Beike Earnings: Operating Loss Disappoints but Capital Allocation Improves; Fair Value Cut by 12%

Narrow-moat KE Holdings, or Beike, delivered mixed results for the fourth quarter of 2023. While the CNY 20.2 billion in revenue beat the upper end of management’s guidance of CNY 18.5 billion, recurring operating margin of negative 0.6% missed our projection of positive 2.8%. The company ascribed the margin contraction to elevated marketing expenses and the rental management division's property leasing costs, and refrained from guiding for first-quarter 2024 results amid high uncertainty over housing sales. Given the subdued homebuying activities in China, we reduce our forecast for Beike’s first-quarter revenue and non-GAAP net profit by 6% and 13%, respectively. We also factor in a steeper 2.9% top-line contraction for 2024 a milder 9.5% revenue rebound for 2025, and slower receivables turnover in the next few years. These adjustments lead to a decrease in our fair value estimate to USD 15.00 per ADR (HKD 39.00 per share) from USD 17.00 (HKD 44.20) for Beike. That said, we believe the company will benefit from ongoing policy easing in China's wealthy cities, which should gradually lift Beike's earnings through 2028.