The real estate market is booming, but Ke only earns from "hype" and not profit?

On the evening of March 18, Beijing time, $KE(BEKE.US) announced its Q4 2024 financial report. Overall, the performance can be summarized as explosive scale growth under favorable policies + growth in revenue without profit increase, with even negative profit elasticity. The key points are as follows:

1. The core of the core existing home business had a GTV of 744.8 billion, a year-on-year surge of 59%. Although the expected growth rate in the market was also 45%, the actual market heat was still better than expected. This once again demonstrates Beike's ability as a leader to resist cyclical downturns and expand faster in favorable conditions. Moreover, from high-frequency data, the transaction area of existing homes in core cities 1-2 months before 2025 is still significantly better than the same period last year, and the growth of the company's existing home business in the first quarter of this year is likely to remain good.

However, due to the company's proactive reduction of the commission rate for its self-operated existing home business, there was a slight month-on-month decrease of 0.1 percentage points (possibly to lower transaction costs to stimulate transactions, and regulatory factors cannot be ruled out), the revenue of the existing home business grew by 47% year-on-year, slightly lagging behind the GTV growth rate.

2. Beike's new home business is also strong, with transaction volume increasing by 49% year-on-year to 355.3 billion, about 28 billion more than market expectations (8.5%). During the same period, the transaction volume growth rate of the top 100 real estate companies nationwide improved from -29% to 0%, while Beike's improved from 18% to 49%. The improvement of Beike and the market is generally consistent, but its absolute performance still significantly leads the industry. However, high-frequency data shows that the sales momentum in the new home market slightly declined in the first two months of this year, not as resilient as the existing home transactions.

Unlike the declining realization rate of the existing home business, the comprehensive realization rate of the new home business increased significantly by 0.3 percentage points to 3.7% this season. The revenue of the new home business surged by 79%, exceeding 13 billion, nearly 17% higher than market expectations. This further verifies that Beike's role as a customer acquisition channel for real estate companies is further increasing. Even in a situation where the overall environment is improving and the difficulty of buying a house is relatively decreasing, this remains true.

3. The second channel, focusing on home decoration, leasing, and home services, achieved total revenue of 9.13 billion this season. It seems not to have benefited from the supportive policies of the real estate market, and with the rising base, the revenue growth rate is still in a steady decline trend, at 39%, slightly better than market expectations.

Among them, the home decoration business had revenue of 4.11 billion this season, decreasing compared to the previous season, and the year-on-year growth rate also fell to only 13%, significantly below expectations. It seems there may be some issues in the business, and attention should be paid to the management's explanation.

The leasing business continued to grow rapidly, with revenue reaching 4.58 billion this season, surpassing the home decoration business, with a month-on-month growth rate of 16%. However, since most of the revenue from this business needs to be transferred to landlords, the profit margin contribution remains below 5% From a profitability perspective, its importance is still lower than that of the home decoration business.

4. However, under favorable policies, this quarter saw a explosive recovery in growth for Beike (especially in the housing agency business). Yet, there was a lack of surprises on the profit side, with no signs of profits rising significantly alongside revenue.

First, the gross profit margin for this quarter was 23%, a slight increase of 0.3 percentage points quarter-on-quarter. Considering the significant revenue growth, the improvement is quite limited and below the consensus expectation of 23.5% from sell-side analysts. Specifically, the commission costs (including internal employees and external platform merchants) accounted for 48.7% of total revenue this quarter, up from 42.4% in the previous quarter (despite a revenue quarter-on-quarter increase of about 38%). It is evident that the rise in commission proportion is one of the important reasons for the lack of significant improvement in profit margins.

Additionally, the total of Beike's three expenses this quarter increased by 40% compared to the previous quarter, even slightly higher than the revenue quarter-on-quarter growth rate. The explosive growth in business and revenue scale did not lead to a dilution of expense ratios or economies of scale. On the contrary, due to the company's more optimistic and aggressive investment attitude, the expense ratio for the three operating expenses increased by 0.3 percentage points quarter-on-quarter.

As a result, the slight increase of 0.3 percentage points in gross profit margin was completely eroded by expenses, leading to an operating profit margin this quarter that remained flat year-on-year at 3.2%, significantly lower than the expected 3.8%. With total revenue exceeding expectations by 2.3 billion, the actual operating profit was 1.01 billion, slightly lower than the expected 1.08 billion.

More "unpleasant" is that the adjusted net profit for this quarter was 1.34 billion, a significant decline from 1.78 billion in the previous quarter. Although sell-side expectations for net profit this quarter were not high, merely aiming to be flat with the previous quarter (indicating that the market somewhat anticipated profits would not significantly improve with the surge in revenue scale). However, the actual quarter-on-quarter decline was significant, falling short of even the not-so-high expectations.

The main reason was that this quarter confirmed a tax expense of 1 billion, which doubled compared to the previous quarter, leading to a quarter-on-quarter decline in net profit that significantly missed expectations. Attention should be paid to management's explanation for the substantial increase in tax expenses. If the impact of this tax expense is more of a one-time nature, it would indicate that Beike's "real" profit this quarter is not as bad, at least remaining roughly flat quarter-on-quarter.

Dolphin Research's View:

It is clear that Beike's performance this quarter is quite fragmented. On one hand, under the support of favorable policies, the core transaction agency business, whether in the existing housing or new housing sectors, saw a year-on-year surge of about 50%, with recovery strength stronger than the already not low expectations. This also reaffirms Beike's excellent market position in the industry, capable of resisting cyclical headwinds and expanding faster in favorable conditions.

However, as we mentioned in the Quick Interpretation, despite enjoying rapid expansion in business scale under the huge industry recovery dividend, Beike's failure to generate incremental profits is the biggest issue in this financial report. This is without "harshly demanding" employees and managing the commission ratio for employees The characteristics of real estate agencies being heavily reliant on manpower and contract fulfillment mean that gross profit margins do not naturally increase with scale expansion.

In light of the observed improvement in the macro and industry environment, the company has quickly shifted to a more optimistic and aggressive pace in its expenditure. The year-on-year growth rate of expense spending even exceeded that of revenue. In other words, the company has to some extent ended the contraction and profit squeeze during the downturn cycle and has returned to a phase of expansion and scaling.

However, Dolphin Research does not believe that one should overly emphasize the impact of short-term profits or hastily judge whether the return to expansion is right or wrong. After all, the management always has the opportunity to pivot back when changing strategies to refocus on profits. Nonetheless, this does raise an additional layer of concern in the market regarding how to view the company's subsequent profit growth. Given that the macro environment has clearly improved, the inability to release incremental profits raises the question of whether expectations for profit release should be lowered while the company is still in an investment cycle. This is a question that needs to be answered by the management.

Moreover, due to favorable policies and the impressive transaction situation in the domestic real estate market since September-October last year, it has long been clear that the performance of Beike's stock price once surged to $25 per share, the high point of September-October last year, indicating that market expectations are not low. Based on the trend of this quarter, achieving an adjusted net profit of 8-10 billion next year would be considered good, corresponding to a market value that has already declined, still reflecting a valuation of about 20x-25x PE (and this is on a non-GAAP basis). Compared to other internet peers, Beike is indeed enjoying a valuation premium.

Looking ahead, the domestic real estate market seems to show signs of stabilization, but demand still carries a high degree of uncertainty. The real estate agency business is too influenced by industry factors, and even for Beike, it remains more beta than the company's own alpha. Therefore, Dolphin Research can only proceed with caution. As for new tracks like home decoration, there is a greater possibility of following an alpha logic, but this quarter's decline in both revenue and profit margin for home decoration has temporarily cast some shadows over this logic. Let's pay attention to the management's explanations.

Detailed Interpretation of This Quarter's Financial Report:

1. Existing Housing: Under the "strongest" policy support, has the long-term turning point for existing housing arrived?

The core of the core existing housing business, this season's GTV was 744.8 billion, a year-on-year surge of 59%. Although the market's expected growth rate is not low at 45%, the actual market heat is significantly better than expected, reflecting the company's ability as a market leader to expand faster in favorable conditions and resist cyclical downturns. Moreover, from high-frequency data, the transaction area of existing housing in core cities 1-2 has been significantly better than the same period last year since 2025, and the growth of the company's existing housing business in the first quarter of this year is likely to remain strong.

However, in terms of revenue, the revenue growth of the existing housing business was 47%, slightly lagging behind the GTV growth rate. Recently, due to better real estate markets in core first and second-tier cities, the proportion of Lianjia's self-operated GTV has actually increased, so it is not because of a higher proportion of platform-type GTV. It was explained that Beike actively reduced the commission rate for its self-operated existing housing business ( possibly to lower transaction costs to stimulate transactions, but it cannot be ruled out that there is some regulatory guidance ).

II. New Housing: Beike's channels are becoming increasingly important, breaking 13 billion in revenue for the first time

Beike's new housing business also showed strong growth, with transaction volume increasing by 49% year-on-year, reaching 355.3 billion, about 28 billion more than market expectations (8.5%). In comparison, the top 100 real estate companies in the country saw their transaction volume growth rate improve from -29% in the previous quarter to 0% in Q4, while Beike improved from 18% to 49%. It can be seen that Beike's improvement compared to the market is generally consistent, but its absolute performance still significantly leads the industry (cooperating real estate companies and projects are of higher quality). However, from high-frequency data, the sales momentum in the new housing market has slightly declined in the first two months of this year, not as resilient as the existing housing market.

The revenue performance of the new housing business is even stronger, unlike the declining monetization rate of the existing housing business, the comprehensive monetization rate of the new housing business this season increased significantly by 0.3 percentage points to 3.7%. Therefore, the revenue of the new housing business surged by 79%, exceeding 13 billion, nearly 17% higher than market expectations. This further verifies that Beike's role as a channel for real estate companies to acquire customers is further increasing. Even in the context of an improving overall environment and relatively reduced difficulty in buying houses, this remains true.

This also aligns with our previous view that land in key urban central areas will become increasingly scarce, while projects in the outskirts lack natural customer flow and are difficult to sell, indicating that the bargaining power of channel providers over developers is on an upward trend in the medium term.

3. Home decoration revenue declines month-on-month, leasing continues to grow steadily

In addition to the housing transaction business of the first channel, Beike's total revenue for the second channel, mainly from home decoration, leasing, home services, and financial services, reached 9.13 billion this season. It was not significantly affected by the favorable policies stimulating the real estate market, as the base increased, revenue growth stabilized and slowed to 39%, slightly better than market expectations.

Specifically, perhaps the most important home decoration business in the second channel generated revenue of 4.11 billion this season, which decreased compared to the previous season and the year-on-year growth rate also fell to only 13%, significantly lower than expected. The announcement did not explain the reasons for the sharp decline in home decoration growth, so it is necessary to pay special attention to whether the management provided any explanation during the conference call.

The leasing business continued to grow rapidly, with revenue reaching 4.58 billion this season, surpassing the home decoration business, with a month-on-month growth rate of 16%. However, since most of the revenue from this business needs to be transferred to landlords, the contribution profit margin remains below 5%, making the revenue appear somewhat "inflated," with relatively limited contribution to the company's profits.

After summing up all businesses, Beike's total revenue this season was 31.1 billion, driven by a significant rebound in housing transactions in the first channel, with total revenue increasing by 54% year-on-year, exceeding the consensus expectation of about 2.3 billion.

4. Revenue surges but profit margin declines?

Although the growth perspective is quite strong, there is a lack of surprises on the profit side. With a month-on-month revenue growth of only 40%, the profit margins of various segments did not show significant improvement, and some even declined. Looking at the specific segments:

The contribution profit from the existing housing business this season was 3.61 billion, although the profit amount increased significantly month-on-month, and was slightly higher than the expected 3.5 billion. However, the contribution profit margin was 40.4%, which is a decline compared to the previous season's 41%, likely due to the decrease in the monetization rate of existing housing this season. That is, the growth in profit amount and the exceeding expectations were entirely due to the increase in revenue volume, while the profit margin did not increase with the scale (at least not this season).

The new housing business saw a significant increase in the monetization rate this season, with the contribution profit margin rising from 24.8% to 25.6%, but still declining year-on-year (-0.8pct). Considering the premise of nearly 80% year-on-year revenue growth, the elasticity of profit is not particularly impressive

In the second channel, the home decoration business not only saw a decline in revenue compared to the previous quarter, but its profit margin also narrowed from 31.2% last season to 29.8%. With both business volume and profitability declining, it is highly likely that there has been some business change, and attention should be paid to management's explanation.

However, the profit margin contribution from the leasing business is still slightly improving, rising from 4.4% last season to 4.6%. As the business volume further increases, there should be more room for profit margin growth.

Overall, Beike's overall profit margin contribution this season is 28%, a decrease of 0.1 percentage points compared to the previous season. This time, despite a significant increase in revenue volume, the profit margin did not show much upward elasticity (especially in the first channel's housing agency business), Dolphin Research believes that this reflects the labor-intensive and performance-driven nature of the business to some extent. The profit margin of the business may not naturally increase with the growth in volume, but rather relies on adjustments to employee commission ratios (otherwise, logically, regardless of how many times the revenue scale grows, the proportion of commissions allocated to employees will not naturally decrease).

5. The increase in employee commission rates is the main reason for insufficient profit elasticity

From the perspective of costs and expenses, the reasons for this poor profit performance are observed as follows:

1) First, from the perspective of gross profit, the gross profit margin this season is 23%, a slight increase of 0.3 percentage points compared to the previous quarter. Although there is a slight improvement, considering the massive growth in revenue, the improvement is quite limited, falling below the consensus expectation of 23.5% from sell-side analysts. In detail, this quarter, the commission costs (including internal employees and external platform merchants) accounted for a proportion of total revenue, increasing significantly from 42.4% last season to 48.7%. (It is emphasized that this is under the condition of nearly 40% revenue growth), the increase in commission proportion is one of the important reasons why profits did not show significant elasticity.

In terms of expenses, this season, Beike's three expenses increased by 40% compared to the previous quarter, which is slightly higher than the revenue growth of 38%. It also shows that the explosive growth in business and revenue scale did not lead to a dilution of expense ratios and scale effects. On the contrary, due to the company's more aggressive and optimistic investment attitude, the operating expense ratio increased by 0.3 percentage points compared to the previous quarter. Among them, research and development expenses grew by about 38% year-on-year, making it the expense item with the most significant increase in investment.

Due to the increase in commission ratio, the gross profit margin only slightly increased by 0.3 percentage points, which was completely eroded by expenses that grew slightly faster than revenue (the combined expense ratio increased by 0.3 percentage points). This resulted in the operating profit margin for the quarter remaining flat year-on-year at 3.2%, significantly lower than the expected 3.8%. Despite total revenue exceeding expectations by 2.3 billion, the actual operating profit of 1.01 billion was slightly lower than the expected 1.08 billion.

In terms of net profit, the performance was even worse compared to the flat operating profit margin. The adjusted net profit for this quarter was 1.34 billion, a significant decline from last quarter's 1.78 billion. Although sell-side expectations for this quarter's net profit were not high, merely flat compared to last quarter (in other words, the market had somewhat anticipated that profits would not significantly improve with the increase in revenue scale). However, the actual performance, which showed a noticeable decline quarter-on-quarter, still fell short of expectations.

In terms of reasons, aside from the factors that led to the flat operating profit, this quarter confirmed a total of 1 billion in taxes payable, which doubled compared to last quarter. The significant increase in taxes is the main reason for the net profit falling short of expectations. Attention should be paid to the management's explanation for the substantial increase in taxes. However, conversely, if this tax impact is only one-time, then Beike's "real" profit this quarter is not as bad as it seems.

Dolphin Research on Beike:

Earnings Report Commentary

November 23, 2024 Conference Call “ Beike: How Strong is the Real Estate Market Recovery After September? ”

November 23, 2024 Earnings Report Commentary “ Beike: The Third Quarter was a "Waste", Will Tomorrow be Better? ”

August 13, 2024 Conference Call “ Beike: How is the Progress of Home Decoration and Rental Business? ” August 13, 2024 Financial Report Review 《 Can the "One Body Three Wings" Help Beike Soar Again? 》

May 26, 2024 Conference Call 《 Beike: Second-hand Housing Shows Year-on-Year Improvement Trend, New Housing Continues to Face Pressure 》

May 26, 2024 Financial Report Review 《 “Strong Medicine for a Serious Illness,” Can Beike Be Saved? 》

March 15, 2024 Conference Call 《 Even if the Real Estate Market is Frozen, There is Still a Dividend Safety Net 》

March 15, 2024 Financial Report Review 《 Beike: High-Quality Development of New Business 》

November 9, 2023 Conference Call 《 Beike: How is the "One Body Three Wings" Strategy Progressing? 》

November 8, 2023 Financial Report Review 《 Beike: A "Plum Blossom" in the Cold Winter of Real Estate? 》

August 31, 2023 Financial Report Review 《 Beike Feels the Chill Deeply, But a Major "Market Rescue" is Coming! 》

August 31, 2023 Conference Call 《 Beike: Outlook for the Real Estate Market in the Second Half of the Year & Future Strategic Direction 》

In-depth

June 30, 2022 《 Can the Real Estate Market Come Back to Life, and Can Beike Take Big Steps Again? 》

December 27, 2021 《 Is the Real Estate Market Warming Up? Should I Buy Beike? Let's Wait a Little Longer **》December 15, 2021: From "Revolutionizing Lives" to "Being Revolutionized," Can Beike Withstand It?

December 9, 2021: The "Rebellious" Beike: Whose Life Has It Revolutionized, and Who Is Its Savior?

Risk Disclosure and Statement of This Article: Dolphin Research Disclaimer and General Disclosure