KE [BEKE] Conference call transcript for 2022 q2
2022-08-23 22:27:03
Fiscal: 2022 q2
Operator: Hello, ladies and gentlemen. Thank you for standing by for KE Holdings, Inc.âs Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. Todayâs conference call is being recorded. I would now like to turn the call over to your host today, Mr. Matthew Zhao, IR Director of the company. Please go ahead, Matthew.
Matthew Zhao: Thank you, operator. Good evening, and good morning, everyone. Welcome to KE Holdings, Inc. or Beikeâs second quarter 2022 earnings conference call. The companyâs financial and operating results were published in the press release earlier today and are posted on the companyâs IR website, investors.ke.com. On todayâs call, we have Mr. Stanley Yongdong 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 strategy and business developments and Mr. Xu will provide additional details on the companyâs 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 Beikeâs earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Please refer to the companyâs press release, which contains a reconciliation of all these non-GAAP measures to comparable GAAP measures. Lastly, unless otherwise stated, all figures mentioned during this conference call are in renminbi. With that, I will now turn the call over to our Chairman and CEO, Mr. Stanley Peng. Please go ahead, Stanley.
Yongdong Peng: Thank you, Matthew. Hello, everyone. Thank you for joining Beike second quarter 2022 earnings conference call. In the second quarter on a proactively easing purchase for industry and the effective pandemic controls. Chinaâs real estate transaction market saw a series of positive changes, especially in the existing home market. Meanwhile, we improved our performance operating efficiency and stability in a scale of our stores and agents as well as year productivity by the internal and external environment we live in remains follow challenges. Micro uncertainty continued to increase and our businesses are becoming more diverse and complex as we advance our One Body, Two Wings strategy. Faced with such a complex internal and external environments to command and control our diversifying businesses, our organization need to have deeply what players at the center that we need to believe service providers, the real estate agents, when a veteran workers and foreman, designers, customer service representatives, rental housekeepers. They are our customers and our valuable assets in terms of market corrections, our tried and true progress of the years, it will seek any answers from industries frontline finance trends from the day to day work our ordinary service providers. This is even more necessary today, because we faced a market adjustment with a greater than euro magnitude in a scale and the complexity of our organization have also reached a new level. First, going to a frontline will have us to award the potentially the company disease, as we grow in scale, by our management in a platform teams connecting with those we so as equals, instead of from the call, while the frontline remains at a distance. We can bring everyoneâs heart together and establish a true understanding amongst one another. Second, we need to be all have to all the frontline to be an industry internet platform. We have deep industry insights, is only through our companyâs industry immersion that we can leverage the advantage of the platform, formulates useful rules and the mechanisms and develop helpful functions and products. To that end, close to half of the 147 middle and a senior management members on the Beike platform, myself included spend 1 to 2 months working on the frontline over the past few months as a junior agents, interior designers or rookie housekeeper. Going back to the frontline, it has fueled our organization with an edge to fulfill our mission or admirable service. Prompting us to again think about how to truly have our service providers improve their productivity, job security, and enhance your sense of happiness at work. It has also urged us to streamline our process and get our organization team. At the same time, by going to the frontline, we are more convinced that ever allow positioning to become industryâs spokesman person. Our opponents are not the other high quality providers in the industry, but all the low quality service providers that hurts the industryâs reputation and customer experiences. We will make the industry better by isolating the eliminating of this suburban players going to the frontline. We have gained more confidence in our One Body, Two Wing strategy. Our infrastructure foundation, the agents in a strong network in the communities, it already completed like a high quality world is now open for more vehicles based positioning us as a full leading service platforms providing a complete range of services, including home purchase and sales, home rental, home renovations and other home-related services. Moving on to our progress in the second quarter with our One Body parts existing at the new home transaction services. At the end of the second quarter, the number of stores and an active stores on Beikeâs platform was over 42,800 and 41,100, down 6% or 4% quarter-over-quarter, respectively. At the same time, the number of agents and active agents on our platform was over 415,000 and 380,000, respectively with a moderated quarter-over-quarter decline over 3% and 0.4%, respectively. The number of stores and agents in most cities stabilized in the second quarter with a churn rate for Lianjia agents dropping to just 1% to 3% in Beijing and Shanghai. Normally Lianjia stores agent churn rate fell to only 5.6% in June, significantly better than the industry average of over 12% in cities where existing home showed a stronger recovery trend on our platform, such as photo the number of agents even start to grow. Total MAUs Beikeâs platform reached RMB43 million, up 8% quarter-over-quarter. Our existing home transaction services continue to outpace the market according to data from the Beike Research Institute, nationwide GTV of existing home sales dropped 45% year-over-year in the second quarter. Whereas GTV of existing home transaction on Beikeâs platform was on the RMB393.5 billion, down 14% year-over-year, or which existing home sales declined 41% outperforming the market throughout the second quarter. The year-over-year decline of our existing home GTV continue to narrow from 41% in April to 17% in June. In 21 out of 32 Beike key cities, existing home GTV in cities the average 2021 level in June. The frequent release of using policies in second and the lower cities brought the pent up rigid. Home upgrade demands back to the market and so far the recovery of using home market in these cities reflected in our Q2 existing home transactions. GTV of non-Lianjia connected stores increased by as much as 33% quarter-over-quarter in Beijing and Shanghai, effective pandemic controls firmly took roots in June. And we saw transactions recover rapidly and return to normal levels in the final weeks of the months. Our firm investment in infrastructure and the products have supported more stable network of stores and agents in a higher operating efficiency, allowing us to substantially outpace the market in the recovery cycle. On the infrastructure side, we constantly iterate our fear and a competitive platform operation mechanism to motivate and retain high quality service providers. In the second quarter, we optimized our business leads allocation mechanism to prevent cheating, and enhance the sense of fairness. We also iterated our businesses, letâs make it more accurate, and operation more focused. In terms of operations, we continue to refine our operations of existing home sales net center on home listings, improving home listing, maintenance listing, promotion, and conversion efficiency effectiveness for Lianjia this year. Lianjia have focused on improving operations to solidify the foundation for quality services and organizational development. In the second quarter, we rolled out several major initiatives. First, we reduced number of loss making stores through more granulized management and establishing single store P&L models. As a result, the proportion of loss making stores Lianjiaâs Zhengzhou pilot cities dropped by significant 80% from January. Secondly, we further improve Lianjiaâs agent productivity by establishing a 5-day productivity management model to enhance overall management prospective any capabilities apart from Beijing and Shanghai. In the other 27 cities in Lianjia agents versus connected stores agents per agent productivity ratio is depending by more than 21% from the 2021 level. Certainly Lianjia agents actively participated in community pandemic prevention services and a warm recognition from community residence, which further support the rapid recovery of our business of the pandemic resurgence passed since July. They are helping some corrections in the existing home market affected by hall temperatures in southern cities and the micro market fluctuations. But we are more convinced that ever than existing home services, it would be the call of our future. And we will strategically redouble our focus on existing home services. Turning to new home transaction services. According to data from the National Bureau of Statistics, in the second quarter, the GTV of new residential home sales were down 36% nationwide year-over-year. It is expanding from the first quarter and it was the second largest single-quarter decline since 1999. The GTV or CRICâs top 100 real estate companies fell by 43.4% year-over-year. The new home market remains in a tough with weakness on both the supply and the demand side. Amidst the market headwinds GTV on new home sales on our platform with RMB222.7 billion, down 55% year-over-year and up 15.6% quarter-over-quarter. Positive changes emerged at the end of May, and a number of new home purchases offers on Beikeâs platform materially increased on a sequential basis in May and June. But the industry continues to face significant challenges in the short-term, lacking improvements in financing and consumer demand with mountain pressure our sales drove. As the industry undergoes rapid and powerful changes, high quality developers have begun to establish new understanding, very long-term advantages we will be built through better and a comprehensive utilization of qualifying sales channels. Against this backdrop, first, in terms of new home listings, we have been rigorously carried out corporate-to-corporate collaboration with high quality developers, increasing our share of sale by state and a central developers to 37% in the second quarter, 7 percentage point higher quarter-over-quarter. This has improved the quality of our new home listings and made our sales easier and more risk is resistant. Second, with respect to channels, during the recent round of market corrections, agent plays a more emphasize on operational setting, preferring to collaborate with a platform with high quality listings, strict risk control and a safe, faster receivable collections. Channels with weak risk control, the adequate receivable collection management and a single-minded pursuit of a scale have been winded out by the market. This will result in a high concentration for new home sales channels, and our higher coverage or newer home agents and store. So operationally, we continue to promote and reinforce execution of the commission and events model and other focused sales strategies. The commission and events model offer developers the opportunity to pay events. Projects with commissioning the events consistently deliver higher sales through efficiency, making a widely effective by the developers, agents and our receivable collection are further secure, setting in motion a positive cycle. In the first half of the year, commissioning and events accounted for tenting 22% of value from new home sales on our platform. Despite the short-term challenges, we expect a stable new home market with higher certainty in the long-term of whether continue to strengthen our strategic focus and increase cooperation with high quality stay and a centrally owned developers iterate on risk control protocols, data products, and other value added products and services, while further reducing costs and enhancing efficiency. Moving on to the home renovation and furnishing business of our two wings. July 6, this year marked the first anniversary of our official announcement of the Shengdu acquisition. We officially consolidated with Shengdu during the second quarter of this year. Over the past year, Beike and Shengdu of carry out efficient all along the integrations of term of key organization structure, operations and systems. The process how to progress very smoothly driving diverse solutions, for example, the supply chain advantage, what Shengdu has helped raise pay was up 33% year-over-year. And the referral customers from our core business contribute to over 25% of home renovation and operations contractor sales. In the second quarter, our home renovation and a furnishing business achieved robust growth against challengers of the pandemic. According to data from China Building Decoration Association, the broad output value of leading home renovation and furnishing companies declined 21% year-over-year in the second quarter. While our home renovation and furnishing business generated pro forma revenue of RMB1.37 billion, rising more than 10% year-over-year, and 58% quarter-over-quarter and our contractor sales reached close to RMB1.7 billion, meanwhile, reached organizational structure as well as strong rules and systems to support a better connection between home and emerging businesses. Real estate brokerage, stores owners can receive commissions within 5 days of their referral traffic to home renovation and a furnishing signed contract for the incentive and traffic referrals in June, contrary sales from our business transaction traffic referrals accounted for over 25% of home renovation and furnishing contracted sales. Home renovation and the furnishing is a low transaction frequency industry to improve the quality and consumer experience. We started with the industry role that interacts with a platform with high frequency the service providers. Only happy service providers can bring quality services and happy customers. Service providers in the industry, how many pain points including unstable order is patient, untimely settlements, and that home service does not necessarily yields go to income. We build transparent frameworks and assistance that cover the service providers qualification at the mission ranking promotion was on the basis on service quality to address this pain points in terms of project delivery, we carry out refined process managementâs to ensure on time construction completion is stabilized systematic, all online, offline closed loop management and promoting standardization of construction technology projects. Acceptance and other options for consumers weâve advanced our service commitments of 10 permits for 10 warrants . Our construction process can be monitored online by customers in real time, and after sales maintenance can be completed within 6 days. As a result, the absolute construction delivery period was shortened. In the customer satisfaction NPS of construction completion increased from 40% in January to 35% in June. We are exploring how to raise our top-line potential and profitability beyond the range youâre already seen in the traditional home furnishing business. The natural of home renovation is our service business, itâs about quality service with a high entry barrier, but carry relatively low profitability. Furniture and a home furnishing on the other hand is a manufacturing business with a good traffic acquisition, significant economics of scale can be shown. We are trying to find out if it is possible to drive the sales of furniture and home furnishing including customized furniture, soft furnishings, electrical appliances. So home renovation, we are assessing this by tracking furniture and home furnishing sales as a percentage of full service contracted sales. We believe on a single city basis and for our overall business units. 30% represents the initial validation milestone of this model feasibility and a 50% will represent the midterm milestone of its maturity. Today, we are rapidly growing our furniture and home furnishing sales as a percentage of full service control sales raising from 11% in the first quarter to 15% in the second quarter, yet there is still tremendous upside potential. Moving to our home rental services, creating social value as our society, as a social responsibility enterprise, we achieve rapid high quality development in our home rental services in the second quarter, while teaching greater importance to cost control and sales so efficiency. Our aim is to achieve long-term operational sustainability of this business. As of the end the second quarter, the number of contracted rental units manager or co-manager on our rental services exceeded 42 solid, an increase of nearly 22 solid units from the end of the first quarter. Among them, there were 31,000 units under Carefree Rent. We also took various measures to improve staff productivity and occupancy rate, aiming to balance, scale and profitability through business model iterations, scientific amendments, systematic incentive mechanisms. We strive to stay on the high net units that the right price realized faster sales through all with enhanced services quality and productivity. With these initiatives the occupancy rates are our Carefree Rent continued to improve at the pandemic resurgence passed. In addition, we jointly launched the new initiatives in June to provide fresh college graduates with favorable rental rates, and the commission reductions or exempt exemptions to help them address the difficulty of renting houses at affordable prices, as of July 31, 2022, over 8,000 transactions are completed under the new U.S. initiative serving the graduates approximately RMB12 million. Lastly, Iâd like to go back and talk about our return to the firm that our business to be about people especially the case for the housing registers industry, which point to both consumers and service providers for managers on the platform and myself, itâs easier to connect and relate to consumers, because every one of us is a consumer at some points. But itâs more difficult to identify with service providers. By going back to the phone line, many of us have the power to emphasize with service providers relating to consumer convinced us that as the request for joyful living will never change, or same topic identify with service providers enables us to understand and itâs strengthen our conviction that that to service providers, the need for long-term progress and pride in their auto occupation remains a constant as opposing goals. During the quarter end, cards will revive. The business of the future will never stop change, presenting us with when challenge of another. But as long as we can add with cost and elements while continuing to iterate ourselves with the only get better and have the industry get better. Thank you. Next, I would like to turn the call over to our CFO, Tao, to review our second quarter financials.
Tao Xu: Thank you, Stanley. Thank you everyone for joining us today. Before discussing more detail about our second quarter of 2022 financial results. Iâd like to provide a brief update on the recent housing market. In the past quarter, so most supportive policies rolled out to shore up demand in the real estate market in China. That includes the central government that holds it lower mortgage rates guided by the Central Bank and the stand up easing measures from lower to higher tier cities across the country. The property market has to show some signs of improvement with the existing housing market, especially responding quickly to the policy relaxation. With the new home market was still clouded by that crisis among developers and weak homebuyer sentiment. Recently, the reemergence of COVID-19 operates and mortgage boycotts sites on unfinished new home projects have a disrupted recovery of China housing market. However, we would like to address those resulting hurdles will now the impact Beikeâs business directly. As we believe this government will properly resolve the issue and ensure the delivery of the property project. In addition, the uncertainty of the new home market in some cities could apply a part of demand to the whole housing market. While we have a stronger presence and the incomparable competitiveness, while position the shift in demand, while those market was still on a rocky way of recovery. We were able to take a concrete measures to continuing building up our market presence and to maximize our restaurants including the collaboration network and the digitalization capability to enhance operating efficiency. Here, we would like to extend a sincere gratitude to the employees who have been impacted by the companyâs business restructuring in Q2 for their dedication and professionalism in the transition period. So contributions are extremely available this company and there will always be a source of inspiration of our future developments. In addition, we update our segment reporting farm Q2 as a result of acquisition of Shengdu, which was closed in late April. Weâre consequently update our business structure results in fallout business, which were existing home construction services, new home construction services, home renovation and furnishing, and then emerging and other services and update the financial measures accordingly. Turning to our financial details in Q2. Our net revenues decreased by 43% to RMB13.8 billion in Q2 from RMB24.2 billion in the same period of 2021. However, itâs based the high-end of our guidance by over 30% and exceeded the street consensus. The better than expected revenue were fueled by the following factors: firstly, Beijing and Shanghai to make a market and the world of operation going to hold due to the COVID introduced lockdown in April and May. Gross transaction rebound rapidly in June, after the pandemic, which was much quicker than what was expected previously. Secondly, the existing home market in many higher tier cities was able to stage a solid recovery support by the policies. This was approved by 33% quarter-over-quarter jump of GDP of existing home transaction. So by connect agent as accomplished platform in Q2. Thirdly, although in new home market remains weak, we will strengthen the cooperation with the high quality developers; and the fourth to enhance the sell to ability which enable us to seize opportunities as the developer rush to show off the middle-year sales performance. However, the year-over-year run new increase was primarily attributable to the decline in total GTV of 47.6% to RMB639.5 billion in Q2 from RMB1,220.8 billion in the same quarter of 2021. In particular, our net revenue from existing home transactions decreased by 42.5% to RMB5.5 billion in Q2 compared to RMB9.6 billion in the same period of 2021, primarily due to a 39.6% decrease in GTV of existing home transaction to RMB393.5 billion in Q2 from RMB652 billion in the same period of 2021. Our net revenue from the new home construction services decreased by 52% to RMB6.7 billion Q2 from RMB13.9 billion in the same period of 2021, primarily due to a 35.3% decrease in GTV of new home transaction to RMB222.7 billion in Q2 from RMB498.3 billion in that same period of 2021. Our net revenue from home renovation and furnishing were RMB1.0 billion in Q2, compared to RMB43 million in the same period of 2021, primarily because of the company completed the acquisition of Shengdu Home Renovation coordinated and the right business opportunities do it. We began to consolidate its financial results during the second quarter of 2022. Our net revenues from emerging and other services decreased by 9.6% to RMB557 million in Q2 from RMB660 million in the same period of 2021, primarily attributable to the decrease of net revenue from financial services, which was partially offset by the increase of net revenue from the lite rental property management services. Cost of revenues decreased by 41.3% to RMB11.1 billion in Q2 from RMB 18.8 billion in the same period of 2021. Gross profit was RMB2.7 billion in Q2, compared to RMB5.3 billion in the same period 2021. The gross margin was 19.7% in Q2 compared to 22.1% in the same period of 2021. The decrease in gross margin was mainly due to a relatively higher percentage of cost related to 2.1% in the same period of 2021. The decrease in gross margin was mainly due to a relatively higher percentage of costs related to stock of net value as a result of the decrease of net revenue in Q2, compared to the same period of 2021. Operating expenses remained flat at RMB4.2 billion in Q2 compared to the same period of 2021 to remain flat at RMB4.2 billion in Q2, compared to the same period of 2021. General and other administrative expenses were RMB2,250 million in Q2, compared to RMB2,202 million in the same period of 2021, mainly due to the increase of share-based compensation expenses, and additional severance payment incurred in Q2, which was partially offset by the decrease of the recurring personnel cost and overheads along with the decreased headcount, as well as the conferences and travel expenses as a result of the COVID-19 outbreaks in certain regions in Q2 compared to the same period of 2021. Sales and marketing expenses were RMB1,122 million in Q2 compared to RMB1,241 million in the same period of 2021, mainly due to the decrease of the brand advertising and promotional marketing expenses for the housing transaction services, which was partially offset by sales and marketing expenses of Shengdu. Research and development expenses were RMB779 million in Q2, unchanged from RMB775 million in the same period of 2021, mainly due to additional severance payments incurred in Q2, which was mainly offset by the decrease of recurring personnel costs and share-based compensation as a result of decreased headcount in research and development personnel in Q2 compared to the same period of 2021. Loss from operations was RMB1,518 million in Q2 compared to income from operations of RMB1,116 million in the same period of 2021. Operating margin was negative 11% in Q2 compared to 4.6% in the same period of 2021, primarily due to: one, a relatively lower gross profit margin; and two, an increase of the percentage of total recurring operating expenses of net revenues in Q2 primarily due to decreased net revenues; and three, additional severance costs of RMB438 million incurred in the second quarter of 2022 compared to the same period of 2021. Excluding non-GAAP items, our adjusted loss from operations was RMB690 million in Q2 compared to adjusted income from operations of RMB1,669 million in the same period of 2021. Adjusted operating margin was negative 5.0% in Q2, compared to 6.9% in the same period of 2021. Adjusted EBITDA was negative RMB104 million in Q2 compared to RMB2,555 million in the same period of 2021. Net loss was RMB1,866 million in Q2 compared to net income of RMB1,116 million in the same period of 2021. Excluding non-GAAP items, adjusted net loss was RMB619 million in Q2, compared to adjusted net income of RMB1,638 million in the same period of 2021. Net loss attributable to KE Holdings Inc.âs ordinary shareholders was RMB1,868 million in Q2 compared to net income attributable to KE Holdings Inc.âs ordinary shareholders of RMB1,112 million in the same period of 2021. Adjusted net loss attributable to KE Holdings Inc.âs ordinary shareholders was RMB622 million in Q2 compared to adjusted net income attributable to KE Holdings Inc.âs ordinary shareholders of RMB1,635 million in the same period of 2021. Diluted net loss per ADS attributable to KE Holdings Inc.âs ordinary shareholders was RMB1.57 in Q2 compared to diluted net income per ADS attributable to KE Holdings Inc.âs ordinary shareholders of RMB0.93 in the same period of 2021. Adjusted diluted net loss per ADS attributable to KE Holdings Inc.âs ordinary shareholders was RMB0.52 in Q2 compared to adjusted diluted net income per ADS attributable to KE Holdings Inc.âs ordinary shareholders of RMB1.37 in the same period of 2021. We maintain a strong cash position and a sufficient liquidity in Q2. As of end of June, certain bank balance of our cash, cash equivalents, restricted cash and short-term investments amounted to RM50 billion or US$7.5 billion. The balance of our long term cash items, many including the long-term investments amounted to RMB 24 billion or US$3.6 billion. In addition, we reported positive operating cash flow despite the challenging environment, under the cash to income ratio of our new home services was 1.27 in Q2, demonstrating our strong cash generation ability. Next, I will talk about the recent developments regarding over operational and capital market initiatives, as well as our near-term focus on the corporate financials. First of all, facing modestly idling by interface of the marketing headwind, nearly half of our senior level directors went to the frontline in the past month to work on spirits as agents, home decoration commanders, or other roles, holding the form belief that only you become well then, kind of understand often. By working side by side with our service providers and engaging day to day interaction with customers. We have a deeper understanding of how to truly help service providers improve their productivity and a sense of security, as well as better satisfy customer demand. It also uncovers to fully embrace the challenges and create the indispensable value for the industry. Secondarily, weâll talk about the rest of the cost saving measures and the focus on the efficiency in our daily operation to enhance the possibility. Partial to efforts were reflected in the improvement of the contribution margin of the new home transaction services, which was at 2 years high of 24% in Q2, despite still sluggish in new home market. Moreover, as we carry out for the organization of maintenance initiatives in Q2, where again the larger operating leverage for our housing transaction services against the changing market environment. Our operating expenses saving for the housing transaction services in the second half of this year, to reach out approximately RMB300 million to RMB400 million in each quarter, and absolute dollar amount of operating expenses to be decreased to the same level of the second half of 2019 followed by in spite of market recovery in the coming quarters. We believe our possibility for the housing transaction services will gradually recover in the second half of this year. Secondly, where weâll continue to make the investment in our 2 businesses, home renovation and furnishing services, and the Beike rental services, despite of the top market environment, we will especially make the necessary and sufficient investment is a home renovation and the rental services, which enjoys a much larger total addressable market compared to the housing transaction services. We formulated as this investment will yield long-term economic benefits. And this product weakened from our customer, and dependability were accumulated in our core business. Weâll well positioned to capture the rising demand in the burgeoning sector. Fourthly, we obtained a general and traditional mandate from to repurchase the share of fall shareholders at the annual general meeting held on August 12. Of that, we will execute the share repurchase program of up to US$1 billion have already covered 12 months period. Just highlighted the confidence we have in our long-term growth under the capability of our capital allocation, where to prioritize the balance of the financial flexibility with the efficient capital structure. Turning to the guidance for the third quarter of 2022. We believe while the new home market is still groping in the dark. I think housing market is already seeing the light at the end of the tunnel, and is fighting to stage large scale recovery in the second half of this year, based on about considerations, combining the factors of the potential negative impact of the COVID-19 containment measures in certain regions, under the base effect of the same period of 2021. We expect the total revenue to be between RMB16.5 billion and RMB17 billion in Q3, representing a decrease of approximately 6.1% to 8.8% from the same period of 2021. This forecast constitutes the competence current and preliminary view on the business situation and the market conditions which are starting to change. Lastly, weâd like to highlight that recovery of the property market is on horizon. On the government policy hobby on the supportive side with a focus on the meeting demand for the better housing. We will assist opportunities to further improve the efficiency saw a range of the cost management to both the synergy allocate the resources more efficient, oriented and the risk aversion and the strike a balance between the profitability and the investment in the new business. As we continue to reiterate, cannot help market is changing to your funds and new home sector to the new home market at an accelerated pace. With the home price stabilizing, and the need for the better living of the Chinese people increase home upgrade demand will serve as a prominent driver, turbo charging continued is a function of the market and the result of high derived demand for a range of services, including home renovation and furnishing, and the rental services. We believe are a unique competency and a solid layout in those sectors were supposed to take the fast ride and achieve the rapid growth in the long run. This is what we have been doing, not perfect by the way are on our way. That concludes our prepared remarks. Weâd like now to open the call to your questions. Operator, please go ahead.
Operator: Thank you. Our first question comes from Jiong Shao with Barclays. Your line is open.
Jiong Shao: Thank you very much for taking my Questions. I have a couple of questions if I may. The first question is you briefly mentioned about the policy relaxation in your prepared remarks. And I was just wondering, could you talk about the actual fact youâre seeing from those policy relaxation, and any comments about the potential further relaxation for the second half of the year? My second question is that you also highlighted in your prepared remarks of a very nice rebound of the existing home sales, particularly in Shanghai and Beijing. Could you just talking about your expectation for further recovery for the second half or what have you seen so far in the third quarter? Thank you very much.
Tao Xu: Thank you, Mr. Sharo. Let me address your first question. Guided by the supportive time set by the central governments and is a central bank liquidity support from low to higher tier cities. We actually saw the local government continue to step up the policy relaxation. Since the beginning of this year, about 220 Province at the city level authorities have loosened the restrictions nearly 600 times exceeding the total 400 tightening policies issued last year. In particular, after politburo meeting, as end of this April, so frequency which the local relaxation policy were introduced in the same call, second-tier cities can play accelerate, reaching more than 110 times for each month from April to June. These policies are meant to ensuring the normal creation of the growth entities under the stability of the market transactions. There are many full types of easing measures. The first is relaxation on the loan restriction, and also includes into the record. The mainstream first and second home purchase mortgage interest rate, we monitor the 103 cities recently dropped to 4.35% and 5.07% in July, respectively. Beijing is a new loan since the year of 2017. Relaxation on loan restrictions also include the reduction of down payment ratio, lower recognition standard for the second hand home, and also lowered the restriction on the use of housing provident fund et cetera. Cities that issued actual relaxation in the city of Suzhou, Taiyuan, Jinan, and Guangzhou. And the second part is the relaxation on the home purchase restrictions, including encouraged for the city resident, and the relaxed purchase distribution for non-local householders is a function of non-restricted every , and also the added purchase quota for the family members with more than one child and this was implemented in the city such as Nanjing, . So third part is subsidy incentives, including the Thailand settlement subsidies, housing projects subsidies, relief of value added tax and the deep tax, et cetera. This kind of encouragement policy implemented the city such as the Suzhou and Changsha. Under the both parties promoting home upgrades in the first half of 2022 due to lighting cityâs requirement to measure such as Shenzhen town revamps by using so called housing cooper as a monetary compensation. These are easing policies with a stronger intensity implemented in the city such as the Zhengzhou and Lianjia. We have to set up an introduction of our policies, multiple cities so the sub-sequential recovery income leading indicators is including the number of new property listings, new home customer and all sorts of property tools as well as the agent competence in those cities, also saw the substantial recovery in the transaction volume region in the second half of 2022 ways by the various stages to continue using the easing policies to support the steady market recovery. There are still substantial rule for more policy easing. In last year 2021 mark the year of the catalyst of policy control in past 12 years, so the relaxation and support this year, this restriction gradually being loosened. Nevertheless, at the end of June, most of the key second-tier cities will follow through relaxed the compared to the most relaxed the period in past 12 years. Under the basic principle, the housing is fully mean not for speculation, there is still a lot of potential for the further policy relaxation in given regions, both in terms of the diversity and the intensity of the easing policies. And the central government has said as opposed to encourage the local government to activate introduce a policy to ensure the market is stability. With the recent new home market rate environment, the politburo meeting held as of July emphasized, the full and effective utilization of our policy toolbox and the cityâs specific policy to support the rising housing demand and home adequate demand. Local governments are to fulfill their responsibility to ensure delivery of the home products and to protect the peopleâs livelihood. So from our perspective, we believe thatâs the 4 tier cities have a strong housing demand and a solid fundamentals and that their local finance are less dependent on the real estate. The local property market canât recover to a healthy level, even without a policy support. Well, for the support of policy sides supply to be introduced in the second tier cities and the lower tier cities during the second half of the year to actively reduce the risk and to restore the market confidence and support the continued recovery of the market transaction. And regarding to your second question. In the second quarter, many states open the policy toolbox and actively use the easing policies. With these new home markets are being so forced to benefit lengthen market sentiment about not generally speaking Beijing and Shanghai was severely affected by the pandemic. A large number of consumer who has taken away the consistent began to enter to the market, as evidenced by career recovery science in the transaction volume of the single market. Overall, according to Beike Research Institute, in the second quarter, the GTV for China new home sales market increased by 9.8% quarter-over-quarter, and the decline 45% year-over-year, a series of leading indicators monitored by Beike such as the home to impact number of new customers and a new listing under the price index, such as that the market expectation rebounded in May and June from the bottom. For new home prices in June, there was slight year-over-year increasing the first-tier cities the exception while the prices in the 2018 second-tier cities have recovered to the level of the same time last year. But at present in the third-tier and the fourth-tier cities continue to transact. In different types of cities, the key second tier cities. Thirdly, to recovery due to the last impact from the pandemic and the strong policy support is in home sales GTV Beike platform, according to Beijing and Shanghai, increased the sequential rate by 23% and 20% month-over-month in May and June, respectively. In June, existing home sales volume, excluding Beijing and Shanghai rebounding the 205% of the housing transaction volume of 2021 as the year-over-year decline, narrowed down to only 2%. Transaction volume of the 21 major cities such as Chengdu, Suzhou, Hangzhou and Tianjin surpass the 2021 average level in June. Cities such as Jinan, Wuhan, Hefei have also rebounded level similar to 2021 average wage is bad debt in the second half of the year. The key second-tier cities will quickly return to year-over-year growth given the continued introduce â to continue your function of the easing policy and stabilizing market sentiment. And the Shanghai, there were splitting the impact by COVID on April and May, but to deliver the strong market resiliency with the transaction volume rapidly picking up as the pandemic come under control. Transactions volume of Beijing and Shanghai in the last week have returned to 2021 average level, this is very good signals. With that, Beijing and the Shanghai will benefit upon the release of pent up demand caused by the pandemic disruption, and thatâs the monthly transaction volume is likely to return to year-over-year growth. Starting from the fourth quarter, Beijing and Shanghai will enter to a healthy and a normalized range in terms of transaction volume, together with restoring the confidence in the home market nationwide. For the whole country recovery pace, as we have repeatedly emphasized the China market is just transitioning from the new home driven to the existing home driven. So recently, the emergence of series of province in the new home market will diverse substantial amounts of the demand to the existing home market from the new home market, this is increasingly evident in a number of key second-tier cities. For example, in Wuhan, the existing home transaction accounted for 40% of the total transaction with the first half of this year, compared to roughly 30% in 2020. Same thing in Lianjia, the proportion of these new home transactions increased to nearly 38% in the first half of 2022 from 28% in 2020 that is certain that the existing home market will continue to recover our greater scale in the second half of the year. We normally puts down the entire cycle of the real estate transaction into both stage the down cycle, including the stage of the price stable and the volume down under the price, volume was down, so upcycle include the stage of price stable and the volume increase under the price and the volume both in it. During the first half year, so the existing home market has a start to shape hovering at the bottom towards the recovery. While some strong second-tier cities have gradually entered into the recovery stage, it may take more than 6 months for the market to fully recover in this drawn. Beike Research Institute data demonstrates the overall in home sales market deliver a year-over-year growth in July. So our market was a temporarily impact on euro high temperature beyond the normal seasonality, while this one whatnot change the recovery trajectory. Weâve had home prices in some weaker second-tier cities to stabilize into Q3. While there is a home prices in the third and the lower tier cities will be stabilized by the end of this year. Okay, thank you.
Jiong Shao: Very helpful. Thank you so much, Tao Xu.
Tao Xu: Thank you.
Operator: Thank you. Our next question comes from Harry Cheng with Citi. Your line is open.
Harry Cheng: Thank you management for the opportunity. My first question is about mortgage boycott and the provision of receivables. Starting from July, there has been mortgage boycott for new home with construction suspended in various cities in China. Could the management share your views of the impact on company business? Besides the company management give us an update on collection and the provision of accounts receivables. My second question is to ask managementâs views of current new home market and its outlook after the contaminants fine tune the second quarter of this year? Thank you.
Yongdong Peng: Hello, Harry. Iâd like to hear from you. Let me address your first question. Firstly, we want to continuously reiterate that it is a bank and the referral rate is kind of Beike for the payment by card, so to know the right impact on Beike. Most of the developers suffering from the mortgage rewards will identify by earlier so called a high rate developers. So we have made a sufficient bad debt provisions for those receivable concerned. Secondarily, to start new home construction and the mortgage payment, the suspension or the events to happen under extraordinary circumstance at the extraordinary time. And we believe the Chinese government has sufficient capability and a determination to resolve the issue. Recently, from our observation, local governments, in several cities already implemented various initiatives to ensure the project delivery, and as a result multiple project was a potential mortgage payment to rebound risk resumed construction. Under most circumstances, homebuyers called mortgage payments, owner was new home construction is stalled as a protest to get its construction to resume instead of refusing to pay all right. We also believe in some mortgage payments suspension, while promoting local government to help industry and our crisis difficult as the faster pace and stabilize the consumer expectation, which will be instrumental for the industry to return to normal operation. Thirdly, if mortgage payments suspension will choose supply, it may indeed negatively affect new home market sentiment in some cities, and that disrupts the new home market or recovery in the second half of this year. It is very bad. However, due to new home that have to start construction that may fulfill the spell over demand from the new home market, which could benefit the Beike giving up giving our wilder presence in the new home market and existing home higher profitability compared with the new home. It was also outside to some extent of the mortgage payment the suspension negative effect of the new home market. Four, Beikeâs new home by the provision, we have made adequate by that provision for the new home receivables. Until Q2, our cumulative balance of the better provision was RMB2.21 billion, covering 31% of the original value of the corresponding total receivables, especially for the 41 hierarchy members, including Sunak will make a better provision at the upper limit of 83% of their historical unsecured receivables balance cumulatively amounted to RMB1.32 billion. We made the better provision of 49% of the receivable, but doesnât developers and protests with the cumulative amount of RMB160 million. So with the remaining developers with a low risk, we also made a better provision and ratio of 10% to 20%. I believe, currently identify the list of the property developers with a high bad debt provision already covered nearly all the high risk developers in the industry with a little chance of the incurring subsequent large bad debt provisions. While making a sufficient reserve against the better, we also consistently reinforce our collection measurements of the receivables. In the second quarter, we collect a total of RMB8.45 billion of new home sales receivables, 1.27 times of the RMB6.67 billion of our new home sales revenue in this quarter. So new home sales at Beike also failed farm last Q1 from this Q1 152 days in the first quarter to 108 days in this quarter. At the same time, we have maintained our selection criteria and the risk control mechanism for collaboration with developers iterate the developer rate evaluation model, optimize the settlement terms and conditions and increase the percentage of the project with developer for the commissioning of creating a variable condition for the subsequent receivable collection. In addition, where you cooperate with new home receivable quality into our mentors and performance evaluation system at every level. We believe this initiative combined well consistently lowers lifetime risk of our new home receivables. Regarding your second question, Iâd like to say in the first half of this year, the national new home market was weak, both on the supply and the demand side, particularly up to 2 new home sales from the National Bureau of Statistics recorded a year-over-year decline of 36%. While the GTV of CRICâs top 100 real estate developer fell by 53.4%. Developers investment confidence was awake in most cities. The industry was in a deep water phase with a sluggish consumer demand the pandemic or resurgence as a mortgage payments one costs. While some positive changes in the new home market since May. The number one is the market recovery proposed by multiple parties starting in May step up local supportive policies. Developer reason for the half year performance and catalyst of the holiday have our browser series on the positive change of the market and the positive changes verified by the front end numbers. The numbers of the offers to buy new home on Beike platform achieved consecutive growth in May and June of 50% and 27% month-over-month, respectively. Beikeâs new home on-site sales index in 50 facilities has also rising for the two consecutive months and has come out for the freezing cold range and also active promotion by developers. The channel panel attrition rate in the second quarter increased significantly quarter-over-quarter. The new home markets recovery in June with the year-over-year decrease now down to 23% according to the National Bureau of Statistics. There are still uncertainties in the new home market in the second half of the year. So macro economy and the income certification are under pressure. And the homes higher under the home-related developer higher requirements for the living, and also the geopolitical situation is facing uncertainties under their repeated the pandemic service mortgage payments going costs developers by that default and uncertainties in the new home project delivery are factoring the restoration of the market competence. Insurgence overdrafts over the new home demand in certain regions is also a constraint for the recovery of the new home market. The industry is still facing the huge downward pressure under the recovery of the new home market about a time. We come on into the subsequent promotional developers and efforts on the policy requisition to establish the slump of the recovery trajectory and sustain the system benefit going forward that were short in production in the new home sales in July and August of developers middle year promotion in fact moderate from June. Meanwhile, so combine efforts overtime euro high temperature in China, Southeast, Southwest is also a problem in this summer, and also the mortgage payments suspension have also led to a multiple decline in the new home market in August compared to June. Starting from September from our observation and expectation we expected developers to again enter into an active promote a new cycle under the pressure of the target. Therefore, the market is more likely to answer to our weight recovering period by the central hiring.
Harry Cheng: Thank you, management.
Operator: We have a question from Steven Tsai with Morgan Stanley. Your line is open.
Steven Tsai: Thank you management for taking my questions. My question is about the whole innovation business, could management share with see if thereâs any update on the business strategy or geographic pleasure plan or postal consolidation percent to, and if thereâs any guidance on this business for the coming quarters. Also, is there any update on the timing of your launch in the platform model for renovation which you mentioned the 2025 or 2026 before? Any milestone related to that that you are looking at internally where are we now and whatâs the biggest bottleneck are you think? Thank you.
Yongdong Peng: This is Stanley Peng. Let me quickly address your question. So firstly, as I mentioned during the prepared remarks, so during the second quarter, if you look at the leading industry combination in the whole renovation and furnishing business has been declined over 20% year-over-year. But whereas our home renovation furnishing business, actually has been increased significantly on a year-over-year basis. So the revenue is one that I was already mentioned another dimension we can describe for that business is we look at a referral rate from our core business issues are housing transaction business. So when we look at the second quarter results, weâre actually seeing more than 25% of the referring and a conversion coming from the housing transaction business already in some of the special cities such as Beijing, the conversion rate actually it also has been reduced to 80% or even higher, some of these didnât do very well, right? But we do believe there has a huge space to continue you full. So overall, we do believe the customers referral and a conversion from the mandate needs also another dimension to do has a program for that purpose. So when look at a future evolution for the home decoration and furnishing business. We actually look at it in the four business elements or the three major reasons. The firstly coming from the policy side, so we recently noted the fall of the central government department. The action has been drawn to promote so called high quality of the leaving fans into the national wide, so that definitely will provide the additional policy drivers for the overall industry environment. Secondly, we look at the overall so called industrial pattern or shape as well as industrial correlations, which is link into the home decoration and furnishing business. We look at into new fronts both of the upstream and downstream, right? So from the downstream rather than the existing home, which has to continue furnishing and the performance of the services of the demand rather than that we also notice for the new home, they also have the decoration and furnishing demand. So we do believe that we will create additional market opportunities. And from the upper stream we also look at the correlation of the partnership from the home decoration business itself into the furniture and home furnishing sales business together. And we do believe up the leveraging of the good quality of the home decoration business. Definitely that will bring the additional potential to further boom of our furniture and the home furnishing business going forward. And third is from the consumers perspective, they all prefer more like full coverage on the one stop services ranges from the previously pure construction services into the full coverage of the services, which just means â we just cover from those of the construction part as well as a home furnishing and decoration business as a whole, right? So we wonât be new by promoting of those kinds of full services, you also will create additional opportunities. So looking into the future development for the whole decoration and furnishing business, we do believe there three of quantified of the elements as well as additional, more decided and quantified of the elements to seen about their properties, right? So in terms of the quantified of the elements, so firstly we look at a scale, right? Because until now we donât see any of the companies in the industry can surpass of RMB4 billion scaled in the whole home decoration and furnishing industry in China, right? So whether there could be one so company, which is annual revenue could surpass of RMB10 billion, we do believe that was one of the quantified elements. Secondly, as we look at, as I mentioned before, is a conversion rate from the core business into the home decoration and furnishing business. We do believe in the future, these kinds of customer refer and a conversion rate, whoâs surpass 40% from our housing transaction business into the home decoration and furnishing business, and it will be continued to grow. So thatâs what will be the second quantified of the elements. The third factor, quantified factor is the correlation between a single home decoration business with furniture and the home furnishing sales. Starting from the beginning of this year, we look at the correlation is about 1.08. But itâs gradually actually had been increased to roughly 1.1. And we do believe the mid- to long-term goal will be 1.05, right? Which is means every $1 of the construction rather it will come with rapidly back up half dollar of the home furniture and home furnishing of the revenues, right? So that is we do believe with 3 of the quantified factors, we can continue to monitor. And beyond that we do believe other and quantified of the factor is, as you mentioned is a platform business model, right? Because if you look at our execution in the past two decades, slew of paper successful execution. We have improvement of the platform business model in our housing transaction business. So we do believe for the housing â for the home decoration and furnishing business, definitely also could gradually grow to a top on business model in the long-term goal, right? But in the next couple of years, especially in the next 2 to 3 years, we do believe we will focus on our one key business development. Because we do believe there has a lot of things we can continue to grow, including the teamâs material reality includes the delivery quality, in terms of supply chain, in terms of the design, in terms of the online ultimate correlation, as well as the ultimate upsells sales and marketing, or other kind of offline events, definitely for all those kinds of things we can continue to grow and continue to show of the solid progress in the next 2 to 3 years. So we do believe, weâre not very fast to run to the tap on business model. So during on that part of time, what weâre trying to do is build up more solid provides for our one key business. Then, 2 to 3 years later, we congratulate to develop into the platform business model. Thatâs the answer to your question. Thank you. Back to the operator.
Operator: Our next question comes from Timothy Zhao with Goldman Sachs. Your line is open.
Timothy Zhao: Hi, Stanley. Hi, Tao Xu. Thank you for taking my question. I also have real quick question on the cost saving, I think, you mentioned in the second half, you expect around RMB300 million to RMB400 million costing per quarter. Could you further elaborate on the competence measures, how to cut costs and improve the efficiency as well as what would be the future impact of these measures on your financial performance? That would be helpful. Thank you.
Yongdong Peng: Okay. Thank you, Timothy. As I mentioned in my first day remarks, we took a series of cost saving measures and the focus on enhancing the efficiency and profitability in our day to day operation in Q2. Meaningful progress was delivered was again repricing our organizational strong execution and operational quality. We adjust our organizational structure and adjust is the proportion of the junior and senior agents according to the different conditions in different cities and the most regional teams. In addition, we prioritize the new home business and higher profit making new home business on our city level. In terms of the cost control, where we form and the shutdown, the loss making stores on the drop run through reduction for stores and office space, where this measures our fixed costs and expenses, as well as our particular level breakeven points continue to fall. In Q2 the fixed costs for the Lianjia decreased by more than 25% year-over-year. And the way itâs all breaking expenses of the saving for the housing transaction and services in the second half of this year, to reach up to approximately RMB300 million to RMB400 million in agriculture. And obviously, the dollar amount of the operating expenses will be decreased to the same level of the second half of 2019. As a way to carve out further organizational restructuring initiatives in Q2, we have again to the larger operating leverage and the profitability for our housing transaction services against the challenge market environment. Our Shengdu business, for example, central pockets in June, for the first time in past 15 months in face of the very weak market. Another example is the also reflect in the improvement of our contribution margin of new home business, which was at two years high opportunity 4% contribution margin in Q2, despite the still sluggish new home market, followed by this due to Q2 market recovery in the coming quarters. We believe our possibility for the housing transaction and services while gradually recover in the second half of this year. Thank you.
Operator: We are now approaching the end of the conference call. I will now turn the call over to your host today Mr. Matthew Zhao for closing remarks.
Matthew Zhao: Yeah. Thank you, operator. Thank you once again for joining us today. If you have further questions, please feel free to contact Beikeâs Investor Relations team through the contact information. Thank you and goodbye. This concludes todayâs call and we look forward to speaking with you again next quarter. Thank you and goodbye.
Operator: This concludes todayâs conference call. Thank you for participating. You may now disconnect.
