r/EducatedInvesting - DD Thread: KE Holdings (NYSE:BEKE) 贝壳

KE Holdings (NYSE:BEKE) 贝壳 : EducatedInvesting

Morning all

Been trying out a DD approach and wouldn’t mind some feedback if you can spare the time to read. Anything not ringing true or missing, general theory, that sort of thing.

Comments on the format would also help. Too dense? Too simplified?

If there is any value found in it, I’ll try and get these going on a semi-regular basis, but I’ll likely only post about companies that I’m really enthusiastic about… which isn’t all that often!

NYSE:BEKE (KE Holdings)

KE Holdings Inc. (“Beike”) is the leading integrated online and offline platform for housing transactions and services in China. Pioneering in building the industry infrastructure and standards in China to reinvent how service providers and housing customers efficiently navigate and consummate housing transactions, ranging from existing and new home sales, home rentals, to home renovation, real estate financial solutions, and other services.

In August this year KE went public on the NYSE. This was the largest IPO float by a Chinese company in the U.S. since iQiyi Inc. (IQ) raised $2.4 billion in March 2018.

What do they do?

KE owns and operates Lianjia, China’s leading real estate brokerage brand and an integral part of their Beike platform. The success and proven track record of Lianjia paves the way for KE to build the industry infrastructure and standards and drive the rapid and sustainable growth of Beike, with more than 18 years of operating experience through Lianjia since their inception in 2001.

Such extensive industry experience has provided KE with distinct insights into markets, business conditions and customer needs, which they believe are critical to offer effective and practical solutions.

Products and Services

The Beike platform offers the following services;

  • Existing home transactions (ie. second hand market)

  • New home transactions (ie. new build market)

  • Financial Solutions (eg. home financing)

  • Home renovation

Agent cooperation network, connecting customers to service providers

r/EducatedInvesting - DD Thread: KE Holdings (NYSE:BEKE) 贝壳

Source: SEC F-1 Filing

r/EducatedInvesting - DD Thread: KE Holdings (NYSE:BEKE) 贝壳
r/EducatedInvesting - DD Thread: KE Holdings (NYSE:BEKE) 贝壳
r/EducatedInvesting - DD Thread: KE Holdings (NYSE:BEKE) 贝壳

Metrics and Scale at a Glance

r/EducatedInvesting - DD Thread: KE Holdings (NYSE:BEKE) 贝壳

Source: SEC F-1 filing

Company Details

Sector: Services

Industry: Real Estate Operations

Founded: 2001

HQ: Beijing, China

Employees: 87,706

Market Cap: $74b

Revenue: $71b

Websites:

https://investors.ke.com/home/default.aspx

https://www.bkjk.com/en/

https://bj.ke.com/

Management

CEO: Peng Youngdong

CFO: Xu Tao

  • CFO at SenseTime Technology, Didi Infinity Technology, Dimension Data, Sun Microsystems China Co., & Lucent Technology

Co-COO: Xu Wangang

Co-COO: Wang Yongqun

All veterans of the industry and dedicated significant portions of their careers to Beike.

Founder-led also, which is a great sign that the company is cared for and being steered in the right way and direction.

Financial Highlights

I’d recommend going over the latest 6-K filing for a full view. It can be found via the SEC website or their own Investor Relations site. Here is a link.

  • Turned profitable during the first half of 2020, bucking the trend of other money-losing IPOs

  • Q3 2020 Net revenues were ¥20.5 billion (US$3.0 billion), an increase of 70.9% YoY

  • In dollars, the quarterly diluted loss per ADS was $0.05

  • In dollars, the quarterly adjusted diluted EPA (earnings per ADS) was $0.25, a 117% improvement on the previous year that beat analysts estimates of $0.17

  • Total Assets as at Q3 2020: ¥90,9b (~$13.8b), which represents a YoY growth of 168%

  • Gross Margin grown from 18.7% in 2017 to 24.5% in 2019. As of Q3, 2020 Gross Margin sits at 16.3% with expectation that it will exceed 2019 by EoY

  • As at end of 2019 KE were debt free, ie. held net cash

  • YTD EPA: $0.21

  • EV / Sales Ratio: 6.84

r/EducatedInvesting - DD Thread: KE Holdings (NYSE:BEKE) 贝壳

Source: Wallmine

Q4 Guidance

  • KE Holdings Inc. sees Q4 2020 revenue of $2.8-3 billion, versus the consensus of $2.82 billion

  • For the fourth quarter of 2020, the Company expects total net revenues to be between RMB19.2 billion (US$2.8 billion) and ¥20.2 billion (US$3.0 billion), representing an increase of approximately 33.5% to 40.5% from the same quarter of 2019

Read about:   Wells Fargo Mortgage Review 2020

Other Fundamentals

  • In terms of quality, KE Holdings are regarded very, very highly. Genuine Impact list them as #1 for Quality criteria under their Real Estate universe and #7 overall for Quality across their full universe of companies.

  • No insider trading has been reported at this time. I am unsure if this is due to current US/China trade terms, whereby ADRs on the NYSE are not obligated to divulge insider trading (would take further investigation) or if there simply hasn’t been any trading yet. Given the current price vs. forecasted (see below) I suspect the latter.

  • In terms of ownership the Top 10 largest shareholders are listed below;

r/EducatedInvesting - DD Thread: KE Holdings (NYSE:BEKE) 贝壳

Source: simplywall.st

Great to see the Chairman of the Board sitting pretty at the top, and with the backing of names like Tencent and SoftBank they look very strong in their market. But personally it’s Baillie Gifford’s stake that gets me excited as their Investment Trusts (most notably Scottish Mortgage (LSE:SMT)) have consistently been the highest performing in recent years.

Other institutional investors include Vanguard, BlackRock, Fidelity and Morgan Stanley

Most recently ARK Invest have started to take positions in BEKE in their Next Generation Internet ETF (ARKW)

Landscape / PESTLE Analysis

Political;

  • Trump administration had proposed a plan to delist Chinese companies from the big U.S. exchanges if they don’t comply with auditing standards by 2022. It remains to be seen if these plans will continue under Biden, but very doubtful

  • Obligation of businesses to adhere to Communist Party ideals

Economic;

  • China has the largest housing market in the world in terms of the GTV and number of transactions of existing and new home sales and home rentals in 2019

  • As of December 31, 2019, close to 20% of the existing homes in urban areas in China were built before 1990. Many of these buildings are poorly maintained or suffer from inherent quality issues

  • China’s population as at Oct 2020 is 1,439,323,776. 64% of the population sit in the 16-59 yrs age range

Sociological;

  • The average age of home buyers in China remained at 29.5 in 2018, younger than other countries around the world. When considering this against the 64% of the population in the 16-59yrs age bracket, that is a considerable TAM

  • Annual per capita disposable income in urban area expected to grow at CAGR of 7.7% by 2024. As this continues to increase, consumers are shifting from simply owning a home to having quality housing and upgraded living conditions

  • The demand for upgraded housing quality and living conditions is expected to continue to drive the growth of China’s residential real estate market

  • 25% of housing transactions in the past two years in China were motivated by housing upgrades, especially in first-tier cities where the percentage was 39.7%

Technological;

  • Chinese real estate market is currently fragmented and underdeveloped, weighed down by traditional offline practices and traditions. Huge scope for disruption here

  • The Second-hand housing market is currently experiencing a macro-trend of increased interest, with less buyers looking at New houses, however this area of the real estate market is not currently managed online, rather via offline stores

Legal;

Environmental;

  • The housing market has experienced prolonged expansion and is expected to enter into a new phase of steady growth, underpinned by continuous urban development, consumer demand for quality housing and a stable policy environment

  • China’s urbanization rate reached 60.6% in 2019 and is expected to increase to approximately 70% by 2030, adding at least another 150 million urban population during the same period

  • The penetration rate for brokerage services in existing home sales and home rentals market is high. In 2019, approx. 88.0% of existing home sales and 54.4% home rentals were conducted through brokerage service providers in terms of GTV

Read about:   United Wholesale Mortgage, LLC and Gores Holdings IV, Inc. Announce Closing of Enterprise Mixture

Peers / Competitors

Key fundamental measurements at a glance;

r/EducatedInvesting - DD Thread: KE Holdings (NYSE:BEKE) 贝壳

Data Compiled from Stockopedia

Notes;

  • 58. com (NYSE:WUBA) makes a heck of a case for contention on a fundamental level, and if it hadn’t been for a bearish decline leading up to the March drop (see below) I may have considered a position in both;

r/EducatedInvesting - DD Thread: KE Holdings (NYSE:BEKE) 贝壳

Source: Trading View

  • Green Brick Partners (NASDAQ:GRBK) is first in class if you buy into Investor’s Business Daily’s analytics, however their model is a bit farther removed from what KE / Beike does, and is also nowhere (nor will they ever be) near their market

  • Re/Max (NYSE:RMAX) does not fit the growth profile any longer

  • The rest pale by a simple numbers comparison

KE Holdings quality is already starting to show through… and they are just getting started.

Analyst Forecasts

r/EducatedInvesting - DD Thread: KE Holdings (NYSE:BEKE) 贝壳
  • simplywall.st forecasts Revenue of ¥86.994b (~$13.23b) in 2021 and ¥107.917b (~$16.41b) in 2022

  • They also forecast Earnings of ¥5.164b (~$0.79b) in 2021 and ¥8.230b (~$1.23b) in 2022

Upside

  • No. 1 Market share in China

  • As at 2018 TAM worth ¥1.4trillion

  • Largest integrated online and offline platform for housing transactions and services in China

  • Existing home transactions market expected to grow with a CAGR of 12.4%, from RMB8.4 trillion in 2019 to RMB15.1 trillion in 2024 (Source: CIC Report)

  • Penetration rate of brokerage services for new home sales in China in terms of GTV is expected to increase from 25.5% in 2019 to 42.5% in 2024

  • Pioneer in developing industry infrastructure and promoting digitalization and standardization across data, transaction process and service quality

  • Brand of choice for industry participants

  • Majority of peers/competitors are US companies with no access to the same housing market, and therefore occupy none of the market share

  • Biggest local competitor, E-House (backed by Alibaba) focuses 100% on the new residential market, which is currently shrinking due to a macro trend in the Chinese real estate market. This leaves KE Holdings / Beike’s second-hand market business, managed via offline stores (that neither Alibaba nor JD.com have) un-jeopardised

  • Trading volumes of other local peers are vastly inferior

  • Massive housing market in China with low efficiency in housing transactions and services; no framework for exclusive engagement for home sellers; fragmented market information and resources; and a shortage of professional agents with experience and tenure services presents considerable room for disruption

  • Scalable business model with increasing quality of agent and store network

  • Majority of IPO proceeds directed to R&D and expansion into new geographies

  • Management team that have been around for the long haul, including founders, with proven track record of innovations and execution

  • Very little retail investor coverage, which reduces price volatility;

r/EducatedInvesting - DD Thread: KE Holdings (NYSE:BEKE) 贝壳

Source: Wallmine

Risks

  • US / China tensions. Potential de-listing if Biden continues where Trump left off

  • Adverse effects brought on as a result of future SEC rules

  • Over reliance on China’s major cities (Beijing and Shanghai) for revenue

  • Home price rises slowing in China’s biggest cities, which could slow revenue growth

  • Alibaba recently (Aug 2020) raised their stake in competitor, E-House, to 13.26%, which could bring uncertainty to KE Holdings business, particularly in relation to New house sales, where E-House’s business solely lies

  • Long term plans and short-term financials can be incompatible, so future costs should be expected

  • Fluctuations in China’s residential real estate market and its regulations

  • China has almost fully recovered from the effects of the pandemic this year, therefore any re-emergence or future impact of COVID-19 on offline business centres (second-hand market business) would be felt

  • Reliance on Tencent (a key backer) on various aspects of operations

  • Failure to keep up with technological advances in the industry

  • App store relationships turning sour

  • Limited existing insurance coverage

  • At current price the stock is overweight, so future volatility should be expected

Read about:   Down Cost Grants | NSH Mortgage

Potential Catalysts

  • Analysts expect earnings to jump 75% in 2021

  • Earnings are forecast to grow 82.8% per year

  • Expansion of service offerings

  • Development of infrastructure

  • Future strategic investments and acquisitions

  • Further relaxation of COVID-19 restrictions in China (although this is almost entirely back to normal in China, so any COVID-related news has more potentyial to be a negative catalyst)

  • Although E-House moving into the second-hand market would present new competition, any positive impact on the stock might also reflect on KE’s stock price through sentiment

Final Thoughts

  • It’s hard to comprehend that until recently, China didn’t have a centralised property listing resource. Coming from the UK where we have them in abundance, we don’t even consider this as a convenience anymore; merely the norm. So if China have that switch in state of mind still to come, that transition period of enlightenment could be very rewarding to investors, where we see mass migration from tired and clunky traditional means to the efficiency of the online platform. Make no mistake this is a growth stock

  • What Beike and E-House are doing is disruptive and has the potential to signal the evolution of the Chinese real estate market, eliminating old ways that have grown stagnant and out-dated over the next 5-10 year period

  • The second-hand housing market in China is majorly negotiated offline, so KE / Beike’s moat lies in their coverage in this space, which none of their close competitors, all online presences only, are involved in, although this will not always be the case

  • Since its IPO, the stock has enjoyed some steady and consistent growth and the chart continues to reflect a bullish trajectory, to the point it has already well surpassed the early analyst median averages and now has its sights on the high estimates. You only need to look at Digital Turbine (APPS) to see how little analyst forecasts matter at times, as they can change on a weekly basis and, like APPS, it seems the foerecasts are now moving to keep up with reality with no analysts really willing to stick their necks out on this one

  • Like many stocks, Q3 earnings seemed to have a reverse effect and the price saw a slump, but it is now recovering steadily and heading back to its overachieving highs

  • For me this is a long hold as I can see the stock enjoying some tremendous growth over the next 2 – 5 years

  • At current price the stock is considerably overvalued, more than 100% in fact, with fair value sitting around the $24 mark, however that is not unusual in the market this year and we are already seeing the analyst PTs racing to catch up

  • Following the most recent earnings call, and the subsequent dip, I have increased the overall sizing of my position to 10% of my folio. Very bullish on this and wouldn’t be surprised if bettered its all time highs ($79.40) by the end of the year

Sources

https://investors.ke.com/financials/sec-filings/default.aspx

https://wallmine.com/nyse/beke

https://simplywall.st/stocks/us/real-estate/nyse-beke/ke-holdings#summary

Hope you’ve found this useful and I would recommend you supplement the above with your own research and have a good read of the material located in the sources above. Cheers