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spk04: Hello, ladies and gentlemen. Thank you for standing by for KE Holding, Inc.' 's second quarter 2023 earnings conference call. At this time, all participants are in listen-only mode. Today's conference call is being recorded. I will now turn the call over to your host, Ms. Siting Lee, IR Director of the company. Please go ahead, Siting.
spk05: Thank you, Operator. Good evening and good morning, everyone. Welcome to KE Holdings or Baker's second quarter 2023 earnings conference call. The company's financial and operating results were published in the press release earlier today and are posted on our company's IR website, investors.ke.com. On today's call, we have Mr. Stanley Peng, our co-founder, chairman, and chief executive officer, and Mr. Tao Xu, our executive director and chief financial officer. Mr. Peng will provide an overview of our strategies and business development, and Mr. Hsu 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. Please apply to this call as we will make forward-looking statements. Please also note that FACA's earnings press release and this conference call include discussions on unaltered gaps, financial information, as well as unaudited non-GAAP financial measures. Please refer to the company's press release, which contains a reconciliation of the unaudited non-GAAP measures to comparable GAAP measures. Lastly, unless otherwise stated, all figures mentioned during this conference call are in R&E. With that, I will now turn the call over to our chairman and CEO, Mr. Stanley Tung. Please go ahead, Stanley.
spk03: Thank you, Siting. Hello, Erwan. Thank you for joining the second quarter 2023 audience conference call. In the first half of the year, our performance improved significantly compared with the same period last year, with 43% year-on-year growth of our total GTV and 51% year-on-year growth of our total revenue. Although the housing market experienced a surge and a subsequent adjustment on a quarterly basis compared to the same period last year, China's real estate and residential market as a whole still demonstrated recovery. In addition, during the market correction, we successfully retained service providers, effectively reduced costs, and raised our efficiencies, all while rapidly expanding our emerging businesses. This combination of initiatives has enabled us to capitalize more effectively on the market rebound and outperform the market. In the first half of this year, for our primary business or home transaction services, we continue to retain our ACN, optimize its ecosystem and refine platform operations while exploring grassroots Indian jobs. This all propels our organic growth. The capabilities of our service providers have also expanded. Our home renovation and furnishing services have gained rapid growth momentum. we constructed the industry-compatible mechanisms to have the good get better and established capabilities in customer acquisition, conversion, project delivery data, products, supply chain, and others. This has led to grassroots in our service quality and scale, as well as the economic performance of our home renovation and furnishing service businesses. While total contract sales in the first half of the year reached 6 billion RMB and total revenue reached 4 billion RMB. Going forward, we expect to replicate our success in leading cities to more areas and gradually establish a virtual cycle across the board. Our rental property management services business has also achieved meaningful development in the second quarter The scale of our carefree rent improved significantly to reach 120,000 units under management and the occupancy rate reached 94.5%. Today's house industry has reached an inflection point in the course of its development. The traditional golden age of real estate was accompanied by its 30 years of reform and opening up. Along with rapid organization and a substantial demographic dividend, as the per capita living area increased, houses have been in short supply, leading to a one-way increase in property prices. Buying a house becomes the core goal of many people in China. In the process, real estate has gradually strayed away from its initial function to provide residential homes. Instead, it has taken on the dual role of an investment asset and a speculative tool. However, all that deviation from their intended cost will return to their original track, and today the industry is reverting to its core value proposition The essential function of real estate is once again serving people with quality living. The true golden age of focusing on people and the living has just begun. On this shift, customer rising demand for better living is far from being fulfilled. In other words, there is a central challenge in today's house market and the foreseeable future. All of the disparities between customer demand for more joyful living and inadequate supply of quality services and products. This contradiction motivates us to climb our next mountain and introduces substantial growth opportunities in our future. Our solution to resolve the supply and demand imbalances includes two essential components, providing joyful living for customers In China, in Chinese, we call it An Ju, and facilitating, fulfilling careers for service providers, which we call Le Yi. In Chinese, this is also a continuation of our mission of admirable services, joyful living. Specifically, we have upgraded our corporate strategy to one body, three wings, a company's by our organizational alignment. This evolution represents the strategic intention and the deepening of a one-body, two-way model with a focus on our customers and a frontline value creation. We have established four business lines, housing transaction services, home renovation and furnishing services, home rental services, and our newest addition, Bei Hao Jia. where we are engaging in new home supply-side upgrades. Each of these teller businesses cutters to customers' residential aspirations and service providers' diverse career aspirations. In the process of providing Joyful Living and G for customers, superior goods and services will see great benefits, whether they relate to the property itself or the provision of a wide range of residential necessities, such as renting, purchasing, trustorship, home renovation and furnishing, and so on. Next, I will go into more detail about how we define good products and services for Joyful Living within the context of our OneBody 3Win strategy. Regarding our OneBody Home Transaction Services businesses, Its value will be more of a virus after market normalizes, enabling more sustainable and healthier development. When identifying the right property becomes more challenging and emotional for customers, service providers must establish trust, emphasizing the importance of building emotional connections around these relationships. Fostering this type of customer relationships will allow service providers the opportunity to provide more value-added services and intended value for communities around Joyful Living. It will also enable consumers to redefine how service providers view and unleash the huge potential of our ACN. We also have significant room. to further enhance customer experience with our home transaction services. On one side, the bargaining power of home buyers continue to rise. On the other side, homeowners are replacing intense demand for quick property sales and exchange. This will inevitably reshape the service dynamics of the brokerage industry and direct the way to better consumer experience in the next phase of industry evolution. Meanwhile, we see room for further value creation in deeper integration with communities and in the evolution of consumers and aesthetics. All these opportunities are allowing our core business to become a key force in joyful living. Next, we come to our first wing business, home renovation and furnishings. At a time when housing endurance is becoming increasingly important, consumers have high expectations for housing improvements. As such, home renovation and furnishings are often top of mind when consumers require a better home endurance. But the pain points for this industry are very clear. To address these pain points, we are moving away from an assembly model and toward a product-centric philosophy that focuses on people. Customers should feel at ease when they undertake renovations, and we can help them through this process. This means providing one-stop services, which removes many of the complications felt by customers. We should also be able to help consumers pursue a better living, for example, In addition to construction and installation, our refined capabilities, facilities, smart homes, maximizing the efficiency of a home's living area, and offering fluid designs that complement customers' preferences. To achieve this, we will continually push industry transformation through digitalization and a complex working process reconstruction to enhance customer endurance, and increased service providers' efficiencies. Our second win is big for rental services. Today, renting is gradually becoming a way of life, with houses are for living, more for speculation. We're shaping the market dynamics that previously favored property sales over rentals. The resonances. between growing rental supply and demand presents a historical opportunity for us to expand our rental services. On the supply side, a substantial portion of Chinese assets is tied to real estate, making preserving and a reasonably appreciating property value crucial to families. More homeowners want their properties to be better cared for, and rental property management services can be streamlined and more convenient. On the demand side, for tenants, we aspire to comprehensively elevate the rental endurance through customer-centric products and services, transforming the concept of renting a house from a transitional compromise to an appealing option. In turn, this can foster a balanced approach between renting and purchasing. We are pleased that our carefree rent has made initial strides in the rental space, and we will keep looking for ways to use our technological platform and operational adventures to create value for the marketplace and society. Moving to our newly added third wing, Bei Hao Jia. The traditional model has been driven by first home buying demand, increased leverage, and attempt to rapidly acquire a house and enjoy asset appreciation. These driving forces are becoming outdated in the market with stabilizing housing prices A new consumer trend is taking shape that prioritizes quality and endurance. As a result, there is increasing evident demand for high-quality housing products. Going forward, market differentiation might come from the difference in the quality of houses being built. This translates to a call for supply-side improvements in the new home market. It's our responsibility and opportunity to heed this call. We will establish capabilities and explore innovative offerings in order to define quality houses based on customer demand, build good products and services, and enable value chain partners to promote the housing industry supply side upgrades. Moving to how we can let service providers have a full, fulfilling, career, . The residential service sector operator operates and resolves around agents and stores. Service providers are our core assets. Investing in their goods and guiding their self-improvement results in a steady increase in our corporate assets. As Real Estate assumes, it's a fundamental purpose of providing a space to live. stores and agents will also shift from scale expansion to optimize efficiency. In this regard, several trends come into view. Firstly, building sustainable relationships based on professionalism and integrity is increasingly crucial for real estate agents. As properties return to the most fundamental residential function, the dynamic between customers and agents change from information-based to trust-based. A knowledgeable and reliable agent becomes more valuable when market transactions slow down and it becomes harder to identify the right property. As such, agents' role and skills must evolve from transaction facilitators to long-lasting community housing service experts. We see many areas of this dynamic where we can help. For example, The operational efficiency of mid-level agents has the potential to be significantly improved. Additionally, there is great room for development in terms of community engagement. Our goal is to support our agents to become the bridges that connect communities with better living conditions in the future. Second, the trend toward a large store model is unquestionable. As more commission might be directed to agents who provide value to customers directly, store owners' profitability might decrease. As such, bigger stores with higher revenue potential are crucial to improving efficiency and realizing greater returns for both stores' owners and agents. To this end, we have consistently pursued a large store strategy since 2022, but end of June, this year, we have effectively restructured over 4,500 stores. Stores on our platform achieved an average efficiency improvement of 80% year-over-year in the first half of this year. Certainly, the light store model fosters a new relationship between our store owners and agents. that goes beyond a mere employee relationship revolving into a partnership or collaboration. Store owners must treat agents as both employees on the management and clients who require support, empowerment, and services. On our end, we need to stimulate creative thinking among store owners in order to benefit from the new trend. With these changes, we hope not only to make timely adjustments, but also to become a trendsetter. We have started by establishing entire rankings infrastructure for stores and agents, as well as standards for both stores and individuals. These are the first step to enhance the management and operational capabilities of the platform and store owners, helping to cultivate a robust agent talent pool. Our continuous efforts encompass similar values, rules, and protocol-based management, training and empowerment programs, certification systems, and establishing a more rational payment distribution structure. Through these initiatives, we can enhance the efficiency of store owners committed to taking good care of service providers and facilitate service provider transformation from taking a job to entering a professional and engaging in fulfilling careers. To close, I'm both energized and awed by the tremendous possibilities and the growing pain I had. As housing industry transformers from high growth to a focus on quality and endurance, we will continue to solidify our core competencies. At the same time, we will have the courage to reform and break new ground, all together creating new values while undertaking historical mission and social responsibilities. We are in the foothills of the next mountain on our quest, and we look forward to the exciting roadmap ahead. Thank you, everyone. I want to invite our CFO, Mr. Xu Tao, to present the financial highlights for the second quarter.
spk02: Thank you, Stanley, and thank you, Irvine, for joining us. Before going into the details of our second quarter financial results, I would like to provide a brief update on the housing market over the first half of this year. The market trends for the first half of the year are in line with the prediction that we made at the beginning of this year. Overall transaction volume gradually normalized following by the post-slide rebound, fueled by the pent-up demand. Since the second quarter, The lingering effects of the pandemic have become more pronounced, with the pressure on household income and the employment expectations, sluggish exports and declining FDI posing challenges to the economy recovery. In the real estate market, divergent price expectations between buyers and sellers, along with the policy-loosening speculations, have intensified the market's wait-and-see attitude leading to a deceleration in transaction cycles. Meanwhile, in the high-tier cities, policy optimization, targeting the unleash of the home upgrade demand, have yet to materialize, maintaining obstacles to the release of the reasonable demand. Under the various factors, the market underwent a noticeable quote-over-quote adjustment in transaction volume in Q2. the home market continues to grapple with the debt risks of developers. Both supply and demand have remained weak due to the constraints of the effective new home supply and ongoing consumer concerns about project delivery following a series of defaults by some top property developers. However, we also noticed that the leading indicators of the home demand have been relatively resilient. For instance, The number of home-choose made in Q2 remained above the historical average in recent years, which is indicative of the continued underlying strength in overall demand. In general, the overall market saw notable year-over-year growth in the first half of the year. We have always maintained a neutral market view, and our persistence is being fruit. We have continuously enhanced the support for the service providers and store owners, implemented effective cost reduction and efficiency improvement, and fine-tuned our operations. These measures, coupled with the rapid growth of our emerging business, have resulted in our outstanding performance and have better position errors to assist our communities in the market recovery amidst the fluctuations. In the first half of this year, our GTV reached the R&D 1.75 trillion, up 43% year-over-year. During the second quarter, our GTV amounted to RMB 780.6 billion, reflecting a 22.1% year-over-year increase. Furthermore, our net revenue in Q2 increased by a faster rate at 41.4% year-over-year, to reach RMB 19.5 billion, beating both high ends of our guidance under strict consensus. Net revenue from the new home sales services have expanded quarter-by-quarter for the past five quarters. Our business, apart from the housing transaction services, which include home renovation and furnishings, and the rental services, achieved significant on-year growth, contributing to a revenue share of over 20%. For the first time in Q2, our gross margin stood at 27.4%, and the GAAP net income reached RMB 1,300 million. On a non-GAAP basis, our net income reached RMB 2,364 million, compared with the net loss of RMB 690 million for the same period last year. By business segment, in Q2, this in-home transaction GDP increased by 16% year-over-year, as the market recovered to a certain extent from the lower base last year, and thus through our continued enhancements in the operation efficiency, which further supported our performance. Nevertheless, on a quarter-over-quarter basis, the existing home market experienced a considerable adjustment in Q2, following the intensive release of pandemic demand, resulting in a 31.3% sequential decrease in our existing home GTV. In particular, due to the more pronounced market sentiment adjustment in the first-tier cities, Lianjia's sequential adjustment in its in-home GTV was notably higher than that of the Connect brands. With a relatively stable market position rate, in Q2, net revenue from its in-home transaction services amounted to RMB 6.4 billion, up 15.9% year-on-year, and down 38.1% quarter-over-quarter. While the overall new home market remains subdued, the willingness of developers to adopt external sales channels continue to increase, offering us a resilient target market. Building upon this foundation, our new home business maintains robust operational momentum and a compensable sales-through rate, boosted by our ongoing refined operations, ecosystem optimization, and our commissioning-in-avance model, which is repaired by developers. New home transaction GTV on our platform increased by 32.4% year-over-year and 6.2% quarter-over-quarter. Next revenue from new home rose by 30.4% year-over-year and 3.5% quarter-over-quarter. Total RMB 8.7 billion, of which commissions from SOE developers constitute 46.8% and the project with the commission in advance contributes 53% of the total commission collected, remaining at a high level. Our home renovation and the function business has taken off this year, with breakthroughs in both skill and efficiency, reaping the benefits of the Stanford's investment in our capability over the past few years, as well as a successful integration with Chengdu. Starting from February, monthly contracted sales have consistently exceeded RMB 1 billion for five consecutive months, and the total contracted cells for the fourth half of this year reached over RMB 6 billion. In Q2, total contracted cells stood at RMB 3.4 billion, reflecting a year-over-year increase of 170% and a sequential increase of 28.2%. Our pace of remnant recognition accelerated in Q2, as a seasonal factor from the spring festival subsided and our delivery capability improved. As such, we achieved net revenue of RMB 2.6 billion, up 157.5% year-over-year and 86.4% quarter-of-quarter. Net revenues from the first six months of this year exceeded RMB 4 billion. In our leading cities, such as Beijing, we have established positive operational cycles. In Beijing, our monthly contract sales surpassed RMB 200 million in May and June. With the city level net margin exceeding the industry ceiling, the Verified Business Model in Beijing provides a foundation for our rapid replication in additional cities. We will roll out this proven model in new cities we enter. which will gradually make higher contributions to our total revenue as we expand. In Q2, our net revenue from emerging and other services increased by 213.9% year-over-year and 36% quarter-over-quarter to reach RMB 1.7 billion, primarily driven by the growth of our rental property management services and financial services. In terms of the profitability, Contribution margin for its in-home transaction services expanded by 8.9 points year-over-year to 45.6% in Q2, driven by this in-home revenue growth, a decline in fixed labor cost, and a relatively stable variable cost ratio from previous years. On the sequential basis, despite a 30% quarter reduction in revenue scale, contribution margin for the in-home transaction services only decreased by 3.4 points from Q1, remaining at over 45%. This signifies the sustained and robust profitability in our core business. Contribution margin for the new home transaction services rose by 3.6 points year-over-year to reach 27.2%, resulting from the revenue expansion and the relatively streamlined personnel cost, making the highest point since our listing for five consecutive quarters. Our gross profit in Q2 registered 97.3% year-over-year growth to RMB 5.3 billion, as we benefited from the improved contribution margin of our major business segments, as well as a decrease in store and other costs as a proportion of revenue. Our gross margin stood at 27.4%, compared to 19.7% in the same period of last year. The slide 3.9 points declined from Q1's high was mainly due to the change in our revenue mix with the adjustment of existing home revenues. In Q2, our gap operating expenses amounted to RMB 4.3 billion, among which sales and marketing expenses for RMB 1,649 million, increasing by 47.1% year-over-year and a 27.5% quarter-over-quarter due to the uptick in the market expenses for the home renovation and furniture services and our home transaction business. General and other administrative expenses were armed in $2,105 million, down slightly from $2,250 million in the same period of last year, while increasing by 29.9% from Q1, primarily due to the lack of the better provision written backs in Q2. the increase in the share-based compensation and the growth of emerging business. While we have a job of a rigorous provision method over past two years to fully provide for all foreseeable risks, we have encountered unforeseen incidents of continued debt crisis faced by the top property developers with a growing number of developers fighting for the liquidation or bankruptcy. We have further raised the expected loss ratio for developers with some being elevated to 100%. Especially in Q2, we set aside approximately RMB 64 million yuan as a better provision for Country Garden. With a provision ratio exceeding the 85%, we hope the industry can emerge quickly from this predicament and achieve stable and healthy development. Research and development expenses decreased by 39% year-over-year to RMB 475 million, primarily due to a high count reduction leading to a lower personnel cost and a share-based compensation. Sequentially, R&D expenses remained relatively stable with a slight increase of 4% from Q1. Our non-GAAP operating expenses for Q2 amounted to RMB 3.3 billion, down 4.6% year-over-year. In Q2, revenue from operations amounted to RMB $1,081 million, a significant improvement from the loss from operation of RMB $1,518 million in the same period of last year. The operating margin increased to 5.5% in Q2, from negative 11% in the same period of 2022, thanks to our gross margin dysfunction and greater operating leverage. Our non-GAAP income from operations for Q2 reached RMB 2,148 million compared with the non-GAAP loss from operations of RMB 690 million in the same period of last year. Our non-GAAP operating margin was 11% compared to negative 5% in the same period of 2022. Q2 net income was RMB 1,300 million. compared with the net loss of RMB 1,866 million in the same period of last year. Non-GAAP net income for Q2 reached RMB 2,364 million versus the net loss of RMB 690 million in the same period of 2022. Our balance sheet remains robust. As of June 30, 2023, the combined balance of cash, cash equivalents, with street cash and shorting investments amounted to RMB 60.8 billion or USD 8.4 billion. We spent approximately USD 346 million or RMB 2.51 billion in the share repurchase in Q2. On top of that, our total cash liquidity, which accrued custom deposit payable, amounted to RMB 79.4 billion, up 680 million from Q1. Our net operating cash outflow was RMB 196 million in Q2. Excluding custom deposit payable, the operating cash inflow was RMB 1,754 million. We remain strong in our commitment to reduce receivable management. In Q2, our cash collection from new home business increased to RMB 10.06 billion, surpassing the new home revenue. for the eighth consecutive quarter. New home DSO in Q2 was 52 days, making a new record low since we went public. Turning to our guidance for the subculture of 2023, we expect the total revenue to be between RMB 15.5 billion and RMB 16 billion in Q3, representing a decrease of approximately 9.1% to 11.9% from the same period of 2022. This forecast consists of the potential impact of the real estate-related policies and the macroeconomic recovery status that constitutes the current and preliminary view on our business situation and market conditions, which are subject to change. We have always placed great emphasis on the shareholder returns, leveraging our robust cash reserves and the prudence of financial management while enhancing shareholder value through the proactive shareholder return initiatives. we have maintained strong share repurchase efforts. And from the program initiation in September 2022, we have concluded a year of buyback. Over this period, we cumulatively repurchased a share worth around US dollar 605 million, representing approximately 57% of our free cash flow during 2022. The ADS bought back totaled nearly 41 million, accounting for approximately 3.24% of the company's total share prior to launch of our 2022 repurchase program. These shares have already been fully canceled. This year alone, we have spent close to US$414 million in buybacks and the repurchase share amount for 2.12% of our total shares. Moreover, today, County's Board approved the extension of the Extended Share Repurchase Program until August 34, 2024, with the repurchase authorization being increased from USD 1 billion to USD 2 billion. At the same time, we are pleased to announce that the Board has approved a special cash dividend of USD 0.057 per ordinary share or USD 0.171 per EDS. to holders of ordinary shares and to holders of ADS, as recorded September 15, 2023, respectively. The aggregate amount of the special dividend to be paid will be approximately US$200 million, which will be funded by surplus cash on the company's balance sheet. We hope to share the benefit of development with like-minded investors who accompany the in the growth journey and the transcendent cycles. While disputing the dividends, we are also continuously responding to the new business, seeking organic and sustainable growth. At this stage, the primary contradiction in our society is the contradiction between the unbalanced and inadequate development of the people's ever-growing needs for a better life. held in the late July made an important assessment of the new situation where supply-demand dynamics of the real estate market have undergone major changes. The real estate market is going through a rapid transformation from a seller's market to a supply-demand balance. Against this backdrop, the home upgrade-oriented demand is gaining prominence This trend is accompanied by the elimination of excess capacity, consumers' strong demand for better living, and the establishment of long-term mechanisms within the real estate market. All of these will all contribute to a more stable environment and sustain the impetus for the industry development. Our financial strategy entails maintaining a robust balance sheet and a healthy cash flow while practicing stringent risk management. We will persistently enhance efficient capital allocation, concentrate on critical growth drivers, foster frontline endeavor, support continuously efficiency gain for our agent and store, respond our within a healthy platform ecosystem, increase income for the service providers, and solidify the fundamental capability of emerging business, including home renovations. But amidst the recovery of the real estate market and ongoing breakthroughs in our new business, we will make a reasonable investment in skill and marketing to further boost our business momentum. Furthermore, we will prudently explore transformation and upgrades in other areas related to better living. On the cold side, we will have a clear total cost level, manage the efficiency of the investment, and ensure that money that should be spent must be spent, and the money that shouldn't be spent will not be spent, and the money spent should demonstrate the clear efficiency and effectiveness, thus supporting the business operation effectively. We believe that in the vast market of residential services, We will gain huge potential and certainty of growth. We will always uphold the neutral market perspective. We are firmly believing that the Chinese economy will continue to adjust, consolidate, enrich, and enhance the long path of high-quality growth. We still hold strong belief that the next China is China. This concludes our prepared remarks. Now, we are open for questions. Operator, please go ahead.
spk04: Yes, thank you. If you wish to ask a question, please press star then one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star then two. If you are on a speakerphone, please pick 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 reenter the queue. If you are going to ask a question in Chinese, please follow with the English translation. At this time, we will pause momentarily to assemble the roster. And the first question comes from Alex Yao with J.P. Morgan.
spk03: Okay, thank you, Manager Tan, for giving me this opportunity to ask a question. I have a question about the Hong Kong market. Just now, we also talked about the fluctuation of the market in the first half of the year. including the change in the current market supply and demand structure, can you expand further to tell us how we view the fluctuation of the real estate market in the first half of the year, and how we view the supply and demand structure change in the current housing and trading market. So, after the recent policy stage has become more and more active, how do we consider the outlook for the second half of the year? Can you guys talk about the property market volatility in the first half this year, and also whether the supply and demand structure has changed in the current home transaction market? And finally, how do you think about the market outlook after the recent policy statement? Thank you.
spk02: Yes, thank you, Alex. Although we believe the existing whole market will improve this year from the extreme conditions in 2022 at the bottom of the cycle, the recovery trend will strengthen confidence in the market. Both supply and demand sides have become more responsible to the policy relaxation. The market's recovery and supportive policies are expected to ease the lingering effect of the three-year pandemic. We believe the China economy cycle has a strong vitality, and we believe the property market will usher in a new period of the recovery and growth. The new home market faces the risk of concluding the year with a year-over-year decline. Considering the current macroeconomic pressure, unemployment rate, and the rest of the expectations, this still requires further improvement. and the impact of the continued debt crisis that the leading private developer faces. The willingness of the developer to adopt an external sales channel continues to increase. Rather than fixate on the overall market scale, we place a greater emphasis on the sustainable, healthy, and stable growth of the brokerage channel sales market. This is our target address to market and where we see more opportunity to be benefited. In the first half of the year, we experienced a market surge and a subsequent fall. The rapid increase in the first quarter elevated the market expectations. Since April, the market has retreated notably, with the steam home sales on our platform continuing to decline from April to June. New home sales also contracted on a sequential decline and showed a year-over-year decline in June for over 28%. The reasons for this decrease are threefold. First, the market is normalizing. Second, the market's previous expectation was too high. During the normalization, the gap between the reality and the expectations further dampened the market confidence. Third, the market economy has been under pressure since the second quarter of this year. This has shown in the employment rate and the import-export data, which also caused infatuation in resident companies. The three-year pandemic has left a long-lasting impact on the economy, and it will take time and effort for this prolonged effect to further eliminate. As for the market, in the first half of the year, first the market trends have severely divergent. We are seeing this even in different districts within a single city. In recent five years, just take Beijing and Shanghai as an example, the whole area of Beijing and Shanghai has performed very differently than that in the outer suburbs, with the housing price index of the former to reach 40 to 50% points higher than the later. Second, in terms of the supply demand structure, the home upgrade demand is still the most essential force in the market. On the supply side, the proportion of newly listed homes with age under five years and age over 20 years has increased most significantly. The increasing supply of the high-quality and relatively new homes in the single market provides more choices for buyers. From demand perspective, in the first half of this year, the proportion of the transactions involving the demographic and housing unit type of this home upgrade demand have further increased. The proportion of customers aged 35 to 44 have increased by 2% to 35% compared with the year of 2022. And the proportion of the unit, about 90 square meters, has increased by 3% to 37 compared with the year of 2022. Whether from supply or demand perspective, the houses in key city areas and the homes from upgrade-oriented demand are still the primary market focus. Third, the existing homes are playing a bigger role in satisfying the home upgrade demand, supporting the overall existing home demand to be stable. Whereas in the new home market, it still takes time to digest the cumulative risks related to developers, and the effective supply in whole areas is limited. We are in a market with a strong performance of existing homes, and the demand for the new home continues to be diverted to the existing home market. The comparative advantage of existing homes remains significant, and the existing home demand is also relatively stable. In June, our monthly using-home choose index fell only by 1.7% from April, and even recorded as a rebound in July. According to our research, in the second quarter, the number of the residents with a home purchase plan even rose by 1% compared to the Q1. The steady demand side data supports our view that the market adjustments in the second quarter are shortened no more corrections, not an implication point indicating a long-term trend. For the second half of this year and going forward, we first want to emphasize that our market is not suitable for linear extrapolation based on a single-causars fluctuation. It has an inherent cycle and rooms for structural and directional growth. In the future, we believe the active policies will bring better support for the market recovery. Based on the objective understanding of market dynamics and the neutral market perspective, we also believe the market will recover. The Politburo meeting held on July 24 emphasized the need to effectively prevent and resolve risks in the key areas. particularly while adopting the significant change in the supply-demand dynamics of China's real estate market. It is necessary to adjust and optimize real estate policies in a timely manner, make good use of policy toolbox for city-specific measures to better meet the rigid and improvement-oriented housing demands, promoting the stable and healthy developments of the real estate market. With the implementation of the relevant supported policies, We expect the existing home market to be bolstered in June and recover in the second half, while the new home market will find a bolster among the fluctuations in the third quarter. Since the Politburo meeting, we have observed that in Beijing and Shanghai, the number of home-choose new customer demands and the transaction volume are the first to pick up. The potential rollout of the improvement demand-related policies is deciding to activate more than 50% of the population in demand structure, further amplifying and activating the home replacement chain. At the same time, real estate is not only a steel and a concrete, but also a carrier of the economy, happy lives, and inspiring dreams. In the long run, real estate assets, service, and efficiency needs to be comprehensively improved to better align with the customer's demand for the better living. Recently, the government authorities issued measures on promoting home furniture consumption, focusing on summer homes, one-stop home furniture solution, old home renovation, et cetera. The recommendation put forward measures to comprehensively promote the house furniture consumption. fully release the potential of the housing industry value chain and facilitate the overall improvement of people's quality of life. We believe that in the future, the housing industry will be more mature and comprehensive, entering into a new stage of growth funded by higher quality.
spk05: Thank you.
spk02: Thank you.
spk04: And the next question comes from Timothy Zhao with Goldman Sachs.
spk00: How should we look at the longer-term growth outlook for the core home transaction business, including the new home and secondary home transactions? as well as what is the room for the further efficiency enhancement in the core , and what is your specific strategic actions in this regard, and any color that you can share on the progress here today would be helpful. Thank you.
spk02: Thank you, Kimsie. Benefiting from the better empowerment and the retention of the service providers, effective cost reduction and the efficiency enhancement measures during the market corrections Baker achieved rapid growth during the market recovery in the first quarter of this year. Our housing transaction services have built on this foundation and continue to multiply refined platform operations and drive breakthroughs of the Lianjia's business. This has led to the steady growth of our housing transaction services while allowing Baker to better meet customer needs and elevate the service provider's efficiency and income. As for our core business, we are implementing policies according to the distinctive development status of different regions. In the cities where our city-connected stores are insufficient in scale, we aim to ramp up the connection with high-quality stores while supporting stores' ability to recruit agents, conduct suitable training and overall management. The number of our stores in the first half of this year increased by almost 10% from the end of last year, and the number of agents increased by 17%. In the cities where we reached a certain scale, we are dedicating our efforts to enhancing our efficiency and quality, which are mutually reinforcing and inseparable. On the storefront, we are promoting a competitive based on store ranking, which has also been extended to our new home sales channel. We are also dedicated to promote our large store strategy and creating dedicated homepage for store owners and are leveraging digitalized operation analysis tools to enhance their efficiency in business management and facilitate more intuitive interaction with our platform. Our next step will be to help store owners elevate their business understanding and improve their management approach using online products and dedicated operations support staff, thereby driving successful store and brokerage brands. Targeting three more granular elements in our operations, the houses, customers, and agents. We continue to refine our existing operations and promote collaboration and more focused operations by agents, ultimately achieving enhanced efficiency. For instance, on the home listing side, in the first half of this year, underpinned by our systematic capabilities, we implemented a home listing operation mechanism of home listing maintenance score and store-to-home listing program matching nationwide. This allows agents to focus on specific community while improving home maintenance capability and the transaction efficiency. On your home site, we are also implementing the focus project strategy to drive sales efficiency. In terms of home customer matching, we launched a product called Point2Point as an interagent channel for the flow of the home listing. improving the home customer matching efficiency and the home listing inventory liquidity. As a result, the 14-day sales through rate of our home listings through these two improved from 6% to around 12%. As for agent-customer matching, we completed the comprehensive optimization of our online sales leads allocation for the existing home and new home transaction services, which take into account both fairness and efficiency to support junior agents' growth. With respect to the ecosystem governance, to address the issue of the private transfer orders that every platform in the industry is facing, we achieved new breakthroughs in our business conduct governance. We empower our client achievement team by creating digital tools and promoting closed-loop management awareness, identify risk, and fix any issue forms. Through our integrated online-offline governance system, service providers on our platform now engage in a proactive self-review instead of being passively supervised. Store owners and agents now hold elevated trust in our platform, and their sense of compliance has improved. For new homes, we promote developers with all sales channels to jointly abide by the Sunshine Promise a series of pledges on the transparent operations and promoted industry-wide compliance. As of June, more than 5,000 cooperative real estate projects have been covered by this Sunshine Promise. Going forward, we will continue to focus on enhancing our service capability for store owners and homeowners. In the context of the increased cross-district new home projects, the transaction of existing homes. We hope to further improve our customer targeting capability to match customers with the respective new home projects and enhance our understanding of the customer needs in a more systematic way, thereby strengthening our collaboration network and improving matching efficiency. In the cities where our network coverage are already at a high level, We are further enhancing efficiency and quality of our ACN. We are pursuing the growth of our core and emerging business and the breakthroughs of our emerging business. Meanwhile, despite the possible volume decline in the new home market, developers have been more willing to adopt external sales channels. Instead of the total addressable market, we put more emphasize on and benefit more from this sustainable, healthy, and steady growth of our dressable market, that is, the brocade China sales market. For our direct operation Lianjia business, first, we continued to leverage our large store model to take our agent income to the next level. In the first half of this year, the average number of agents per Lianjia store reached 18. of 16% year-over-year. The unjust average agent's income to average social income index also improved by 40% year-over-year. Second, we continue to pilot innovative agent incentive mechanisms. Our goal is to create a working environment that benefits professional agents and managers' long-term development. Third, we will continue to enhance our service capability and increase investment in traffic acquisition to boost brand momentum, invigorating the Lianjia brand. In the first half of this year, we will refocus and standardize our service commitments, and then we will invest in more brands, cultivating going forward. Thank you.
spk04: Thank you. And the next question comes from Harry Chen with Citigroup.
spk01: Hello, everyone. I am Harry Chen, an analyst at Huaqi Bank. I am very grateful for this opportunity to ask a question. I would like to ask you to share with us the progress of the entire large-scale housing business and the development of the current core capabilities. Can you sort out the current core operating standards in some of our benchmark cities, such as Hangzhou and Beijing, as well as the situation of the unit economic model? I will translate it myself. Thanks, management, for the opportunity. How's your home renovation and furnishing service business progressing? Any updates on the development of your core capabilities? Could you share some key operating metrics and the unique economics model for the benchmark cities like Hangzhou and Beijing?
spk02: Thank you, Henry. The progress of our home renovation and furnishing business continues to exceed our expectations. In the second quarter, Our home renovation and furniture service business sustained its growth momentum. The contracted sales reached around 3.4 billion in the second quarter, making the first half of contracted sales volume to reach more than RMB 6 billion. The year-over-year growth rate in the second quarter continued to reach over 100%. Notably, the home renovation order volume increased by over 90% year-over-year. expanding scale. As project completion and delivery accelerated, our revenue for the second quarter surpassed RMB 2.6 billion, making a 91% increase year-over-year and 86% increase culture-over-culture. In cities where we have leadership, we have established a virtual cycle of the scale, quality, and economy performance. Beijing and Hangzhou were the first cities we entered and are leading the way in establishing a virtual cycle. Just take Beijing as a showcase. In terms of the scale, our contract sales in the city exceeded RMB 600 million in the second quarter, with monthly contract sales surpassing RMB 200 million for two consecutive months, with a quarter revenue to reach over RMB 500 million We expect Beijing's annual contract sales to exceed RMB 2 billion in this year. For Hangzhou, the contract sales falling for the second quarter also reached over RMB 500 million, and we expect their annual contract sales in this year to reach more than RMB 1.8 billion. We can now simultaneously initiate and complete thousands of home renovation units per month in Beijing. This is a significant breakthrough for the industry. In terms of the profitability, the quarterly operating profit in Beijing reached RMB 50 million, and the monthly operating profit exceeded RMB 10 million for five consecutive months. Using Beijing and Hangzhou as guiding examples, we are replicating the model and the experience from this well-established city across the entire country. Shanghai is expected to break through the milestone of RMB 1 billion in annual contract sales and to contribute annual revenue of RMB 700 million in this year, which means it will reach the same scale as Beijing, trading one year behind. We expect cities like Wuhan, Ningbo, Suzhou, and so on to reach the same scale as Beijing and Hangzhou in our third wave of expansion. As of middle of this year, After just nine months of the integration of Wuhan, Chengdu, and Beike, we achieved RMB 240 million in contracted cells and RMB 120 million in revenue, each showing the growth rate exceeding 120% year-over-year, which is a strong testament to the effectiveness of our laser-focused cell strategy. Progressing the capability development The virtuous cycle we have established at the city level is a result of our committed effort in developing capability, combined with consistent iteration for the improvement over years. Number one, for the customer acquisition, we continue to empower agents to become the community expert and home advisor. Their effective and extensive customer acquisition and conversion has helped breaks through the home renovation and furniture industry bottleneck at the top of the funnel. This year, more than 45% of the home renovation customers were referred by our core business. Simultaneously, home renovation business is contributing to the growth of the home construction and home rental services the other way around. In Beijing, designers are involved in the measurements during the initial stage of the home transaction and create the renovation design plan during the negotiation stage to facilitate the transaction completion. Our customer acquisition advantage frees us up from putting our main effort into acquiring the customer like our peers typically do. Instead, we can focus more on enhancing our core capabilities in home renovation and the furniture business This enables us to concentrate on the sense of the operation and overcome growth barriers. Number two, for the management of the service provider. We have invested our resources in service providers. Fundamentally, we define how they can earn the income and how they participate in the industry. This is achieved by the passive and the systematic order dispatching timely settlement, providing the incentive and respect for the high-quality service providers, both financially and culturally. This shift has transformed the industry past practice of the bad money drives out of good money into the good quality wins. Number three, for the delivery capabilities, we invested technology and research, focusing on two things. We enhanced our reliance on the system and the rules for the progress management, not just on people. So we can build an end-to-end system that covers design, construction, materials, and supply chain. Moreover, we installed AI-driven technology to improve customer acquisition and efficiency, which empowers Baker to go beyond the traditional boundary of the project management enable us scientifically and efficiently manage the timeline, conduct the governance and service online. This ensures a high-quality breakthrough in scale. Number four, for our product capability, we invested in product capabilities. Our products are based on the deep user insights, covering the rich SKU offers to meet specific user demands. As we keep developing our capabilities, We are confident that we can continuously improve our business towards a virtual cycle of quality, scale, economic return across various regions. Thank you.
spk04: Thank you. Thank you. And the next question. Thank you. And the next question comes from Randall Rong with Bank of America Securities.
spk06: Thank you. Thank you for taking my question. So can management elaborate more on the recent organization upgrade and structural change? So what are the changes that have taken place and what are the thoughts behind this upgrade? Thank you.
spk03: Okay, thank you, Miranda. The purpose of our organization's structural adjustment is to establish a new formation to achieve our strategic goals. The strategies and business concepts requires new organization structure to undertake and implement them. Focusing on joyful living, fulfilled career services, and aspirated to call, we upgraded our strategy to one body, three wins. Our corresponding organizational adjustments is also an upgrade of our management philosophy and mechanism. The new organization structure is centered on customers and placing the front line At the center of our value creation, we have established four business lines. There are home transaction services, home renovation and furnishings, rental property management services, and , and nine function lines comprising finance, R&D, strategy, quality assurance, human resources, users, compliance, public affairs, and collaboration. Together these are designed to provide job relieving for customers and fulfill careers for service providers. Our business lines will work to take care of customers, inspiring job relieving for customers in each city and fulfilling careers for different types of service providers. The function lines will leverage their professional capabilities to provide good services to home that defines and accompanies internal customers and have different cities achieve the goals of the admirable services job of living. Through these actions, we aspire to get rid of many of our creating and big company disease and return to entrepreneurship in how we view ourselves, our customers, and internal partners. The adjustment of our organizational structure lays the foundation for company-wide consensus. and invite every individual to participate in very cool co-creation. It will facilitate unifying ideas and goals, help us grasp the essence of our industry throughout our cycles, and return to the nature that houses are for living and in service of people, and everyone demands a better living. Thank you.
spk06: Thank you.
spk04: Thank you. We are now approaching the end of the conference call. I will now turn the call over to your speaker host today, Ms. Ting Li, for closing comments.
spk05: Thank you, operator. Thank you once again for joining us today. If you have any further questions, please feel free to contact Baker's Investor Relations team through the contact information provided on our website. This concludes today's call, and we look forward to speaking with you again next quarter. Thank you, and goodbye.
spk04: Thank you. The conference has now concluded. Thank you for attending today's presentation, and we now disconnect your lines.
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