KE Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
March 14, 2024

There are 6 speakers on the call.

Operator

Hello, ladies and gentlemen. Thank you for standing by for KE Holdings Inc. 4th Quarter and Fiscal Year 2023 Earnings Conference Call. Please note that today's call, including the management's prepared remarks and question and answer session, will all be in English. Simultaneous interpretation in Chinese is available on a separate line for the duration of the call.

Operator

To access the call in Chinese, you will need to dial into the Chinese language line. Call. Today's conference call is being recorded. I would now like to turn the call over to your host, Ms. Siting Li, IR Director of the company.

Operator

Please go ahead, Sifing.

Speaker 1

Thank you, operator. Good evening and good morning, everyone. Welcome to KE Holdings Inc, or Baker's 4th quarter fiscal year 2023 earnings conference call. The company's financial and operating results were published in the press release earlier today and are posted on our company's IR website, investors. Ke.com.

Speaker 1

On today's call, we have Mr. Stanley Peng, our Co Founder, Chairman and Chief Executive Officer and Mr. Tao Xu, our Executive Director and Chief Financial Officer. Mr. Peng will provide an overview of our strategies and business developments, and Mr.

Speaker 1

Xu will provide additional details on the company's financial results. Before we continue, I refer you to our Safe Harbor statements in our earnings press release, which applies to this call as we will make forward looking statements. Please also note that Baker's earnings press release and this conference call include discussions on unaudited GAAP financial information as well as unaudited non GAAP financial measures. Please refer to the company's press release, which contains a reconciliation of the unaudited non GAAP measures to comparable GAAP measures. Lastly, unless otherwise stated, all figures mentioned during this call are in RMB.

Speaker 1

For today's call, management will use English as main language. Please note that the Chinese translation is for convenience purpose only. In the case of any discrepancy, management statements in their original language will prevail. With that, I will now turn the call over to our Chairman and CEO, Mr. Stanley Peng.

Speaker 1

Please go ahead, Stanley.

Speaker 2

Thank you, Soutine. Hello, everyone. Thank you for joining Baker's Q4 fiscal year 2023 earnings conference call. 2023 was a fruitful year for Baker, not just in terms of business growth, but more importantly, in our organization's strengths, which foster our team's deeper sense of purpose and inspire dedication in us to move forward and embrace more possibilities. Over the past few years, we have made a series of proactive adjustments in our strategy and business operations in the face of changes.

Speaker 2

We are gearing up for crossing the Mass Mountain to capitalize on the promising residential market with a technology driven, one stop residential services platform for better living. These efforts have created more hope for our future. Scale wise, our 1 body business has substantially outperformed the market, which our new initiatives have taken off. For profitability, our 1 body business has reached historical highs and the new initiatives have seen significant improvement in core cities. We have achieved breakthroughs in at least 5 cities in terms of an integrated one body to win business model with service consolidation and end to end experience optimization.

Speaker 2

More importantly, our organization gained unity and cohesion. The synergistic development in 2023, guided by the 1 Body 3 Win strategy, has laid a solid foundation for our company. It has fostered a shared understanding within our organization. We are more certain of the path ahead and our steps are firmer. Now let's take a more detailed look at our performance in 2023.

Speaker 2

Overall, we achieved strong results in the turbulence market. For full year 2023, we recorded a GTV of RMB3.14 trillion on our platform, up 20% year over year. CTV of existing home transactions grew by 29% year over year, with notable market penetration improvements in most of the cost cities. Full year GTV, our new home transaction rose 7% year over year, significantly outperforming the market as compared with year over year decline of 6% in China total new home GTV according to the MBS and a decline of 18% in GTV over CRIC's top 100 developers. As for our new initiatives, pro form a contracted sales of our home renovation and furnishing services soared over 93% year over year.

Speaker 2

The number of units managed by our big rental services surpassed 210,000. Our full year total revenue increased by 28% year over year to RMB 77,800,000,000, it's the 2nd highest level on the cost, which more than 20% attributable to our new initiatives. Regarding operating efficiency, we have been reducing costs and enhancing efficiency, while controlling risks over the past 2 years. It did cause a lot of sacrifices internally. These efforts paid off in 2023, as evidenced by the record high profitability we said across our existing and new home transaction sources as well as for the group as a whole.

Speaker 2

We have also seen great improvements in our earnings quality and operation cash flow. Our achievements in 2023 have given us greater safety margins and bolstered our confidence. Next, we maintained our solid strides in our 1 body business in 2023 with some proactive actions to drive growth in the second half. By the end of 2023, our platform served a total of 43,800 Canadian stores, reach of 42,000 ITU stores, up 12% year over year. The number of agents connected to on our platform was close to 428,000 and the number of active agents rose by 15% year over year to 3 197,000.

Speaker 2

Also, service providers on our platform achieved substantially improvements in efficiency and income as well as a 44 percent of per store revenue increase for Li and Jia stores, excluding Beijing and Shanghai, and a 31% increase for Kinetic stores on a year over year basis. Moving to our new initiatives. At the heart of our achievements in scale this year, their progress reaffirm that we are headed in the right direction. We also get a clear picture of where we fall short and the vast potential for improvement in these sectors. Our home renovation and the furnishing services achieved great backstories in 2023.

Speaker 2

Beyond the numbers, what matters most is that we gain much deeper industry understanding and knowledge base. First, we developed a deep understanding of customer methods. Their happiness, pain points and frustration deeply motivated us to iterate our business models in line with the customer perspectives. Past industry priorities emphasize a good centric installation process with logic similar to assembling a computer. Understanding our customers allows us to take initiatives from human perspective, evolving our business logic and restructuring processes based on real customer needs, thereby creating competitive barriers and steepness.

Speaker 2

We also understand that a hunter like sales model commonly used as the early development stage of low frequency industries is not as sustainable. Only by keeping our roots in communities, winning long term customer trust, customer recognition and word-of-mouth referrals can be can we increase the transaction frequency and the density. Now turning to our Beacon rental services, as it grew rapidly throughout 2023, new problems began to emerge at a faster pace, recovering a higher business activity and accelerated model integration. We were successful on both fronts. Our carefree rental model recorded our 200,000 manager units, up from 70,000 in 2022 and our centralized long term apartment to rental services has managed over 10,000 units by the end of 2023 from 5,000 in 2022.

Speaker 2

We are evaluating meetings of rental orders on our platform every year from conventionally lower value added rental brokerage services to higher value added long term rental property management services. The core behind us is, 1st, our understanding to the added value, which our homeowners and tenants needs and the ability to serve. 2nd, our ability to control risks, which requires high operation efficiency. In 2023, we upgraded rental products to enhance value proposition to homeowners and strengthening risk control and we redefine the roles of our key service providers. All of these efforts helped create a sustainable business model to emerge, only by advancing our understanding of the fundamental can we truly drive industry progress.

Speaker 2

For 2024, our goal is to achieve growth with stability, focus on quality and efficiency and make decisions on long terrorism. Striking a balance between business growth and risk control is a fundamental challenge for every organization. In our approach, we need to respect the law of the market in the same way farmers honor the law of nature. We also must protect our seedlings from storms to ensure a fruitful harvest. Over the past 2 years, we focus on mitigating risks and reducing uncertainties amidst external turbulence.

Speaker 2

This has significantly improved our safety margins and deepened our rules in the industry. On top of that, our future developments will come from innovation. As we face a different environment now with new changes, we need to find new solutions. The first changes lies in shifting our priorities. For our wind body business, scale and agents income were once the most important factors.

Speaker 2

Now efficiency and agent experience have become more important as knowing our AC resource allocation mechanism helped us, we think a large pool of talents, which formed our competitive advantages in the past. However, going forward, this advantage in scale may not be the key to help us meet customer demand or benefits any stakeholders. As our agents mature, their needs are also changed from high income to work life balance. As we navigate these challenges, we have already seen our frontline teams taking steps ahead. Let me share a few examples.

Speaker 2

Our platform showcase many distinguished home brokerage brands, large franchise brands like Fufeng. They have plenty of their store counts from 100 to 1000 within 5 years. Their strategy focus on differentiated urban coverage and in-depth exploration in lowest tier market. Every aspect from store location selection and development planning to internal communication and team building follows a skillfully designed top down approach. We are also honored to connect with our long term franchise brand like Yoo Xindo, Yooijia Real Estate, who have achieved 5 fold growth since Yoon Baker in 2019.

Speaker 2

Defying the market trend, their growth strategy emphasized on collaborating with stores owners and agents with quality services and risk businesses, especially those having rather hard times by efficiently leveraging brand resources. They are actively LTE service model innovations. Let's serve the first transaction under our new model, helping customers lock in new homes before old homes were sold. On the storefront, we place a strong emphasis on the large store strategy, which demand excellent leadership and management skills from store operators taking our Lin Jia branch of Lin Lan Chao D Tier, Zhang Fenghang. In Shanghai, as an example, the store manager said our clear plans for staffing and operations, making each core business line led by the aging top in the current corresponding business to ensure robust and comprehensive customer services.

Speaker 2

During key services stage such as face to face consultations with homeowners, the manager also helps the team to cultivate awareness of devoting into homeowners' needs and developing a methodology with it to further strengthen the leadership skill of store operators, managing large stores. Tianjia has launched the Store Leadership Development Program as LDP this year. The 3 year program aim to reshape store managers' leadership model through operating planning, quality assurance, efficiency improvement, talent growth, team management and so on. By setting up a comprehensive certification system linked to career developments and aware incentives. SVODT aims to neutral versatile managers for the industry.

Speaker 2

On the agent side, our dedicated agents have been instrumental in introducing numerous innovation initiatives to enhance service quality and efficiency. We always say closing a transaction is just the beginning of a service case. This is not just a slogan. Our agent from Shanghai, Lin Jia, Ku Piling, set a good example. She deliver a special photo album for homeowners upon property Hanover.

Speaker 2

The album documented details of the apartment during this agent's house and maintenance period. Having homes get seller, keep a good memory of their past home is buyer by Peilin's idea. We have introduced the Peilin Auburn companywide at Lianxia, honoring the handover of home with these precious memories. This example of our ongoing exploration of a new path for quality and efficiency grows with deepening our marketing presence. Going forward, the advancement and widespread adoption of technology may be the key.

Speaker 2

As such, in 2024, we need to open our minds in understanding the relationship between agents and technology, embrace and create changers. New media is another powerful force we want to better explore and leverage. Finally, business model innovation is another possible solution In an effort to advance our one stop residential services model for better living, we will explore initiatives such as membership system and flagship stores. These mechanisms will foster deeper synergies under the One Body Stream win strategy, energizing our business holistically. Given that Beijing is our mother ship and stand at the top of scale in many ways, we believe it's both the best innovation growth and we plan to conduct more efficiency and model improvement trails there.

Speaker 2

For our emerging business, our main focus in 2024 is on quality. For home renovation and the furnishing, the new the next step is to continually enhance our understanding of our customer needs. This involves deepening our capabilities in quality, products, process innovation, technology and supply chain management, thereby cultivating customer trust and driving future business growth. For Beike Rental Services, there's a huge market demand. Operationally, we have established a solid foundation and our next store our next day strategy is clear, enhance efficiency through managing individual service capabilities, various improving occupancy rates and profitability and elevating service quality by various dedicated roles.

Speaker 2

What's more important for this business is to explore innovation model better balance risk and return better, then we can replicate them, look to long term growth prospects, while self guiding our bottom line. In terms of technology, we have the strongest data assets and the richest offline scenarios in the leading industry. Digitalization and technology hold the greatest potential to solve the long term efficiency issues for agents. In 2024, we will further advance the digitalization across our business areas in the industry, conduct more in-depth exploration and practices around technology driven initiatives. Regarding quality, for us, it sets up limits on how much we can be motivated by our customers and represents our business bottom line.

Speaker 2

In 2024, we are doubling down on quality, exploring a way to enhance our ability to improve quality and to create value through products, services, operations and commitments. For example, we are innovating supervisory systems and products to remove barrier between customers and our platform, making sure we are always open to hearing from our customers. This quality centric products and capabilities represent the real value to our customers and the business also namely long tourism capabilities less the possible customer feedback to continually motivate us while turning our customers' dissatisfaction into our driving force to improve and evolve our organization. That's the real power of focusing on quality. Lastly, we never stop thinking forward.

Speaker 2

If we could stand in 20 years behind and look back to today, what strategies may not work anymore and what new ones will, opening up our mind to reflect and address these core long term issues is a major task for us in 2024. We are on solid growth with ample opportunities to make our mark to mark in the vast residential sector backed by team, visibility and trust forms through Battles Fall Together. Moving forward, we will continue to focus on the things at hand, encouraging, supporting and learning from each other and growing together by lending strengths to one another. We are increasing, reassembling an invincible team. 2024 is about welcoming new possibilities and challenges, each one guiding us toward more promising opportunities and helping us cross next mountain.

Speaker 2

Thank you. Next, I would like to turn the call over to our CFO, Xu Tao to review our Q4 and fiscal year 2023 financials. Thank you.

Speaker 3

Thank you, Stanley. In 2023, the Chinese growth market deepened with the transformation. So we started with concentrated release of pent up demand before moving to gradual normalization middle year. Attraction to rebound followed in the second half of twenty twenty three, fueled by incandescent support policies. The existing and new home market shows the depreciating performance, with later being affected by the risk associated with the low Easter demand per stat and the limited effect of supply, resulting in continued weakness in supply and the demand.

Speaker 3

In contrast, both JFA and the GTV of the steam home transaction increased significantly year over year, showing homebuyers preference for readily available home. This is an inevitable trend as China's real estate market approaches maturity. Houses are returning to their original purpose of providing a comfortable living environment, bringing us closer to the vision of joint living. This is an evolving actionable environment. Our performance in 2023 demonstrated a remarkable resilience, guided by our goal of achieving high quality growth.

Speaker 3

Our series of measures to reduce cost, enhance efficiency and mitigate risk, have broader significant operating leverage. Our full year revenue reached RMB77.8 billion, up 28.2 percentage points year over year. Revenues from existing and the new home All home transaction services maintained steady growth with a solid foundation. Revenue from our home renovation and furniture, emerging and other services become new engine of growth, contribute 24% of total in 2023, an increase of 11.7 percentage points from 2022. Specifically, revenue from the home renovation and furniture business was RMB10.9 billion, rising by 74.3% year over year on a pro form a basis.

Speaker 3

Our profitability also increased substantially in 2023. Contribution margin grew by 7.3% to 47.2% for the existing home transaction services and a 2.9 percentage point to 26.6% for the new home transaction services, both setting new historical highs. Our adjusted operating expense ratio dropped by 2.1 percentage points year over year, with an adjusted operating margin of 11.2% for the year. Our adjusted net margin increased by 7.9 percentage points to reach 12.6%, bringing our full year adjusted net income to RMB9.8 billion. Earnings cost improved meaningfully as well.

Speaker 3

We realized a net operating cash inflow of RMB11.2 billion in 2023, 1.14x of our adjusted net income for the year and DSO fell by 50 days year over year to 55 days, we believe we have delivered commendable results in 2023. Turning to our performance in Q4. Our top line and bottom line each grew by double digits on a year over year basis. This revenue for the quarter increased by 20.6 percent year over year to RMB20.2 billion, beating the top edge of our guidance, primarily attributable to the better than expected performance for our new home transaction services, home renovation and the emergence services. Our gross margin reached 25.5%, up 1 percentage point year over year.

Speaker 3

Our GAAP net income rose by 80.2% percent year over year to RMB670 1,000,000 and our non GAAP net income increased by 10.8% year over year to reach RMB1.71 billion. For Home Transaction Services, the 4th quarter witnessed a prolonged witnessed the contrast of performance between new and the existing home market nationwide. The existing home market has seen a year on year increase, driven by the lower base effect caused by year of 2022's pandemic and increased activity in the distinct home market in 2nd and third tier cities. Sequentially, Zhengyi's has been relatively stable since October, benefiting from favorable policies and the increasing market maturity. Revenue from instant home transaction reached RMB6 1,000,000,000, up 14.6 percent, with DTV reaching RMB468.1 billion, up 30.1 percent, both on a year on year basis.

Speaker 3

Lastly, GTV sold by connected store shows even more robust growth at 41.1% year over year. Our strategic expansion through more connected store and the positive performance from the 2nd tier cities and below in the in home market, fueled by the increased proportion of GTV sold at the connected stores. Meanwhile, this structure change contributed to a lower growth in revenue than GTV for in home transaction services. The contribution margin for the in home transaction services reached 44.5%, surging by 7.4 percentage points year over year, mainly attributable to the low base in the same period of 2022 when operations were nearly impossible because of the pandemic. The contribution margin grew by 4.1 percentage points quarter over quarter, primarily due to the actual bonus issued in Q4.

Speaker 3

In terms of new home transaction services, as I mentioned, the national new home market remained sluggish. CRC shows the sales from the top 100 developers declined by 32% in Q4 year over year and increased by 12% quarter over quarter. The industry is still undergoing a process of supply construction and the risks being cleared. While maintaining our risk threshold, we proactively and strategically expand our channels in Q4. Our new home TV reached RMB238 1,000,000,000, dropped by 9.7% year over year and grew 23.9% sequentially, significantly outperformed the market.

Speaker 2

Revenue from

Speaker 3

the new home transaction was RMB7.6 billion, down 8.5% year over year and up 28.3% sequentially, upvacing GTV growth. This is a reflection of our steady monetization capability in a market downturn. The contribution margin for new home transaction services slightly increased year over year, maintaining a high level of 26.4%. Our ability to grow contribution margin despite the decline in the revenue is another testament to our operational resilience. In Q4, the percentage of commission income from Mysoe developers rose from 46% in Q3 to 53% in Q4.

Speaker 3

Projects with commissioning advanced model also remained at a high level, accounting for 53% of total commission revenue. We'd like to emphasize that we have never and will never compromise on risk control to outperform the market. Revenue from home renovation and furniture, emerging and other services grew by 106.6% year over year in Q4, accounting for an increased portion of our total revenue at 32.6 percent, significantly increased by 13.5 percentage points from the same period of 2022. Our home renovation and furniture business continued to grow at a fast pace with further breakthroughs in both scale and efficiency. In Q4, contracted sales reached RMB3.9 billion, up 99.7% year over year and 19.7% quarter over quarter.

Speaker 3

Revenue reached a new high of RMB3.6 billion, increasing 73.9% year over year. The percentage of contracted sales contributed by our home construction services continue to increase to about 47% of total GTV in Q4, further demonstrating the synergy between our housing construction and other residential services. Moreover, our home renovation and furniture business has grown more diverse. With furniture and home furnishing, sales reached RMB1.15 billion in Q4, accounting for around 29% of total contracted sales, making a 3.4 percentage improvement from the same period of 2022. In Q4, our net revenue from emerging and other services increased by 169.3% year over year and 21.2 percent quarter over quarter to RMB2.9 billion, primarily propelled by the recognition of our rental property management services.

Speaker 3

Our store costs were RMB727 1,000,000, remaining overall stable in Q4 compared with the same period of 2022. Asset costs rose subsequently to RMB548 1,000,000 year over year due to the increase of human resources related costs, maintenance costs of the rental property management services and the share based compensation expenses. As a result of our increased operating leverage, our gross profit grew by 25.7% year over year, reaching RMB5.1 billion. Our gross margin ticked up 1 percentage point year over year to 25.5 percent, while falling by 1.9 percentage points quarter over quarter due to lower contribution margin of its in home construction and a smaller proportion of revenue from this business. In terms of expenses, our GAAP operating expenses for Q4 totaled RMB5.3 billion, up 43.5 percent year over year.

Speaker 3

Specifically, G and A expenses rose by 47.7% year over year to RMB2.6 billion, mainly due to an increase in provision for buyback from 1 single developers for new home transaction services and the increase in personnel costs. With regards to the new home receivable provisions, we have conducted a more cautious assessment of the realization value of the single collateral assets provided by Sunak early for its unpaid amount to Beike. This asset is expected to be impaired by over 50%. Based on this, in the Q4, we made additional provision for Baibank amounting to around RMB400 1,000,000, which represents over 50% provision on-site receivable and other outstanding amount corresponding to this collateral asset. As a result, apart from the Sunlands portion of secured receivables, the average provision ratio for the bad debt related to receivables from 6 state high risk developers on our platform has exceeded 95%.

Speaker 3

Sales and marketing expenses grew by 56.1 percent year over year to RMB2.1 billion. The rapid development of our full service renovation business led to a fast parallel increase in our sales and marketing expenses. The increase was a result of the rising marketing expenses in our housing concession service business. R and D expenses grew by 4.9% year over year to RMB534 1,000,000, mainly due to the salary increase of the R and D personnel. On the profitability front, GAAP income from the operations amounted to a loss of RMB173 1,000,000 in Q4, compared with RMB387 1,000,000 from the same period of 2022.

Speaker 3

GAAP operation margin was negative 0.9%, compared with 2.3% from Q4 of 2022. Non GAAP income from operations was RMB856 1,000,000, compared with RMB1.34 billion from the same period of 2022. Non GAAP operating margin was 4.2% compared with 8% from Q4 of 2022. The year over year reduction in operating margin was mainly due to a higher operating expenses ratio. In Q4, GAAP net income was RMB670 1,000,000, up 80.2% year over year.

Speaker 3

Non GAAP net income was RMB1.71 billion, a year over year increase of 10.8%. Moving to cash flow and the balance sheet metrics. We realized a net operating cash inflow of RMB1.77 billion in Q4. New form DSO for Q4 was only 43 days, dropping below 50 days for the first time. This is a testament to our effective risk control.

Speaker 3

On top of approximately $173,000,000 we spent on the share repurchase this quarter, our total cash liquidity, which excludes customer deposit payable, still amounted to RMB79.1 billion, remaining at a high level. While our team excellent results in 2023, we also placed a great emphasis on shareholder returns. We spent approximately $718,700,000 in a strong buyback program and fully canceled all purchased shares. The total number of the repurchased share accounted for around 3.7% of the company's total share before the start of buyback program. We also initiated our first special cash dividend of around $200,000,000 during the year.

Speaker 3

On the basis of such positive shareholder returns, we'd like to announce our 1st final cash dividend plan, which has been approved by the Board at US0.11 dollars 7 per ordinary share or US0.351 dollars per ADS to holders of ordinary shares and the holders of ADS of recorded as of April 4, fiscal, respectively. The amount paid for the final dividend will be approximately $400,000,000 which will be funded by our surplus cash on our balance sheet. As of year end, our total shareholder return for 2023 significantly exceeded our net income, accounting for around 1 159% of our net income for the year. In addition, we're developing a long term proactive, stable total shareholder return plan, aiming to share the value we create with our long term shareholders. In doing so, we aim to provide our shareholder with certainty of returns in an uncertain external environment.

Speaker 3

Market confidence has yet to recover in 2024. Despite market uncertainties, we remain undetermined and will continue to strive for excellence as our 1 body, 3 ways business develop at a fast pace, gradually forming a positive cycle of scale, efficiency and quality, while required to strengthen our financial prudence, improve resources allocation and refine our operations. So in terms of financial strategy, we will continue to enhance the financial infrastructure of each business and provide comprehensive support through our financial expertise. We remain unwavering in efforts to prevent risks and establish regulations. For our new home transaction services, we will proactively control risks and strictly follows developer ranking and accounts receivable management.

Speaker 3

Regarding to our new business, including home renovation and furnishing and the rental property management, As we see the rapid expansion, we will replicate our Saudi integrated business and the financial system, management capability from our primary business to the new business. This will improve financial process automation rates and bolster data analysis and possessing the ability for those business lines. In addition to actively rewarding shareholders, we consistently prioritize the safety of our funds in cash management. We meticulously select underlying assets and establish clear investment strategy and the risk preference. Currently, the majority of our cash investments are in deposit based products.

Speaker 3

We believe our excellent financial management capability will serve as a safeguard for the healthy growth of the organization, helping us to navigate through cyclical fluctuations and overcome challenges, enabling more organic and efficient business development. Furthermore, our proactive shareholder returns were our long term investors who have accompanied us on this journey to better share in the fruits of the company's growth. Thank you.

Operator

Thank Your first question comes from Timothy Zhao with Goldman Sachs. Please go ahead.

Speaker 3

Thank you very much for taking my question. My question is regarding the home renovation and the furnishing business. I noticed 2023, you had a very strong growth year in this business line. Can management further elaborate what is the driver behind? And what are the key operating metrics that you are focusing on?

Speaker 3

And in 2024, what is your key focus in the operation of this business? Thank you.

Speaker 2

Yes, we achieved big breakthrough in our home renovation and furnishing business in 2023. As for scale, our contracted sales reached RMB30.3 billion, up 93% year over year on non pro form a basis, with revenue growing by 74 percent to reach RMB10.9 billion. As for profitability, we held 11 cities with operating profits in 2023, with the 4 cities achieving operating profits of RMB10 1,000,000. On the operation side, around 43% of the total contracted sales were attributable to customer referrals from real estate agents in 2023, a remarkable increase of 9.9 percentage points from 2022. Our product portfolio are also more diverse with our contracted sales of furniture and home furnishing reaching about RMB3.6 billion in 2023, accounting for 27% of total contracted sales, showing a 5.8 percentage points increase from 2022 on pro form a basis.

Speaker 2

These achievements were the results of improvements across our business operations. Our overall expansion were mainly driven by rapid expansion in core cities in Beijing and Hangzhou, contracted sales exceeded RMB2 1,000,000,000 and Shanghai exceeded RMB1 1,000,000,000. There were also 6 cities that had contracted sales of RMB500 1,000,000. Our breakthrough scales for the home renovation and the furnishing business with mining, I think it's due to 3 reasons. The first, high efficiency high efficient synergies between our core and emerging business.

Speaker 2

The second is more diversify our products portfolio and the 3rd higher deliver capabilities. Yes. So, the business outlook for 2024, we achieved breakthroughs in the scale in 2023 for our business to be successful and recognized by customers. The more important thing is customer buying and the key to this that is quality. So in 2024, while ensuring steady scale expansion, we have chosen quality as our keywords.

Speaker 2

High quality delivery is a competitive divide in the home renovation industry. For now, we can provide the customer guarantee when facing problems. Going forward, we plan to take preventive measures to reduce problem frequency, finally offering customer a truly hassle free experience and creating a positive cycle of quality. Right now, the main problem regarding renovation, including construction delays and response, slowness and so on. We will take a series of measures to address its pain points in 2024.

Speaker 2

The first is shorten construction time line by completing more steps simultaneously. The second is we will establish roles in charging of the quality control with online and well thought sources to identify and resolve problems as early as possible. While enhancing quality, we aim to achieve further breakthroughs in the scale and operation model in 2024, Then we are replicating our model in more cities going forward. Yes, that's my answer to your question. Thank you.

Operator

Thank you. Your next question comes from Harry Chen with Citi. Please go ahead.

Speaker 1

I think there's maybe a disconnection or something wrong with Harry's Internet. Maybe we can go ahead to the next question.

Operator

Thank you, Harry. Your next question comes from John Lam with UBS. Please go ahead.

Speaker 4

So what was the take penetration rate in the existing home market for 2023? And also what is the overall focus for the company existing home business for 2020 24 this year. I first noticed that the company's plan to expand its store network. Can you share more color on this? Can management also share some insight regarding on this year's strategy for the connected blockage brands and store?

Speaker 4

Thank you.

Speaker 3

Thank you, John. In 2023, we did quite well in the Sling Home business, achieving significant improvement in scale, efficiency and profitability. In face of the steep market adjustment, we managed to return quality service providers That's the big reason why we could jump on when the market rebounded at the beginning of last year. On top of that, we actively connect with more quality brands, stores and agents in the second half of last year, while refining our operation strategy and infrastructure for better efficiency. In 2023, our existing home GTV was up 29% year over year and the revenue was up 16% simultaneously.

Speaker 3

We also significantly increased our market penetration in most cities, including like Beijing, Shanghai, Nanjing, Hefei, Hangzhou, Jinan, Changsha and Jingdao, so on and so forth. Specifically, we focus on a few key areas to boost our existing home business. In 2023, we expand our store and agent network. By end of 2023, the total number of active store on our platform reached over 42,000. This is an increase of 12% year over year.

Speaker 3

The number of active agents on bigger platform was over 397,000, an increase of 14% year over year. And we also enhanced our operational efficiency through the following refined strategies like first, in the face of lots of new and previously active listings, we are developing the ability to identify the top listings. We aim to create a virtual cycle of securing high quality listings by establishing efficient matching tools and the cooperation between the buyers and the sellers' agent, ensure the quickly sales and achieving the high customer satisfaction, leading us to secure more high quality listings and boost our efficiency. And second, we adopt diverse online tools to optimize efficiency. For example, we introduced AI assistant to help agents improve their responsive time to the clients and their ability to accurately recommend the listing.

Speaker 3

As a result, the store and agent activity on the bigger platform improved very well. In 2023, the average TV per store increased by 29% and the TV per agent was up by 25%. So average income per connect store increased by 31% year over year. And in fact, our proprietary brand, Lianjia in Beijing and Shanghai, The store trend rate decreased by 34% and the agent trend rate decreased by 2% to 1%. Our focus in 2024 is on growth and ecosystem.

Speaker 3

Even with ongoing uncertainties in the market this year, we are set on growing our business confidentially, very confident. For growth, we see big opportunities to expand our network in many cities in the year of 2023. We are expected to connect over 5,000 new stores in this year. In a few cities where we have the longer operations history like Beijing, we have attracted more customers and increased our market penetration since adjusting our commission rules last year. This year, we will fund our coverage for the first time homebuyers in the city and also feeding the most starting point of the chain of the home upgrades.

Speaker 3

In addition, we will also continue to grow through the refund operations. We were transforming our agents from just making sales to become experts who truly understood what the customer needs. We are looking to increase our presence on the customer side by exploring different channels to bring in more online traffic. For service providers, we are working hard to create a more harmonious ecosystem. We are moving from a strong focus on the profitability to providing more targeted support.

Speaker 3

This change aim to have less efficient stores start making deals and ensure higher productivity, store receives the better return. We will bolster collaboration and share management with the store owners, improving the operational environment for stores and also increasing their satisfaction with our platform. And also for our self owned business, Bianjia, in terms of the store strategy, we will respond with a large store model. We'll also open some small stores in the key areas to increase our service coverage and ensure our penetration in this whole spot. Simultaneously for our Lianxiao agent strategy, we have launched Outsourcing plan to bring back the former agents and are opening up to recruiting for the experienced agent from the industry to strengthen our Lexia team.

Speaker 3

In 2024, we will focus on improving agent expertise through the training and talent nurturing, building a talent pool for our 1 body, 3 to 1 business strategy. Thank you.

Operator

Thank you. Your next question comes from Griffin Chan with Citi. Please go ahead.

Speaker 5

Thanks, management, for the opportunity. Congratulations first on the solid 2023 results and improving shareholders' return. So my question is that how do you view the overall real estate market in 2023? Did the market perform recently? With a notable outperformance of the existing housing market compared to the new home market, How does the management think of the underlying reasons?

Speaker 5

And how is the trend expected for the new and existing housing market in the 2024? Will they continue to differentiate? Thank you.

Speaker 3

Mr. Birkin, regarding the market situation in 2023, there was a lot of turbulence in the gross market. And overall, it is still in the middle of the deep adjustment. Here is what we observed. The market is shifting towards existing homes at a fast pace.

Speaker 3

Full year in home GTV nationwide rose by around 20% to 30% year over year. Official data showed that new homes accounted for nearly 40% of the full year real estate transaction volume. This is historical high. The new home market recovery few short. According to official data, national new home sales declined by 6% year over year, while for the new home sales of the top 100 real estate developers dropped by 18% year over year.

Speaker 3

New home sales saw some mild recovery in the Q1 of last year, but then it dropped again and has been hovering there at a very low level ever since. Housing price continue to adjust. 4th tier cities home prices saw a faster decline in Q4 last year. But overall, 1st tier cities with home prices were still higher than in the year of 2019. New home prices are stable on hold, primarily due to the structure shift towards the high tier cities.

Speaker 3

The market supply and demand continue to evolve, leading to what we observe the polarization of the market. For demand side, demand structure keeps changing. Demand for the home upgrades becomes dominant, making up 50% of total housing demand, with the first time home buying demand at 30% and the investment demand narrowing to around 10%. Consumers are more inclined to purchase these new homes. Our survey showed customer preference for its new home purchase grew from 23% in June 2022 to 35% in December 2023, while interest in new homes dropped from 31% to 18% over the same time period.

Speaker 3

Basically, the Xinyhomes are meeting the ready first home buying demand and the people who want to upgrade their homes by selling one property to buy another also enter into the existing home market first. For new homes, there is the lack of demand due to the location and the project reissue as well as pre sold model and the product design, which doesn't align with the current consumers' needs. Nevertheless, buyers are still interested in the properties located in scarce areas or with good designs. The demand for large sized and the higher priced new home are most stable. Overall, the demand is resilient, but it didn't translate into the transaction.

Speaker 3

There is still a wait and see momentum among home buyers. In 2023, the total number of clients viewing the properties exceeded the total number of newly listed properties on bigger platform, indicating there is the number of people looking to buy homes In cities where the solid foundation, such as Shenzhen and Hangzhou, we offset situation where there was a solid home purchase demand, but consumers are hesitant to enter into the market. With the market with abundant home listings or downtrending prices, there is need for the resource confidence among homebuyers. Overall, in Q4, home prices were lowered, while people were still willing to make a transaction, indicating the resilience of the demand. Regarding the supply side, we noticed investors are paying attention to the number of existing home listings concerned about the high inventory.

Speaker 3

The number of existing home listings did reach an all time high in 2023. It is natural result of the growth of the Yixin home market. It also reflects the accelerated release home upgrade demand on the policy encouragement. In 1st tier cities, more than 70% of seller were also the buyer. The increase in home listing is typically the early sign of the growth in demand.

Speaker 3

In addition, not all home listings are the real supply. Some homeowners lease their homes just for a keep it try manner. Moreover, a portion of the old housing stock remains listed through the year with a very low liquidity, leading to a continued increase in the total volume of existing property listing. For new homes, there are still a mismatch between the supply and demand. New homes with the prices lower than the neighboring existing homes into core areas of the top cities are still favored and contribute to the majority of the sales.

Speaker 3

But for new home supply in this key area are limited. The supply is more concentrated in faraway suburbs, while demand is weaker. So in high tier cities, more demand was fulfilled by its in home supply. The overall lack of demand for new homes also caused a prolonged inventory clearing period on supply side. For recent market updates, the policies continue to support the market stabilization.

Speaker 3

Recently, multiple cities have continued to optimize their policies in terms of process restriction loosening like today's news for the Hangzhou city and more financial support. The supply side, funding condition could improve and the mortgage rate lowers down. Although the efforts of the policy boost sometimes are marginal in short term, the massive buildup of the easing policies since 2022 should bolster the relative stability of today's eSIM home market. For eSIM home market, overall PTV of eSIM home has been very stable since October 2023. During the Chinese New Year, average data transaction volume of the Sing Home on our platform rose over by 70% year over year.

Speaker 3

For example, after the split festival, in 1st tier cities such as Shenzhen, the 2nd tier cities like Chengdu, Chongqing, Hefei, Bali and Nanjing. So average existing home sales in the 2 weeks right after holiday exceeded the weekly average from the December to January. This aligns with the total trend, indicating that the Sing Home is operating relatively stable. On recent leading indicators, the daily average home showing and the transaction volume, we see the parallel change during the Chinese New Year, which average ratio of the showing churned transactions performed better than the same period of last year. The Baker Prosperity Index based on the listing and the price adjustment behavior of homeowners on our platform has been bolting out at the beginning of the year with fluctuations.

Speaker 3

The Frontline Brokerage Managers' Conference Index has been steadily recovering since this February. In terms of the housing prices, the month on month decline in the single home price index for the key 50 cities from January to February in 2024 continue to narrow to reaching 1% in February. The number of cities is experiencing a decline in home prices also reduced. For the recent home for the recent new home market, according to CRRC, the sales of the top 100 developers declined 49 year over year in January to February, with a 6% drop in February alone. So continued weak demand for the new homes has led to a low enthusiasm among developers to promote their projects.

Speaker 3

Looking ahead into 2024, the real estate market in 2nd and in the 3rd tier cities accelerates its transaction to Disney Homes. All Disney Home transaction volume will gather momentum for a structural environment. Here, we believe Yifeng Home GTV will remain relatively stable. As for new homes, demand remains the key as the market will continue to fluctuate at its bottom result. On the supply side, under an uncertain environment, we believe developers will take active measures to adopt and focusing on enhancing product activity and the sell through.

Speaker 3

Thank you.

Operator

Thank you. Your next question comes from Thomas Chong with Jefferies. Please go ahead.

Speaker 5

Thanks management for taking my question. My question is about home housing rental business, which has experienced rapid growth in 2023. Could management team please provide more color on what we have accomplished in this business during the year last year? And how are we managing the risk while expanding our scale? What is the development plan for the year 2024?

Speaker 5

Thank you.

Speaker 3

Yes. Thank you, Thomas. Let me first summarize the business in 2023. Our goal is to provide homeowners with carefree rental services and reliable property management services, also provide tenants with safer and more reliable living experience. And the 2023 was a key year for establishing our fundamental capabilities.

Speaker 3

We prudently expanded our operation scale with our decentralized rental management services, Carefree Rent, growing from 70,000 units by end of 2022 to over 200,000 units by end of 2023. We also enhanced our assets' operation efficiency and rental service qualities. At the end of 2023, so occupation rate of carefree rent increased by 6 percentage points compared to the year of 2022, reaching 95.1%. The increase in sales and the last time rental property management operations placed a new demand on our operating capabilities. In 2023, we made the following iterations.

Speaker 3

Number 1, we made a significant upgrade to our carefully wrapped business model, which greatly reduced the seasonal fluctuations and the risks associated with the failure to release. It also better resisted the risk of continued market downturn on rental prices. Number 2, we implemented refund operation by redefining core roles around the full cycle of rental management, ensure proper staffing to smooth out our operation process. Number 3, we comprehensively enhanced the service quality around the 7 major pain points of the tenants, continually improving our standardized service capabilities. We enhanced our service team's response time and they encourage preemptive problem solving.

Speaker 3

So in 2023, our year and date in 2023, our apartment business also is funded in scale and efficiency, with the most intense housing units on our management. For 2024, we have ambitious goals for the skill we manage. Our focus will be primarily its core cities, Beijing, Shanghai and Chengdu will be the key targets for the major growth. 2nd, we aim to robustly establish our business at all levels, including achieving operational breakeven in these core cities and continuously improving overall operational efficiency and quality. This requires building and strengthening a range of capability.

Speaker 3

Improving efficiency, we are aiming for operational breakeven in the leading cities, and we also target to increase the productivity. In 2023, the average property stands up productivity per manager has reached 100 units. In this year, we aim to reduce the capacity variance and have more rental property managers achieve that level. In addition, we will also solidify the quality. First, we secured a safe auction line by identifying the potential risks in advance and establishing a mechanism for handling process.

Speaker 3

2nd, we work on making our service both standardized and customized. We do this by clearly defining the distinct roles and enhancing our online capability to keep our rental service reliable and standardized. We also pay attention to the community demands and customer needs based on their demographics, so we can offer them right fit services. And we will also build the technology and service capability around the 5 key strategies. They are unit startups, unit, occupation, rental management, operations and the reputation to make sure our business can achieve the sustained growth in the long term.

Speaker 3

Thank you.

Operator

Thank you. Your next question comes from Eddie Wang with Morgan Stanley. Please go ahead.

Speaker 3

Thank you, management, for taking my question. My question is regarding the new home business. So we have seen that our new home business have been significantly outperformed the industry performance. So what's the reason behind? And considering that the sales of the new home has been more difficult going forward, do we expect the penetration rate of the brokerage channel to keep going up?

Speaker 3

And what's our strategy and outlook for the new home business in this year? Thank you. Hi, Eddie. Thank you for your question. As you said, China new home market faced a big trend in the year of 2023.

Speaker 3

In such a tough market, BACO will achieve around 7% growth in full year of new home GTV, significantly outperforming the industry. Our operating metrics also reached historical highs. Throughout the year, we deepened our insights into the new home business as the market evolves. And our efforts into operation and business management also paid off. Operationally, the industry is still on a strong move shifting to a better market.

Speaker 3

Consumers now need more professional services. In the past, with the home pricing was always going up, agents get used to just focusing on listing and then find the super buyers. This approach is not effectively anymore because there is a lack of understanding and insight into the customer needs. To boost the sales conversion. It's the key for agent to think from the buyer side, identify who is buying the new homes and what they're after.

Speaker 3

Meanwhile, on the device side, with the rate demand, traditional promotional method such as the prize cards are not working anymore. Developers have a stronger need for the product services. In the 20 key cities we're monitoring, the proportion of the project that developers choose to cooperate with brokerage sales channel reached 82% at the second half of twenty twenty three. This is an increase of 11 percentage points compared to the first half of last year. Given this context and in line with our group strategy adjustment, last year, we have shifted our new home strategy from defensive to proactive manner with a focus on growth and its quality.

Speaker 3

We deepened our online consumer coverage and insights and established a better online presence with initiatives like the live streaming for quality homes. Based on our consumer insights, accumulated user data and close connection with Yixin Home customers, In the second half of twenty twenty three, we started to build new type of partnership with developers. We introduced innovative services of marketing and sales. This helped boost our coverage of the high quality new home projects. In 2023, our new home cooperation project coverage ratio improved significantly to 51% in Q4, up by 10 percentage points from Q1 in the same year.

Speaker 3

We remain committed to strengthening our ecosystem development. In 2023, more than 6,500 new projects have been covered by the commitment with both developers and the platform to transparent operations. Over 3,500 cooperating new home projects have embraced the private phone number protection services. On our financial management in the first half of twenty twenty three, our focus on the risk control and the profitability as core KPIs, strictly manage receivable collection and financial safety. In the second half of twenty twenty three, while maintaining a strict risk baseline, we specifically emphasize the commissioning the mass model and the collection management for the high risk developers.

Speaker 3

Thanks to these efforts, our new home DSO shortened to only 33 days in Q4. Commissioning advanced model accounted for 53% of total new home revenue in Q4 last year. The percentage of commission income from SOE developers reached at 43% level. Our new home commission rate in the 4th quarter also increased modestly. Based on our outlook regarding the new home market in 2024, we will take the following steps to improve the operations.

Speaker 3

Number 1, on supply side, we will further promote new strategy collaborations with high quality developers to secure higher quality new home supply for our channel services. On sell through side, we aim to empower our service providers and the boost productivity and the job satisfaction. We will properly raise the commission rebate rate for downstream brokers. We will also enhance operation for our external new home sales channel and optimize our product offered to brokers. And number 3, we'll also strengthen our infrastructure, including our new home housing dictionaries, ecosystems and online new home content development, giving our richer and higher quality new home listings, deeper customer understanding and a stronger sell through capabilities, we believe our new home business will consistently outperform the market.

Speaker 3

Thank you.

Operator

We are now approaching the end of the conference call. I will now turn the call over to your speaker host today, Ms. Siting Li for closing remarks.

Speaker 1

Thank you, operator. Thank you once again for joining us today. If you have any further questions, please feel free to contact FAIC's Investor Relations team through the contact information provided on our website. This concludes today's call and we look forward to speaking with you next quarter again. Thank you and goodbye.

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Earnings Conference Call
KE Q4 2023
00:00 / 00:00