2423.HK BEKE.US
From good to great, can Shell do it?

The integrated online and offline real estate broker returned to the black last year and paid a generous dividend despite operating in China’s weak property market

Key Takeaways:

  • KE Holdings posted a net profit of 5.89 billion yuan for 2023, returning to the black after losing 1.4 billion yuan in 2022
  • The leading property broker paid a generous final dividend of $0.351 per American depositary share

By Lau Chi Hang

It’s one thing to ride the coattails of a booming industry like China’s property market was for most of the last three decades. But what separates an ordinary building from a modern high-rise is the ability to stand tall, even during a winter like the one now chilling the sector.

The last two years have decimated China’s property market, with nine out of 10 private developers now teetering on the brink of insolvency. The chill has rippled through to real estate brokers, forcing former heavyweight E-House (2048.HK) to restructure after failing to collect commissions from developers. Despite that, brokerage KE Holdings Inc. (2423.HK; BEKE.US) stands out as one of the few companies that managed to not only grow last year, but also to do so profitably.

The leading broker returned to the black last year with a 5.89 billion yuan ($815 million) annual profit, reversing a 1.4 billion yuan loss in 2022. Its revenue also rose 28.2% for the year to 77.8 billion yuan. And to show off its deep pockets, the company announced a special interim cash dividend of $0.171 per American depositary share (ADS) midway through last year, followed by a newly announced final dividend of $0.351 per ADS, according to its latest results released earlier this month.

The past year highlighted success for the company’s “One Body, Three Wings” strategy, featuring its traditional brokerage service as the body, and home renovation and furnishing, rental property management, and its developing Beihaojia business that “facilitates supply-side upgrades for new homes” as its three wings.

Expanding market share

Even as overall home transactions in China dropped last year, KE Holdings managed to maintain solid growth in its core business. Transaction value for its existing home sales totaled 2.03 trillion yuan, while that for new homes was 1 trillion yuan, up 28.6% and 16.7%, respectively. The company’s net revenue from existing home transactions rose 15.9% to 28 billion yuan, while the figure from new home transactions was up 6.7% to 30.6 billion yuan.

The strong results owe to turf wars that KE Holdings is winning over its smaller rivals, which is the only way to grow in such an ailing market.

As those rivals scaled back operations and even closed, KE Holdings actually expanded its footprint by boosting its store count to 43,817 at the end of last year, up by 8.1% from a year earlier. Its salesforce of individual brokers grew by a similar 8.5% year-on-year to 427,656, showcasing its ability to keep expanding even in such a tough market.

A major concern for all property brokers is the potential for delayed commission payments, which was a major factor in E-House’s downfall. But KE Holdings seems to be avoiding the issue, at least for now. Its accounts receivable turnover days for new home transactions actually fell from 105 days in 2022 to just 43 days in last year’s fourth quarter. The company is avoiding deadbeats through its “Commission in Advance” model. Such prepaid commissions from developers accounted for around 53% of its net revenues from new home transaction services in last year’s fourth quarter, up from around 44% a year earlier. 

It’s worth noting that KE’s demands for quicker commission payments haven’t dampened its new home transaction business, as reflected by its revenue gain last year. That reflects the company’s strong bargaining power with the cash-strapped developers that are some of its largest clients, many of whom are struggling to pay their bills.

“Two wings” take off

The company’s non-brokerage services, while still small as a proportion of total revenue, still performed well last year. The integration of its home renovation and furnishing business into its broader property transaction process helped to boost that business. The company also enriched its offerings and delivery capabilities in the business, lifting revenue from its home renovation and furnishing services to 13.3 billion yuan last year, up 146% from 2022.

KE also continued to boost its “Carefree Rent” rental property management business, whose property under management roughly tripled from 70,000 units in 2022 to 200,000 units by the end of last year. The occupancy rate for that part of the business also rose by 6 percentage points to 95.1%.

Unlike many cash-strapped real estate companies, KE Holdings is also relatively good at managing its capital. Its current gearing ratio is 40%, and it had 19.6 billion yuan in cash at the end of last year. That strong position allowed the company to spend approximately $719 million last year to buy back 46.7 million of its ADSs, accounting for 3.7% of the total number outstanding before the buybacks. Meanwhile, the company has invested its idle funds in low-risk wealth management products to secure certain basic returns, avoiding riskier higher-return products that in the past were often backed by real estate assets.

“We now have a solid foundation – we have the space to make our mark in the vast residential sector, our team has the trust and unity formed through battles fought together, we increasingly resemble an invincible team,” said Chairman and CEO Peng Yongdong in the results.

Ability to endure?

Despite its strong performance, no one knows if KE Holdings will be able to remain a winner. That may explain why the stock fell 2.5% in New York after the announcement, and the shares continued to fall the next day in Hong Kong, closing down nearly 3% at HK$36.90.

Some noted a slowdown in the company’s fourth quarter results, even though its full-year performance was strong. In particular, total transaction value for its new home sales fell 9.7% to 238 billion yuan during the quarter, while its revenue fell 8.5% to 7.6 billion yuan. Investors may be concerned that even if KE Holdings stays ahead of its rivals, it may ultimately fall victim to continued deterioration in China’s oversupplied property market. In such a challenging environment, even a well-managed company may not be able to keep growing indefinitely.

The book “Good to Great” by Stanford University professor Jim Collins has been widely read and respected by entrepreneurs around the world. KE Holdings looks well-run right now, but can it become the kind of great company described by Collins? That could largely depend on whether it can continue to thrive and grow, even as the property market around it crumbles.

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