Company Reports

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.

KE Holdings, or Beike, is a leading real estate brokerage company in China with an over 30% share in gross transaction value, or GTV, for existing homes. It charges commissions on housing transactions through self-owned agents and collects service fees on existing home transactions of connected third-party or franchise realtors. We think Beike has successfully combined the network reach of its online platform with an enhanced offline store experience to retain leadership in a competitive brokerage market. A continuing top-line growth, coupled with improved store efficiency, should translate to stronger operating leverage for Beike as well, in our view. That said, we expect slower turnover for lived-in homes and mounting competition to weigh on its commission rate. As the company cuts fee rates in main cities to ramp up GTV, we foresee a tempered uptick in margins over time.

We cut our first-quarter 2024 assumptions for narrow-moat KE Holdings, or Beike, after reviewing the growth outlook of services for new homes, existing homes, and home renovation. Sluggish housing sales for year-to-February 2024, coupled with management’s cautious tone, have reaffirmed our view of worse-than-expected top-line growth. Hence, we lower our commission income forecasts for new homes and existing ones by a respective 22% and 10% for the first quarter. We also model a more conservative home renovation revenue for the same period due to low project delivery. These revisions translate to a 22% decline in our non-GAAP net profit estimate for the first quarter, but we foresee gradual home demand recovery in the second half of 2024 to uphold full-year earnings. Hence, we keep our fair value estimate for Beike at USD 17.00 per ADR (HKD 44.20 per share), and view its ADRs as slightly undervalued.

KE Holdings, or Beike, is a leading real estate brokerage company in China with an over 30% share in gross transaction value, or GTV, for existing homes. It charges commissions on housing transactions through self-owned agents and collects service fees on existing home transactions of connected third-party or franchise realtors. We think Beike has successfully combined the network reach of its online platform with an enhanced offline store experience to retain leadership in a competitive brokerage market. A continuing top-line growth, coupled with improved store efficiency, should translate to stronger operating leverage for Beike as well, in our view. That said, we expect slower turnover for lived-in homes and mounting competition to weigh on its commission rate. As the company cuts fee rates in main cities to ramp up GTV, we foresee a tempered uptick in margins over time.

We published our inaugural China real estate industry pulse for the first quarter of 2024 with the view that housing demand should gradually recover through 2026, supported by ongoing policy tailwinds. While new home sales in China remained sluggish in 2023, the nationwide average price was steadier due to a continuing mix shift to wealthier regions with more resilient prices. Moreover, we like the ramping-up of supportive measures since the second half of 2023 and expect further easing in buying restrictions and mortgage rate cuts in large cities. While share price performances could remain volatile in the near term, we see an improving risk/reward profile at the current valuation as the market may be missing key developers' improving sales outlooks. As such, we prefer top state-owned builders, China Overseas Land & Investment and China Resources Land, as both have seen better sales growth, higher asset quality, and healthier gearing ratios versus their peers.

We initiate coverage on KE Holdings, or Beike, with a narrow moat rating and a fair value estimate of USD 17.00 per ADS (HKD 44.20 per share), which falls in Morningstar 3-star territory. With over 48 million monthly active users, or MAU, as of June 2023, Beike is one of the largest housing brokerage companies in China with both an online marketplace and physical stores. While Beike’s commission revenue growth should moderate amid normalizing home demand, we like the firm’s online-offline integrated business model and strong brand reputation. This should also be reinforced by robust expansion of Beike’s home renovation services via acquisitions. As such, we model a 10.8% top-line CAGR for Beike in 2022-27.

KE Holdings, or Beike, is a leading real estate brokerage company in China with an over 30% share in gross transaction value, or GTV, for existing homes. It charges commissions on housing transactions through self-owned agents and collects service fees on existing home transactions of connected third-party or franchise realtors. We think Beike has successfully combined the network reach of its online platform with an enhanced offline store experience to retain leadership in a competitive brokerage market. A continuing top-line growth, coupled with improved store efficiency, should translate to stronger operating leverage for Beike as well, in our view. That said, we expect slower turnover for lived-in homes and mounting competition to weigh on its commission rate. As the company cuts fee rates in main cities to ramp up GTV, we foresee a tempered uptick in margins over time.