BEKE: The real estate market cools again, can Beijing and Shanghai's 'relaxation of purchase restrictions' turn the tide?

$KE(BEKE.US) announced its Q2 2025 earnings before the U.S. stock market opened on August 26th. Overall, the performance was relatively flat, with revenue growth slowing as expected and profits slightly underperforming expectations, lacking any standout features. Specifically:

1. In terms of large numbers, due to the impact of the domestic real estate market cooling again in the second quarter, Beike's total revenue growth rate fell to 11% year-on-year, completely in line with expectations. New home and innovative business performed strongly, but existing home business was weaker.

However, in terms of profit, although the profit margin improved compared to the previous quarter, market expectations were higher. The gross margin was 1 percentage point lower than expected, although conservative expense spending partially offset this impact. Ultimately, the operating profit of approximately 1.06 billion was about 3.5% lower than expected.

2. By segment, the core of the core existing home business saw GTV growth rate significantly slow to only 2% year-on-year this quarter. However, since April, the transaction of second-hand houses in key cities began to weaken, the market had already anticipated this, and the actual performance was slightly better than the nearly zero growth expected.

In terms of revenue, due to the increasing proportion of transaction volume dominated by franchised stores, the comprehensive realization rate of existing homes continued to decline by 3 basis points compared to the previous quarter. This led to an 8% year-on-year decline in existing home revenue, underperforming GTV growth rate, showing poor performance.

3. In contrast, Beike performed well in the new home market, with GTV growing 9% year-on-year this quarter, continuing to outperform the industry, reflecting Beike's increasing market share in the new home market. However, the market had also anticipated this.

In terms of revenue, the comprehensive realization rate of new home business also declined by about 11 basis points to 3.4% quarter-on-quarter this quarter, remaining basically flat year-on-year. Therefore, new home business revenue grew 9% year-on-year, consistent with GTV growth rate. Since Beike's own channels and franchise channels performed similarly in new homes this quarter, the decline in new home realization rate was not due to structural changes, attention should be paid to whether this is sustainable.

4. In new business, the second channel's total revenue reached 10.7 billion this quarter, growing 32% year-on-year, maintaining impressive high growth, outperforming market expectations of 28%.

Among them, the most important home decoration business did not perform well, with revenue growth rate of 13% year-on-year, although in line with expectations, absolute growth was not high. It seems that Beike has encountered significant bottlenecks in this "tough business."

Rental business continued to grow rapidly, with revenue reaching 5.67 billion this quarter, continuing to grow 78% year-on-year, significantly outperforming market expectations. Mainly due to the rapid growth in the number of properties managed by Beike under the "worry-free rental" model.

5. In terms of segment profit performance, overall, mainly due to the decline in commission ratio, the profit margins of various businesses improved compared to the low point of the previous quarter, but market expectations were higher, specifically, except for the home decoration business's contribution profit margin slightly decreased by less than 1 percentage point quarter-on-quarter, other existing home, new home, and rental business contribution profit margins improved by 1 percentage point to 2 percentage points compared to the previous quarter.

6. The main reason for the profit underperformance this quarter was that although the gross margin improved by about 1.2 percentage points to 21.9% quarter-on-quarter (thanks to the decline in commission ratio), it was still lower than the market expectation of 22.9%.

Moreover, although there was quarter-on-quarter improvement, from a year-on-year perspective, due to the significant acceleration in the proportion of low gross margin rental business, and the realization rate of existing home business was significantly narrower than last year. The company's overall gross margin narrowed significantly by 6 percentage points year-on-year, and gross profit fell by 13%, indeed quite weak.

7. Fortunately, in terms of expenses, this quarter Beike's total expenses increased by only 3% year-on-year, and did not lead to a significant increase in expenses due to the continuous growth in the number of stores, actual expense spending was about 240 million less than expected, partially offsetting the impact of gross profit underperformance.

Ultimately, in terms of profit, the trend this quarter showed a slight improvement in gross margin quarter-on-quarter, and the expense rate remained low, ultimately operating profit margin was 4.1%, significantly improved from the previous quarter's low point of 2.5%, operating profit reached 1.06 billion, nearly doubling compared to the previous quarter.

However, from the perspective of expectation difference, the actual performance still slightly underperformed the higher market expectations by about 3% to 4%.

The market is more concerned about the adjusted net profit, which was 1.82 billion this quarter, slightly outperforming expectations, mainly due to the tax expense decreasing by more than 100 million quarter-on-quarter, and the confirmation of slightly more than 100 million investment income benefits.

Dolphin Research View:

From the analysis above, it can be seen that Beike's overall performance this quarter was relatively flat. In the first channel business, whether it is existing home business or new home business, both saw transaction volume growth rates significantly decline as expected after the rapid cooling of the real estate market following the fading of the previous policy dividend. Although compared to the industry overall, it still showed resilient performance (especially in new home business), the extent of leading the industry this quarter does not seem large.

In addition to growth slowing as expected, another phenomenon worth noting this quarter is the simultaneous decline in comprehensive realization rates for new home and existing home businesses quarter-on-quarter. Although there is the impact of the increasing proportion of platform franchise channels (also reflecting Beike's platform attributes to hedge the risk of self-operated business concentration in some high-line cities), the continuous decline in realization rates is a suppressive factor for profitability. In the long term, it will also make the market reluctant to expect a trend increase in realization rates--this is the imagination space that can continue to drive company revenue and profit growth even if the real estate transaction volume encounters bottlenecks in the future.

On the profit side, although this quarter achieved marginal improvement in profit margin through reducing commission ratio and still excellent expense control, in the face of the headwind combination of slowing growth and store expansion, due to the decline in realization rate of existing homes, and the current situation of obvious supply surplus, insufficient demand, and significantly extended transaction cycle, it will inevitably lead to a decline in intermediary business efficiency and profit margin (this quarter, the average GTV facilitated by a single intermediary agent fell by 18% year-on-year).

This efficiency decline in the underlying business model is difficult to solve entirely by controlling expenses. In the absence of significant improvement in transaction speed upstairs, it is necessary to rely on the improvement of realization rate to fundamentally hedge the impact and ensure continued profit growth. But currently, this path seems unfeasible.

With adjusted net profit of approximately 7 to 7.5 billion expected in 2025, Beike's current market value corresponds to a PE valuation of about 21x to 23x, indicating that although the company is currently in an unfavorable headwind cycle, the market still gives some valuation premium and full trust to companies like Beike with absolute industry leadership and execution advantages.

From recent high-frequency data, the transaction situation of new homes and existing homes in July and August further deteriorated compared to the second quarter, but since August, Shanghai and Beijing, these two heavyweight cities, have successively announced policies to relax suburban purchase restrictions and other support policies. Whether the new policies can stimulate the sluggish real estate market to recover is a key factor affecting the company's short- to medium-term trend. Pay attention to the guidance from management in the conference call.

Detailed interpretation of this quarter's financial report:

I. Existing Homes: Real Estate Market Cools, Self-Operation Weakens, Franchise Supports

The core of the core existing home business had a GTV of 583.5 billion this quarter, with year-on-year growth rate significantly slowing to only 2%. However, according to high-frequency data, the transaction of second-hand houses in key cities began to weaken since April, the market had already anticipated this, and the actual performance was slightly better than Bloomberg's consensus expectation of 0 growth.

However, looking ahead to the third quarter, data shows that transactions in July and August further deteriorated, although the government recently relaxed suburban purchase restrictions in first-tier cities like Beijing and Shanghai, whether it can have a significant pulling effect still needs to be observed.

However, this quarter existing home revenue fell 8% year-on-year, continuing to underperform GTV growth rate. Mainly because structurally, the proportion of transaction volume dominated by franchised stores continues to increase, and the company's realization rate in platform business is lower than in self-operated business. According to disclosures, this quarter's self-operated existing home GTV fell nearly 8% year-on-year, but franchise store GTV grew nearly 10%. Therefore, it is estimated that this quarter's comprehensive realization rate for existing homes was 1.15%, continuing to decline by 3 basis points compared to the previous quarter.

II. New Home Business Continues to Outperform the Market, but the Extent is Not Surprising

In contrast, the overall market performance was weaker in the new home market (30 cities' new home sales growth rate was 1% in Q1 vs. -8% in Q2), Beike's performance was still significantly better than the market, with new home GTV growing 9% year-on-year this quarter, reflecting the continued increase in the proportion and importance of Beike's channels in the new home market. However, the market had also anticipated this, and the actual performance did not outperform Bloomberg's consensus expectation of 10%.

In terms of revenue, due to the comprehensive realization rate of new home business declining again by about 11 basis points to 3.4% quarter-on-quarter this quarter, remaining basically flat year-on-year. Therefore, new home business revenue grew 9% year-on-year, consistent with GTV growth rate. This quarter, Beike's self-operated channels and franchise channels contributed similarly to new home GTV growth rate, so the decline in new home business realization rate should not be due to structural reasons. After the comprehensive realization rate of new home business climbed from 3% in 2022 to a high point of 3.7%, there may indeed be pressure for a pullback.

III. Rental Continues to Surge, Home Decoration Faces Bottleneck?

Including home decoration, rental, home service, and financial services, the second channel's total revenue reached 10.7 billion this quarter, growing 32% year-on-year, maintaining impressive high growth, outperforming market expectations of 28%.

Specifically, the most important home decoration business still did not perform well, with revenue growth rate of 13% year-on-year, although in line with expectations, absolute growth was not high. It is evident that in the context of overall low real estate market sentiment, Beike's progress in the "tough business" of home decoration has also encountered significant bottlenecks.

Rental business continued to grow rapidly, with revenue reaching 5.67 billion this quarter, continuing to grow 78% year-on-year, significantly outperforming market expectations. According to the company, this is mainly due to the rapid growth in the number of properties managed by Beike under the "worry-free rental" model.

After summing up all businesses, Beike's total revenue this quarter was 26 billion, growing 11% year-on-year, significantly slowing compared to the previous quarter, but within market expectations. Among them, new home and rental business performed strongly, driving the slightly weaker existing home and home decoration business.

IV. Commission Ratio Declines, First Channel Profit Margin Improves Quarter-on-Quarter

As seen from the above, Beike's revenue performance this quarter was mediocre, within expected slowdown. So how did the profit performance look by segment? In summary, the profit margins of various businesses improved compared to the low point of the previous quarter, but underperformed higher expectations, specifically:

1) Although existing home transaction volume shrank year-on-year this quarter, and comprehensive realization rate declined quarter-on-quarter, existing home business contribution profit margin rose by about 1.8 percentage points quarter-on-quarter to nearly 40%. Dolphin believes that on one hand, platform franchise business, although having lower revenue scale, has higher profit margin. On the other hand, according to news reports, the company recently lowered the commission ratio for home-buying intermediary employees, suggesting that the comprehensive commission ratio this quarter was declining.

2) Similarly, although the realization rate of new home business also declined quarter-on-quarter this quarter, new home business contribution profit margin also rose by 1 percentage point quarter-on-quarter to 24.4%, suggesting that the commission ratio for new home business should also be declining.

3) In the second channel, home decoration business saw a slight decline in contribution profit margin (less than 1 percentage point) while growth slowed, and rental business saw significant improvement in profit margin while revenue grew rapidly, improving from 6.7% last quarter to 8.4%.

Overall, Beike's overall contribution profit margin this quarter was 27.1%, improving by 1 percentage point quarter-on-quarter. It shows Beike's typical pattern of profit margin generally declining during high business growth, but once business growth encounters difficulties, it quickly controls costs and expenses, releasing good profits.

V. Profit Margin Improves Quarter-on-Quarter, but Still Underperforms Higher Expectations

From the perspective of costs and expenses affecting this quarter's profit performance:

1) Firstly, this quarter's gross margin was 21.9%, improving by about 1.2 percentage points quarter-on-quarter, the reason being the decline in commission ratio reflected in the contribution profit margin above. But from the perspective of expectation difference, the market expected a higher gross margin of 22.9%, resulting in actual gross profit of 5.7 billion, more than 4% lower than market expectations.

Additionally, from a year-on-year perspective, due to the significant acceleration in the proportion of low gross margin rental business, and the realization rate of existing home business was significantly narrower than last year, leading to the company's overall gross margin narrowing significantly by 6 percentage points year-on-year, and gross profit fell by 13%, indeed a relatively weak performance.

However, in terms of expenses, this quarter Beike's total expenses increased by only 3% year-on-year, and did not lead to a significant increase in expenses due to the continuous growth in the number of stores, actual expense spending was about 240 million less than expected, partially offsetting the impact of gross profit underperformance.

Ultimately, in terms of profit, from the trend perspective, this quarter's gross margin slightly improved quarter-on-quarter, and the expense rate remained low, therefore the final operating profit margin was 4.1%, significantly improved from the previous quarter's low point of 2.5%, operating profit of 1.06 billion also nearly doubled compared to the previous quarter.

However, from the perspective of expectation difference, due to the market's expectation of a higher gross margin, operating profit still slightly underperformed market expectations by about 3% to 4%.

The market is more concerned about the adjusted net profit, which was 1.82 billion this quarter, slightly outperforming expectations, but this was mainly due to the tax expense decreasing by more than 100 million quarter-on-quarter, and the confirmation of slightly more than 100 million investment income benefits.