KE Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 23, 2024

There are 7 speakers on the call.

Operator

Hello, ladies and gentlemen. Thank you for standing by for KE Holdings, Inc. 1st Quarter 2024 Earnings Conference Call. Please note that today's call, including the management 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. At this time, all participants are in listen only mode. Today's conference call is being recorded. I will now turn the call over to your host, Ms. Siting Li, IR Director of the company.

Operator

Please go ahead, Siting.

Speaker 1

Thank you, operator. Good evening and good morning, everyone. Welcome to KE Holdings for Beike's Q3 2024 earnings conference call. The company's financial and operating results were published in the press release earlier today and are posted on the company's IR website, investors. Kei.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 development and Mr.

Speaker 1

Xu will provide additional details on the company's financial results. Before I continue, I refer you to our safe harbor statement in our earnings press release, which applies to this call as we will make forward looking statements. Please also note that Bankers' earnings press release and this conference call include discussions 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 conference 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 service only. In the case of any discrepancy, management statements in this original language will prevail. With that, I will now turn the call over to our Chairman and CEO, Mr. Stanley Pen.

Speaker 1

Please go ahead, Stanley.

Speaker 2

Thank you, Siting. Hello, everyone. Thank you for joining Beike's Q1 2024 earnings conference call. In the Q1 of 2024, the transaction volume of existing homes on our platform prevailed, Surpassing that of new homes in 74 cities is quite a high base rate in the Q1 of last year. Existing home transaction continued to show year over year growth in 15 cities.

Speaker 2

The steady growth in the existing home RMB630 1,000,000,000 in the 4th quarter, down 35% year over year. At the same time, GTV, Resisting Home and New Home transactions declined by 32% 45% year over year, respectively. The overall performance is expected to improve in the coming quarters. At the end of the Q1, the total number of actual stores on our platform reached over 42,500, an addition of nearly 3,000 stores compared with last year, primarily attributable to a substantial increase in number of international stores. In particular, our strategy on active partnering with connected stores has paid off, with additional key partner brands joining us across Wuhan, Xiamen, Nanjing, Jilin and other cities, it also demonstrated that more industry partners are finding inroads to improve efficiency nowadays.

Speaker 2

Since the Q4 of 2023, the performance of newly connected stores had also exceeded our expectations. There has also been a positive surprise in aging productivity in the new Canal stores with only a handful of employees compared to those of Glass stores having stores major market fluctuations. These smaller stores posted operational efficiency and the community outreach capabilities thrive beyond our expectations. Their performance also motivated us to improve our service competencies to better serve the diversified types of stores. The scaling up of aging and store network also further enhances the most fundamental infrastructure of our 1st store residential services.

Speaker 2

On the agent and store front, Tianjia Shanghai has adopted innovative business for men to achieve growth. Looking back at 2022, our homeless coverage rate in Shanghai was around 35%. This told us there was room for improvement in our community outreach and that our traditional large store model was too heavy handed and impersonal. We advocate for unlimited agent store model, where stores and service providers with strong community ties are indispensable strategic components. Over the years, we have explored many ways to make improvement on the agent side.

Speaker 2

And in 2023, Tianjiang Shanghai discovered more possibilities on storefront, exploring various innovative practices under the large store model with introducing nearly 60% of community mini services outlets derived from these large stores, which we call community mini stores. This streamlined approach, including providing local convenience services, such as printing at various small stores or mobile service kiosks and reception points located in high traffic areas like community centers, shopping malls and subway stations. By deepening our exposure in neighborhoods and establishing a close community of rational presence. We strengthened customers as well as agents' sense of security. We have achieved deeper community coverage and better yet identify local customer needs.

Speaker 2

In 2023, our coverage of the 3 500,000 target residential households rose to 95% compared to 87% in 2022. And our home listing coverage rates in Shanghai soared from 65% to 84%. We also made new attempts to enhance the customer experience in housing transactions. In terms of online operations, the rise of new media platform over the past few years has led more agents to leverage those channels to acquire and engage customers. Capitalize on this trend, aging and strong owners of our platform also began using tools like short videos and live streaming to present home listings, introduce residential neighborhoods and share real estate knowledge.

Speaker 2

Despite these early efforts, the lack of a new media strategy resulted in consistent customer acquisition efficiency. In response, we kicked off the Galaxy initiatives in 2022, incubating and empowering more agents and store owners to acquire customer through short videos and live streaming. By the end of Q1 of this year, our inflow answer network has grown to over 12,000 with almost 36,000,000 followers, making it one of the largest real estate MCN networkers nationwide. The traffic led to thousands of transactions last year. More importantly, this can better satisfy customer needs, Those providers can connect with a wide audience via those new media platforms, which offer potential customers a more impartial interaction compared with traditional online methods.

Speaker 2

This approach gives agents an edge in uncovering heightened customer needs. Plus, the emergence of this realistic content influencers is not just a trend of a result of technological advancement. Rather, it reflects any results from the further specification of buyers and sellers' agents within the industry. As for our offline operations, we have been advancing the iteration of a series of services that directly improve customers' experience. This includes a direct connection with the housing provided fund to facilitate easier access.

Speaker 2

We also implemented measures that enhanced customer experience by elevating our business partners' engagement, such as public supervision and control program to enhance ecosystem governance and tighter agent operations. Taking the wins to our transaction services model, we implemented in Suzhou as example. Historically, customers need to go to 4 separate places to complete the required procedures for existing home transactions and are often hand pressed to schedule appointments in advance. This internalized process also hinder our ability to ensure assembly's experience throughout the entire transaction. So we saw ways to streamline this experience by promoting collaboration among local government agencies, banks and related enterprises in Suzhou alongside our technology support.

Speaker 2

All these efforts provide advanced or post sale services for existing home transaction, covering transaction funds, funds escrow, face to face bank mortgage sign ups, home title transfers, tax payments and the collection of property ownership certificates. As Suzhou successfully pioneered the WinStar services model with an end to end post sales transaction process for existing homes, we plan to replicate this model in most cities and significantly improve customer experience going forward. Regarding customer experience in our new initiatives, there is still ample room for improvement as we delve deeper into customer needs and iterate our service products. For example, new home rental services. Last year, we conducted a survey involving the needs of 100,000 tenants and identified several major pain points, such as delay, service response, nonstandard housing amenities after moving in, the high cost of changing rentals and a lack of lease termination guarantees.

Speaker 2

As a response, on March 16, 2023, we upgraded our services to include 7 service offerings: timely repair, housekeeping, broadband setup, smart door lock, worry free rental change, flexible payments and dedicated vouchers. Also, we implemented FireSource Communities 3 day unconditional reform upon lease termination, guaranteed reform for rental change, a home security guarantee, compensation for unsatisfactory rental variances and timely deposit reforms. These services benefits and guarantees are specifically designed to address customer most critical pain points. We have created a standardized service fulfillment processes based on best practice in this area. The result has been a notable improvement in the standardized services, fulfillment rate, high customer satisfaction rates, 3 days after moving and a better customer recommendation rate.

Speaker 2

The area I have just touched uncovered some of the key initiatives we have been deploying over the quarters. What we are working toward is assembling a group of people to force a better pace forward that enables us to navigate the changing times. We are looking to evolve our agent store model for housing transaction services, enhance the quality and efficiency of our new initiatives and elevates overall big platform to new heights, striving to meet and address the opportunities presented by the new era in China's housing market. Thank you. Next, I would like to turn the call over to our CFO, Qutao, to review our Q1 financials.

Speaker 3

Thank you, Stanley, and thank you, everyone, for joining us. Before we dive into the performance of Q1, I would like to briefly touch upon some updates on recent housing market. The housing market saw a year over year decline in Q1 primarily due to high base effect from the release of the pent up demand early last quarter early last year following the pandemic. However, compared with the typical Q1 market performance, the existing home market was fairly stable in this Q1. Some cities' transaction volumes exceed those of the same period last year.

Speaker 3

This improvement can be partly attributable to the city's specific policy optimization that further relaxed the criteria of the homebuyers' eligibility. Another reason is the active entry of the first time homebuyers into the market, primarily driven by the reduced mortgage rates and the housing price adjustments. This factor further lowers the home purchase cycles and costs. At the same time, due to homebuyers' performance for readily available easy home, more demand was met by the easy home market. Turning to our performance in Q1.

Speaker 3

Our revenue reached RMB16.4 billion compared with RMB20.3 billion in the same period last year. Gross margin stood at 25.2 percent compared with 31.3% in Q1 last GAAP net income reached RMB432 1,000,000 compared with RMB2.75 billion in the same quarter last year, and the non GAAP net income was RMB1.39 billion, contrasted with RMB3.56 billion in the same period last year. Our Q1 performance was weaker than the same period last year, mainly due to the higher base performance from the one time impact. It can be partly attributable to the concentrated release of pent up demand in the same period last year. The other reason was the optimistic expectation for housing market continued to surge our demand in Q1 last year.

Speaker 3

At the same time, the new home market continues to experience depression. We believe the first two factors are one time impact and our future performance will be better reflect our business operation. Regarding the home transaction services in Q1, both new and existing home markets saw year over year decline, primarily due to the higher base performance from the one time impact, as I previously mentioned. Revenue from existing home transactions reached RMB5.7 billion, down 37.6 percent, with GTV reaching RMB 453.2 billion, down 31.8% also on a year over year basis. GTV outperformed revenue year over year, mainly due to a higher contribution from the GTV of its in home transportation services facilitated by connected agents.

Speaker 3

The revenue was recorded on a net basis. Our strategic expansion of the mall connected stores played a key role in driving this growth. The contribution margin from the in home transaction services reached 44.5%, remaining steady quarter over quarter, but dropped 4.6 percentage points year over year. This change was mainly due to the increased fixed labor cost related to growth of the number of Lejia agents and the negative leverage influence from the reduced revenue. In terms of the new home transaction services, the industry is still in a risk clearance phase with supply and demand dynamics remaining subdued.

Speaker 3

CRC shows that the sales from the 1200 developers decreased by nearly 50% year over year in this Q1. Through the sustained refinement of our new home business operations, we have expanded our channel partnership with upholding our risk set code. In Q1, new home GTV reached RMB161.8 billion, down 45.4% year over year. Revenue from new home transactions was RMB4.9 billion, dropping by 41.5 percent year over year. The outperformance of revenue over GTV year over year was due to our strong monetization capabilities.

Speaker 3

The contribution margin for new home transaction services was 22.3%, falling by 4.1 percentage points quarter over quarter and 4.8 percentage points year over year. The decline was attributable to the rise in the variable commission and the negative leverage influence due to the relatively stable fixed labor cost and the lower revenue. In Q1, the commission income percentage from SOE developers was around 39%, maintaining a relatively high level. Revenue for home renovation and furniture business, Home rental services, emerging and other services grew by 112.9% year over year in Q1, accounting for increasing portion of our total revenue at 35% and 13% by 21.7 percentage points from the same period of 2023. Our home renovation and furniture business continued to grow at fast pace.

Speaker 3

In Q1, contracted sales reached RMB3.4 billion, up 26.1% year over year. Revenue reached RMB2.4 billion, rising by 71.1% year over year. The growth rate of revenue outpaced that of the contracted sales. This was primarily due to the concentrated release of the Tantan demand after lifting of the pandemic restrictions in the same period last year, leading to a substantial rise in contracted sales and creating a high base of GTV. But due to insufficient delivery capacity, the revenue recognition was slow in the same period last year, led to a lower base of revenue.

Speaker 3

In terms of the highlights in the Q1, total contracted sales in March reached nearly RMB2 1,000,000,000, up around 53% year over year. Particularly noteworthy was the record breaking March contracted sales in Beijing surpassing RMB 400,000,000. The contribution margin for the home renovation and the furniture business was 30.6%, remaining flat year over year and up 2.8 percentage points sequentially. This was mainly attributable to the rebound in gross margin of furniture and home furnishing quarter over quarter. The percentage of contracted sales contributed by our home transaction services continue to increase, representing around 51% of total GTV in Q1, making an 11 percentage points increase year over year.

Speaker 3

It further highlights the synergies between our housing transaction and other residential services. Moreover, our home renovation and furniture business has grown more diverse. Furniture and the home furnishing sales reached around RMB940 1,000,000 in Q1, accounting for around 27.8% of total contracted sales, representing a 5.1 percentage point improvement from the same period of 2023. The contracted sales of the furniture and the home furnishing retail, which are outside of our home renovation package, reached around RMB882 1,000,000 in Q1, accounting for around 26% of total contracted sales, representing a 4.7 percentage points improvement from the same period of 2023. Starting from this year, we have begun to disclose the financial of our home rental services due to their growing skill and significance in our business and the revenue from this service accounted for over 10% of total revenue in the Q1.

Speaker 3

In Q1, revenue from our home rental services reached RMB2.6 billion, up 189.3 percent year over year, mainly due to the rapid growth of the numbers of the rental units under our management. At end of Q1, the number of units managed by our home rental services exceeded 250,000, reflecting 159.1% rise year over year. With the revenue generated from our home rental services, our decentralized rental management services, character in rent, contribute to more than 95% of total. Other revenue sources include centralized rental apartment services, monetization of platform traffic and online rental management services. In Q1, our net revenue from emerging and other services increased by 85.3% year over year to RMB700 1,000,000.

Speaker 3

Next, let's move on our other costs and expenses in Q1. Our store costs totaled RMB685 1,000,000 in Q1, remaining stable overall compared with the same period of 2023. Other costs decreased by 10.7% year over year to RMB379 1,000,000, primarily due to the reduction in taxes and the surcharges. As a result of a decreased operating leverage, our gross profit dropped by 35.1 percent year over year to RMB4.1 billion with gross margin of 25.2 percent, down 0.3 percentage points quarter over quarter, remains relatively stable. Year over year gross margin fell by 6.1 percentage points, mainly due to the lower contribution margin from these existing and the new home transactions, along with the decreasing share of the revenue from these new home transactions.

Speaker 3

This decline in gross margin was partially offset by the larger portion of revenue from our home renovation and furniture business. In Q1, our GAAP operating expenses totaled RMB4.1 billion, showing a 21.9 percent year over year increase and a 22.7 percent quarter over quarter decrease. Specifically, G and D expenses climbed by 24.5 percent year over year to RMB2 1,000,000,000 driven by the higher personnel costs associated with our home renovation and home transaction services. The rise in Jiali expenses on year over year basis was mainly due to the provision for the bad debt, totaling approximately RMB19 1,000,000 in Q1, whereas around RMB127 1,000,000 of the provision for bad debt were reversed in the same period of last year. Sales and marketing expenses grew by 25.5 percent year over year to RMB1.6 billion, propelled by the rapid dysfunction of our home renovation and furniture business.

Speaker 3

Our R and D expenses amounted to RMB467 1,000,000 with only slight change compared with the Q4 last year. In terms of the profitability, GAAP income from operations totaled RMB12 1,000,000 in Q1, compared with RMB2.98 billion from the same period of 2023. GAAP operating margin was 0.1%, compared with 14.7% from the Q1 2023. Non GAAP income from operations amounted to RMB960 1,000,000 compared with RMB3.83 billion from the same period of 2023. Non GAAP operating margin was 5.9% compared with 18.9% from Q1 2023.

Speaker 3

The year over year decline in operating margin was mainly due to the lower gross margin and the higher operating expenses ratio. GAAP net income totaled RMB432 1,000,000 in Q1, compared with RMB2.75 billion from the same period of 2023. Non GAAP net income amounted to RMB1.39 billion, compared with RMB3.56 billion from the same period of 2023. Shifting to cash flow and the balance sheet metrics. We realized the net operating cash outflow of RMB915 1,000,000 in Q1, largely due to the seasonal impact of the bond's payment during this Q1.

Speaker 3

On top of that, US220 million dollars allocated towards share repurchase during the Q4. Our total cash liquidity, which excludes customer deposits payable, reached RMB75.6 billion. This year, the eastern market remains challenging and internally, this is the year we will increase our strategic investments. Under these circumstances, we remain committed to enhancing shareholder returns, refining the company's capital structure and optimizing capital operations. Our goal is to provide shareholders with consistent returns, enabling them to navigate the economy cycles alongside others.

Speaker 3

Our actions demonstrate that we have delivered on our promise. Throughout 2023, we allocate around $719,000,000 to the share buyback program and recently completed the payment of the final cash dividend plan, distributing around $400,000,000 in aggregate. Our total shareholder returns from repurchase and the dividends significantly exceeded our net income, accounting for around 159% of our net income in 2023. In 2024, as of May 10, we have allocated around $344,000,000 for the share repurchase, as the number of the repurchased share accounted for around 2% of the total shares at the beginning of the year. This year, we are focusing on strategic investments to expand our store network, enhancing training for the frontline service providers, iterate product technology, upgrade card services and improve the middle to back office operations for our emerging business.

Speaker 3

This initiative require more efficient financial management. As such, we are committed to supporting our business in optimizing financial resources allocation and making every effort to help our business achieve long term development. Simultaneously, we will maintain our high standards for risk management and the capital allocation efficiency to ensure our investment generate better returns in the future and create long term value to our shareholders. Thank you.

Operator

For the benefit of all participants on today's call, please limit yourself to one question. And if you have additional questions, you can reenter the queue. Your first question comes from Sophie Zavong Zhang with CICC.

Speaker 4

So thanks management for taking my questions and I got two questions here. First of all, could you please share your views on recent policies as well as market outlook? And secondly, since the customer acquisition channels are becoming increasingly diverse for real estate agencies, how are you going to ensure your efficiency in online traffic acquisition and especially regarding the new home transaction services? Developers started to allocate part of their sales and marketing budget on emerging media platform. So I wonder if the company has considered about investing more in video based products or content to better reactivate unused traffic?

Speaker 4

Thank you.

Speaker 3

Thank you, Sophie. Regarding your first question, despite ongoing price adjustment in the single market, the overall transaction volume has remained relatively stable. The market performance in some cities even exceeded the expectations, which made us cautiously optimistic about future Disney home market. Nevertheless, the new home market is still somewhat sluggish with the rollouts of the policies and inventory reduction. We anticipate improved liquidity on the new home market supply side and the recovery in market confidence.

Speaker 3

Let me have some further elaboration. Regarding the policies in this year, the positive policies can be classified into 3 categories. Firstly, policies aimed at releasing and attracting buying power, such as the consolidation of the optimization of the purchase restrictions in cities like Hangzhou, Chengdu and Shenzhen and removing the minimum mortgage rates secondly, policies facilitating sell old homes for new ones and the government buying on sold homes to help address inventory thirdly, policies to optimize the supply of new homes, such as directive to limit the residential land supply in areas with high entry levels. Those policies are very supportive to the housing market. Since the beginning of the year, PTV for its new home has remained largely stable, although not matching the higher base set by the release of the pandemic demand in the Q1 last year.

Speaker 3

It also has showed the recovery in March after the spring festival, followed by a normal seasonal adjustment in April. In April, the number of existing home transactions on our platform did not experience the rapid decline in the same period of last year, instead recording a year over year increase of 14%. Cities such as Shanghai, Shenzhen, Nanjing, Hangzhou, Changsha, Wuhan and Xiamen showed a notable increase. At the same time, the recent trend indicates that the weekly transaction volume has not continued to decline sequentially. The total number of existing home transactions on our platform increased by over 20% year over year for the 1st 3 weeks of May, while the GTV increased by over 10%.

Speaker 3

Higher than the level of the decline from the higher base in the same period of last year. Meanwhile, residential home prices are still in distressing, while the market is in a state of decreasing price for increasing volume. Looking at the leading indicators, Apple's volume of the home tours were higher than last year's average, indicating that buyers are actively seeking to purchase homes. Meanwhile, so far in this year, the growth rate of both month over month and year over year listing home listings in the top 50 key cities have a slowdown, unlike in September of last year. With numbers of listings surge under the more policy loosening.

Speaker 3

There has been no similar surge in this year. Overall, people in the market have become more rational. In terms of the transaction structure, the proportion of the home purchase by the first time buyers has increased in the short term, driving from around 30% to around 35%. This is partly due to the price adjustments and the Yixin policies, which have lowered the barriers and the cost for buyers, which need to lack school enrollment for their kids or the residential permit registration. In addition, issues with new home presales, making of effective supply and a trend towards luxury housing have pushed some first time homebuyers out of the new home market.

Speaker 3

Positive trends in the first time buyers entering the market are also aiding at the front end of the housing upgrade chain, increasing the customer accumulation and activation. For new home markets, the new home market continuing to see weakness in supply and demand with low expectations. From January to April, PTV of 1200 real estate developers declined by around 47% year over year. This is historical low. On the demand side, potential buyers with home upgrade demand are more focused on large sized homes.

Speaker 3

Data from China Index Academy indicates that in key cities, the proportion of the new home unit with 4 or more rooms has increased from 21% in 2020 to 25% this year. Additionally, a substantial demand for other type of new homes is flowing into the existing home market. On supply side, in light of setting new home sales, developers are adopting pre cyclical business strategy, getting back from the land auction and project launch within insufficient and new effective supply and high inventory levels at the end of March 2024. For the CRC data shows that the average inventory turnover period for the new homes in AT Cities was extended to 24.4 months. With the strengthening of policy, we believe that the expectation for new home market will improve.

Speaker 3

For your second question, this year, one of Baker's key focus area is the construction of online infrastructure at the customer front end and the business needs acquisition. In the past, we firmly invested in solving the pain points

Speaker 5

that the

Speaker 3

customers encounter will actively searching for homes through our authentic listing and the home listing centric emphasis In today's buyers market, customers have a wider range of choices and longer decision making period, making it even more crucial to start from the customer perspective. We aim to provide the real and effective information and better understand and translate customer needs. Therefore, we are updating our ways of connecting with customers, our service models and the online content that we provide. Regarding the user connection methods, previously, user would only connect with us on our APP when they're needed. Now we have added proactive ways to connect with users, hoping to better utilize both internal and external traffic channels to proactively reach out to them.

Speaker 3

For example, we use live streaming and short videos, which better language user habits. In terms of the service models, we are making service provider rather than the house itself the 1st online content point for the customer. We believe that only by doing so can we better explore and understand customer needs and provide better services. Based on this approach, we have introduced new online roles for the service providers such as streamers, house selection consultant. These roles help build personal brands and attract customers.

Speaker 3

On the content front, in addition to share for sale information display, we have diversified our content, including market trends in commercial areas, land auction information and property analysis. We expand property listing and provide professional home buying consultation services through short videos and live streaming. 1 of our initiative is Galaxy Plan, just as our Chairman introduced in Slator, which aims to cultivate new media talent from the store owners and agents on our platform, helping them acquire customers through short video and live streaming on external video platforms, enhancing both agents and the platform transaction activity. Currently, the guest plan in Weibo covers the 63 cities nationwide, empowering a total of over 12,000 people. The influencer network has accumulated tens of millions of the followers, with more than 600 agents having over 10,000 followers each.

Speaker 3

In the Q1 of 2024, our total over 2,000 housing transactions were achieved by the influencer through the new media customer acquisition, increasing by 103% year over year. We have also established a comprehensive employment system for the online influencer, including online, offline courses system and the mentorship program. This system covers the various stage of empowerment from the account incubation to long term operation and business lead efficient conversion. In terms of the content, Baker's massive housing resources provide a strong content support for the agents. Meanwhile, we empower agents to improve their online influence through the various methods, such as the sector analysis, property evaluation, dynamic maps and the skills in popular tools and also the copyright.

Speaker 3

We also graded accounts based on the indicator, such as the followers' numbers, conversion rates and the performance matching with their traffic support and other incentive mechanism to give more streamers sustained growth and long term return opportunities. Thank you.

Operator

Your next question comes from Timothy Zhao with Goldman Sachs.

Speaker 6

Thank you, management, for taking my question. I have two questions here. The first one is regarding our investments into the core home transition business. Just wondering, could management share any color on what is our key focus for this year in terms of investments and how to evaluate ROI of investments? And we used to mention that for this year, one of the key focus is to increase the number of connected stores.

Speaker 6

Just wondering what is the latest updates and how to think about the efficiency impact on the existing stores from the increasing connected store number? And the second question is on our outlook for the new home sales or the new home GTV on the platform after a relatively weak Q1. Just wondering what is your outlook here? Thank you.

Speaker 3

Yes. Thank you, Timothy. For your first question, in this year, we are major focused on the growth with enhanced cardi and efficiency with our housing transaction business, Actively connecting with more high quality brands, stores and agents is one of our main investment directions. The results have surpassed our execution in both skill and efficiency. On store connection, we have been proactively connecting with the stores to our network since September last year.

Speaker 3

By end of the Q1, the number of active stores increased by 1.4% compared to the previous quarter. In addition, over 1,000 new stores, including those being prepared for opening, were signed in the Q1. The 90 days retention rate of those newly connected stores remained at a high level of around 98%. Our market penetration has further improved, showing considerable gains in cities, for example, in Yingbo and Yantai. Regarding efficiency, we have not lowered entry barrier or the threshold or so called to sacrifice quality of the for the sake of its dysfunction.

Speaker 3

The average number of agents per new store is slightly lower than that of the platform is in stores, but it maintains steady growth. The efficiency of newly connected stores continue to rise rapidly. For the stores connected since last September and up to March of this year, the average revenue per store increased by 100% within 6 months of the operation. Moreover, by end of March, the productivity per agent in this newly signed stores reached over 90% of that in the stores on the platform. In addition, we are seeing that in the newly connected stores, some small stores such as family operated stores with around the 2 agents have performed well due to their deep community involvement, especially considering the capital efficiency.

Speaker 3

Within 3 months of connecting to the network, the agent productivity in those small stores was 16% higher than the average of agent productivity of stores connect during the same period. Those competitive small stores also inspire us to further connect with the various type of stores, enhancing our ability to serve them on the platform. We aim to implement more refined stores tier management. We also achieved better than expected ROI for those investments. For overall perspective, the stores newly connected in Q4 2023 achieved a positive ROI by March of this year.

Speaker 3

In supporting our growth in scale, we are also very cautious with our investment strategy. We primarily provide performance based support, such as funding, storefront renovation and business development to newly connected stores rather than increasing personnel. This ensures flexibility in our investment and streamlines our operations. For your second question, the new home market has remained tough since start of the year. In Q1, our new home GTV reached RMB151.8 billion, a 45% drop year over year, but still better than the market.

Speaker 3

Revenue from new home transaction was RMB4.92 billion, down 41.5 percent from the same period last year. This smaller decline compared to the GTV shows our stronger monetization capabilities. We believe our new home business will continue to show greater resilience and a solid performance. In Q1, we showcased this trend in multiple ways. Number 1, we made a significant breakthrough in our channel service operation capabilities.

Speaker 3

This year, the number of devices that achieved strategic cooperation increased by 20% from the same period of last year. As the quality of those collaboration continue to improve, as we are expanding our coverage to most core and the large scale state owned developers. We have already established strategic partnerships with the 6 out of the top 10 developers. Those high level of in-depth cooperation have facilitated our local teams to more actively pursue regional business expansion. We also made new brick suits in our cooperation terms.

Speaker 3

This includes not only strategic initiative from the past, but also the new guaranteed payment terms that ensure the improved cash collection from our new home business. Based on those improvements, our new home collaboration project coverage ratio was 55% in Q1, an increase of 25% year over year. This has also led to a more stable supply of the new homes. Number 2, regarding our channel sell through capability. As I mentioned earlier, we have integrated our new and existing home business to develop an innovative model that makes it easier for consumers to replace their old apartment with new ones.

Speaker 3

Considering customer needs, we also introduced a service like worry free repayment and the car free renovation, collaborating with developers, banks and others to boost new home sales and drive customers' home purchase challenges. Number 3, we also strictly adhere to the risk control and the baseline management. In Q1, new home DSO was 6 to 9 days. The commissioning of the 1 model covered 46 of the total commission being at a high level. The percentage of commission from Mysoe developers remains at high at around 50%.

Speaker 3

Thank you.

Operator

Your next question comes from Griffin Chan with Citi.

Speaker 5

Thanks management for taking my question. My question is about home replacement policies. The whole government's rolled out replacement policies to support upgrade demand. How does the management view the effect of overall housing demand? And how will Baker as a service leader in the new and existing home market to participate?

Speaker 5

Thank you.

Speaker 3

Thank you, Harry. For parts on inventory reduction, R1 is very focused on the inventory reduction of so called destocking policy, which is a positive approach. In response to evolving supply and demand dynamics, the destocking policy has been reintroduced since its last implementation in the year of 2016. A new round of inventory reduction efforts is expected to help refinance market supply and demand and improve market sentiment, also stabilize the price system in the market. It will also help developers sell off inventory and improve the liquidity, supporting stabilization in the new home market and ensuring project completion.

Speaker 3

Government led the repurchase of the homes for the conversion into affordable housing will also better meet the housing needs of the new urban resident. Currently, the relevant supporting policies are still in the formation stage. For example, the Central Bank will provide $300,000,000,000 in re lending funds to support the local governments in acquiring some unsold homes and to convert them into affordable housing. More time is needed to observe the scope and impact of this policy's implementation. The other one is the major policy innovation this year regarding the destocking initiatives to encourage residents to replace their old homes with new ones.

Speaker 3

This is the first time a policy has a link to previously independent existing and the new homes market. This is intent to stimulate the transactions and contribute the stability of the market going forward. As of now, over 6 cities had introduced the housing owed for new policies, generally falling into 2 categories, that is brokerage agency led models and the government led models. Through the subsidy of the acquisition of the old home through the state owned enterprise of developers. Regarding to Baker's participation opportunities, we would like to say where developer agents and the homebuyers and the agreement and also under this model, this will promote the old homes and the buyer locking in the new home listing.

Speaker 3

We have been deeply involved and actively promoting this implementation. We pioneered the old 4 new models in Qingdao in the year of 2022 in collaboration with developers and the stores on our platform. This initiative brought innovative practice to local government by activating transactions and has inspired other city governments and the industrial association to reference and promote the Qingdao model. In Qingdao, our model has also received government endorsements and a substantial support in the form of 1 stop administrative services. With our strong capabilities in in home sell through and the coverage of the homeowners for sale 1 and file 1 transaction, we help investors to attract additional and incremental buyers to accelerate the sales of new homes and collect back funds, offering a more efficient and lower rate housing exchange experience to the clients.

Speaker 3

Under our innovative sell all homes for new wines model in Qingdao in the year of 2023, we completed nearly 200 transactions. Original, this dormant deals were activated under this model. Currently, our such model known as the Worry Free Exchange has already been introduced in 12 cities. We are also engaging with developers in more cities to iterate and innovate on this model. Looking forward, we hope to explore more new methods with the garments and developers to accelerate the inventory reduction.

Speaker 3

Thank you.

Operator

Your next question comes from John Lam with UBS.

Speaker 5

Could management share a bit about decoration business and also the rental home services business in terms of the progress and also any highlights? Thank you.

Speaker 3

Thank you, John. Let me talk about the home renovation and furniture services. We achieved strong growth in our home renovation and the furniture business in Q1. As for SKU, our contracted sales reached RMB3.4 billion, up 26% year over year, with revenue growing by 71% to reach RMB2.4 billion. In March, the total contracted sales reached nearly RMB2 1,000,000,000, up around 53% year over year.

Speaker 3

The March contracted sales in Beijing achieved a historical breakthrough. On the operation side, the contribution of the contracted sales attributable to the customer referral from our real estate agent in Q1 also hit historical high. This achievement resulted from the improvement of our customer acquisition ability and also the stronger delivery capability. Let me elaborate on that. First, better integration for our housing construction and home renovation services highly improved our customer acquisition capability.

Speaker 3

In 2023, we aligned with our organizational structure, enabling each renovation business unit to work with brokerage stores. In return, renovation business also has some home transactions. Customers receive a rough plan and budget for the home renovation before the housing transactions are completed. Our 1 stop residential service model is taking initial shape. Meanwhile, the improving customer acquisition requires strong delivery capability.

Speaker 3

Our great efforts in delivery capability over the past few years have paid off. For instance, our average construction time line dropped to 104 days in this Q1, decreasing by around 18 days compared to the same period of last year. We use a strategy that encourages healthy competition to ensure sufficient labor capabilities. We also manage key process points strictly, including identifying potential delay risk ahead of time to resolve the problem quickly and avoid delays. In this year, while ensuring steady growth in our business scale, we will focus on enhancing the quality.

Speaker 3

By implementing one stop site management services and online quality control, we aim to proactively prevent issues, reduce their occurrence and improve customer satisfaction. Regarding the baker rental business, in Q1, revenue from baker rental services reached RMB2.63 billion, increasing by 189.3% year over year, mainly due to the rapid increase in scale of rental property management services. Under our carefree rent model, we are managing over 240,000 units by end of Q1 compared to over 90,000 in the same period of last year. As of now, we have a total of nearly 270,000 units managed by a cafe rent. The number of units managed under the centralized long term apartment exceeded 11,000 by end of Q1 compared to around 7,000 in the same period last year.

Speaker 3

In terms of efficiency improvements and the operational rates control, the occupancy rate for Capri U Less model increased by around 2.7 percentage points year over year to 96.5% at the end of Q1. We significantly reduced the rate of the vacancies by increasing coverage of low rate carefree rent model and the training out a batch of long term vacant properties. Also, at the end of the Q4, the occupancy rate of our self operated apartments that have opened for over 6 months increased by around 3.8 percentage points year over year, reaching 94.8%. Thank you.

Operator

We are now approaching the end of today's conference call. I will turn the call over to your speaker host today, Ms. Citing Li for closing remarks. Thank you once again for

Speaker 1

joining us today. If you have any further questions, please feel free to contact Sika'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 again next quarter. Thank you and goodbye.

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Earnings Conference Call
KE Q1 2024
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