter-on-quarter basis, while the market's expected gross profit margin remained largely stable.

In detail, not only did the gross profit margins of the home decoration and leasing new businesses each increase by less than 1 percentage point, the main contribution came from the significant improvement in the gross profit margin of the first channel (benefiting from the market rebound).

On the expense side, with the market rebounding, all operating expenses of Beike have returned to growth on a quarter-on-quarter basis, with marketing expenses showing the most significant increase (+16% QoQ). From an expected difference perspective, only marketing expenses were slightly higher than expected by 2%, while other expenses remained below expectations.

Under the dilution of stronger revenue growth, all expense ratios have still decreased significantly, with the three expense ratios combined decreasing by 6 percentage points compared to the previous period. Coupled with a gross profit margin increase of about 2 percentage points, the operating profit margin for this quarter has directly rebounded to 8.6% from nearly zero profit in the previous quarter. Ultimately, the operating profit for this quarter is 2.02 billion, far exceeding the expected 0.95 billion.

Even after adding back equity incentives, credit impairments, and amortization, the adjusted net profit for this quarter is 2.64 billion, nearly 800 million more than expected.

Dolphin Research on Beike:

Financial Report Review

May 26, 2024 conference call "Beike: Second-hand housing shows year-on-year improvement, new homes continue to be under pressure"

May 26, 2024 conference call "Can Beike still be saved with 'strong medicine'?"

March 15, 2024 conference call "Even in the frozen real estate market, dividends provide support"

March 15, 2024 financial report review "Beike: High-quality development of new businesses"

November 9, 2023 conference call "Beike: How is the three-wing strategy progressing?"

November 8, 2023 financial report review "Beike: The 'Plum Blossom' in the real estate winter?"2023 年 8 月 31 日财报点评"Beike Feels the Chill, But a Heavyweight 'Market Rescue' is Here!" Link

2023 年 8 月 31 日电话会"Beike: Outlook for the Second Half of the Year & Future Strategic Direction" Link

2023 年 5 月 22 日财报点评"Beike: Exploding Performance and Plummeting Stock Price, Where Did It Go Wrong?" Link

2023 年 3 月 17 日电话会"Beike: Outlook for the 2023 Real Estate Market and Company Development Direction" Link

2023 年 3 月 17 日财报点评"Real Estate 'Early Spring,' Is Beike's Spring Coming Too?" Link

In-depth

2022 年 6 月 30 日"Real Estate Reviving, Can Beike Stride Forward Again?" Link

2021 年 12 月 27 日"Real Estate Rebounding? Investing in Beike? Wait a Bit Longer First" Link

2021 年 12 月 17 日"Muddy Waters Shorting Beike? Superficial Analysis" Link

2021 年 12 月 15 日"From 'Revolutionizing Lives' to 'Being Revolutionized,' Can Beike Withstand It?" Link

2021 年 12 月 9 日"The 'Rebellious' Beike: Whose Lives Did It Revolutionize, and Who is Its Savior?" Link

Risk Disclosure and Disclaimer for this Article: Dolphin Investment Research Disclaimer and General Disclosure