This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk01: Thank you for standing by for K.E. Holdings, Inc.' 's third quarter 2022 earnings conference call. At this time, all participants are in listen-only mode. Today's conference call is being recorded. I would now like to turn the call over to your host, Ms. Siting Lee, IR Director of the company. Please go ahead, Siting.
spk02: Thank you, Operator. Good evening and good morning, everyone. Welcome to KE Holdings or BECA's third 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 IR website, investors.ke.com. On today's call, we have Mr. Stanley Peng, our co-founder, chairman, and chief executive officer, and Mr. Cao Xu, our executive director and chief financial officer. Mr. Pohn 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 Safe Harbor Statement in our earnings press release, which applies to this call, as we will make forward-looking statements. Please also note that Bayco's earnings press release and this conference call include discussions of unmodulated GAAP financial information, as well as unmodulated non-GAAP financial measures. please refer to the company's press release, which contains a reconciliation of the unaudited non-GAAP measures to comparable GAAP measures. Lastly, unless otherwise stated, all figures mentioned during this conference call are in RMB. With that, I will now turn the call over to our Chairman and CEO, Mr. Stanley Peng. Please go ahead, Stanley.
spk04: Thank you, Suti. Hello, everyone. Thank you for joining PICC third quarter 2022 audience conference call. Against the many uncertainties in the real estate market, we achieved a series of breakthroughs in the third quarter. We have supported our stores and agents network to consistently outperform the market and achieve steady efficiency and profitability improvements in each business line on our platform. This was thanks to the initiatives we implemented beginning last year to enhance efficiencies. I believe Ultimately, these achievements stem from the enterprising spirit of the organization, from the perseverance of each one of us on the platform in the face of external challenges. November 12 marked the 21st anniversary of our organization's founding. To celebrate this momentous occasion, we organized a home linker event witnessed online by over 7,000 home linkers who have stayed with us for more than 10 years, spreading in more than 80 cities across China. Home linkers and employees who have been with our organization share the same experience and collective memories and have learned the same methodologies. Moreover, they believe in the same values and make similar choices that shape the resilience of the organization. We are not only practitioners but also disseminators of our spirits. We carry the same mission and responsibilities to influence more people, cementing their convictions during down times and keeping them grounded in the up cycle while always striving for growth, virtue, and positivity. Moving on our progress, in the third quarter of 2022, in our one body, our existing and new home transaction services, we have prominent advantages in our one body business thanks to our years of efforts and investments in the initiatives to enhance efficiency. Now, a one body has entered the development stage where deepened operations are vital for incremental improvements. These strategic measures may look small to outsiders, but only by finding every core areas of inefficiency and working on it every day can we continue making our business better. The store and agent count on our platform has been stabilizing or even growing in some cities. As of the end of the third quarter, the number of connected stores and active stores on our platform reached over 41,339,700, both about 3% lower quarter over quarter. The number of active agents on our platform surpassed 400,000 and 317,000 respectively, with quarter-over-quarter decrease narrowed to 3% and 2% respectively. The number of active stores grew quarter-over-quarter in nearly 30 cities, including Nanjing, Changsha, and Hefei, and the number of active agents increased quarter-over-quarter in 40 cities, including Shenzhen. The composition structure of stores and agents on our platform has been improving. We now have a higher percentage of agents with long track records and higher performance results. The proportion of agents with over three years of industry endurance rose by about 10 percentage points in the second quarter compared with the first quarter. Along with the overall improvement in professional qualifications, per-store and per-agent productivity also increased. In the third quarter, the average store commission income of the real franchise stores and Canadian stores on our platform grew by 25% year-over-year and 30% quarter-over-quarter. Average commission income per-agent rose by 22-25% year-over-year and 9% quarter-over-quarter. The continued Improvement in our new home receivables collection also further ensure the certainty of income for store owners and agents. Our agents are increasingly identifying with their profession. This year, we conducted two nationwide market surveys participated by a total of over 80,000 real estate agents on our platform. Survey results show that Despite a decline in confidence due to major market corruptions, agents have developed a greater pride in their profession, supported by the growing acceptance of their profession by family and society, along with its elevated social status. In terms of the store agent network and the industry development, efficiency and quality need to be improved. The productivity of a single agent has not improved much over the years, and the overall income level of agents is low, and their churn rate is high. In the next stage, the industry will shift from the pursuit of scale to high-quality development with an accelerated pace, focusing on efficiency and quality. This will undoubtedly force us to grow more and better abilities from inside. Our existing home transaction services continue to significantly outperform the market. According to data from the Baker Research Institute, nationwide GTV of existing home sales climbed by about 7% year-over-year in the third quarter, while GTV of existing home transaction on Baker's platform was RMB 400, and 49 billion up 19% year-over-year, of which existing home sales GTV rose by more than 20% year-over-year. The stress was partly due to the release of pent-up demand in the third quarter in Beijing and Shanghai after the pandemic flares up in the second quarter. In the meantime, our operational and management initiatives have been paying off giving the industry's service providers a strong determination to work with us. Our existing home services, including existing home sales and rental, are becoming increasingly important in terms of both business growth and risk control. We have made efforts on various fronts to accelerate the growth of this business. For instance, We have been closely watching the proportions of new and existing homes in different cities' strategic goals and driving the development of our existing home services. We also allocated more to B personnel to support the existing home business, fortifying system development and ecosystem governance. Meanwhile, in many cities where new home sales previously dominated property transactions. Local brands and store owners have become keen to make organizational and personnel adjustments to shift to existing home business. Turning to new home transaction services, according to data from National Bureau of Statistics, in the third quarter, the nationwide DTV of new home residential home sales was down 21% year-over-year and 7% quarter-over-quarter. The GTV of CRIC's top 100 real estate companies fell by 33% year-over-year and 0.2% quarter-over-quarter. Although the year-over-year decline in the new home market narrowed in the third quarter, there was no obvious sequential improvement. The new home market is still in a tough down by a range of factors, including ceased mortgage payments on unfinished projects, pandemic resurgences, and fewer developer promotions. In the third quarter, GTV on new home sales on our platform was RMB 261.5 billion, down 36% year-over-year, and up 17%. percent quarter-over-quarter. While the market remains under pressure, we have constantly improved the health of our business operations across the board, as well as gained further market recognition with our efficient sell-through capabilities and our effort to build a healthier industry ecosystem. On the consumer side, we mobilized our resources to collect and provide construction progress updates to customers. Our city-based operations and photographer teams collect accurate, comprehensive project updates on construction progress from multiple site locations monthly for ongoing cooperation projects and quarterly for other unfinished projects. Updates are provided to customers and agents on our apps. This practice also kept us fully informed on the latest construction programs of different developers. As of November 15, we have covered 32,442 housing projects in this initiative. Operationally, we continue to strengthen our commission in advance model. In September, commission in advance accounted for 34% of our nationwide new home sales commission revenue, 44% for private developers in cities excluding Beijing and Shanghai, and 32% for state and centrally owned developers. On top of the commission in the advanced model, we promoted our strategy of focusing on selected high-quality projects and key new home projects. On the service side, we collaborate with more high-quality developers and projects. During the quarter, the proportion of new home sales from state and centrally-owned developers expanded to 42% from 37% in the second quarter to really accelerate sales through in the current market. effective lead generation from brokerage channels and promotional conversion from developers must join forces. We are proud to stand out from other brokerage channels with our exceptional existing home transaction service capabilities and add many new home customers leveraging our existing home customer base. In addition, our continuous undertaking to improve the new home industry ecosystem have helped to reduce the ingrained problems of good industry players being driven out by sub-bar practitioners. This has further garnered the respect and the support of high-quality developers for us. In the future, I look forward to providing an overall review of the effort we have made to improve the health of the new home ecosystem. Moving to our two main businesses, our full-service home renovation and furnishing business is progressing as planned. In the third quarter, the industry started to recover as pandemic resurgence in Beijing and Shanghai subsided. According to data from the China Building Decoration Association, the revenue of leading home renovation and furnishing companies in the third quarter decreased by 4% year-over-year and increased by 13% quarter-over-quarter. Our home renovation and furnishing business continued to outperform the market, rising more than 40% year-over-year and 34% quarter-over-quarter, generating revenue of close to RMB $1.85 billion. Contracted sales in the third quarter reached close to RMB $2 billion. an increase of more than 60% year-over-year. Among this, the number of our home renovation contract volume increased by more than 50% year-over-year, with average order value up by more than 10% year-over-year. The percentage of total contracted value attributable to core business traffic referrals increased from 25% in June to 43% in the third quarter. We have replicated the technological capabilities accumulated in our core business, such as AI Assistant, Xiaobei, into our home renovation and furnishing business. As of October 31, more than 9,500 service providers, including home renovation and furnishing designers, engineers, foreman as well as agent from our core business has participated in the Xiaobei training and testing. Our home furnishing new retail sales accounted for 20% of the total contracted sales in the third quarter, up from 16% in the second quarter. The ratio of home renovation orders that come with need for customized furnishing increase to one out of six from one out of nine in the second quarter. In the third quarter, Beijing Beiyuoshengdu reached quarterly breakeven and monthly contracted sales of over RMB 100 million in June and July and August, becoming the largest full-service home renovation brand in Beijing. This is a significant breakthrough and achievement aimed at the current head of headwinds. The underlying capabilities we accumulated in the past have propelled the Beijing business into a positive cycle. We did this by first establishing from the ground up large-scale home renovation delivery management capabilities. Second, our scale and more complete supply chain created a virtuous cycle that has won additional suppliers and enables customers to select from our great choices of better quality products. Third, our proven competencies in delivery management and business operation have become better recognized among service providers. Agents start to actively recommend our home renovation services to customers and accompany them on visits. Whereas designers, workers, and foremen are proud to join us and they feel confident in their professional development with the increase belonging to the platform. Only by attracting and assembling high-quality service providers in the industry can we provide consumers with a superior service experience. With Beijing as an example, we aim to continue to integrate and manifest our capabilities in more cities, bring better living services to more customers, Next, moving to our home rental services, which continue to expand in scale and improve in efficiency in the third quarter. In terms of scale, as of the end of the third quarter, the number of contracted rental units managed by our rental services doubled quarter over quarter to over 85,000 among them. The number of units under the decentralized leasing management carefree rent reached over 50,000 units, an increase of nearly 17% quarter over quarter. The carefree rent services is currently available in certain cities. To improve our efficiency, we continue to develop and interactively optimize our sign-up and occupancy model, as well as refine our operational capabilities. In September, both our of occupancy rate and average sales through period improved compared to the second quarter. It is particularly worth mentioning that this July, we were selected as part of the first group of affordable rental housing operation service enterprises in Chengdu, and we were the only private enterprise among the four selected, thanks to the opportunity we will able to become more deeply involved in the improvement and operation of local affordable rental homes. As of November 21st, we have provided high-quality leasing operation services, including leasing brokerage to more than 1,000 rental homeowners and tenants in Chengdu. In the future, we will also strive to participate in the planning and operation of more affordable rental housing and contribute to the development of a housing system that ensures supply through multiple sources, provides housing support through multiple channels, and encourage both housing purchase and renting. In conclusion, our business performance this quarter demonstrated great vitality and resilience of our organization. Internally, this is due to the people we have and the organization culture we have formed. We have an unshakable existence on technology for good quality service and utmost operation efficiency, which has won us the affirmation of customers and service providers. Externally, it comes from the solid economic foundation of our nation. from the desire of each small family for joyful living, which together have amounted to the tremendous demand in China's living sector. There have been a series of favorable policies unveiled recently to support future release of rigid and upgraded housing demands, help high-quality developers restore liquidity, and boost market confidence. We will also do our best to make our network of store and agents the warm connect of homes to bring better quality and more diversified housing and related services to customers and play our part to promote a stable and healthy development of the real estate market as well as to better satisfy the housing needs of all people. Thank you. Next. I would like to turn the call over to our CFO, Tao, to review our third quarter financials.
spk06: Thank you, Stanley, and thank you, everyone, for joining us today. Before discussing more detail about the third quarter of 2022 financial results, I'd like to provide a brief update on the recent housing market. In the third quarter of this year, policymakers maintained relatively easy credit conditions and the local government continue to introduce city-specific measures to better satisfy demand for housing and home upgrades. Overall, however, the frequency and the intensity of supportive policy throughout Q3 weakened compared to Q2, and we also saw some strong relaxation rewards in several key cities. Meanwhile, a number of factors disrupt China housing market recovery in Q3. just included head waves that ravaged a vast swath of the country. COVID-19 flared us up, and the slowdown in developers' sales promotions, and the fact that some buyers seized the mortgage payment on unfinished new home projects. The existing home market maintained a moderate recovery, with GTV ticking up slightly on a year-over-year basis. The new home market also saw a decrease in GTV contraction, but still remained soft. Despite the macro headwinds, our operating efficiency and profitability improved significantly in Q3. The profitability of our new home transaction services and the company's gross margin both reached new highs since our IPO in 2020, whereas our DSO and non-GAAP operating expenses fell to record lows since IPO. This result did not come about overnight. These are the results of our rapid and resolute implementation of a series of cost management and efficiency-enhancing measures launched a year ago in the face of market adjustment. They also embody our encouragement against setbacks. Our management team's humility and involvement in the frontline operations and our decisive will to never give up. These achievements further motivate us to respect laws of the market, return to the essence of the operation, seek improvement from the refined management, and continue to implement our series of efficiency, risk control, and cost management measures. Against this backdrop, let's turn to our financial details for Q3. Our net revenues were RMB 17.6 billion during the quarter, representing a narrowed year-over-year decline of 2.8% and a 28% increase compared with Q2 2022. This quarter-over-quarter revenue improvement was primarily due to the increased revenue from instant home transactions as pent-up demand in the megacities of Beijing and Shanghai translated into the higher sales volume at the beginning of Q3 after COVID battered Q2. Meanwhile, other factors also helped drive the total net revenues. This included more new home revenues recognized in Q3 following a jump in subscriptions in May and June. Our commissioning advanced model that drove faster new home subscriptions to sales conversion, as well as our stable monetization ability. In particular, our net revenue from existing home transaction services increased by 16.6% to RMB 7.2 billion in Q3, compared to RMB 6.1 billion in the same period of 2021. Primarily, due to an 18.7% increase in GTV of existing home transactions to RMB 449 billion in Q3, from RMB 378.2 billion in the same period of 2021. Of net revenues from new home transaction services decreased by 31.3% to RMB 7.8 billion in Q3 from RMB 11.3 billion in the same period of 2021. Primarily due to the decrease of GTV of new home transaction of 36.2% to RMB 261.5 billion in Q3 from RMB RMB 410.1 billion in the same period of 2021. On net revenue from home renovation and furniture, or RMB 1.8 billion in Q3, compared to RMB 6 million in the same period of 2021, primarily because of the company completed the acquisition of Chengdu Home Renovation Co., Ltd., and it began to consolidate its financial results during the Q2 2022. and the organic growth of GTV for the home renovation and the furnishing business. Our revenue from emerging and other services increased by 45.8% to RMB 800 and 1 million in Q3, from RMB 550 million in the same period of 2021, primarily attributable to the increase of net revenue from the rental property management services, which was partially offset by the decrease of net revenue from financial services. Cost of revenues decreased by 16.3% to RMB 12.8 billion in Q3 from RMB 15.3 billion in the same period of 2021. Gross profit increased by 72.8% to RMB 4.8 billion in Q3 from RMB 2.8 billion in the same period of 2021. was 27% in Q3 compared to 15.2% in the same period of 2021. The increase in gross margin was primarily due to A, a shift of revenue mix towards the existing home transaction services with a higher contribution margin than some of other revenue streams. B, a higher contribution margin for existing home transaction services led by the increase in net revenue from existing home transaction services and the decrease of the fixed compensation cost for Lianjia agents. C, a higher contribution margin for the new home transaction services as a result of an increased number of projects with higher margin and a relatively lower percentage of fixed compensation cost of net revenue from new home transaction services. And D, a relatively lower percentage of cost related to the store and other costs of net revenue in Q3 compared to the same period of 2021. Total operating expenses decreased by 29.9% to RMB 3.5 billion in Q3 from RMB 5.1 billion in the same period of 2021. General and administrative expenses decreased by 26.4% to RMB $777 million in Q3 from RMB $2,412 million in the same period of 2021, mainly due to the decrease of the provision for the credit losses, along with the decrease of accounts receivable balance, personnel costs, and overheads, along with the decreased high count, as well as the decrease of the conference and the traveling expenses, which was partially offset by an increase of the share-based compensation in Q3 compared to the same period of 2021. Sales and marketing expenses were RMB 1,258 million in Q3, compared to RMB 1,202 million in the same period of 2021, mainly due to the increase in the sales and marketing expenses for the home renovation and furniture services, as the financial results of Chengdu were consolidated since Q2 2022, which was partially off-site by the decrease of the brand advertising and the promotional marketing expenses and the personnel cost for housing transaction services. Research and development expenses decreased by 51.2% to RMB $509 million in Q3, from RMB $1,043 million in the same period of 2021, mainly due to the decrease of personnel cost and the share-based compensation as a result of the decreased high cost in research and development personnel in Q3 compared to the same period of 2021. Income from operations was RMB 1.2 billion in Q3 compared to loss from operations of RMB 2.3 billion in the same period of 2021. Operating margin was 6.9% in Q3. compared to negative 12.7% in the same period of 2021, primarily due to, one, a relatively higher gross profit margin, two, the decrease in total operating expenses, along with the relatively flat net revenue, primarily due to the personnel severance and optimized resource utilization in Q3, compared to the same period of 2021. Excluding non-GAAP items, Our adjusted income from operation was RMB 2.1 billion in Q3, compared to adjusted loss from operation of RMB 1.4 billion in the same period of 2021. Adjusted operating margin was 12% in Q3, compared to the negative 7.9% in the same period of 2021. Adjusted EBITDA was RMB 2.3 billion in Q3, compared to the negative RMB 550 million in the same period of 2021. Net income was RMB 716 million in Q3, compared to net loss of RMB 1,766 million in the same period of 2021. Including non-GAAP items, adjusted net income was RMB 1,888 million in Q3, compared to adjusted net loss of RMB 888 million in the same period of 2021. Net income attributable to KE Holding Inc.' 's ordinary shareholders was RMB 723 million in Q3, compared to net loss attributable to KE Holding Inc.' 's ordinary shareholders of RMB 1,765 million in the same period of 2021. Adjusted net income attributable to KE Holding Inc.' 's ordinary shareholders was RMB 1,895 million in Q3, compared to adjusted net loss attributable to KE Holding Inc.' 's ordinary shareholders of RMB 887 million in the same period of 2021. Diluted net income per ADS attributable to KE Holding Inc.' 's ordinary shareholders was RMB 0.6 in Q3, compared to diluted net loss per ADS attributable to KE Holding Inc.' 's ordinary shareholders of RMB 1.5 in the same period of 2021. Adjusted diluted net income per ADS attributable to KE Holding Inc.' 's ordinary shareholders was RMB 1.57 in Q3, compared to adjusted diluted net loss per ADS attributable to K.E. Holding Inc.' 's ordinary shareholder of RMB 0.75 in the same period of 2021. All in all, our profitability strengthened substantially, and we fully demonstrate our strong execution and operational capabilities. Among these developments, I'd like to address the following financial highlights. First, the profitability and the financial health of our new home business further improved. As we cooperate with a greater number of projects with higher margins and optimize our fixed cost, the contribution margin of the new home transaction services increased to a new high of 24.9% in Q3 since our IPO, up 1.4% from Q2. Meanwhile, our effective risk control strategy helped improve our financial situation Cash collection from our new home business totaled RMB 9.27 billion in Q3, and that amount surpassed new home revenue for five consecutive quarters. As such, new home DSO shortened by 30 days from Q2 to 78 days in Q3. Apart from the fast collection of the new account receivables, we also strove to collect receivables that were previously recognized by debt provisions. It enabled us to write back RMB 195 million in by debt provision in Q3. Therefore, the by debt provision did not have negative impact on our P&L during Q3. This reflected the company's principle of adopting the most prudent accounting treatment while highlighting the indispensable value of our new home transaction services. in bolstering better sell-through for the developers and promoting healthy property market circulation. Second, as we continue to carry out all-around integration between Beike and Chengdu, our home renovation and furniture services achieved robust growth and started to contribute more revenue to the company in Q3. The business generated revenue of RMB 1.8 billion up over 40% year-over-year, and 34% from Q2. On an apple-to-apple basis, for Beijing Beiwo, Q3 revenue from the home renovation and the furnishing services rose over 90% year-over-year, while the gross margin increased by 8.3% points from the same period of 2021. On that basis, Beijing achieved a city-level operating break-even for the quarter, Beijing's advancement in building up its business model and the improvement in financial performance provides a feasible path for us to further explore a larger scale across the country. Third, average paid incomes. In Q3, our ongoing optimization of the operating expenses showed the results. It filled 30% year-over-year to RMB 3.5 billion under GAAP financial measures. driving the recovery of our profitability. On the non-GAAP, our total operating expenses decreased by 35.6% to RMB 2.7 billion, including a buy-die provision written back of RMB 195 million. Fourth, we maintained a strong cash position and operating cash flow in Q3. At the end of September, the balance of our cash cash-like items was RMB 77.2 billion or USD 10.9 billion, among which the combined balance of our cash, cash equivalents, restricted cash, and short-term investments amounted to RMB 57.5 billion, up by RMB 7.5 billion from Q2. The balance of our long-term cash-like items mainly included in the long-term investments amounted to RMB 19.7 billion. Our net operating cash inflow was RMB 2 billion in Q3, remaining positive for the fourth quarter in a row. This outcome demonstrates our strong ability to generate cash, and in our view, this makes us well-positioned to navigate the market fluctuations and future challenges. Fifth, as we previously disclosed, we established a share repurchase program under which companies may purchase up to USD 1 billion of our Class A ordinary shares, or ADS, over a 12-month period. Since launch of the program on September 1st, we have spent a total amount of around USD 155 million to purchase approximately 11.75 million ADS in the open market as of November 30th. Despite the market fluctuations, we continue with the repressive program, underscoring our managing team's confidence in the company's long-term development prospects and our efficient capital allocation. Turning to the guidance for the first quarter of 2022, we expect the total net revenue to be between RMB 14.5 billion and RMB 15 billion in Q4, representing a decrease of approximately 15.7% to 18.5% from the same period of 2021. This forecast can see the potential impact of the recent real estate-related policy and measures and the COVID-19 resurgence and the containment measures in certain regions, which remains uncertain. It constitutes the current and preliminary view on our business situation and market conditions. which are subject to change. Last but not least, in the face of market challenges, we respond quickly and actively with exceptional resilience and execution capabilities, as well as fully prove the effectiveness of our operating leverage. Our abundant cash reserves and the healthy cash flow also serve as a safety cushion against external uncertainties. Financial security and operational efficiency, a capability we have afforded in confronting numerous difficulties and challenges, which have enabled our fundamental to remain intact and strengthen our sustainable operation amidst adversities. Our management team has always led by example into the frontline, respects every effort and achievement of our service providers. and through it always a proclamation and honesty. All of us at Baycorp are making an all-out effort with heart and soul and never leave anything to chances. Step backs have translated into courage, and the dangers ahead inspire us to push forward. As we stand the test of time, not a single step along our journey will be easy, but we will never stop. Keep going. We will keep getting better. That concludes our prepared remarks. We would like now open the call to questions. Operator, please go ahead.
spk01: Thank you. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star 2. If you are on a speakerphone, please take up the handset to ask your question. 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 the question in Chinese, please follow with the English translation. The first question comes from Steven Tsai with Morgan Stanley.
spk00: Please go ahead. Can you share with us your view on the first quarter outlook for each of the new home and existing home markets? And what are the underlying assumptions behind your Q4 revenue guidance? Also, I know it's a bit too early, but could you also share with us your thoughts on the market recovery path next year if we look through the short-term pandemic impact in the quarter? I'm asking this because on the one hand, we have seen several supporting policy in the past few weeks, but on the other hand, some of the core cities of our existing home business also have seen some slowdown in sales recovery, while existing home supply seems increasing fast, but price is also trending down. So just wondering how we should think about the recovery path next year. Thank you.
spk06: Thank you, Steven. Let me talk about the third quarter review first. From the macro perspective, The real estate market in the third quarter was affected by multiple factors, including a euro hot summer across the country, the pandemic flare-ups in some high-tier cities, and the new home mortgage payment suspension, slowdown in developers' sales promotions, as well as household concerns about geopolitical tension, economic downturn, and uncertainty for the income expectations. At the same time, The frequency and the magnitude of supportive policies slow down in Q3 from both the central and the local government levels. In the second quarter, the central and the local government introduced close to 100 measures and policies to support market recovery. But in this Q3, there's only 70. And we also saw some strong relaxation reversing in some several key cities. The reduction of the positive factors and the increase of inactive factors both contribute to the recovery slowdown in the housing market in Q3. In terms of the existing home market, despite the market headwinds in the third quarter, the recovery of the existing home market quickened. The GTV for China's existing home market increased around 6.6% year-over-year and 8.1% quarter-over-quarter. The GDP in July recorded year-over-year growth for the first time in past 12 months. Specifically, the Disney Home market hit a high in July and a moderate month-over-month afterwards. This trend is consistent with the monthly trend in the third quarter from 2018 to 2021. City-wise, the fourth tier cities benefited from the pent-up demand after pandemic restrictions were lifted resulting in a significant GTV growth quarter over quarter, while the performance in the second and third-year cities was basically flat versus the second quarter. Among them, like the city of Jinan and Suzhou, which have more supportive policies, and Zhengzhou, which benefited from the demand shift from the new homes, saw steady improvement in the in-home market in the third quarter. while cities such as Chengdu were more affected by the pandemic at the end of Q3. In terms of the new home market, affected by multiple macrofactors, the new home market recovery trend in May and June did not extend to the third quarter. Following the mortgage payment suspension incident in July, our leading indicator, the number of new home subscriptions plummeted down around 42% week-over-week and 26% month-over-month, and it continued to drop in August and September. According to the data from National Bureau of Statistics, third quarter, new residential housing sales filled by 21.3% year-over-year and 7.1% quarter-over-quarter. CRRC's data on top 100 developers showed a 33% year-over-year drop in the period and a slight downward trend month-over-month. City-wise, according to Baker Research Institute, in the first nine months of the year, New Homes GTV was down merely 2% year-over-year for the first-tier cities, but dropped 46% and 41% for second-tier and third-tier cities, respectively. As of September, Regarding the pricing, for the 50K cities, using home price has fallen for 13 consecutive months and is still showing a downward trend. It further fell 1% in September from August, taking cumulative decline to 9%. Using home prices in Beijing and Shanghai hit new highs in Q3 and began to adjust slightly in October, while in most other cities, the price declined more notably. Cities with most significant home price adjustment are mostly cities that saw large price increases in the past, like Shenzhen and Dongguan. In summary, there were many unexpected factors in the market during the Q3. It will require additional observation to tell how the market will perform. Regarding for the Q4 outlook, since the fourth quarter, Fearable policies have been introduced continuously. On the one side, policies including lowering the mortgage rate, tax refunding, and the relaxed forced home recognition to ease the down payment for the home upgrade amount have all played a role in promoting market recoveries. To address the liquidity crisis, developers, several ministries from the central government jointly introduced tools to support the credit debt financing of the private developers, including the famous 16 measures from the central bank. The path to credit restoration for developers is getting clear, and it has played a role in the restoration of the market confidence. Nevertheless, the ongoing COVID outbreak and the corresponding control measures in many cities still brings great pressure on the market recovery and have a dilutive effect on supportive measures. For a single-home market, at present, among our top 32 cities, over 95 of the stores in Beijing, Zhengzhou, Chongqing, and Shijiazhuang are affected and unable to operate normally due to COVID-19 and related containment measures. more than 60% of our stores in Guangzhou are affected. And the pandemic situation in Chengdu, Tianjin, Xi'an, and Suzhou is also intensifying. During the previously severe fires up in Shanghai, Shenyang, Zhengzhou, and other cities, the transaction volume was close to zero for about four to eight weeks. Therefore, we prudently assume that roughly 25% of our in-home transactions in the fourth quarter will be affected by the pandemic. However, unlike the discretionary consumption, housing demands are largely rigid. Based on our experience, the demand will bounce back and be replenished to a certain extent after the pandemic resurgence is over. New home market. It's more notably driven by the developers' active promotion, easing policies, and the national day holidays, and is expected to see a narrow year-over-year decline in Q4. In October, Baker new home subscription data rose sharply by nearly 35% compared with September. The subscription data usually leads to the online contract signing by about a month. and the recovery of the leading indicator support over recovery of the new home market in Q4. Despite the private developers' measures still experiencing that default, relentless efforts are being made in that relief for the industry in the fourth quarter. Regarding the communist view for the year of 2023, I would like to say the market trend will be affected by multiple factors. but it is unlike for the market to weaken further. There is room for the real estate policies to further relax. Guided by the principle of the housing is for living, not for speculation, maintaining the stable development of the real estate market and supporting the release of the reasonable housing demand have become the consensus among the various entities. Judging from the timing of the anti-approval September and November, when central government release easing measures, the current market downturn may reach the point of triggering more policy relaxation. Considering the housing price are still falling and the transaction volume is still at the top, we expect to see increased policy support next year, especially from the local government. Whether it is in the form of purchase fund support Or more importantly, further is the purchase qualification. This will lay the foundation for the demand to retain and stabilize the market. For other micro factors that have relatively large impact on the market recovery, you've seen that, we would like to say number one, the global economy and political landscape does not experience significant turbulence. There is a moderate economy growth domestically, and the pandemic has been effectively controlled, with its impact on the economy gradually easing. Number three, the urban employment rate is back on track, as well as the pace of urbanization. Number four, the residency income expectation and the consumer confidence are moderately restored. Lastly, on the policy front, the implementation of the property tax will not be rushed in the short run. Under all of these assumptions above, we expect the performance of the existing home and the new home market as followed for the year of 2023. Strong certainties in recovery of the existing home market. The existing home market has undergone deep adjustment in the year of 2021. and show a trend of quarter-over-quarter recovery so far in 2022. In the second half of 2022, most cities might be able to return to the monthly transaction average over the past five years. We expect the existing home market to continue to recover and continue to benefit from the spillover demand from the new home market in the year of 2023. According to the forecast from Baker Research Institute, nationwide GTV for its new home sales is expected to stage a mild recovery, rising around 5% year-over-year next year compared with 2022. Regarding the new home, it might take longer for the new home market to see a mild recovery. The recovery of the new home market next year will depend more on the restoration of the consumer confidence in real estate market and the strength of the supportive policies. According to Baker Research Institute, the support of the more relaxed policy, developers, especially those state and centrally owned, will increase their sales through effort on the supply side next year, bringing a marginal improvement in transaction volume. However, the consumer confidence and the housing price, which were more deeply wounded by COVID and the delayed new home project, it will take longer to recover. The decline in some customers' confidence in the second half of this year is expected to extend to the first half of next year and begin to repair in the second half of 2023. As such, we expect the GTV of the new home market to be largely flat-lined year-over-year in the year of 2023. Thank you.
spk01: The next question comes from Timothy Zhao with Goldman Sachs. Please go ahead.
spk05: Thank you, Mr. Guan. I have two questions for Mr. Guan. The first one is, Mr. Guan, please help us look at the scale of our store and how we will look at it in the future. How is the sales of our store and our agent? Does the company's profit increase in the past quarter mean a decline in the income of stores or managers? The second question is about the proportion of private and state-owned enterprises in the front sales side, because I see that the proportion of private enterprises still occupies more than 50% of our total. I would like to ask which private enterprises are mainly in the key layer, especially considering that some private enterprise developers have recently appeared. Thank you for taking my question. I have two questions here. First, could you imagine share some outlook on how our store and store network expansion plan into next year? And what is the efficiency and income level of the store and agents at this moment? In the third quarter, we achieved very strong probability, but does that mean that the income level of the stores and agents is coming down? And secondly, it's related to the SOE versus the private developer's breakdown within new home sales. As I noticed, private developers do account for over 50% of the new home sales on Baker platform. May I check what are the top customers in the private developers and considering that some of the private developers recently also default on bonds or delayed interest payment, are we expecting more risk related to account receivables? Thank you.
spk06: Thank you, TMC. Regarding your first question, store and agent numbers are stabilizing and even start to grow in some cities. We see stabilizing store and agent network scale Since the second quarter, the number of active stores and agents have started to stabilize. And in the third quarter, the quarter-over-quarter decrease in active stores and agents narrowed to 3% and 2%, respectively. Among them, in nearly 30 cities, including Nanjing, Changsha, and Hefei, the number of active stores grew quarter-over-quarter, and the number of active agents increased quarter-over-quarter in 40 cities, including Shenzhen. There is no significant network dysfunction needed going forward in Shaoruan. A large number of practitioners left the industry following the recent round of market corrections, and we believe many of them might not return even when the market recovers. Therefore, looking ahead, We do not expect the rapid growth in the number of stores and agents industry-wide in short to medium term, and the number of stores and agents on our platform will also remain relatively stable over the coming quarters. The steady improvement in store and agent productivity facilitates organic business growth. Increasing per-store and per-age income is a key to the organic growth. The industry has shaped the way from the frenzy of the pure skills function towards the pursuit of the refined high-quality services. Only in such an environment can service providers who take care of customers to stand out from the pack and to see the improvement in their living conditions. In 2021, the average income of Lianjia agents nationwide was still far below the average local salary, 77% and 63% of average and median local salary, respectively. Therefore, while maintaining a relatively stable scale of the store and agent on our platform, we hope to support each high-quality store and agent to grow revenue and profit thereby realizing the high quality and the sustainable growth for the overall business on our platform. The productivity also improvement. The productivity improvement has delivered results. Overall speaking, we implement a series of strategy including reforming loss-making stores, merging the large stores, facilitating the business shift from the new homes to existing homes, and focusing on the key new home projects. We insisted on taking care of agents and help agents and store owners transcend the cycle. Although it takes time for our effort to pay off, we have observed a clear recovery in store and agent productivity on our platform. In the third quarter, while GTV-owned Baker dropped by 11% and our revenue fell by 3% year-over-year, the unit store commission revenue of our franchise and the connected store on Baker platform grows by 25% and 26%, respectively, year-over-year, and 14% and 12%, respectively, quarter-over-quarter. Meanwhile, commission revenue per agent of connected store grows by 25% year-over-year and 9% quarter-over-quarter. Of course, there are structural reasons that partially expands increase, but overall store and agent income on bigger platform has been improving. Just take Zhengzhou as a showcase. Due to the market corrections, our revenue in Zhengzhou decreased by 43% in the first three quarters and 23% year-over-year in third quarter. However, our operating profit margin in the city rose significantly from last year's average 6%. to 24% in the third quarter. Operating profit grew by 69% for the fourth three quarters and was 14 times in the third quarter compared with the same period of last year. While we improved the profitability in Zhengzhou as a whole, the connected stores in Zhengzhou have also achieved significant improvement in their operational and financial performance. In the third quarter, Their unit stock mission revenue grow by 57% year-over-year and 40% quarter-over-quarter. Looking for the future in the year of 2023, assuming market enters a period of steady recovery, we hope to have more agent and stock to reach above the bright line. Regarding your second questions, first I need to emphasize again the Baker's beta risk is minimal, mainly for three reasons. Number one, as Baker continues to increase the cooperation with the state and centrally owned developers, they are accounting for an increasingly higher proportion of our new home sales. In third quarter, the proportion of the new home sales from the state and centrally owned developers further is pumped by 5% quarter over quarter to 42%. Number two, The news coverage on the data crisis created a so-called hello effect, giving the impression that the majority of the private developers are in a data crisis. But in the real world, a significant number of the local private developers remain crisis-free. Contrary to the common perception, these small yet strong developers with low leverage are our important cooperative partners. Meanwhile, Baker does not subject to the concentration risk. We currently serve more than 1,000 private developers, of which only six who each count for more than 1% of the total sales contribution. The robust housing of our local private developer and our low business customer concentration empower Baker to maintain active control of our risk exposure. We continue to increase the coverage of the commissioning-in-advance model, particularly among the private enterprise. The percentage of the revenue from the commissioning-in-advance model to the total private developer new home revenue in cities as Beijing and Shanghai already exceeded 32% in fall three quarters and reached 44% in September. A further deterioration in the operating condition of a single or even multiple private developers will not have a material impact on our accounts receivable collections. And number three, we are equipped with an industry-leading risk control strategy and a strong backing power. We have never slackened in our new home risk control measures. And the new home receivable collection is a core KPI in this year. This year, we continue to strictly manage our DSO with an emphasis on the detection and the prevention of risk in advance, revenue safety, and the settlement of the historical receivables. There are some examples. Up from risk detection and the prevention, we continue to iterate of the rapid risk assessment system to conduct up from risk detection and the classification. We also strictly manage the cooperation with developers in accordance with different risk levels. Contra with the high-risk developers are completely prohibited, and only with advanced commission payments and the settlement of historical receivables can such cooperation be resumed. Moreover, safeguard our newly generated revenues comprehensively expands the scale of the commission in advance payment. and the percentage of the cooperation with the state and the centrally owned developers. In addition, we also resolve to the legal remedy as much as possible against the high-risk developers with delinquent account to ensure receivable preservation. Conduct corporate-to-corporate cooperation with the low-risk developers to reach the settlement agreement on receivables in arrear to expedite the settlement of historical receivables As a result of the serial initiatives in Q3, our new home sales cash inflow reached $9.27 billion, almost 10% higher quarter over quarter. While the book value of our new home receivable decreased to $6.15 billion, the receivable collection cycle shortened by 30 days to 78 days in Q3. In the fourth three quarters of this year, Our cumulative new home transaction revenue reached RMB 20.4 billion, but our cumulative cash collection reached RMB 26.4 billion. Our accounting treatment against the beta provision has always been prudent with the maximum provision. For almost all of the developers who had a previously generated default risk, as the maximum amount receivable was booked as a buy-day provision. Meanwhile, we are in an effective and indispensable channel for developers to generate sales and resume liquidity. We continue to receive the collections from the developers which were previously recorded as a buy-day provision. Therefore, in Q1 and Q3 of this year, we were able to write back provisions for the buy-day in amount of RMB $150 million and RMB $195 million respectively. While our cumulative by-debt provision amounted to almost RMB $2 billion, covering 32% of the new home accounts receivable. We think this is a sufficient by-debt provision and that there is very little chance for a large amount of one-time by-debt provision in the future. Giving to our highly decentralized business and the implementation of the strict risk control. We believe our new home receivable will continue to become more secure and our buy-back from the new home sales will not deteriorate maturely any further. Thank you.
spk01: The next question comes from Lipeng Zhao with CICC. Please go ahead.
spk03: Hi, Stanley, Cao Ge, Siting. Thank you for accepting my question. I want to ask about the issue of the second track. We have seen that after the second quarter, the company has continued to promote the basic ability of our large-scale business, including the navigation of the first and second track business. We have also seen good results. 那如果就是未来的话,管理层能不能对就是整装大家居业务的发展阶段如何规划,再跟我们分析一下。 然后这块业务的增长和投入的节奏应该如何去平衡。 我自己快速翻译一下。 So since the consolidation of Chengdu in second quarter, the company has achieved many progresses in terms of home renovation and furnishing infrastructure capabilities. and also the enhanced cooperation with transaction business line. Looking ahead, what's your development strategy of this business, and how will you balance the growth and investment of this sector? Thank you.
spk04: Okay, I'm standing. Thanks for your question. The home renovation and furniture industry is relatively capital-intensive, and it faces many iteration opportunities. We have our standing to such industry that requires high standardization and transformation through technology. Our standing are, first, we must not rush. It took Baker and Lianjia 20 years of development to get to where we are now. It's the same for home renovation and furnishing. We need to look at growth with a time horizon of three years for the business, and its gradual start does not mean to view not reach greater heights in the future. Second, to achieve long-term growth, we should cultivate needed capabilities and resolve the major outstanding issues in the industry. We have observed the following areas in the industry where challenges are needed. One, there is no online services with great home renovation and furnishing experience provided in China. Two, in terms of production, of localized home renovation and furnishing products tailored for the Chinese market. The industry is still relatively weak. Three, the home renovation and furnishing services are not standardized. Four, professional skills of service providers need to be improved. Five, we need to identify possible areas of innovation through structural changes in technology, materials, process, and methods. Facing these industry problems and opportunities, we need to leverage our storage network to turn traffic and provide more and better products. At the same time, we need to upgrade our capability to capture these opportunities and realize long-term goods. Therefore, we need to stay fast and target investment in areas that will enable us to provide more products and iterate our capabilities for long-term benefits, instead of making investment to stimulate short-term growth and extend skill without bringing our capabilities. That is why we are not going to advise heavily, but rather invest in service training. For example, our Huaqiao Academy spent months developing courses for home renovation service providers home renovation managers throughout the country only to take full-time training for three to four days, during which time we will be missing out on revenue. But this is an investment we must make. Also, we are not going to use large one-time subsidiaries to stimulate sales. Rather, we will spend on system development, online content, and home renovation product R&D Among others, we see investment in home renovation products in the industry inadequate. Going forward, we will engage in more refined development and operations to provide targeted products for different user groups, such as products for old neighborhoods and upscale residential communities. If we do not invest in these areas, it means we have stopped in our tracks. without striving for long-term growth. These investments are necessary as they match our vision and expectation for the future. Of course, during our investment, we require our business to manifest its capability in growing from zero to one and fostering a virtuous cycle of quality, efficiency, and skill. So in summary, there are ample opportunities in the industry As customers have needs and we want to meet their demands, as such, we will cultivate our capabilities and harness our resources rationally. In my view, it does not make sense to make investments in this industry for mere financial gains or short-term revenue growth. All investments need to drive better development over a long time frame. That's my opinion. answer to a question. Thank you.
spk01: We are now approaching the end of the conference call. I would now like to turn the call over to your speaker host today, Ms. Siting Li, for closing remarks.
spk02: Thank you once again for joining us today. If you have any further questions, please feel free to contact the Bay Coast Investor Relations Team through the contact information provided on our website. This concludes today's call and we look forward to speaking with you again next quarter. Thank you and goodbye.
spk01: Thank you. The conference has ended. You may now disconnect your line.
Disclaimer