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spk01: Hello, ladies and gentlemen. Thank you for standing by for KE Holdings, Inc.' 's second quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. Today's conference call is being recorded. I would now like to turn the call over to your host today, Mr. Matthew Dowell, IR Director of the company. Please go ahead, Matthew.
spk06: Thank you, operator. Good evening and good morning, everyone. Welcome to KE Holdings, Inc. albeit for the second quarter 2022 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 IRF website, investors.ke.com. On today's call, we have Mr. Stanley Yongdongpeng, our co-founder, chairman, and chief executive officer, and Mr. Tao Xu, our executive director and chief financial officer. Mr. Peng will provide an overview of our strategies and business developments, and Mr. Xu will provide additional details on the company's financial results. Before we continue, I refer you to our Steve Harper statement in our earnings press release, which applies to this call as we will make forward-looking statements. Please also note that Baker's earnings press release and this conference call include discussions of an audit gap financial information as well as all the non-GAAP financial matters. Please refer to the company's press release, which contains a reconsideration of the non-GAAP matters to comparable GAAP matters. Lastly, and as otherwise stated, all figures mentioned during this conference call are . With that, I will now turn the call over to our chairman and CEO, Mr. Stanley Peng. Please go ahead, Stanley.
spk05: Thank you, Master. Hello, everyone. Thank you for joining FICA's second quarter 2022 earnings conference call. In the second quarter, under proactive easing policies for the industry and effective pandemic controls, China's real estate transaction market saw serious or positive changes, especially in the existing home market. Meanwhile, we improved our platform's operation efficiency and stability in the scale of our stores and agents. as well as their productivity, but the internal and external environment we live in remains full of challenges. Micro uncertainty continues to increase, and our businesses are becoming more diverse and complex as we advance our one body, two wins strategy. Faced with such a complex internal and external environment to command and control our diversifying businesses, Our organization needs to have deeply rooted beliefs. At the center of that, we need to believe service providers, the real estate agents, renovation workers and foremen, designers, customer service representatives, rental housekeepers, they are our customers and our valuable assets. In terms of market corrections, our tried and true practice over the years is to seek from industry's front line, finding strengths from the day-to-day work of ordinary service providers. This is even more necessary today because we face market adjustments with greater than your magnitude. And the skill and the complexity of our organization have also reached a new level. First, going to the front line will help us to award the potential big company disease as we grow in scale by our management and platform teams connecting with those we serve as equals instead of from the top while the front line remains at a distance. We can bring everyone's heart together and establish a true understanding amongst one another. Second, we need to be of heart to our front line to be an industry internet platform require deep industry insights is only through our complex industry immersion that we can leverage the advantage of the platform, formulate useful rules and mechanisms, and develop helpful functions and products. To that end, close to half of the 147 middle and senior management members on the Baker platform Myself included, spent one to two months working on the front line over the past few months as a junior agent, inter-designers, or rookie housekeeper. Going back to the front line has filled our organization with energy to fulfill our mission of admirable service. Promoting us to again think about how to truly help our service providers improve their productivity, job security, and enhance their sense of happiness at work. It has also urged us to streamline our process and get our organization lean. At the same time, by going to the front line, we are more convinced that than ever for our positioning to become industry spokesman, person. Our opponents are not the other high quality providers in the industry, but all the low quality service providers that hurt the industry's reputation and customer experiences. We will make the industry better by accelerating the eliminating of this sub-bar players going to the front line, we have gained more confidence in our one body, two win strategy. Our infrastructure foundation, the agents installed network in the communities is already completed. Like a high quality road, it's now open for more vehicles based positioning us as a full living service platform. providing a complete range of services, including home purchase and sales, home rental, home renovations, and other home-related services. Moving on to our progress in the second quarter with our one body part, existing and new home transaction services. At the end of the second quarter, the number of stores and active stores on Baker's platform was over 42,800 and 41,100, down 6% and 4% quarter over quarter respectively. At the same time, the number of agents and active agents on our platform was over 415,000 and 380,000 respectively. with a moderated quarter-over-quarter decline of 3% and 0.4% respectively. The number of stores and agents in most cities stabilized in the second quarter, with a churn rate for Lianjia agents dropping to just 1% to 3% in Beijing and Shanghai. Non-Lianjia stores' actual agent churn rate fell to only 5.6% in June, significantly better than the industry average of over 12%. In cities where existing homes showed a stronger recovery trend on our platform, such as Suzhou and Fuzhou, the number of agents even started to grow. Total MIUs on Beka's platform reached 43 million. up 8% quarter-over-quarter. Our existing home transaction services continue to outpace the market. According to data from the Baker Research Institute, nationwide GTV of existing home sales dropped 45% year-over-year in the second quarter, whereas GTV of existing home transaction on Baker's platform was RMB 300. and 93.5 billion, down 40% year-over-year, of which existing home sales declined 41%, outperforming the market. Throughout the second quarter, the year-over-year decline of our existing home GTV continued to narrow from 41% in April to 17% in June. In 2021, out of 31%, 32 bigger key cities. Existing home GTV exceeded the average 2021 level in June. The frequent release of easing policies in second and lower city-cities brought the pent-up reduced home upgrade demands back to the market and spurred the recovery of using home market in these cities. Reflected in our Q2 existing home transactions, GTV of non-Landjiaz Canadian stores increased by as much as 33% quarter-over-quarter. In Beijing and Shanghai, effectual pandemic controls firmly took root in June, and we saw transactions recover rapidly and return to normal levels in the final weeks Over the months, our firm investment in infrastructure and the products have supported a more stable network of stores and agents and a higher operating efficiency, allowing us to substantially outpace the market in the recovery cycle. On the infrastructure side, we constantly iterate our fear and a competitive platform operation mechanism. to motivate and retain high-quality service providers. In the second quarter, we optimized our business leads allocation mechanism to prevent cheating and enhance the sense of fairness. We also iterated our business leads matching model to make it more accurate and the operation more focused. In terms of operations, we continue to refine our operations of existing home sales that center on home listings, improving home listing maintenance, listing promotion and conversion efficiencies, effectiveness. For Lianjia, this year, Lianjia has focused on improving operations to solidify the foundation for quality services and organizational development In the second quarter, we rolled out several major initiatives. First, we reduced number of loss-making stores through more granularized management and by establishing single-store P&L models. As a result, the proportion of loss-making stores in Lianjia's 20 pilot cities dropped by a significant 80%. from January. Secondly, we further improved D&J's agent productivity by establishing a 5A productivity management model to enhance overall management perspective and capabilities. Apart from Beijing and Shanghai, in the other 27 cities, D&J's agents versus Canadian stores' agents per agent productivity ratio expanded by more than 21% from the 2021 level. Certainly, D&J's agents actively participated in community pandemic prevention services and won recognition from community residents, which further supported the rapid recovery of our basis of the pandemic resurgence past since July. There have been some corrections in the existing home market affected by the unusually hot temperatures in southern cities and the micro market fluctuations. But we are more convinced than ever that existing home services will be the core of our future. And we will strategically redouble our focus on existing home services. Turning to new home transaction sources, according to data from the National Bureau of Statistics, in the second quarter, the GTV, or new residential home sales, were down 36% nationwide year over year. It expanded from the first quarter and was the second largest single quarter decline since 1999. The GTV or CRIC's top 100 real estate companies fell by 43.4% year over year. The new home market remained tough with weakness on both the supply and the demand side. Amidst the market headwinds, GTV or new home sales on our platform were the RMB 222.7 billion, down 55% year over year, and up 15.6% quarter over quarter. Positive changes emerged at the end of May, and the number of new home purchases offers on Baker's platform materially increased on a sequential basis in May and June, but the industry continues to face significant challenges in the short term, making improvements in financing and consumer demand with mountain pressure on sales through as the industry undergoes rapid and powerful changes. high-quality developers have begun to establish new understandings. That is, long-term advantages will be built through better and comprehensive utilization of qualified sales channels. Against this backdrop, first, in terms of new home listings, we have been vigorously carried out corporate-to-corporate collaboration with high-quality developers increasing our share of sale by state and central owned developers to 37% in the second quarter, seven percentage point higher quarter over quarter. This has improved the quality of our new home listings and made our sales easier and more risk resistant. Second, with respect to channels, During the recent round of market corrections, agents placed more emphasis on operational safety, preferring to collaborate with a platform with high-quality listings, strict risk control, and safe, fast receivable collections. Channels with weak risk control, inadequate receivable collection management, and single-minded pursuit of scale have been winded out by the market. This will result in high concentration for new home sales channels and our higher coverage of new home agent and stores. Third, operationally, we continue to promote and reinforce execution of the commission and advance model and other focused sales strategies. The commission in advance model offered developers the opportunity to pay in advance, projects with commission in advance consistently deliver higher sales efficiency, making it widely accepted by the developers. Agents and our receivable collection were further secured, setting in motion a positive cycle. In the first half of the year, Commission in advance accounted for 22% of revenue from new home sales on our platform. Despite the short-term challenges, we expect a stable new home market with higher certainty in the long term after this round of correction. We will continue to strengthen our strategic focus and increase cooperation with high-quality state and centrally owned developers iterate on risk control protocols data products and other value-added products and services while further reducing costs and enhancing efficiency moving on to the home renovation and furnishing business of our two wings july 6 this year marked the first anniversary of our official announcement of the Chengdu acquisition. Our financials were officially consolidated with Chengdu during the second quarter this year. Over the past year, Beike and Chengdu have carried out efficient, all-rounded integrations of terms, of teams, organization structure, operations, and systems. The process has progressed very smoothly, driving diverse synergies. For example, the supply chain advantage brought by Shendu has helped raise paywalls up by 33% year-over-year. And the referral customers from our core business contribute to over 25% of home renovation and furnishings contractors' services. In the second quarter, our home renovation and furnishing business achieved robust growth against challenges of the pandemic. According to data from the China Building Decoration Association, the broad output value of leading home renovation and furnishing companies declined 21% year-over-year in the second quarter, while Our home renovation and furnishing business generated per-format revenue, or RMB, 1.37 billion, rising more than 10% year-over-year and 58% quarter-over-quarter. And our contract sales reached close to RMB 1.7 billion. Meanwhile, we established organizational structure as well as ground rules, and systems to support a better connection between core and emerging businesses. Real estate brokerage stores owners can receive commissions within five days of their referral traffic to home renovation and furnishing sign contract. For the incentive traffic referrals in June, contracted sales from our business transaction traffic referrals accounted for over 25% of home renovation and furnishings contracted sales. Home renovation and furnishing is a low transaction frequency industry. To improve the quality and the consumer experience, we started with the industry role that interacts with the platform with high frequency, the service providers. Only happy service providers can bring quality services and happy customers. Service providers in the industry have many pain points, including unstable order dispatching, untimely settlement, and that good service does not necessarily yield good income. We build transparent frameworks and systems cover the service provider's qualification, admission, ranking, promotion, and rewards, all on the basis on service quality. To address these pinpoints in terms of project delivery, we carry out refined process management to ensure on-time construction completion. Establish systematic all online, offline, closed-loop management, and a promoted standardization of construction technology, projects, acceptance, and other actions. For consumers, we further advanced our service commitments of 10 permits for 10 virus. Our construction process can be monitored online by customers in real time, and after sales maintenance can be completed within six days. As a result, The absolute construction delivery period was shortened. In the customer satisfaction NPS, our construction completion increased from 40% in January to 35% in June. We are exploring how to raise our top line potential and profitability beyond the range you're already seeing in the traditional home furnishing business. Our home renovation is a service business. It's about quality service with a high entry barrier, but carry relatively low profitability furniture and home furnishing. On the other hand, is a manufacturing business with good traffic acquisition, significant economics of scale can be shown. We are trying to find out if it is possible to drive the sales of furniture and home furnishing including customized furniture, soft furnishings, electrical appliances, etc. Through home renovation, we are assessing this by tracking furniture and home furnishing sales as a percentage of full service contracted sales. We believe on a single city basis and for our overall business unit, 30% represents the initial validation milestone of this model's feasibility, and 50% will represent the mid-term milestone of its maturity. Today, we are rapidly growing our furniture and home furnishing sales at a percentage of full service control sales, raising it from 11% in the first quarter to 16% in the second quarter, yet there is still tremendous upside potential. Moving to our home rental services, creating social value as a society, as a social responsibility enterprise, we achieved rapid, high-quality development in our home rental services in the second quarter while attaching greater importance to cost control and sales efficiency. is to achieve long-term operational sustainability of this business. As of the end of the second quarter, the number of contracted rental units manager or co-manager on our rental services exceeded 42,000, an increase of nearly 22,000 units from the end of the first quarter. Among them, there were 31,000 units under carefree rent. We also took various measures to improve staff productivity and occupancy rate, aiming to balance skill and profitability. Through business model iterations, scientific management, systematic incentive mechanisms, we strive to sign up the high and the high units at the right price, realize fast sales through, all with enhanced services quality and productivity. With these initiatives, the occupancy rates of our carefree vets continue to improve as the pandemic resurgence passed. In addition, we jointly launched the new youth initiatives in June to provide fresh college graduates with favorable rental rates and commission reductions or exemptions. To help them address the difficulty of renting houses at affordable prices, as of July 31, 2022, over 8,000 transactions were completed under the New Youth Initiative, saving the graduates approximately RMB 12 million. I'd like to go back and talk about our return to the front line. Our business boils down to be about people. This is especially the case for the housing-related service industry, which points to both consumers and service providers. For managers on the platform and myself, it's easier to connect and relate to consumers because every one of us is a consumer at some points, but it's more difficult to identify with service providers by going back to the front line. Many of us have the power to empathize with service providers. Relating to consumer convinced us that their quest for joyful living will never change. By the same token, identifying with service providers enables us to understand and strengthen our conviction that to service providers, the need for long-term practice and pride in their occupation remains a constant. As the poem goes, when the water ends, clouds will rise. The business world of the future may never stop changing, presenting us with one change after another. But as long as we connect with the constant elements while continuing to iterate ourselves, we will only get better and help the industry get better. Thank you. Next, I would like to turn the call over to our CFO, Tao, to review our second quarter financials.
spk07: Thank you, Stanley. Thank you, everyone, for joining us today. Before discussing more detail about our second quarter of 2022 financial results, I would like to provide a brief update on the recent housing market. The past quarter saw more supportive policies rolled out to shore up demand in the real estate market in China. Such steps include the central government tonceting, lower mortgage rate guided by the central bank, and a step up easing measures from lower to higher tier cities across countries. The property market has shown some sign of improvement, with the existing housing market especially responding quickly to the policy relaxation, with the new home market still clouded by debt crisis among developers and a weak home buyer sentiment. Recently, the reemergence of COVID-19 outbreaks and the mortgage boycott starts on the unfinished new home projects have disrupted the recovery of China housing markets. However, we would like to rejoice that those shortening hurdles will not impact Baker's business directly, as we believe the government will properly resolve the issue and ensure the delivery of the property projects. In addition, the uncertainty of the new home market in some cities could drive part of the amount to the existing home housing market while we have a stronger business presence and the incomparable competitiveness well positioned to serve the ship in demand. Although the market was still on a low key way of recovery, we were able to take concrete measures to continuing building up our market presence and maximize our strengths including the collaboration network and the digitalization capability to enhance operating efficiency. Here, we would like to extend sincere gratitude to the employees who have been impacted by the company's business restructuring in Q2 for their dedication and professionalism in the transition period. Their contributions are extremely valuable to the company and will always be a source of inspiration of our future developments. In addition, we update our segment reporting from Q2 as a result of acquisition of Chengdu, which was closed in late April. We consequently update our business structure results in four lines of business, which were existing home transaction services, new home transaction services, home renovation and furnishing, and emerging and other services, and update the financial measures accordingly. Turning to our financial details in Q2. Our net revenues decreased by 43% to RMB 13.8 billion in Q2 from RMB 24.2 billion in the same period of 2021. However, it beat the high end of our guidance by over 30% and exceeded the street consensus. The better than expected revenue were fueled by the following factors. Firstly, Beijing and Shanghai, the mega market and where offline operations go on to halt due to the COVID-19-introduced lockdowns in April and May. Those transactions rebound rapidly in June after the pandemic eased, which was much quicker than what we expected previously. Secondly, as in-home market in many higher tier cities was able to stage a solid recovery support by the policy easing, This was approved by a 33% quarter-over-quarter jump of GTV of existing home transactions served by connected agents on the complex platform in Q2. Thirdly, although the new home market remains weak, we will strengthen the cooperation with high-quality developers and further enhance the sales availability, which enables us to seize opportunities as developers rush to shore up the middle-year sales performance. However, the year-over-year revenue increase was primarily attributable to the decline, in total GTV of 47.6%, to RMB 639.5 billion in Q2, from RMB 1,220.8 billion in the same period of 2021. In particular, our net revenue from these home transactions decreased by 42.5%, to RMB 5.5 billion in Q2 compared to RMB 9.6 billion in the same period of 2021. Primarily due to a 39.6% decrease in GDP of the same home transaction to RMB 393.5 billion in Q2 from RMB 652 billion in the same period of 2021. Our next revenue from the new home transaction services decreased by 52% to RMB 6.7 billion Q2, from RMB 13.9 billion in the same period of 2021, primarily due to a 55.3% decrease in GTV of new home transactions to RMB 222.7 billion Q2, from RMB 498.3 billion in the same period of 2021. On net revenues from home renovation and furnishings, or RMB 1.0 billion Q2, compared to RMB 43 million in the same period of 2021. Primarily because of the company's acquisition of Chengdu Home Renovation Co., Ltd. and the direct business opportunities to it, we began to consolidate its financial results during the second quarter of 2022. Our net revenues from emerging and other services decreased by 9.6%, to RMB 557 million in Q2, from RMB 660 million in the same period of 2021, primarily attributable to the decrease of net revenue from financial services, which was partially offset by the increase of net revenue from the last rental property management services. Cost of revenues decreased by 41.3% to RMB 11.1 billion in Q2, from RMB 18.8 billion in the same period of 2021. Gross profit was RMB 2.7 billion in Q2, compared to RMB 5.3 billion in the same period of 2021. Gross margin was 19.7% in Q2, compared to 22.1% in the same period of 2021. The decrease in gross margin was mainly due to a relatively higher percentage of costs 2.1% in the same period of 2021. The decrease in gross margin was mainly due to a relatively higher percentage of costs related to stock of net revenue as a result of the decrease of net revenue in Q2 compared to the same period of 2021. Operating expenses remained flat at RMB 4.2 billion in Q2 compared to the same period of 2021. just remained flat at RMB 4.2 billion in Q2 compared to the same period of 2021. General and administrative expenses were RMB 2,250 million in Q2 compared to RMB 2,202 million in the same period of 2021, mainly due to the increase of the share-based compensation expenses and additional severance payments incurred in Q2. which was partially offset by the decrease of the recurring personal cost and overheads, along with the decreased high cost, as well as the confidence and the travel expenses as a result of COVID-19 outbreaks in certain regions in Q2, compared to the same period of 2021. Sales and marketing expenses were only $1,122 million in Q2, compared to RMB 1,241 million in the same period of 2021, mainly due to the decrease of the brand advertising and the promotional marketing expenses for the housing transaction services, which was partially offset by the sales and marketing expenses of Chengdu. Research and development expenses for RMB 779 million in Q2 unchanged from RMB 775 million in the same period of 2021. mainly due to additional severance payments incurred in Q2, which was mainly offset by the decrease of recurring personnel cost and the share-based compensation as a result of the decreased high cost in research and development personnel in Q2 compared to the same period of 2021. Last, from operations was RMB $1,580 million compared to income from operations of RMB 1,116 million in the same period of 2021. Operating margin was negative 11% in Q2, compared to 4.6% in the same period of 2021, primarily due to, one, a relatively lower gross profit margin, and two, an increase of the percentage of total recurring operating expenses of net revenue in Q2. primarily due to the decrease in net revenue. And three, additional severance cost of RMB 438 million incurred in Q2 compared to the same period of 2021. Excluding non-GAAP items, our adjusted loss from operations was RMB 690 million in Q2 compared to adjusted income from operations of RMB 1,669 million in the same period of 2021. Adjusted operating margin was negative 5.0% in Q2, compared to 6.9% in the same period of 2021. Adjusted EBITDA was negative RMB 104 million in Q2, compared to RMB 2,555 million in the same period of 2021. Last law was RMB 1,866 million in Q2, compared to net income of RMB $1,160 million in the same period of 2021. Excluding non-GAF items, adjusted net loss was RMB $619 million in Q2 compared to adjusted net income of RMB $1,638 million in the same period of 2021. Net loss attributable to KE Holding Inc.' 's ordinary shareholders was RMB 1,868 million in Q2, compared to the net income attributable to KE Holding Inc. ordinary shareholders of RMB 1,112 million in the same period of 2021. Adjusted net loss attributable to KE Holding Inc.' 's ordinary shareholders was RMB 622 million in Q2, compared to adjusted net income attributable to KE Holding Inc.' 's ordinary shareholders of RMB 1,635 million in the same period of 2021. Diluted net loss for ADS attributable to KE Holding Inc. ordinary shareholders was RMB 1.57 in Q2, compared to diluted net income for ADS attributable to KE Holding Inc. ordinary shareholders of RMB 0.93 in the same period of 2021. Adjusted diluted net loss for ADS attributable to KE Holding Inc.' 's ordinary shareholders was RMB 0.52 in Q2, compared to adjusted diluted net income for ADS attributable to KE Holding Inc.' 's ordinary shareholders of RMB 1.37 in the same period of 2021. We maintained a strong cash position and sufficient liquidity in Q2. As of end June, The combined balance of our cash, cash equivalents, restricted cash, and short-term investments amounted to RMB 50 billion, or USD 7.5 billion. The balance of our long-term cash items, mainly including the long-term investments, amounted to RMB 24 billion, or USD 3.6 billion. In addition, We reported the positive operating cash flow despite the challenging environment, and the cash-to-income ratio of our new home services was 1.27 in Q2, demonstrating our strong cash generation ability. Next, I will talk about the recent developments regarding our operational and capital market initiatives, as well as our near-term focus on the corporate financials. First of all, we did not sit idly by in the face of the market headwind. Nearly half of our senior level directors went to the front line in the past month to work or experience as agents, home decoration, client managers, or other roles. Holding the firm belief that only if you become one of them can you understand the of them. By working side by side with our service providers and engaging day to day interaction with customers, we have a deeper understanding of how to truly help service providers improve their productivity and sense of security, as well as better satisfy customer demand. It also encourages us to fully embrace the challenges and create indispensable value for the industry. Secondly, we took a series of cost-saving measures and focused on the efficiency in our daily operations to enhance profitability. Part of the efforts will reflect in the improvement of the contribution margin of the new home transaction services, which was at a two years high of 24% in Q2, despite the still sluggish new home market. Moreover, as we carry out further organization optimization initiatives in Q2, we will gain the larger operating leverage for our housing transaction services against the changing market environment. The operating expenses saving for the housing transaction services in the second half of this year to reach up approximately $300 to $400 million in each quarter. An absolute dollar amount of the operating expenses to be decreased to the same level of the second half of 2019. Followed by the expected market recovery in the coming quarters, we believe our possibility for the housing transaction services will gradually recover in the second half of this year. Thirdly, we will continue to make the investment in our 2-1 business, home renovation and furnishing services, and the Baker rental services. Despite of the top market environment, we will especially make the necessary and sufficient investment in the home renovation and furnishing services, which enjoys a much larger total draft market compared to the housing transaction services. We firmly believe this investment will yield long-term economic benefits and the trust we gain from our customers and the capability we accumulated in our core business will well position us to capture the rising demand in the burgeoning sector. Fourthly, we obtained a general unconditional mandate to repurchase the shares from our shareholders at the annual general meeting held on August 12th. After that, we will execute the share request program of up to USD 1 billion of our ADS covered 12-month period. This highlights the confidence we have in our long-term growth and the capability of our capital allocation, which prioritizes the balance of the financial flexibility with the efficient capital structure. Turning to the guidance for the third quarter of 2022, we believe while the new home market is still growing in the dark, the housing market is already seeing the light at the end of the tunnel and is expected to stage a large-scale recovery in the second half of this year. Based on above considerations, combining the factors of the potential negative impact of the COVID-19 containment measures in certain regions and the base effect of the same period of 2021. We expect the total revenue to be between RMB 16.5 billion and RMB 17 billion in Q3, representing a decrease of approximately 6.1% to 8.8% from the same period of 2021. This forecast constitutes the company's current and preliminary view on the business situation and market conditions, which are subject to change Lastly, we'd like to highlight that the recovery of the property market is on horizon, and the government policy have been on the supportive side with the focus on the meeting demand for the better housing. We will seize the opportunities to further increase efficiency through a range of the cost management to boost the synergy, allocate the resources more efficient oriented on the risk version, and the strike a balance between the profitability and the investment in the new business. As we continue to reiterate, China's housing market is shifting gear from the new home sector to the new home market at an accelerated pace. With the home price stabilizing and the need for the better living of the Chinese people increasing, home upgrade demand will serve as a prominent driver. Turbocharging will continue this function of the market and result in high derived demand from four ranges of services. including home renovation and furnishing and the rental services we believe our unique competency and the solid best layout in those sectors will support to take the fast ride and achieve the rapid growth in the long run this is what we have been doing not perfect but we are on our way that concludes our prepared remarks we would like now to open the call to your questions Operator, please go ahead.
spk01: Thank you. As a reminder, to ask a question, please press star 1-1. For the benefit of all participants on today's call, please limit yourself to one question. If you have additional questions, you can re-enter the queue. If you are going to ask a question in Chinese, please follow up with English translation.
spk02: One moment while we compile the Q&A roster. Our first question comes from Zhong Xiao with Barclays.
spk01: Your line is open.
spk04: Thank you very much for taking my questions. I have a couple of questions, if I may. The first question is that you briefly mentioned about policy relaxation in your prepared remarks. And I was just wondering, could you talk about the actual effect you are seeing from those policy relaxation And any comments about the potential further relaxation for the second half of the year? My second question is that you also highlighted in your prepared remarks about very nice rebound of the existing home sales, particularly in Shanghai and Beijing. Could you just talk about your expectation for further recovery for the second half? What have you seen so far in the third quarter? Thank you very much.
spk07: Thank you, Ms. Shaw. Let me address your first question. Guided by the support you've shown, set by the central government and the central bank liquidity support from low to higher tier cities, we actually saw the local government continue to step up the policy relaxation. Since the beginning of this year, about 220 provinces and the city level authorities have loosened the road restrictions nearly 600 times, exceeding the total of 400 tightening policies issued last year. In particular, after the Politburo meeting at the end of this April, the frequency which the local relaxation policy were introduced in the same call second-tier cities significantly accelerated, reaching more than 110 times for each month from April to June. These policies are aimed at ensuring the normal operation of the real estate entities and the stability of the market transactions. There are mainly four types of easing measures. The first is the relaxation of the loan restriction and also includes the interest rate card. The mainstream first and second home purchase mortgage interest rate we monitor in 103 cities. dropped to 4.35% and 5.07% in July, respectively, pitting the new lows since the year of 2017. Relaxation on loan restrictions also include the reduction of down payment ratio, lowered recognition standard for the second-hand home, and also lowered the restriction on the use of the housing provident fund, et cetera. Cities that issue such relaxation include the city of Suzhou, Taiyuan, Jinan, and Chongqing. And the second part is the relaxation of the home purchase restrictions, including encourage for the city resident and relax the purchase restriction for non-local householders. This function of non-restricted areas and also the added purchase quota for the family members with more than one child. And this was implemented in the city, such as Nanjing, Hangzhou, and Changsha. So third part is subsidy incentive, including the Thailand settlement subsidies, housing purchase subsidies, relief of value added tax, and the deed tax, et cetera. This kind of encouragement policy implemented in the city, such as Suzhou and Changsha. And the fourth type is promoting home upgrades. In the first half of 2022, 19 cities recommended the measures such as the shantytown revamps by using so-called housing coupons as a monetary compensation. These are easing policies with a stronger intensity, implementing the cities such as Zhengzhou and Nanjing. We observed that after the introduction of above policies, Multiple cities saw the substantial recovery in some leading indicators, including the number of new property listings, new home customers, and also the property truth, as well as the agent confidence index. Those cities also saw the substantial recovery in the transaction volume in June. In the second half of 2022, we expect various cities to continue using the eating policies to support the steady market recovery. There are still substantial rules for more policy easing. In last year, 2021 marked the year of the catalyst policy control in past 12 years. Through the relaxation and the support this year, these restrictions are gradually being loosened. Nevertheless, at the end of June, most of the key secondary cities were far less relaxed compared to the most relaxed period in the past 12 years. Under the basic principle of the housing is for living in, not for speculation, there is still a lot of potential for the further policy relaxation in different regions, both in terms of the diversity and the intensity of the eating policies. And the central government has set the tone to encourage the local government to actively introduce a policy to ensure the market's stability. With the recent new home market risk emergence, the Politburo meeting held at the end of July emphasized the full and effective utilization of policy toolbox and the city's policy to support the housing demand and the home upgrade demand. Local governments are asked to fulfill their responsibility to ensure delivery of the home projects and to protect the people's livelihoods. So from our perspective, we believe that the four secure cities have a strong housing demand and solid fundamentals, and that their local finance are less dependent on the real estate. The local property market can recover to a healthy level even without the policy support. While for the further supportive policies are expected to be introduced in the second tier cities and the lower tier cities during the second half of the year to actively reduce risk and to restore the market confidence and to support the continued recovery of the market transaction. And then regarding the second question, in the second quarter, many cities opened a policy toolbox and actively introduced the easing policies. with the existing home market being the first to benefit. Next, market sentiment bolted out. Generally speaking, although Beijing and Shanghai were severely affected by the pandemic, a large number of the consumer who had taken a wait and insistence began to enter to the market, as evidenced by clear recovery signs in the transaction volume of the existing home market. Overall, according to Baker Research Institute, In the second quarter, the GTV for China's in-home sales market increased by 9.8% quarter-over-quarter and declined 45% year-over-year. A series of leading indicators monitored by Baker, such as the Home2 index, number of new customers, and the new listing, and the price index, suggest that the market's position rebounded in May and June from the bottom. For existing home prices in June, there was a slight year-over-year increase in the first-tier cities, except Shenzhen, while the prices in the 20 key second-tier cities have recovered to the level of the same time last year. But the prices in the third-tier and fourth-tier cities continue to trend down. In different type of cities, the key second-tier cities their legs to recovery due to the last impact from the pandemic and the strong policy support. Using home sales GT1 maker platform, including Beijing and Shanghai, increased sequentially by 23% and 20% month over month in May and June, respectively. In June, using home sales volume, excluding Beijing and Shanghai, rebounded 205% of the average transaction volume of 2021, and the year-over-year decline narrowed down to only 2%. Transaction volume of the 21 major cities, such as Chengdu, Suzhou, Hangzhou, and Taiyuan, surpassed the 2021 average level in June. Cities such as Qingdao, Wuhan, Hefei have also rebounded levels similar to 2021 average. We expect that in the second half of the year, the key second tier cities will quickly return to year-over-year growth given the continued introduction of the easing policy and the stabilizing market sentiment. And for Beijing and Shanghai, there was significant impact by COVID in April and May, but they delivered a strong market resilience in June with the transaction volume rapidly picking up as the pandemic come under control. Transactions volume of Beijing and Shanghai in the last week of June returned to 20-21 average level. This is a very good signal. We expect that in July, Beijing and Shanghai will benefit from the release of the pent-up demand caused by the pandemic disruption and that the monthly transaction volume is likely to return to year-over-year growth. Starting from the fourth quarter, Beijing and Shanghai will enter to a healthy and normalized range in terms of transition volume, together with restoring the confidence in the home market nationwide. For the whole country, recovery pace, as we have repeatedly emphasized, the China market is transitioning from the new home driven to the new home driven. The recent emergence of a serious problem in the new home market will divert a substantial amount of demand to the new home market from the new home market. This is increasingly evident in a number of key second-tier cities. For example, in Wuhan, the same home transaction accounted for 40% of the total transaction in the first half of this year, compared to roughly 30% in 2020. Same thing in Zhengzhou, the proportion of the in-home transactions increased to nearly 38% in the first half of 2022 from 28% in 2020. It is certain that the in-home market will continue to recover on a greater scale in the second half of the year. We normally break down the entire cycle of the real estate transaction into four stages, the down cycle including the stage of the price stable and the volume down, and the price volume both down. The up cycle includes the stage of price stable and the volume increase, and the price and the volume both up. During the past half year, the existing home market has started to shift, hovering at the bottom toward the recovery, while some strong second tier cities have gradually entered into the recovery stage. more than six months for the market to fully recover in this round. Baker Research Institute data demonstrated that the overall in-home sales market delivered a year-over-year growth in July. The August market was temporarily impacted by the euro high temperature beyond the normal seasonality, but this will not change the recovery trajectory. We expect home prices in some weaker second-tier cities to stabilize in this Q3, while the home prices in the third and lower tier cities will be stabilized by the end of this year. Okay, thank you.
spk04: Very helpful. Thank you so much, Tao Zong.
spk07: Thank you.
spk01: Thank you. One moment.
spk02: Our next question comes from Harry Chen with Citi.
spk01: Your line is open.
spk00: Thank you for the opportunity to give me a question. I am Harry from Watch. I have two questions for you. The first is about the impact of new housing on the company's business and the development of the system. Since July, we have seen new housing in various places. Please share your views on this and the impact on the company's business. And let everyone know about the collection and development of revenue accounts. Thank you, management, for the opportunity. My first question is about mortgage boycott and the provision on receivables. Starting from July, there have been mortgage boycotts for new homes whose construction suspended in various cities in China. Could management share your views of the impact on company business? Besides, could management give us an update on collection and provision of accounts receivables? My second question is to ask management's views of a current new home market and its outlook after local government fine-tuned since second quarter of this year. Thank you.
spk07: Hello, Hari. Glad to hear from you. Let me address your first question. Firstly, we want to continuously reiterate that it is a bank and the developer risk instead of pay for the payment boycott. there is no direct impact on Bayco. Most of the developers suffering from the mortgage revolt were identified by earlier as the so-called high-risk developers, so we have made sufficient better provisions for those receivable concerns. Secondly, the stock new home construction and the mortgage payment suspension are the that happened under extraordinary circumstances at extraordinary times. And we believe the Chinese government has sufficient capability and the determination to resolve the issue. Recently, from our observation, local governments in several cities already implemented various initiatives to ensure the project delivery, and as a result, multiple projects with the potential mortgage payment revolt risk resumed construction. Under most circumstances, home buyers hold mortgage payments only when the new home construction is installed as a protest to get its construction to resume, instead of refusing to pay outright. We also believe the mortgage payment suspension will promote local government to help the industry and address its difficulties at the fastest pace. and stabilize consumer expectations, which will be instrumental for the industry to return to its normal operation. Thirdly, if mortgage payment suspension were to spread, it may indeed negatively affect new home market sentiment in some cities and disrupt the new home market recovery in the second half of this year. This is very bad. As the existing home does not carry any risk of the stalled construction, that may fulfill the spillover demand from the new home market, which could benefit Bayco, giving our wider business presence in the existing home market and existing home higher profitability compared with the new home. It could also offset to some extent of the mortgage payment suspension negative effect on the new home market. Four, because new home by-debt provision, we have made adequate by-debt provision for the new home receivables. As end of Q2, our cumulative balance of the by-debt provision was RMB 2.21 billion, covering 31% of the original value of the corresponding total receivables. especially for the 41 high-rate developers, including Sunac. We made a better provision at the upper limit of 83% of their historical unsecured receivables balance, cumulatively amounted to RMB 1.32 billion. We made a better provision of 49% of the receivables for a dozen developers and projects with a cumulative amount of 160 million, As to the remaining developers with low risk, we also made a buy-die provision at a ratio of 10 to 20%. I believe the current identified list of the property developers with high buy-die provision already covered nearly all the high risk developers in the industry, with little chance of incurring subsequent large buy-die provisions. While making a sufficient reserve against the buy-die, we also consistently reinforce our collection management of the receivables. In the second quarter, we collect a total of RMB 8.45 billion of new home sales receivables, 1.27 times of the RMB 6.67 billion of our new home sales revenue in this quarter. The new home DSO Baker also failed from this Q1 152 days In the first quarter, 208 days in this quarter. At the same time, we have maintained our selection criteria on the risk control mechanism for collaboration with developers, iterated the developer rate evaluation model, optimized the settlement terms and conditions, and increased the percentage of the project with developer for the commissioning amount, creating a favorable condition for the subsequent receivable collection. In addition, we incorporate with new home receivable quality into our manager's performance evaluation system at every level. We believe this initiative combined will consistently lower the collection risk of our new home receivables. Regarding your second question, I would like to say in the first half of this year, the national new home market was weak. both on the supply and demand side. The GTV of Q2, new home sales from the National Bureau of Statistics, recorded a year-over-year decline of 36%, while the GTV of CRRC's top 100 rose the developer field by 53.4%. Developers' investment confidence was awake in most cities. The industry was in the deep water, Faced with the sluggish consumer demand, the pandemic resurgence and the mortgage payment boycott. Well, there were some positive changes in the new home market since May. The number one is the market recovery propelled by multiple parties. Starting in May, step up local supportive policies, develop a reason for the half-year performance, and the catalyst of the holiday have brought a series of positive changes to the market, and the positive changes verified by the front-end numbers. The numbers of the offers to buy new home on Baker's platform achieved consecutive growth in May and June, up 50% and 27% month-over-month, respectively. Baker's new home on-site sales index in 50 key cities has also risen for the two consecutive months and has come out for the freezing cold range. And also, active promotion by developers. The China penetration rate in the second quarter increased significantly quarter over quarter. The new home market recovery in June with year-over-year decrease narrowed down to 23%, according to the National Bureau of Statistics. There are still uncertainties in the new home market in the second half of the year. The macro economy and the income situation are under pressure. And the homes hire and the home residents give up higher requirements for the living. And also the geopolitical situation is facing uncertainties. And there are Repeated pandemic resurgence, mortgage payment boycotts, developers by their default and uncertainties in the new home project delivery are affecting the restoration of the market confidence. In short, overdraft of the new home demand in certain regions is also a constraint for the recovery of the new home market. The industry is still facing the huge downward pressure, and the recovery of the new home market will take time. We can monitor the subsequent promotion of the developers and the effort on the policy relaxation to establish the slope of the recovery trajectory and the sustainability going forward. There were shortened corrections in the new home sales in July and August as developers' middle-year promotion effect moderated from June. Meanwhile, the combined efforts of the euro high temperature in China's southeast and southwest is also a problem. This summer and also the mortgage payment suspension have also led to a notable decline in the new home market in July and August compared to June. Starting from September, from our observation and expectation, we expect developers to again enter into an active promotional cycle under the pressure of the four-year sales target. Therefore, the market is more likely to enter into a weak recovery period by then. Thank you, Harry.
spk01: We have a question from Stephen Tsai with Morgan Stanley. Your line is open.
spk08: Good evening, Mr. Wang. Thank you for accepting my question. I would like to ask, after the official completion of Shandong's acquisition, do we have any progress in the strategy or city expansion plan for the double-sale business? Can you share with us the relevant guidance on financial or operating indicators in the next few weeks? Thank you, Manager, for taking my question. My question is about the home renovation business. Could you, Manager, share with us if there is any update on the business strategy or geographic pension plan post the consolidation of Chengdu? and if there is any guidance on this business for the coming quarters. Also, is there any update on the timing of your launching the platform model for renovation, which you mentioned in 2035 or 2036 before? Any milestones related to that that you are looking at internally? Where are we now, and what's the biggest bottleneck, you think? Thank you.
spk05: As I said earlier, in the second quarter, This is Stanley. Let me quickly address your question.
spk06: So firstly, as I mentioned during all the prepared remarks, so during the second quarter, if you look at the leading industry companies in the home renovation furnishing business, has been declined over 20% year-over-year. But whereas our home renovation furnishing business actually has been increased significantly on the year-over-year basis.
spk05: This is one dimension. The second dimension we see is that through our Ren Dian, the ratio of the first track to home renovation has exceeded 25% today. So the revenue is one dimension I'll be mentioning. Another dimension we can describe for that business is we look at the referral rate from our
spk06: core business, which is a halting transaction business. So when we look at the second quarter result, we actually see more than 25% of the referring and conversion coming from the halting transaction business already. In some of the specific cities, such as Beijing, the conversion rate actually also has been reached to 80%, or even higher. Some of the cities didn't do very well, but we do believe there has a huge space to continue to improve. So overall, we do believe the customer's referral and conversion from the main business is also another dimension to look at the progress for that part of the business.
spk05: Let's go back to the question we just asked. We think about this track mainly from the following four aspects. The first is from the policy aspect. Not long ago, the four departments just released an action plan to promote the development of high-quality housing industry. In the future, Chinese people will live better. The policy on this is very positive. This is the first aspect. The second aspect is related to industrial co-operation. Industrial co-operation includes pre-industrial co-operation and post-industrial co-operation. Pre-industrial co-operation includes today, we see that China's entire home and residential areas, starting from the first house, to the second-hand houses of the first house and the second-hand houses, to develop in the same direction. The first house is the gold room, and the second-hand house is the improved house. This is This is the front-line link. In the back-line link, we can see that in China, there are a lot of residential industries. Due to this, new entrances will be made to the houses. Because they are all shared customers. So who will serve the customers better? This is the back-line link. The third piece is about customer demand. Today, consumers more want to have a single basket of trading services. From the original hard-to-use, it began to evolve to full-size. So when we look at the future evolution for the home decoration and furnishing business, we actually look at it in the four business elements of three major reasons.
spk06: So firstly, coming from the policy side. So we recently noted the fall of the central government department. They actually have been drawn to promote so-called high quality of the living plans into the nationwide. So that definitely will provide the additional policy drivers for the overall industry development. Secondly, we look at the overall so-called industrial partnership as well as industrial correlation, which is linked into the home decoration and furnishing business. We look at it from both of the upstream and downstream. From the downstream, rather than the existing home, which has continued furnishing and the improvement of the services of the demand, rather than that, we also notice for the new home, they also have the decoration and furnishing demand. So we do believe that will create additional market opportunities. And from the upper stream, we also look at the correlation of the partnership from the home decoration business itself into the furniture and home furnishing sales business together. And we do believe by leveraging of the good quality of the home decoration business, definitely that will bring the additional potential to further boom of our furniture and the home furnishing business going forward. And thirdly, from the consumer's perspective, we all prefer more like a full coverage or the one-stop services, which is from the previously pure construction services into the full coverage, of the services, which means, you know, which is covered from both of the construction part as well as the home furnishing and the decoration business as a whole, right? So, we do believe by promoting of those kind of food services, it also will create additional opportunity for us.
spk05: So, in the future, we see that this business will probably have three brightening expectations and one non-brightening expectation. The first is Is it possible for China to have an organization that can cover more than one billion yuan? It can cover more than one billion yuan. Today, there are no organizations that can cover more than 4 billion yuan. The core is the first one. The second one is to combine the storage room. Is it possible for the flow rate to exceed 40% based on the manpower we have? This is also a very important milestone. The third one is based on the hardware, and then add some new beasts, the whole thing. We call it the magnification factor. That is, how much penetration rate and magnification of new beasts can you have on the hardware basis? This is our current magnification factor. From the beginning of this year, this factor has increased from 1.08 to more than 10% now. I think the number of this number in the future can reach 50%. This is also a magnification factor of 1.5. This is also the third one. The fourth is the platform model. The core of the platform model is that we have completed the platform model of the entire real estate trading field of the shell. What kind of form is the platform model in the field of home decoration or home living or whole decoration? This is actually what I think will happen in the future. Today, I think maybe for ourselves, in the next two to three years, I think we are still We hope that in the next two to three years, we will be able to be more solid. After that, we will see the platform mode happen. So we also hope that in the next two to three years, we will be able to be more solid. We don't want it to be too fast. In essence, it is not a short-term thing. We hope that in the next two or three years, we will be able to measure the basic energy consumption. The three variables mentioned earlier, whether it can exceed 100 billion, whether the cost-effectiveness ratio of the first track can exceed 40%, and whether our overall magnification technology can reach 1.5 billion.
spk06: So looking into the future development for the home decoration furnishing business, we do believe there are three of the quantified of the elements as well as additional more excited and quantified of the elements to think about that part of business. So in terms of the quantified of the elements, So firstly, we look at the scale, right? Because until now, we don't see any of the company in the industry can surpass a 4 billion of RMB scale in the whole home decoration, furnishing industry in China, right? So whether there could be one sole company which is annual revenue could surpass a 10 billion RMB, we do believe that's just one of the quantifiable elements. Secondly, is we look at, as I mentioned before, is the conversion rate from the core business into the home decoration and furnishing business. We do believe in the future, this kind of customer referral and conversion rate could surpass 40% from our housing transaction business into the home decoration and furnishing business, and it will continue to grow. So that will be the second quantified of the elements. The third quantified factor is the correlation between of the single home decoration business with the furniture and the home furnishing sales. Starting from the beginning this year, we look at the correlation is about 1.08, but it's gradually actually has been increased to roughly 1.1, and we do believe the long-term goal will be 1.5, right, which means every one dollar of the construction revenue, it will come with roughly like a half dollar of the home furniture and the home furnishing of the sales of the revenues. So that is, we do believe, is three of the quantified factors we can continue to monitor. And beyond that, we do video and other and quantified of the factor is, as you mentioned, is a platform business model, right? Because if you look at our execution in the past two decades, through our paper's successful execution, we have improvement of the platform business model in our housing transaction business. So we do believe for the home decoration and furnishing business, definitely also could gradually grow to the platform business model in the long-term goal. But in the next couple of years, especially in the next two to three years, we do believe we will focus on our 1P business development because we do believe there are a lot of things we can continue to grow, including the team's materiality, including the delivery quality in terms of supply chain, in terms of the design, in terms of the online-offline correlation, as well as the offline sales market or other kind of offline events. Definitely, for all those kind of things, we can continue to grow and continue to show of the solid progress in the next two to three years. So we do believe we are not very hatched to run to the platform business model. So during that part of time, what we're trying to do is build up more solid programs for our 1P business. Then two to three years later, we can gradually develop into the platform business model. That is the answer to your question. Thank you.
spk02: Back to you, operator.
spk01: Our next question comes from Timothy Zhao with Goldman Sachs. Your line is open.
spk03: Thank you for taking my question. I have a very quick question on the cost savings. As you mentioned, in the second half, you expect around 300 to 400 million RMB cost savings per quarter. Could you further elaborate on the complex measures on how to cut costs and improve efficiency? as well as what would be the future impact of these measures on your financial performance. That would be helpful. Thank you.
spk07: Okay. Thank you, Timothy. As I mentioned in my previous remarks, we took a series of cost-saving measures and focused on enhancing the efficiency and profitability in our daily operation in Q2. Meaningful progress was delivered, once again reflecting our organizational execution and operational quality. We adjust our organizational structure and adjust the proportion of the junior and senior agents according to the different conditions in different cities and the most regional teams. In addition, we prioritize the existing home business and the higher profit-making new home business on our city level. In terms of the cost control, we reform and shut down the loss-making stores on the draw of the rent reduction for stores and office space. With these measures, our fixed costs and expenses as well as our city-level break-even points continue to fall. In Q2, the fixed costs for the Lianjia decreased by more than 25% year-over-year, and we expect the operating expenses of the savings for the housing transition services in the second half of this year to reach up to approximately $300 to $400 million in every quarter, and the absolute dollar amount of the operating expenses to be decreased to the same level of the second half of 2019. As we carry out the further organization restructuring initiative in Q2, we have gained the larger operating leverage and the profitability for our housing transaction services against the challenging market environment. Our Shenzhen business, for example, turned to profit in June for the first time in past 15 months in face of the very weak market. Another example is the part of effort will also reflect in the improvement of our contribution margin of new home business, which was at two years high of the 24% contribution margin in Q2, despite the still sluggish new home market. followed by the expected market recovery in the coming quarters. We believe our profitability with the housing container services will gradually recover in the second half of this year.
spk01: Thank you. We are now approaching the end of the conference call. I will now turn the call Over to your host today, Mr. Matthew Zhao, for closing remarks.
spk06: Thank you, Operator. Thank you once again for joining us today. If you have further questions, please feel free to contact the B2C Investor Relations team through the contact information call. Thank you and goodbye. This concludes today's call, and we look forward to speaking with you again next quarter. Thank you and goodbye.
spk01: This concludes today's conference call. Thank you for participating. You may now disconnect.
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