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spk04: Hello, ladies and gentlemen. Thank you for standing by for KE Holdings Incorporation's fourth quarter and fiscal year 2021 earnings conference call. At this time, all participants are in listen-only mode. Today's conference call is being recorded. I'll now turn the call over to your host, Mr. Matthew Zhao, IR Director of the company. Please go ahead, Matthew.
spk07: Thank you, Operator. Good evening and good morning, everyone. Welcome to KE Holdings & Albeco's fourth quarter and fiscal year 2021 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, www.investors.ke.com. On today's call, we have Mr. Stanley Yongdong Peng, our co-founder, chairman, and chief executive officer, and Mr. Tao Xu, our Executive Director, and the Chief Financial Officer. Mr. Peng will provide an overview of our strategies and business developments, and Mr. Xu will provide additional details on the company's financial results. Before we continue, I refer you to our CPAPR statement in our earnings press release, which applies to this call, as we will make forward-looking statements. Please also note that FACO's earnings press release and this conference call include discussions of an audit gap financial information as well as an audit non-gap financial measures. Please refer to the company's press release, which contains a reconsideration of the audit non-gap matters to comparable gap matters. Lastly, unless otherwise stated, all figures mentioned during this conference call are in the media. With that, I will now turn the call over to our Chairman and the CEO, Mr. Stanley Peng. Please go ahead, sir.
spk06: Thank you, Matthew. Hello, everyone. Thank you for joining Bitcoin's first quarter 2021 audience conference call. 2021 was a year of unprecedented hardship with lots of passing, the significant correction in the real Eastern market, and the new paradigm for the internet-based platform economy. Massive changes took place, both internally and externally, posing many new challenges to our company. However, this is not uncharted territory for us. Over the past 21 years, difficulties and change have accomplished us and gotten us where we are today. For an organization, it's not hardship when everyone within it is working together toward a common future goal. It's not hardship when an organization proactively resolves a problem it encountered and get better and stronger from the experience each time. This is when hardships become a blessing, rising to challenges, transforming through changes, and deriving more vitality in the process. It's embedded within our DNA. This is also our stance and solution to address the current hardships. Market fluctuations have their own logic and inviolability. The many changes happening right now, or that will happen in the future, have there ceased so a long time ago. From a long-term perspective, the market will revert to its mean, and in the short term, the market will gradually recover. Our underlying belief about the housing-related industry has never changed. It is certain that digitalization catalyzes industry transformation. Service providers are indispensable, and service quality builds customer trust and transcendent market cycles. It's also certain that a business model or industry is characterized by slow early stage development, which means it will take time to establish a virtuous cycle, yet Once we move past the inflection point, business will take off very quickly. All the right things we are doing now will surely sow the seeds for a better future. Therefore, we have a deep peace of mind. We are undisturbed by external fluctuations, and we propel ourselves to looking forward for answers. Be the enterprise of the era. That's our answer. At the end of 2021, we officially launched Baker's One Body, Two Wings. Strategic upgrade. One Body refers to our call, which is our existing and new home transaction services business, while Two Wings refers to our home renovation and furnishing offerings and our inclusive housing services. Through our upgraded strategic focus, we aim to fully energize our wins as we accelerate our core business progress towards its goals. Building an increasing presence in the wide housing related service industry, reaching consumer more broadly and enduring through our diverse array of sources and product innovations. and becoming a new living services provider that make home a better place. By that, we are responding to the higher requirements put forward to us by our country and society in this era, capturing to consumers' fast-evolving demands from finding a place to live to a place to enjoy living as housing price stabilizes and at the same time meeting an organization's need for continuous iteration and progress. It provides long-term vision for our talent and drives the organization to thrive. Can we do this? If something is relevant to our mission and vision, and it is something we have a strong desire and adequate ability to accomplish, we can. Why can we do this? Over the past 21 years, Lianjia expanded its single-city presence in Beijing to nationwide, and Beike grew from a pilot in Zhengzhou and several cities to a platform operating in over 100 cities across China. During this time, we iterated a completed set of methodologies to grow from zero to one for the industrial Internet. We accumulated rich experience and learnings, such as cultivating key capabilities in each stage and finding the right place for the team. Sometimes you can't go too fast. If you want a tree to grow taller, you can't rush it to blossom or bear fruits. The aim needs to be higher and faster. Other times, you must beat up and keep running forward with all your strength to achieve fast iterations. Our team is extremely adept at reflection and abstract thinking, which enables us to constantly learn from experiences, accumulate and improve. Our profound set of zero-to-one methodologies also give us full confidence in our expansion into new business areas. Next, moving to our fourth quarter of 2021, of progress implementing the One Body, Two Wings strategy and our future plans. Thanks to policy support, the market has shown signs of bottoming out since the fourth quarter of last year. However, it will take time for transaction volume to fully recover and the industry supply side to further contract in Q1. According to data from Kong Bai Research Institute, Kong Bai Yan Jiu Yuan, as of the end of last year, the industrial number of agents has contracted by at least 30% to 40% with wide variation across cities. In comparison, on the Baker's platform, we have 51,000 Canadian stores by the end of the fourth quarter up, 8.7% year-over-year and down 5.4% quarter-over-quarter. The number of actual stores exceeded 45,000, up 4.4% year-over-year and down 8.3% quarter-over-quarter. The quarter-over-quarter store reduction was mainly due to a few newly added stores during the market down cycle, as well as store merge to stay competitive. At the end of the fourth quarter, we had around 455,000 agents on our platform, a decline of 7.8% year-over-year and 11.8% quarter-to-over-quarter. Our two agents were around 407,000 down 8.7% year-over-year, 13.1% quarter-over-quarter, and 18.1% 18.6% lower from its peak in the second quarter in 2021, which was in line with our expectation. Our resilience compared with the broader market was largely owned to our aging mechanism and aging specialization, which brought our aging more opportunities to take part in transactions and more stable income. This, together with the base compensation guaranteed to high-quality agents provided by solid store owners, empowered our platform with stronger agent retention capability and resilience. Meanwhile, given the lower housing transaction volume in the fourth quarter, we temporarily cut back our online advertising budget and experienced a decrease in platform traffic In the fourth quarter, we have 37.4 million MAUs on the Baker app and the MIDI program, down 22% year-over-year. Nevertheless, as the market recovers, we expect our online traffic to resume growth in 2022. Moving on to existing and new homes. Regarding existing home transaction services, according to data from Baker Research Institute, GTV of existing home sales market dropped 43% year-over-year in the fourth quarter, and the GTV of existing home transactions on Bitcoin's platform was on the 354.6 billion, down 39% year-over-year, of which existing home sales declined 41%, slightly better than the overall market. Existing home transaction volume is some key cities have started to bottom out. We believe the key to successful brokerage business operation is collaboration and focus. In 2021, we established rules such as agent specialization and agent and store ranking system. We find our existing home sales leads allocation mechanism and direct it agents and stores to focus on homeowners' retention through platform resources deployment, all of which enable us to lead agents to focus and collaborate, strengthening the superior and exclude the inferior. We are also firmly committed to investing in industrial infrastructure. As of the end of last year, we started to operate 200 and 98 contract service centers in 30 key cities. And over 90% of the existing home transaction signing process was completed in these centers. As part of our infrastructure, these centers not only improve customer signing experiences, ensure firms' safety, but will also become one of the best scenarios to direct traffic to our emerging business segments. turning to new home transaction services. The new home market declined 20% year-over-year in the fourth quarter, and the GTV, or new home transaction, on Baker's platform dropped 24%, slightly underperforming the market, meaning as we cut back our new home transaction business due to the liquidity risks of developers to ensure the long-term health of our business. From short-term perspective, it will take more time for the overall new home market to recover. We have prioritized new home risk management to ensure safe home handovers to buyers and payment collection by service providers. With the premise, we also hope to help developers through higher sales efficiency. The key to improving sales through is to provide a work environment that give agents a sense of security with the knowledge that they will receive their commission on time, and their transaction will not be broken by any misconduct such as client information leakage that has prevailed in the industry. In 2021, we continue to promote new home business conduct improvement plan, establishing infrastructure and comprehensive procedures to prevent, intervene, trust, and penalize misbehaviors. We investigated and deal with over 3,000 incompliance cases throughout the year. Agents were feeling safer doing new home sales business. We further developed our systems and tools to enhance agent capabilities. Our Xiaobei training camp also enhanced agents' familiarity with new home projects and their ability to introduce them to customers. 98% of agents in the pilot program use our Xiaobei assistant at night to answer questions on their behalf and pick up the conversation the next day, significantly reducing the loss of customers at night. Looking forward, Regarding our brand body, the housing transaction services business, we have a committed goal in mind and a clear path to get there. Our goal is to offer better customer experience and gather more capable and ethical agents, store managers, and brands. And the path leading to this long-term target is simple. Take care of our customer and helping service providers take care of the customers. empower agents and raising their professional ethics, improve store quality, and become friends with the communities. In 2022, the first target for our core business segment is to neutral capital, ethical, and dignified service providers and advance their professionalism. Second, we will pay more attention to improve the platform operation efficiency of our home transaction business. We will continue to improve organizational flexibility to quickly respond to any changes and take measures according to either increase or rain in expenses. Third, the strength in our body will facilitate the development of our tool wings as we build a higher efficiency customer referral model to our new business. Next, Moving to our progress and plans for our two wins, new business development. We define 2021 and 2022 as the year during which our home renovation and furnishing services business group takes root. We believe that a customer demand for home renovation and furnishing will continue to grow as housing prices stabilize In this market, helping service providers is a key to enhance consumers' experience, standardization, and digitalization, along with renovation product upgrades at the core of improved service providers' capability and delivery quality. In developing our renovation and furnishing offering, we started with the hardest part in the home renovation innovation process. delivering a high-quality interior construction finish. Over the past few years, we have laid the groundwork for this business. This part of our business seems slow, but once we nail it, it will take off quickly. We have already advanced from zero to one in the home renovation business. We are determined. Our team is confident and motivated by the positive feedback from customers. And we have built a replicable regional model. Chengdu is the most significant piece of the piezo we have found, which allow us to replicate our model more rapidly at a scale to go from 1 to 100. In 2021, we built up our capabilities to support expansion in a standardized manner at a large scale. In building our underlying capabilities, we instituted a scientific management approach with respect to scheduling transaction orders and a cooperation mechanism. We officially rolled out the HomeSaaS version 1 system covering the entire home renovation business with multi-modules that could enable process standardization and enhance process productivity. For example, its BIM version 1 system has become the industry's first product covering design, design rendering, detailing, and modularization into a bill of materials. Boostered by our strong capabilities, Baker's self-operated home renovation business Beiwu has become an industry leader in terms of construction standards and the construction cycle, as well as process management and control. In 2021, we delivered our tender offer to Shengdu Home Renovation, China's leading home renovation and furnishing service brand, and the transaction has been approved by the SAMR. As of the end of 2021, Chengdu has more than 110 stores in 31 cities nationwide. We kicked off the preliminary integration between Chengdu and Beike. Chengdu has an absolute leadership position in the industry when it comes to size, organizational management, internal cost control, and supply chain management. Beike has a unique capability in digitalization standardization of complex industry process and customer acquisition in home renovation and furnishing. Not to mention a sizable talent pool of industrial internet professionals, our combined companies are leveraging our respective advantages to generate substantial signatures and build China's number one home renovation and furnishing brand to empower the entire industry. Looking forward to 2022, we hope to accelerate the expansion of our home renovation and furnishing business as well as the development of our underlying capabilities. With respect to building our capabilities, first, we will improve our ability to provide high-quality services through the establishment of middle office capabilities, guarantees, and training. Second, we will focus on improved capabilities of construction, delivery, from both online and offline. Third, we will establish standardized operations to construction delivery process, service provider certification, and so on. We will also continue to iterate our home SaaS version 2 system and invest in our talent pool. Supported by our upgraded underlying capabilities, we will actively expand our home renovation and furnishing business in nine cities. We are big because housing transaction services have core advantages. Our housing transaction services will refer customers to our two wings business. In the pilot cities, our home transaction services already contribute 30% of the new business customer list in the fourth quarter. We are optimistic we can achieve further breakthroughs in 2022 after integration, fostering remarkable growth for our overall home renovation and furnishing business. through the large-scale connection with high-quality services providers, plus customized home furnishing production and sales on the back end. The second win is our one-body, two-win strategy is inclusive housing services. It carries out affection and devotion to our country and responsibility to society. It mainly covers home rentals, plus a wide range of value-added home services. The housing supply gap is a prominent program for new urban residents, young adults, and low-income groups who are in the most urgent need of improving their living conditions. The national policy specifically encourages both home purchase and renting. We will deeply participate in this industry in the future, increase high-quality rental housing supply, and elevate the quality of the industry through diverse solutions and broader external collaborations, providing real solutions to livelihood problems and improving living environments inclusively. Our inclusive housing business is divided into three categories. general home rental brokerage services, light rental property management services, and centralized service apartments, plus value-added home services. In 2021, over 2.5 million general home rental transactions were completed on our platform, up 41% year-over-year. In the second half of 2021, we launched a rental commission fee reduction campaign for fresh university graduates in cities such as Beijing and offer our support to more than 1,600 university students in finding their first home after graduation. The Light's rental property management services manager more than 11,000 units in 2021 on average, up over 51% year over year. As to infrastructure, we promoted post-rental housekeeping services by providing a comprehensive variety of convenient home services for talent and realized penetration of over 80% in the pilot program. In 2022, we will deepen our exploration of diversified solutions for inclusive living from both the supply side and the user end. We will make efforts in a diversified model to address over 100,000 rental units for new urban residents, young people, and low-income groups. On the consumer side, we plan to provide a comprehensive guarantee system for all types of tenants. This, coupled with a diversified home services offer, will provide tenants with safe and high-quality rental experiences. Lastly, It's a great honor for us to do business in China's housing-related services sector, a fertile ground full of promise. No matter what weather comes our way, we will give back to this land, to our society and the people, through our inclusive housing initiatives and more diverse solutions in the future. We, as an organization, will forever strive to go ahead and stay open. With that, I would like to turn the call over to our CFO, Xu Tao, for a close review of our first quarter and full year financials.
spk08: Thank you, Stanley, and thank you, everyone, for joining us. Before discussing more details about our first quarter and fiscal year 2021 financial results, I would like to provide a brief overview of the housing market in 2021. Beginning the second half of 2020, Our housing price began to rise sharply, fueled by an economic recovery and our dealers' expectations in the capital market. In order to cool the red-hot housing market, the government introduced a variety of policies with unprecedented frequency and intensity, most notably tightening the credit measures. These measures precipitated a steep decline in the volume of the visiting home sales, declining 47% in September compared to June. This, in turn, negatively impacts the new home market since approximately 40% of new home transactions rely on the funds from the existing home sales. The financial health of many real estate developers wasn't triggered by that default from some high-profile, large-scale developers. This brought a significant blow to the debt market. making it even more difficult for many developers to issue the new debt to repay the old ones. With concern for a rippling debt scenario, many local banks curb developer funds withdrawal from the escrow account, leaving some developers in a serious cash shortage position. The combined negative consequences of all of these factors were many. Firstly, more developers faced that default rate in the second half of last year. Secondly, cash-strapped developers stopped payment to both upstream and downstream suppliers. Thirdly, some developers started to liquidate their valuable assets, including Sunet, who sold Baker's share in order to strengthen their cash reserve. Developers also offered a hefty discount to promote quick project sales and clear inventories. Fourthly, land sales slumped as developers stayed on the sidelines. Facing these high winds, beginning in Q3 last year, the China housing market froze across the nation. Rapidly deteriorating conditions prompted policymakers to fine-tune some regulations starting in Q3 last year, pledged to promote the health development of the housing market and better meet the reasonable demand for the homebuyers. Since then, marginal relaxation in credit measures have brought some signs of soar. The volume of the existing home transactions has picked up slightly, while new home transactions are still pending developers to shorten liquidity status. We expect market sentiment will gradually recover in the first half of 2022. Although the market recovery was still nascent and fragmented in Q4, which muted overall transaction volume, We are able to utilize this opportunity to optimize our execution and lay the groundwork to better position for the further market recovery, as was reflected in our operational and financial results in Q4. Turning to our financial details in Q4, our net revenues were RMB $17.8 billion in Q4, compared to $22.7 billion in the same period of 2020, exceeding both high ends of our guidance and the street consensus. The decrease was primarily attributable to the decline of total GTV of 34.6% to RMB 732.4 billion in Q4, from RMB 1,120 billion in the same period of 2020, due to the market downturn. In particular, of net revenue from its in-home transaction services, or RMB 6.0 billion, in Q4 compared to RMB 9.2 billion in the same period of 2020, primarily due to a 39.4% decrease in GTV of existing home transactions to RMB 354.6 billion in Q4 from RMB 584.7 billion in the same period of 2020. Our net revenue from new home transaction services decreased by 12.2% to RMB 11.3 billion in Q4 from RMB 12.9 billion in the same period of 2020, primarily due to a 24% decrease in GTV of new home transactions to RMB 356.8 billion in Q4 from RMB 469.2 billion in the same period of 2020, which was partially offset by a moderate increase of new home transaction commission rate. Our net revenue from emerging and other services were RMB 0.5 billion in Q4, compared to RMB 0.6 billion in the same period of 2020, primarily attributable to the decrease of net revenue from the financial services. Cost of revenues was RMB 14.9 billion in Q4, compared to RMB 17.2 billion in the same period of 2020. Growth profit was RMB 2.9 billion in Q4, compared to RMB 5.4 billion in the same period of 2020. Growth margin was 16.4% in Q4, compared to 23.9% in the same period of 2020. The decrease in growth margin was mainly due to, one, a continuing shift of the revenue mix towards new home transaction services with a lower contribution margin. A lower contribution margin of in-home transaction led by a relatively higher percentage of fixed compensation cost for Lianjia agents. And three, a relatively higher percentage of cost related to store of net revenue in the fourth quarter of 2021 as a result of incremental rise in the rental fees of contract service center opened in 2021. And the increased depreciation and optimization cost. Operating expenses were RMB 4.1 billion in Q4, compared to RMB 4.2 billion in the same period of 2020. General and administrative expenses were RMB 2,202 million in Q4, compared to RMB 1,884 million in the same period of 2020, mainly due to the increase of provision for credit losses. Sales and marketing expenses were RMB 809 million in Q4. compared to RMB 1,323 million in the same period of 2020, mainly due to the decrease of brand advertising and promotional marketing activities. Research and development expenses were RMB 738 million in Q4, compared to RMB 714 million in the same period of 2020, mainly due to the increase of high-tech inexperienced R&D personnel. which was partially offset by the decrease of the share-based compensation expenses. Loss from operation was RMB 1,184 million in Q4, compared to income from operation of RMB 1,267 million in the same period of 2020. Operating margin was 96.7% in Q4, compared to 5.6% in the same period of 2020, primarily due to one Relatively lower gross profit margin in the fourth quarter of 2021 compared to the same period of 2020. And two, an increase of percentage of total operating expenses as of net revenue in fourth quarter of 2021, primarily due to decreased net revenue along with relatively flat operating expenses in the fourth quarter of 2021 compared to the same period of 2020. Excluding non-GAAP items, Our adjusted loss from operation was RMB 398 million in Q4, compared to adjusted income from the operation of RMB 2,231 million in the same period of 2020. Adjusted operating margin was 92.2% in Q4, compared to 9.8% in the same period of 2020. Adjusted EBITDA was RMB 484 million in Q4, compared to RMB 2,897 million in the same period of 2020. Net loss was RMB 933 million in Q4, compared to net income of RMB 1,096 million in the same period of 2020. Excluding non-GAAP items, adjusted net income was RMB 42 million in Q4, compared to RMB 2,001 million in the same period of 2020. Net loss attributable to KE Holding Inc. ordinary shareholders was RMB 930 million in Q4, compared to net income attributable to KE Holding Inc. ordinary shareholders of RMB 1,095 million in the same period of 2020. Adjusted net income attributable to KE Holding Inc. was RMB 45 million in Q4, compared to RMB 2,000 million in the same period of 2020. For the fourth quarter of 2020, diluted net loss per ADS attributable to KE Holding Inc. audience shareholders was RMB 0.78, compared to diluted net income per ADS attributable to KE Holding Inc. audience shareholders of RMB 0.93 in the same period of 2020. Adjusted diluted net income per ADS attributable to KE Holding Inc. audience shareholders was RMB 0.04. compared to RMB 1.71 in the same period of 2020. Even during the market downturn, we were still able to remain in a strong cash position and gain the positive cash flow generated from the operating activities in Q4. As of December 31, 2021, the combined balance of companies' cash, cash equivalents, restricted cash, and short-term investment amounted to RMB 56.1 billion, or USD Additionally, as of December 31, 2021, the balance of our long-term cash items, mainly including the long-term investment amount is to RMB 14.9 billion or USD 2.3 billion. Turning to our financial details in fiscal year 2021, although we experienced a sharp market downturn in the second half of last year, that significantly impacted our operating and financial results. We still achieve a resilient year-over-year growth of our top-line in 2021. For the fiscal year of 2021, our net revenue increased by 14.6% to RMB 80.8 billion from RMB 70.5 billion in 2020. primarily attributable to a 10.1% yearly increase of our GDP to RMB 3,853.5 billion in 2021 from RMB 3,499.1 billion in 2020. Our gross profit decreased by 6.2% to RMB 15.8 billion in 2021 from RMB 16.9 billion in 2020. Our gross margin was 19.6% in 2021 compared to 23.9% in 2020. The decrease in gross margin was mainly due to 1. A continuous shift in revenue mix towards new home transaction services with a lower contribution margin. A lower contribution margin of its in-home transactions as a result of the higher percentage of the fixed compensation cost for Lianjia agents. and the compensation cost for the transaction support staff. And three, a lower contribution margin of new home transactions, led by the increased proportion of new home sales transaction, completed by the Connect agent and other sales channels, and the incremental rise in the fixed compensation cost for expansion of dedicated sales scheme, with expertise on the new home transaction services in 2021. Our loss from operations was RMB 1.4 billion in 2021, compared to the income from operations of RMB 2.8 billion in 2020. Operating margin was 91.7% in 2021, compared to 4% in 2020, primarily due to, one, a relatively lower gross margin profit in 2021 compared to 2020, two, an increase of percentage of total operating expenses as of net revenue in 2021, primarily due to the increase of staff related expenses, provision for credit losses, and the impairments of the goodwill incurred in 2021 compared to 2020. Excluding non-GAAP items, our exact income from operation was RMB 1.4 billion in 2021 compared to RMB 5.9 billion in 2020. Our net loss was RMB 525 million in 2021 compared to net income of RMB 2,778 million in 2020. Excluding non-GAAP items, our just net income was RMB 2,294 million in 2021 compared to RMB 5,720 million in 2020. In middle December, We were packed and forced to defend ourselves against a groundless allegation levied by a published short-server report towards our company. Upon receiving the report, the Audit Committee quickly launched an internal review process with the assistance of the third-party professional advisors, including an international law firm and the forensic accounting experts from the Big Four accounting firm that is now the Compass Auditor. In late January, before Chinese New Year, We announced the substantial completion of the data review, which was inclusive in its findings that all allegations were not substantiated. It clearly shows evidence of our high standards and effort in data integrity, corporate governance, and internal control. We sincerely appreciate the extensive support and trust we received from our investors during this period and want to take this opportunity to publicly reiterate our commitment to maintaining those high standards, transparency, and timely disclosure in compliance with applicable rules. To sum up, as Stanley mentioned, 2021 was undoubtedly a challenging year for us. Yet, despite the formidable challenge, we made further solid progress in fulfilling our commitment to support our service provider and bring abnormal service and joyful living to our customers. One body, two wings. will guide our strategy's function into the housing-related complementary services in 2022 and bring meaningful financial impact in fiscal year 2022 and beyond. I will now speak about our near-term focus and plans. Firstly, for our housing transaction services, we will focus on the profitability and the cash generation capability by further honing efficiency in our management and operating initiatives along with continuing to invest into the industry infrastructure and our agent training. The steps we took in Q4 to better optimize our organization have made us more flexible in embarking on our new one-body, two-way strategy and will further drive our operating leverage. We will also continue to focus on the prudent cash management and account the receivable risk controls considering the ongoing uncertainties from developers' operations in the first half of this year. Benefited from our ratified management of the receivables, our DSO for the new home transaction services further reduced to 97 days in 2021 from 103 days in 2020. According to Baker Research Institute, Overall market GTV of both existing home and new home transactions is expected to trend down year-over-year in 2022. As a result, we expect our GTV of the housing transaction services will observe a similar trend. Secondly, for our two wings, home renovation and furnishing services are the inclusive housing services. While we are dreaming big, we will move forward with careful steps In developing both strategy business, further investment will be required and this will have an impact to overall group's profitability in 2022. We firmly believe this investment will yield long-term economy benefits and position us well to capture burgeoning new demand in complementary sectors. Turning now, guidance for the first quarter of 2022. As stated in our Q3 running call, We foresee the market will likely hit bottom in Q1 of 2022 and will gradually, with time, gain transactions into recovery from this point. Considering the housing market is still at the early stage of recovery and adding the high base effect of the same period in 2021, we expect overall market GDP of existing home sales to fall about 50% year-over-year in Q1 and overall market GDP of the new home Research Institute. Based on above considerations, looking forward to the fourth quarter of 2022, we expect the total net revenue to be between RMB 11.5 billion and RMB 12.5 billion, representing a decrease of approximately 39.6% to 44.4% from the same quarter of 2021. This forecast considers the potential impact of the recent real estate-related policies and measures, as the company's current and preliminary view of the business situation and market conditions, which is subject to change. All in all, as we move forward to 2022, the toughest winter is gradually fading away. The year for better living is coming to focus with tremendous opportunity around living at all fronts. In the depths of winter, we proved again within us that the invincible summer, as we continue to pursue our mission and capture adjacent opportunities, we will stay resilient, strengthen vertical capabilities, and most importantly, keep an open mind. Our decades of experience with housing transaction services has prepared us well to level up the playground for the vast and expanding industry of the better living. We will continue to help service providers develop and operate with professional ethics and expertise and win the respect from their high-quality services. We firmly believe our continued effort to bring our customers the service and experience and our proven track record of overcoming difficulties will eventually lead us to a better tomorrow. That concludes our prepared remarks. We would like now open the call for your questions. Operator, please go ahead.
spk04: Thank you. Ladies and gentlemen, we will now begin the question and answer session. To ask questions, you will need to press star 1 on your telephone. To withdraw your question, please press the power or hash key. For the benefit of all participants on today's call, please limit yourself to one question. And if you have additional questions, you can re-enter the queue. If you are going to ask questions in Chinese, please follow with English translations. Our first question comes from the line of Piyush Mubai from Goldman Sachs. Please go ahead.
spk01: Hi, Stanley. Thank you for taking my question. And congratulations on the unveiling of the one-body, two-wing strategy. My first question is about following the decline that we've seen in GTV in fourth quarter and the guidance you've given for the first quarter. Could you take us through how the market conditions have been since? And if I can slip in a second question, with recent policy loosening, how should we set or reset expectations for housing recovery trends in 2022? And if you could take us through that period, quarter by quarter, both in terms of price and volume, that would be great. Thank you again.
spk08: Thank you, Peter. This is Xu Tao. Regarding your first question, how is the market condition since 4Q last year, I would say since the first quarter, the Chinese government has a signaling stabilization for the market and the housing policies, aiming to rectify the previous over-tightened policy under the theme of housing for living, not for speculation. The improving private environment also helped unlock the pent-up demand. At the policy implementation level, response were promptly made to the central government policies. For administrative measures, over 30 cities introduced supportive policies focusing on the last restriction on the mortgage, home buying, and sales, as well as the developers' pre-sale proceeds. For credit environment, that is a key factor for the housing market and has been improving recently. with a significant abatement in the mortgage rates and approval process. As of January 2022, the first home and the second home entry rate fell by 0.16% and 0.18% versus the peak season of last September, respectively. The mortgage orientation cycle shortened to 50 days in 103 cities in January 2022. This is also a normalized level, similar to March 2021, and 23 days less than the peak season in last October. The improving credit environment at the consumer side directly contributes to market recovery. Our impact for both agents and homeowners' expectations and sentiment bolted up since November last year. For existing home sales, the improving private environment injects liquidity to facilitate recovery. According to Baker Research Institute, the China existing home market in Q4 last year shrank around 43% year-over-year and 21% quarter-over-quarter. The Baker existing home transaction GTV dropped by 39% year-over-year, among which the existing home sales GTV dropped by 41% year-over-year and 4% quarter-over-quarter. Market-wise, driven by the improving credit environment, the city-home transactions that are interdependent were fulfilled, and the performance in certain upper-tier cities bottomed out. Monthly transaction volume in 20 out of 32 cities was modelled by Baker, so sequential growth for three consecutive months. The quarter-to-quarter decrease in Q4 plus Q3 was mainly due to the high base in last July and August. Its new home transaction on Baker platform also bolted out in last Q4, witnessed by the month-over-month GDP growth of 11%, 7%, and 90%, respectively, for October, November, and December. And the four new home sales. China new home sales market GDP dropped 20% year-over-year, but the post 9% growth quarter-over-quarter. The new home sales GDP on Baker dropped 24% year-over-year and 13% quarter-over-quarter. The broader new home sales market, despite a slight rebound in Q4, the 9% quarter-over-quarter growth is much slower versus the average 18% growth in the first quarter in the past five years. Lower tier cities' performance is weaker, and albeit with policy easing, it will still take time for the homebuyers to restore their confidence. We expect the shortened downside pressure to continue in new home markets. with divergent performance across different cities. And for Beike, new home sales in Q4, and we continue to prioritize the stability and opt for prudent strategy for new home sales, with a focus on the strengthening risk management mechanism, reducing the receivable collection risk and seeking incremental opportunities. We proactively suspend cooperation with high-risk projects, adopt for conservative revenue recognition presently made provision for potential accounts receivable risks. Regarding your second question for the expectation on the housing recovery trends this year by culture and also the volume and the price with the recent policy loosening, looking ahead to 2022, there are three things we are very sure of. The first is the rectification of over-tightened policy. The second will be the strong consumer demand and the reggie demand for the driver living. And the third thing will be market transactions will return to the steady volume. Based on these views, overall market GDP of home transactions is expected to decrease around 6% to 14% year-over-year. of which existing homes down by low 10% year-over-year and new homes down by 5% to 10% year-over-year. That said, we expect the decline in transaction volume to narrow down from 2Q onwards as the market should see a positive year-over-year growth in the second half. At the macro level, the Chinese government has reiterated its emphasis on the stabilized growth for the macroeconomy in 2022. The Chinese government is calling for proactively introducing the policy positive to the economic stability and cautiously implementing the policy with the tightened side effect. Such a goal of stabilized growth that necessitates the role of the housing as a pillar industry. Baker Institute will reasonably force a neutral to a competitive monetary policy stance to continue. with one RRR cut and two risk cuts this year. And in 2022, estimates the housing-related investment to remain flat versus 2021, underpinning the stable performance across housing sales and the entire industry value chain throughout the year. We also estimate that this year, we will see a steady recovery of the housing market, driven by credit environment and administrative tailwinds On the credit side, as estimated by the Baker Research Institute, further mortgage interest rate cards and credit supply will pace the market demand. That will lead to a higher gross mortgage supply versus the year of 2021, which will drive to unlock the regit and upgrade the demand as a catalyst for the housing consumptions. Under administrative measures, we are expecting the more local government to relax demand-side measures in 2022, such as easier criteria for the first home recognition, fewer home purchase and self-restrictions. Demand for the housing remains massive and it will require time to unleashed. Based on our estimation on accommodative policy environment and secular, stable demand growth trajectory weighs by the back-loaded process of gradual market recovery in 2022. In general, the 2022 new home sales market GTV is estimated to around RMB 15 trillion, down around 5% to 10% year-over-year, factoring in around the 10% year-over-year decline in the gross flow area, according to Baker Research Institute. Existing sales market GTV is estimated around RMB 6 to 7 trillion, down by low-teens year-over-year, factoring in the low-teens year-over-year decline growth flow area. On combined basis of existing and new home market, the total market GTV is estimated at RMB 20 to 22 trillion, down around 6% to 14% year-over-year. Regarding the quarter, Q1 should see a sequential decline both in existing and new home sales market GTV versus 4Q 2021 due to the seasonality like the Chinese New Year and the impact of COVID-19. and reached a trough in this cycle as we break during Q3 running course. We recently foresee the year-over-year decline of 50% for the existing home sales market GTV and a more than 40% decline for the new home market GTV in Q1. We expect that the existing home transaction to stabilize post-Chinese New Year, leading to a gradual recovery both in the existing home cells and new home cells in Q2, where the significant narrow year-over-year decline was Q1. Starting from Q3, according to Baker Research Institute, we expect year-over-year GTV growth for both existing and new home cells to turn positive. And in the second half of 2022, we expect existing and new home cells market GTV to achieve an overall 25% and 15% year-over-year rebound, respectively. Thank you.
spk04: Thank you for the questions. Next question is from the line of Ashley Su of Credit Suisse. Please go ahead.
spk02: Thank you, management, for taking my question. Since you have just discussed the market outlook, could we also go through Baker's business outlook for year 22? And also, would you give us some color on the company's strategy and investment this year in both core business and the two wins? Thank you.
spk08: Thank you, Ashley, and I will answer the Baker space outlook in 2022 and will invite our chairman, Stanley, to answer the follow-up questions of our new strategy, One Body, Two Wings. Based on our outlook, as I just answered to Pierre, we will apply our effort under the One Body, Two Wings strategy. On GTV and agent store sites, we reasonably foresee the Baker existing home the broader market in a recovery cycle. For new home segments, we will closely monitor developer rates in the first half of 2020, focus on the transaction safety and measure accounts receivable rates. Our new home sales performance is expected to be in line with the market. On agent store sites, we foresee a bulging market in Q1 2022 for our platform Compared to Q1 2022, we expect the number of active stores and agents on our platform to grow by the low single-digit when exciting year of 2022. For marketization and profitability, we will lay more emphasis on our operational efficiency for our platform and connect stores, refined by stable marketization rates and platform take rates for our core business, including existing and new home transaction services. We'll continue our strict cost control starting from 4Q 2021. With these measures, the contribution margin is also expected to increase both for the existing and new home sales. And this year marks a new chapter for our new business development. Our home renovation and furnishing, Baker will draw upon this customer acquisition advantage and the leverage construction delivery and execution capability of Beiwo and Chengdu to expand, especially in nine key cities. Chengdu is inspired to be consulted in our financial statement and generates significant revenue contribution upon the completion in the second half of this year. Our inclusive housing service business is in a run-up phase, so in a longer horizon, the two-winds business will effectively mitigate and offset the impact of the market downturns in our core business and capture additional revenues from stable environments. And I would like to invite our chairman, Stanley, to give some color for our research in one-body two-winds.
spk05: Yes, because we discussed the two-winds issue, there may be a few questions. The first is, why is this strategy being introduced at the moment? I think there are two changes. The first change is the change of consumers. From buying a house to living better, to packing a house, to serving the elderly. In fact, they are all serving the elderly and living better. This is the first change of consumers. The second change is the change of value. I think many companies in China are pursuing the value of business to the value of business and the value of society. This is a big premise. Secondly, I'd like to ask, why does the shell answer the question of the current strategy? I'd like to satisfy three conditions. The first is that it is very in line with our mission. Because the mission of the shell is to provide a dignified service and a better living environment. It's all about the home. It's all about the dignified service, such as the manager, the manager, the worker. It's all about the family service. In fact, it's all about our mission. to stick to it. Secondly, we have the ability to do it. Including past experiences, for the online and offline understanding, for the management of the big teams, for the standardization of the process, we all have the ability to do it. Thirdly, we have the will to do it. Because at the moment, we have to bear these challenges. Because many tracks in each industry look easy, and the principles are very simple. But if we really do it, Yeah, this is Danny.
spk07: Let me quickly address our question in terms of the one-body, two-wing strategies, right? I think in terms of the one-body and two-wing strategy, they're actually related to a couple of questions. First question is why we actually has been announced and launching the one body and two wings strategy at the current stage. I think the fundamental reason behind that is we actually monitor the two of the fundamental changes from the market as well as the society. Firstly, is in terms of the consumer's attitude and their value actually has been significant change from buying the house to living better. So that actually brings us very good opportunities to bring the changes. And the second change is coming from the unit evaluation as well as the proposition for all the enterprise. I think now more and more of the enterprise actually has been valued, both of the commercial value as well as the social value at the same stage. So we do believe, followed by those two of the changes, is the right time to launch off our new strategies. And the second, the question relates to one body and two wings, is how we can execute that. And I think there are a couple of the strengths I want to address there. So firstly is our mission of the company, which is admirable services and the service provider with the dignities. Then bring the joy for living. So within our industry, rather than the agents, we do notice for other service providers, such as foremen, workers, as well as other housing services related or the home services related, there are all the different types of service providers, which is eager to improve their professionalism as well as bring the better services to the customers. And secondly, is we actually have the capability to do that. In the past two decades, we actually have been accumulating a lot of different capabilities in terms of standardization, in terms of the online and offline execution, as well as other parts. So that actually gave us more confidence to doing those part of business. And the third thing is we have the willingness to do those kind of, you know, the business. So that's the first two questions I want to address related to one body and two wings strategy.
spk06: Therefore, we have the same focus on quality and efficiency. How can we have better quality? So today, we see that high-quality service providers, including high-quality developers, high-quality agents, high-quality stores, and high-quality brands, are the power of Beike Group to improve our quality, including our service providers and brands.
spk05: At the same time, in terms of efficiency, as Tao Ge shared just now, it will constantly improve our own efficiency in terms of capital use.
spk06: This is for the whole. So the core of 200 million is, first of all, quality, and secondly, scale. Because for 200 million, it is from zero to one, or from one to ten, and then it goes in that direction. For example, home appliances. In our home appliances, the core is, first of all, home appliances, In fact, there is a great concern in this. Is there a business model that can exceed one billion in decoration? This year, we will also form five 1s in Hesheng. One system, one process, one standard, and one organization. The most important thing is one goal. Through these five 1s, we can achieve the restructuring of the entire home decoration industry. In terms of meeting, the core is to unite in rental, as well as insurance housing, as well as the new youth of the city, the new youth of the city, the new youth of the city, the new youth of the city, the new youth of the city, the new youth of the city, the new youth of the city, the new youth of the city, the new youth of the city, the new youth of the city, the new youth of the city, the new youth of the city, the new youth of the city,
spk05: In terms of one-ball and two-wing strategies, there are a couple of the most important factors.
spk07: which is we have been mentioned many times before, including the scalability, quality, as well as the efficiency. But when we develop a business, no doubt we cannot promote all the three parts simultaneously. So at every stage, we have a focus. In terms of one-body business, we truly believe at current stage we should continually improve the service quality to further improve the efficiency. we will continue to find out more of the different, you know, the excellence of the service providers in the one-body business. For example, like the good brands, good stores, good developers, as well as other parts. And meanwhile, we also will make a balance between the investment as well as efficiency, like our CFO Togo has been mentioned before. So we will further improve our cash use efficiency in order to bring the further changes into our one-body business. On the other hand, in terms of the tooling business, we do believe the current focus will be using the further service quality improvement to bring the better scalability. So, for example, in terms of our home decoration and furnishing business, I think for that part of industry, there still has a question. It's whether one company can bring over 10 billion of RMBs revenue per year. So far we didn't see that, but hopefully after we cooperate, we shouldn't do it together, and we can bring more breakthrough in terms of the business model into the home decoration and the renovation, furnishing business. And I think this year we'll continue to promote what we call the 5-1 strategy, which means one organization, one standard, one process, and one system and most important thing is one goal, right? So in order to further bring the better scalability business for the home decoration of furnishing. And meanwhile, for the other, on the other things, which is called the inclusive housing services, we do believe we should continue to unite the different types of the supply in the society, including the life model as well as others the supplies in the society more tailor-made to the young generation or even to the blue collar of the workers or etc. So by consolidating all those kind of high quality of the supply of the industry, we do believe we can use our capability to further empower them in the different parts, such as talent, infrastructure, in order to bring a better balance between all the company's commercial value as well as the social value. Thank you. So that's my answer to your question. Back to you, operator.
spk04: Thank you. Next question comes from Thomas Chong of Jefferies. Please go ahead.
spk07: Thomas, could you translate your question into English?
spk03: Yes, sure. Thanks, management, for taking my questions. My question is about the decline in terms of the store numbers. Can management comment about the reason behind? And my second question is about the AR, the accounts receivable in Q4. Can management comment about the back-to-back situation? Thank you.
spk08: Okay, thank you, Thomas. Just you talk. Let me ask you a first question regarding the decline for the number of stores in the first quarter. The number of brokerage stores on the Baker platform reduced approximately 2,900 sequentially in Q4, down around 5.4% quarter-to-quarter. Around 4,100 connected stores disconnected from the platform in Q4, and an increase of 400 versus Q3. while approximately 1,200 connected stores newly joined the platform in Q4, and 2,300 less in Q3. Therefore, the decrease in the total number of stores on the platform is mainly driven by the slowdown of the newly connected stores in Q4. At market trust, the platform slowed down the pace of connecting new stores to focus on improving the operation efficiency. At the same time, The number of stores meeting our selection criteria, but not yet connected, has been declined during the market downturn as well. For disconnected stores, the quarterly number increased by 400 quarter-to-quarter, of which 310 stores disconnected due to the store merger, aimed to enhance competitiveness during the market downturn. The disconnection due to the violation as of the total disconnect stall was only 7% lower than that in the Q1 2021, showing case of effective governance of the platform ecosystem throughout the year. In Q1, as the market formed a bottom during the Chinese New Year, the common practices such as the merging and the shutting down stall are likely to occur, and the sound stall may also choose not to renew their leases when expiring around the year end or before Chinese New Year, resulting in a further decline in the number of stores on our platform. However, the number of stores on the platform is expected to increase gradually after the market stabilizes in Q2. Regarding the second question for the buy-buy and whether we have any risk for the collection, I would like to say at the first number talks, there is no material risk for Baker's new home business. If you look at our just early release of DSO, reduced from 103 days in 2020 to 97 days in 2021. And also, in 2021, the total commission revenue from new home sales was RMB 46.5 billion, while our collection was 51.7 billion in this year. Our company had approximately RMB 11.5 billion of accounts receivable for Q4, including approximately RMB 11 billion for the new home transaction services, whereas the cash collection for the new home transaction services was approximately RMB 12.6 billion in Q4. The buy-debt provision for accounts receivable and other receivables in Q4 totaled RMB 620 million, representing a culture-over-culture increase of RMB 250 million. Baker strategically increased the buy-debt provision in Q4 due to several reasons. First, on one hand, due to the continuous downturn of the new home market, developers' liquidity rates increased significantly. accounting treatment amid exacerbating market risks. The second is the classification of more projects at high risk and the increase of better provision will encourage our frontline teams to explore more business opportunities from the low-risk projects and reduce the proportion of the high-risk projects in the future. Although there are still some developers under the liquidity pressures to repeat steps, We have recently seen a series of policy easing for developers, such as acquisition loans no longer counting towards the three red lines. Relaxation of the control over pre-sales proceeds. It is believed that these measures marginally ease the developer's liquidity risk. at this moment, while improving the sales through exactly where Baker stressed last. For our internal risk control, we will continue the initiative we have been taking over in the past to improve our dynamic risk control module for monitoring the real estate developers and their new home projects. Through advanced assessment based on our risk rating mechanism, we will avoid cooperation on the high-risk projects. and sees the cooperation of the risks, I suppose, and the focus on the repayment. All in all, I would like to say that Baker's better provision for the new home transaction services was a proactive choice made by us based on our prudent accounting policy. We do not believe Baker's new home business will face material risk because Baker enjoys a high degree of independence in its new home business. Since our business are not reliant on relationship, but on our extensive network of the sales channels, high quality of service, recognition by our customers and our reputation, we closely monitor risk and implement countermeasures as soon as we pursue them. We believe the industry will be in a better shape in the future despite the shortening pain. Thank you.
spk04: Thank you for all the questions. We are now approaching the end of the conference call. I'll now turn the call over to your speaker host today, Mr. Matthew Chow, for closing remarks.
spk07: Thank you, operator. Thank you once again for all of you joining us today. If you have any further questions, please feel free to contact Baker'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. Take care, thank you, and goodbye.
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