Beike: How strong is the recovery of the real estate market after September?

The following is the summary of the Q3 2024 earnings call for $KE(BEKE.US)$BEKE-W(02423.HK) For the earnings report interpretation, please refer to《》

1. Core Information Review of the Earnings Report:

2. Detailed Content of the Earnings Call

2.1. Key Information from Executive Statements:

1. Business Growth

In Q3, the existing home transaction business GTV reached 477.8 billion yuan, a year-on-year increase of 8.8%, higher than the growth rate of approximately 21% for online registered transactions of second-hand houses in first-tier cities, with a year-on-year increase in transaction volume of 44%. The new home transaction business GTV grew 18% to 227.6 billion yuan, while the GTV of new home transactions for the top 100 developers as per CRIC decreased by 29%. Revenue from home decoration and home services, as well as housing rental services, increased by approximately 33% and 118% year-on-year, respectively.

2. Efficiency Improvement and Innovation Mechanism

In Q3, the average revenue of platform stores (excluding Beijing and Shanghai) exceeded the same period in previous years, with the ratio of platform employees to frontline agents reaching a historical high, while maintaining robust risk control and pursuing higher service quality.

A small leadership committee has been formally established, consisting of leaders from major business lines and heads of finance and human resources, reporting directly to the chairman, responsible for planning key company strategies, promoting collaboration, clarifying responsibilities, and self-reflection, with plans to continue improving and promoting governance mechanism innovation in the future.

3. Appointment of New Business CEOs

Xu Wangang has been appointed to lead the home decoration business, and Wang Yongqun to lead the housing rental service business, both reporting directly to the chairman, aimed at responding to future changes and integrating resources to achieve synergy.

4. Platform Ecosystem and Incentive Mechanism

In Q3, a store points incentive program was launched, rewarding stores that demonstrate long-term loyalty, good performance, integrity, and innovation. For example, in the pilot city of Shenzhen, approximately 18 million yuan in cash equivalent incentives were distributed in Q3, with stores receiving a total of 2.49 million yuan in incentives and 930,000 points in October, with the highest single store receiving 210,000 yuan. This program effectively addresses business issues, enhances store satisfaction and loyalty, and promotes value sharing and joint development between the platform and stores

5. Promote Lianjia's Development

Continue to advance Lianjia's take-off plan, with the number of active agents increasing by nearly 13%, exceeding 110,000.

In some cities, the agent attrition rate has decreased, the average number of agents per store has increased, and many management-level employees have received leadership training. The company will continue to innovate and make cautious decisions to explore new business opportunities.

2) Financial Performance

1. Second-hand Housing Transactions

Revenue: Revenue is 6.2 billion yuan, a year-on-year decrease of 1.4% and a quarter-on-quarter decrease of 15.2%. The decline in revenue is mainly due to the increase in the number of agents and enhanced benefits in the market environment, leading to higher fixed labor costs.

GTV: GTV is 477.8 billion yuan, a year-on-year increase of 8.8% and a quarter-on-quarter decrease of 16.3%. The growth of GTV outpaced revenue mainly due to the increased contribution from transactions facilitated by connecting agents, with its market contribution rate decreasing by 7.7 percentage points year-on-year and 6.5 percentage points quarter-on-quarter.

2. New Housing Transactions

GTV: Despite the sluggish market, the company's various indicators performed excellently, with GTV reaching 227.6 billion yuan, a year-on-year increase of 18.4% and a quarter-on-quarter decrease of 3.3%;

Revenue: Revenue is 7.7 billion yuan, a year-on-year increase of 30.9% and a quarter-on-quarter decrease of 2.6%. The revenue performance outperformed GTV, reflecting strong monetization capabilities.

Commission Revenue: In commission revenue, the proportion of state-owned enterprise developers increased to 58%, while the commission ratio for advance payment projects remained at a high level of 44%. However, the strategic increase in variable commissions led to a slight decline in profit margins, down 0.4 percentage points year-on-year to 24.8% and down 0.3 percentage points quarter-on-quarter.

3. Home Decoration and Furniture Business

Contracted Sales: Q3 contracted sales reached 4.1 billion yuan, a year-on-year increase of 24.6%, maintaining stable growth.

Furniture and Home Retail Contracted Sales: Approximately 1.1 billion yuan, accounting for about 28.1% of total contracted sales, an increase of 2.1 percentage points year-on-year.

Revenue: Revenue is 4.2 billion yuan, a year-on-year increase of 32.6%, with revenue growth exceeding contracted sales due to improved delivery efficiency.

Profit Margin: The profit margin reached 31.2%, an increase of 2.1 percentage points year-on-year, remaining relatively stable, mainly due to the improvement in the gross profit margin of the home decoration business.

4. Housing Rental Services

Revenue: Q3 revenue is 3.9 billion yuan, a year-on-year increase of 118.4%.

Managed Units: The number of managed rental units has increased, with the number of units managed by Shunxin Rental exceeding 360,000, a significant increase from about 160,000 in the same period last year.

Profit Margin: The profit margin decreased by 1.4 percentage points quarter-on-quarter to 4.4%, mainly due to seasonal factors leading to increased commission expensesEmerging and Other Services: Q3 net income 487 million yuan, a year-on-year decrease of 21.5%.

5. Costs and Expenses

Q3 store costs and other costs were approximately 703 million yuan and 502 million yuan, respectively, remaining relatively stable.

GAAP operating expenses were 4.4 billion yuan, a year-on-year increase of 11%, and a quarter-on-quarter decrease of 2.1%. Among these, G&A expenses remained relatively stable, while sales and marketing expenses increased by 18.6% due to the expansion of home decoration business, and R&D expenses increased by 21.5% due to increased investment in housing transaction service R&D and exploration of advanced projects.

6. Cash Flow and Balance Sheet

Q3 net operating cash inflow was 449 million yuan, with new home DSO at 47 days, and risk control was effective.

Approximately 204 million USD was allocated for stock repurchase in Q3, with total cash liquidity remaining at a high level of 76.3 billion yuan (excluding customer payable deposits).

As of Q3, approximately 784 million USD of stock has been repurchased, accounting for about 3.3% of the total circulating shares at the end of 2023. Since the stock repurchase plan was initiated in September 2022, approximately 1.49 billion USD of stock has been repurchased, accounting for about 8.1% of the total circulating shares before the plan.

2.2 Q&A Analyst Questions

Q: Regarding recent real estate policies, how does management view the comparison of this policy with previous policies? So far, what has been the effect of the policy? What is its sustainability? And what market forces are needed to stabilize the market?

A: Policy effects and market response: Q3 market performance was affected by the policy on May 17 and the off-season, with the second-hand housing transaction market declining month by month, and the new housing market also experiencing a year-on-year decline that intensified month by month. However, after the policy was introduced at the end of September, the national transaction volume of second-hand and new homes surged, with first-tier cities leading the way, and there are signs of stabilization in housing prices. The effect of this policy exceeds the two rounds of policies on August 31 last year and May 17 this year, with a broader scope and greater intensity, including a package of counter-cyclical policies, credit support, and relaxation of purchase restrictions in first-tier cities, reflecting the country's determination to stabilize the real estate market, and market expectations have recovered stronger.

The transaction volume in the second-hand housing market has significantly increased in cities at all levels, with first-tier cities seeing a year-on-year increase of over 100%, Shenzhen increasing by over 250%, and the average daily transaction volume in Shenzhen reaching the highest level in nearly four years in October; the new housing market has also rebounded, with the GTV of the top 100 developers in October increasing by 73% compared to September. In terms of second-hand housing prices, they stabilized month-on-month in October, with prices rising in some first-tier cities, such as Beijing, Shanghai, and Shenzhen, which increased by 2.2%, 2%, and 0.7%, respectively, mainly due to a decrease in low-priced sales by homeowners. In terms of market structure, homebuyers upgrading dominate the market, consumer willingness to purchase has increased, and the proportion of wait-and-see has decreased.

Sustainability of the policy and market stabilization factors: This round of policies is expected to have a more lasting impact on the market, with the weekly transaction volume of second-hand homes on the platform remaining stable at a high level from October to the first two weeks of NovemberShort-term housing prices are stable, but long-term sustainability needs further observation. The further recovery of the economic fundamentals is key to ensuring that the real estate market hits the bottom. Subsequent policies should focus on improving the macro economy, and based on stimulating housing demand policies, introduce supply-side measures to support developers and reduce inventory to balance supply and demand. At the same time, favorable policies for the real economy will also support residents' income expectations and purchasing power, stabilizing the real estate market.

Q: Given the signs of recovery in the second-hand and new housing markets in September, how do you view the growth prospects of the home decoration business? Can you share recent progress in this business line, such as how to improve operational efficiency?

A: Growth prospects: In Q3, the home decoration business achieved steady growth, with signed sales reaching 4.1 billion yuan, a year-on-year increase of about 25%, and revenue rising to 4.2 billion yuan, a year-on-year increase of 33%. Some cities performed exceptionally well, with signed sales in Beijing, Guangzhou, Zhengzhou, and Nanchang increasing by over 50% year-on-year. In the future, we will continue to invest in infrastructure and capacity building, strengthening the quality foundation to maintain competitiveness.

Progress in improving operational efficiency: Reforming operational management, reviewing each stage of home decoration construction to reduce material waste; updating product packages to ensure reasonable gross profit margins; increasing the proportion of centralized procurement, with the group level conducting centralized procurement of standardized products, with Q3 centralized procurement exceeding 30%, compared to over 20% in Q2; optimizing terminal channel management to shorten construction time, with the comprehensive timeline for basic construction and initial materials in Q3 shortened compared to the same period last year; expanding the after-sales team, increasing from over 200 at the end of last year to over 500 by the end of September this year, enhancing customer satisfaction.

Q: Beike has outperformed the market in both second-hand and new housing businesses. Does the management have confidence in maintaining this advantage? Additionally, Beike has been actively expanding its stores this year; can you share future plans?

A: The confidence in maintaining market advantage comes from: This year, we focused on agency and store network expansion and ecosystem development, actively collaborating with new housing developers, which has enabled the company to continuously outperform the market. In Q3, the platform had over 41,000 active stores and 315,000 active agents, representing year-on-year growth of 16% and 4%, respectively. The company attracts stores to join by providing brand support, and in a volatile market, the platform's resources, cooperative network, professional empowerment, and diversified services are highly attractive to stores. The return on investment for store expansion is good, with new stores opened in Q1 achieving a positive investment return rate by September, and in the second half of the year, we adjusted strategies to increase the average number of agents per store and incentive measures to attract quality stores, enhancing overall scale and efficiency.

Future store plans: In terms of store network operations, different strategies will be adopted for different regions. In areas with complete network coverage, we will optimize the ecosystem and help store owners and agents retain more income through platform benefits and support measures, enhancing store productivity; in areas with insufficient collaboration, we will promote property sales and store cooperation through data analysis, problem diagnosis, and strategic support; in areas with insufficient coverage, we will actively expand new stores. At the same time, in Q3, we piloted a points incentive system to increase flexibility in housing transaction business and incentivize stores to participate in new businesses such as home decoration and leasing, with about 30% of pilot city stores receiving rewards, and the platform distributing over 18 million yuan in cash-equivalent incentivesIn the new housing business, we continue to lead the industry, with Q3 new housing GTV reaching 22.76 billion yuan, a year-on-year increase of 18.4%. The number of core projects continues to increase, with core new projects accounting for 64% in September. Our collaboration with developers is deepening, and the strategic cooperation model protects agency rights, enhances business transparency and stability, and promotes new housing sales.

Q: Regarding the housing rental business, "Worry-Free Rent" is growing rapidly, but this business involves many operational matters. Can management share how it differs from other companies in terms of operations?

A: Operational characteristics and results: Q3 rental service revenue reached 3.94 billion yuan, a year-on-year increase of 118.4%, mainly due to the increase in the number of managed properties. By the end of Q3, "Worry-Free Rent" managed over 360,000 units, a significant year-on-year growth.

In terms of operations, we focus on service quality and efficiency, providing pre-move inspections, standardized handovers, and property transfer services, with cumulative services exceeding 970,000 times. We centralize property managers to enhance service quality and reduce customer violation rates; by improving renewal rates, we reduce channel costs and actively communicate with tenants about renewal matters, achieving a Q3 renewal rate of 52%, an increase compared to the same period last year; optimizing operations to shorten rental time, the secondary rental time was reduced from 14.7 days at the beginning of the year to 7.5 days by the end of Q3; upgrading product modules to improve the first rental success rate and reduce vacancy costs, such as expanding the coverage of the "Worry-Free Rent" new product module with no vacancy period, achieving a first rental success rate of 82% by the end of Q3. We have established our own leasing team to improve leasing efficiency and contribution, with its leasing opportunity contribution reaching 19% by the end of Q3, an increase of 5 percentage points compared to the same period last year. Different strategies are adopted in different seasons, increasing personnel and unit productivity during peak seasons, strengthening rental combinations, improving agency productivity, targeted marketing, managing renewals and pre-sales, and optimizing inventory during off-peak seasons.

Q: Regarding Beike Haojia, we see that it successfully won a project in Chengdu. Can management share the details of this project and the logic behind it? What is the company's view on the business model of Beike Haojia?

A: Project details and logic: The new project "Beike Haojia" obtained land through auction in September in the Jinjiang District Financial City Phase III of Chengdu, which will be independently operated by its team. This project aims to validate the implementation capabilities of the C2M solution at various stages, including land auction, product positioning, design, and marketing, by creating a model project to establish trust with partners such as developers, contractors, and owners, achieving a long-term light asset service platform model.

Business model: "Beike Haojia" is positioned as a data-driven residential development service platform, adopting a "1 + 2" business model, with core capabilities in C2M product solutions, leveraging user insights and big data support to empower partners through efficient customer acquisition and marketing capabilities, charging a comprehensive service fee that includes product positioning, design, and more, rather than making large-scale heavy asset investments. The company does not intend to become a real estate developer and will not engage in large-scale self-capital heavy asset investments. **The land acquisition price is competitive, and the project will serve as a capability testing platform to accumulate experience to support the realization of a long-term platform model**

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