KE Holdings Inc.

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 3/5

KE Holdings Inc. is the leading integrated online and offline platform for housing transactions and services in China, offering a broad range of solutions across the real estate ecosystem.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

KE Holdings Inc. (also known as Beike) operates a comprehensive online and offline platform for housing transactions and services in China.{: .important} The company acts as an intermediary, connecting home buyers, sellers, real estate agents, and developers through its extensive online platform and physical store network.

Revenue Streams

BEKE’s revenue streams are diverse, stemming from various services that cater to different aspects of the housing transaction process:

  1. Existing Home Transaction Services: This segment is the largest revenue contributor, generating income from fees charged on transactions of existing homes.
  2. New Home Transaction Services: Revenue is earned through commission fees from sales of new homes, often collaborating with real estate developers.
  3. Home Renovation and Furnishing Services: BEKE facilitates home renovation and furnishing services, generating revenue from these ancillary offerings.
  4. Emerging and Other Services: This category includes income generated from the company’s emerging businesses and other smaller services.

The housing market in China is dynamic and influenced by various factors, including government policies, economic conditions, and consumer preferences. The real estate brokerage industry is highly competitive and fragmented. BEKE faces competition from both online portals and traditional real estate agencies. However, the company’s integrated online and offline model differentiates it from its competitors. Major competitors in the Chinese real estate market include other online portals, local real estate brokers, and emerging tech companies.

Differentiation and Strengths

BEKE’s strength lies in its integrated platform that combines online portals with a wide network of physical stores and a large agent network. This combination allows the company to tap into both online and offline customer bases. Other key aspects are:

  • Brand recognition and scale: BEKE has strong brand recognition in major cities in China, and its large agent network enables a larger reach and stronger network.
  • Proprietary technology: The company has developed advanced technology, including VR capabilities, online listings, and customer relationship management systems.
  • Data-driven approach: The company uses data and analytics to understand market trends, optimize operations, and provide a better service to customers.
  • One-stop shop: BEKE offers a full range of services, including new home sales, resale transactions, home renovation and financing.
  • Extensive Agent Network: The company boasts a vast network of real estate agents who are able to give better support and reach more clients than a typical agency.

Financial Overview

BEKE has shown significant revenue growth in the past. However, recent years have presented some volatility in income, driven by several macroeconomic factors, and in particular, the Chinese government’s policies.

  • The company’s revenue was RMB24.1 billion in 2020, 79.9 billion in 2021 and RMB60.9 billion in 2022.
  • The decrease in total revenue was mainly attributable to the significant decrease in revenues of new home transaction services, and to a certain extent, the decrease in revenues from other services, partially offset by an increase in revenues of existing home transaction services. The drop in new home sales is partly due to the credit squeeze on property developers.

Margins

The company’s gross margin was 22.7% in 2022 and down 1.5 percentage points year-over-year. Operating expense ratio is 91.6% in 2022 vs 95.8% in 2021. BEKE’s adjusted EBITDA margin was 1.9% in 2022, a drop from 8.1% in 2021.

Key Drivers of Revenue

  • Revenue is directly correlated to sales volumes of new and existing homes in the regions that BEKE operates.
  • Transaction size, which is based upon market prices of homes.
  • Number of agents as well as their productivity levels.
  • Conversion rates of potential clients into actual transactions.

Balance Sheet Health

BEKE’s balance sheet has elements of both strength and vulnerability:

  • Cash and Short-term investments: BEKE has a large amount of cash, cash equivalents, restricted cash and short-term investments, totaling RMB36.6 billion as of December 31, 2022. This strong cash position is one of the few strong factors of the company.
  • Debt levels: BEKE’s debt obligations are relatively low, which improves its capital structure, though as the company expands more and more loans are needed. Long term debt is mainly comprised of unsecured bonds.
  • Negative Shareholder Equity: Shareholders equity is at minus 10 billion due to accumulated losses for the company, which is a concern, but doesn’t affect solvency, due to the company’s cash reserves.
  • Goodwill: Goodwill on the balance sheet is relatively low given the scale of their acquisitions.
  • Off balance sheet items: The group has several liabilities that are not included on the balance sheet, such as operating leases, and pension liabilities. All of these are important to consider, especially since most of their assets are short term and do not give as much safety as long term ones.

Rating: 3/5

Understandability

BEKE’s business model is relatively easy to understand at a high level. However, the complexity of the Chinese real estate market, along with the unique aspects of its online and offline strategies, makes the business more complicated to fully grasp. Also the fact that the company operates across many geographical areas with different regulations, adds to the complexity. Understanding the company’s financial statements is difficult due to several complex accounting principles.

Rating: 3 /5

Moat Analysis

BEKE’s “moat,” or competitive advantage, is based on several factors:

  • Scale: Their national scale in a highly fragmented industry is a huge benefit. They operate in over 100 cities and have a very large agent network.
  • Data Network Effects: As more people use the platform, it attracts more buyers and sellers. The increased interactions and amount of properties on the platform create value for both buyers and sellers.
  • Switching Costs: Once sellers or buyers enter the platform, using other tools becomes significantly more complicated and time-consuming. This generates switching costs.

However, there are also a few weaknesses in this moat:

  • Lack of Proprietary Technology: Even though the company has a technology platform, it isn’t proprietary or hard to copy.
  • Competition: The market is highly competitive, which means other players can compete on price. Other large portals or new emerging technology firms can have the resources to invest heavily into sales or new methods, which may threaten BEKE’s market share.

Rating: 3/5

Risks to the Moat and Business Resilience

  • Regulatory risk: Changes in government regulations, especially in the real estate market, can create instability to both revenues and profitability. The credit squeeze imposed on developers has had a significant impact on revenue.
  • Industry structure risk: The competition from existing players or new entrants can erode BEKE’s position in the industry. The rise of new competitors such as social media platforms can significantly hurt BEKE.
  • Macroeconomic risks: Economic downturns and geopolitical instability are huge risks. If China’s economy slows, so too could real-estate sales, which would greatly hurt the company’s operations. Furthermore, the housing bubble and its risks are very real in the chinese market, and as they appear, they directly affect BEKEs operations.
  • Technological Risk: BEKE must continue innovating and adopting new technologies to maintain its competitive advantage.
  • Operational Risk: BEKE’s business relies on a smooth transition of data, and high customer satisfaction. This is a complex operation, and if any area fails, business may be at risk.
  • Management risk: The effectiveness of top managers’ strategies and execution is critical to the company’s value creation, and inability to secure talent and manage finances can heavily affect the business.

Despite all those risks the company is very resilient:

  • It has a large scale that is difficult to replicate.
  • It has a very vast agent network.
  • The company has high liquidity.

Recent Concerns/Controversies

  • The Chinese Government’s policy changes have impacted the real estate market and had an impact on BEKE’s revenues as noted earlier, but also affected investor confidence in the company.

  • In recent earnings calls, management has focused on emphasizing the potential of its operating model and technological improvements. The management emphasizes that the company will adjust its business model to the ever changing market.

    • This is a direct response to investor concerns of volatility in the Chinese housing market.

Summary

BEKE operates in a challenging and rapidly evolving market. Its integrated approach, strong brand, and focus on technology are its strengths, but the regulatory risks and intense competition are real challenges. While the company’s performance can fluctuate, it has strong long-term potential in the Chinese real estate market. In the coming years, BEKE has to prove to investors that its business model is resilient to macroeconomic and regulatory concerns and can return its profits to a stable state.