Produced by Radar Finance | Written by Xiao Sa | Edited by Shenhai

The temperature of the real estate market is hidden in the financial reports of Ke Holdings.

Recently, Ke Holdings, a real estate brokerage service platform, released its interim results. In the first half of this year, the company achieved a net revenue of 39.7 billion yuan, slightly down from 39.8 billion yuan in the first half of 2023. Net profit was 2.333 billion yuan, a decrease of approximately 42.38% from 4.049 billion yuan in the same period last year.

Compared to the first quarter, Ke Holdings' decline narrowed. In the first quarter of this year, the company generated revenue of 16.4 billion yuan, a year-on-year decrease of 19.2%; net profit was 432 million yuan, a year-on-year decrease of 84.28%.

Revenue from real estate transaction services remains the primary source of income for Ke Holdings, accounting for 65% of total revenue in the first half of the year. However, the decrease in net revenue from resale and new home transactions dragged down the company's overall revenue. During the reporting period, the total transaction value of resale homes decreased by 8.7% year-on-year, while the total transaction value of new homes decreased by 32.4% year-on-year.

In the first half of the year, Ke Holdings' net cash flow from operating activities was approximately 3.86 billion yuan, a significant decline from 7.43 billion yuan in the same period last year.

As revenue from real estate transaction services declined, Ke Holdings set its sights on new markets, elevating the strategic importance of home decoration, leasing, and residential development businesses beyond brokerage services.

In practical terms, net revenue from home decoration and home rental services, two components of Ke Holdings' diversified businesses, both recorded substantial growth in the first half of this year. In terms of residential development, news of Beihaojia acquiring land plots emerged previously, and this business is still in its infancy.

Net profit down 40% in the first half of the year

As the real estate industry continues to adjust, Ke Holdings, as a player in the industry chain, faces pressure on profitability.

On August 12, Ke Holdings released its interim results for the first half of the year, showing that the company achieved net revenue of 39.7 billion yuan from January to June, a slight decrease of 0.04% year-on-year, primarily due to a decrease in net revenue from resale and new home transactions, offset by the expansion of home decoration, home furnishing, and home rental businesses.

In terms of profitability, Ke Holdings' net profit for the first half of the year was 2.333 billion yuan, down approximately 42.38% from 4.049 billion yuan in the same period last year. Adjusted net profit was 4.1 billion yuan, compared to 5.9 billion yuan in the same period in 2023.

From January to June, Ke Holdings' Gross Transaction Value (GTV) was 1.47 trillion yuan, a decrease of 16.2% from the same period in 2023. Among them, the total transaction value of resale homes was 1.02 trillion yuan, a decrease of 8.7% from the same period in 2023; the total transaction value of new homes was 387.1 billion yuan, a decrease of 32.4% from the same period last year.

The decrease in transaction value directly impacted Ke Holdings' revenue, which is based on these transactions. During the reporting period, the company's net revenue from resale home transactions was 13.1 billion yuan, a year-on-year decrease of 16.3%. Among them, commission income declined by 17.5% year-on-year to 10.6 billion yuan, while revenue from platform services, franchise services, and other value-added services decreased by 10.5% year-on-year to 2.5 billion yuan.

The new home business was more significantly impacted, with net revenue from this segment declining from 17.1 billion yuan in the first half of 2023 to 12.9 billion yuan in the first half of this year, a year-on-year drop of 24.9%.

Public data shows that from January to July 2024, nationwide sales of newly-built commercial housing decreased by 18.6% year-on-year, and sales revenue of newly-built commercial housing decreased by 24.3% year-on-year. Funds in place for real estate development enterprises decreased by 21.3% year-on-year. Currently, many real estate indicators are still declining, and the overall real estate market is still adjusting.

However, while the domestic real estate market experienced a lackluster performance in the first quarter, transactions gradually improved in the second quarter following the implementation of various favorable policies.

Affected by this, Ke Holdings' performance in the first half of the year showed a trend of low in the first quarter and high in the second quarter.

In the first quarter, the company achieved revenue of 16.4 billion yuan, a year-on-year decrease of 19.2%; net profit was 432 million yuan, a year-on-year decrease of 84.28%; adjusted net profit was 1.392 billion yuan, a year-on-year decrease of 60.91%.

Affected by the downturn in the new home transaction market, Ke Holdings' total transaction value in the first quarter of 2024 decreased by 35.2% from 971.5 billion yuan in the same period in 2023 to 629.9 billion yuan, a decline of 35.2%.

On May 17, the People's Bank of China jointly launched significant policies for the real estate market with the China Banking and Insurance Regulatory Commission, including removing the national floor for mortgage interest rates, lowering the down payment ratio for mortgages and public housing fund loan interest rates, and establishing re-lending for affordable housing, among other measures to stabilize the real estate market.

Against this backdrop, as real estate transactions increased, Ke Holdings' performance improved significantly in the second quarter.

The financial report showed that the company achieved a total transaction value of 839 billion yuan in the second quarter, an increase of 7.5% year-on-year; net revenue was 23.4 billion yuan, an increase of 19.95% year-on-year; net profit was 1.9 billion yuan, an increase of 46.2% year-on-year; and adjusted net profit was 2.69 billion yuan, an increase of 13.9% year-on-year.

However, the recovery in the second quarter still could not cover up the company's growth downturn. Following the financial report, Kaiyuan Securities downgraded its non-GAAP net profit forecast for Ke Holdings from 2024 to 2026.

Daiwa Capital Markets issued a research report stating that due to the high fixed costs of Lianjia stores, it lowered its earnings per share forecast for Ke Holdings from 2024 to 2026 by 1% to 5%. Based on weaker market sentiment, it also lowered the company's forecast price-to-earnings ratio multiple from 23 times to 21 times and reduced its target price by 12%, from HK$65 to HK$57.

Home decoration business proactively 'hits the brakes'

Compared to real estate brokerage services, Ke Holdings' home decoration business is relatively impressive.

Ke Holdings' layout in the home decoration sector began early on. Public records show that in 2015, Lianjia and Vanke jointly established VankeLian, marking their initial foray into the home decoration sector.

Since then, Ke Holdings has made a series of investments in the home decoration field, and in 2020, it launched its self-operated home decoration brand, "Beiwuo," with its operating entity being Beijing Beiwuo Decoration Co., Ltd.

According to Tianyancha App, VankeLian (Beijing) Decoration Co., Ltd. has a registered capital of 30 million yuan. In March 2022, it was renamed Beijing Beiwuo Decoration Co., Ltd., and Beijing Vanke Enterprise Co., Ltd. withdrew from its shareholders. Currently, it is wholly owned by Ke Home Tech (Zhejiang) Co., Ltd. (hereinafter referred to as "Ke Home").

Furthermore, Ke Holdings has enriched its home decoration portfolio through a series of acquisitions. For example, Shengdu Home Decoration, which originated in Hangzhou, announced an agreement with Ke Holdings in July 2021, with the latter acquiring 100% of Shengdu's equity for a total consideration of 8 billion yuan.

In April 2022, Ke Holdings announced that it had successfully completed the acquisition of Shengdu Home Decoration for a total consideration of 3.92 billion yuan in cash and 44.3159 million shares of the company's Class A ordinary shares. Shengdu officially became a subsidiary of Ke Holdings.

Thus far, "Shengdu" has become another brand under Ke Holdings, in addition to "Beiwuo." According to its official website, Shengdu has achieved full coverage of core prefecture-level markets in Jiangsu, Zhejiang, Anhui, and Shanghai, as well as direct-operated systems in Wuhan, Chengdu, and other first- and second-tier provincial capital cities nationwide. It has also established a strong presence in East China and is expanding nationwide.

Additionally, on October 11, 2023, Ke Holdings announced that its wholly-owned subsidiary, Ke Home, intended to acquire the remaining equity of Kongjianzhihui (full name: Kongjianzhihui Decoration and Renovation (Beijing) Co., Ltd.), with a total maximum payment of approximately 1.55 billion yuan.

Ke Holdings stated that it expected to complete the acquisition in the first half of 2024. Upon completion of the transaction, Kongjianzhihui will become a wholly-owned subsidiary of Ke Holdings.

Through continuous acquisitions, Ke Holdings' home decoration segment has experienced rapid revenue growth. According to the 2023 annual report, Ke Holdings' home decoration and home furnishing business recorded a contract value of 13.3 billion yuan, representing a year-on-year increase of 93% on a comparable basis. Net revenue increased by 74% year-on-year on a comparable basis, reaching 10.9 billion yuan.

In the first half of 2024, Ke Holdings' home decoration and home furnishing business achieved a total transaction value of 7.6 billion yuan, an increase of 24% year-on-year, with corresponding net revenue growing by 59.9% year-on-year to 6.4 billion yuan.

However, Ke Holdings' current home decoration business revenue scale is relatively small, and according to financial reports, its operating profit margin is relatively lower than that of real estate transaction services due to its growth phase.

Furthermore, this year, Ke Holdings proactively slowed down the expansion of its home decoration business. Peng Yongdong, Chairman and CEO of Ke Holdings, stated during the earnings call, "This year, we proactively slowed down the pace of our home decoration business… Running too fast risks sacrificing customer quality and trust."

Undoubtedly, the home decoration business process is complex, involving a wide range of personnel and a diverse range of products. Rapid expansion in scale would increase delivery pressure and pose a challenge to brand reputation and word-of-mouth. Whether Ke Holdings' home decoration business can maintain quality and reputation while achieving scale breakthroughs remains to be seen.

Entering the real estate development sector

Ke Holdings, formerly known as Lianjia Real Estate Agency, was founded in 2001. In 2009, "Lianjia Online" was launched, marking the company's initial foray into the internet. In 2015, Lianjia merged with multiple real estate agencies, initiating a nationwide layout.

In 2018, the "Beike Zhaofang" platform was officially launched, and in 2020 and 2022, the company successively listed on the New York Stock Exchange and the Hong Kong Stock Exchange.

It is worth mentioning that on May 20, 2021, Zuo Hui, the 50-year-old founder and Chairman of Ke Holdings, passed away due to a sudden deterioration in his condition. Subsequently, Peng Yongdong took over as Chairman.

On July 12, 2023, Peng Yongdong issued an open letter announcing the launch of a strategic upgrade under the "One Body, Three Wings" framework and corresponding organizational restructuring.

Previously, Ke Holdings' strategy was "One Body, Two Wings," with "One Body" referring to resale and new home transaction businesses, and "Two Wings" referring to home decoration, home furnishing, and affordable housing businesses.

However, under Ke Holdings' new "One Body, Three Wings" strategy, the Beihaojia business line was added, forming four business lines: brokerage, home decoration, affordable housing, and Beihaojia, corresponding to real estate brokerage, home decoration, leasing, and residential development, respectively.

Among them, leasing revenue reached 5.813 billion yuan in the first half of this year, an increase of 176.7% year-on-year, primarily driven by an increase in managed properties under the hassle-free rental model.

The newly established "Beihaojia" business line is seen as the intermediary giant's formal exploration into residential development from real estate transactions. However, one year later, compared to the high-profile entry into the home decoration sector, Ke Holdings has taken a more low-key approach in residential development.

According to reports, Beihaojia has made attempts in the land auction market this year. Although it failed to acquire land plots in Beijing and Guangzhou, by the end of July this year, Beihaojia-controlled Xi'an Jiajia Zhihe Real Estate Development Co., Ltd. successfully acquired two commercial and residential land plots in Xi'an's Weiyang District for a total transaction price of 134 million yuan.

According to Tianyancha App, Xi'an Jiajia Zhihe Real Estate Development Co., Ltd. is 95% owned by Beihaojia (Xi'an) Real Estate Development Co., Ltd., which in turn is wholly owned by Ke Investment Holding Co., Ltd.

However, as the real estate industry continues to adjust, Beihaojia does not seem to intend to directly engage in real estate development. Ke Holdings has stated that Beihaojia's positioning is not traditional real estate development but rather a data-driven residential development service platform. Currently, Beihaojia is in the early stages of exploration.

Industry insiders believe that directly engaging in development is not a wise choice given the current market conditions, and equity cooperation or even light capital cooperation would be more suitable for Ke Holdings.

In fact, on the day of land acquisition, Greentown Management announced that it had signed a contract to undertake the construction of these two land plots for Ke Holdings, primarily responsible for construction services and brand output guarantees.

It is not difficult to understand that although Ke Holdings has deep roots in residential services and strong capabilities in new home sales, it lacks extensive experience in real estate development and is still a novice in specialized fields such as project investment, design, and construction.

From a revenue contribution perspective, the newly established real estate development business is more like an exploration and validation of new businesses, currently having a relatively minor impact on performance. In the first half of this year, the company's emerging businesses and others generated net revenue of only 1.6 billion yuan.