Morning all
Been trying out a DD approach and wouldn’t mind some feedback on this 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. Tried to keep it neat but if you’d prefer it all laid out in a oner, let me know.
If there is any value found in it, I’ll try and get these going on a semi-regular basis.
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
Community-centric touchpoints (offline), which are key to their existing home business
Revenue is generated from fees and commissions from housing transactions / services.
Metrics and Scale at a Glance
Company Details
Sector: Services
Industry: Real Estate Operations
Founded: 2001
HQ: Beijing, China
Employees: 87,706
Market Cap: $74b
Revenue: $71b
Websites:
Management
CEO: Peng Youngdong
- co-founder
- 19 years service
- Previously a senior consultant of strategy and revolution at IBM (2006 - 2010)
CFO: Xu Tao
- CFO at SenseTime Technology, Didi Infinity Technology, Dimension Data, Sun Microsystems China Co., & Lucent Technology
Co-COO: Xu Wangang
- 2.75yrs service
- 16 years as GM at two significant Real Estate Brokerages
Co-COO: Wang Yongqun
- With Lianjia since 2008
- Chief Information Officer of SF Express (2004 - 2007)
All veterans of the industry and dedicated significant portions of their careers to Beike. Having a CEO who is also a co-founder is a great sign that the company is cared for and being steered in the right way and direction.
Financials
Having only IPO’d in August, there are currently no quarterly earnings reports to go by, so the following tables are taken from their F-1 filing;
This represents a Gross Margin that is moving in the right direction, from 19% in 2017 to 26% in H1 2020.
A full breakdown can be found in the filing on the SEC website.
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 #3 overall for Quality across their entire universe.
Again, without more recent data and only the F-1’s coverage since 2017 to go on, pulling the devil out of the detail is no mean feat. However based on the available figures, we can extrapolate an estimated current EPS of $1.85 and PE Ratio of 34.8.
While the latter is quite high, it’s worth noting that BEKE only turned profitable this year and so upcoming ERs may see these numbers change for the better.
In terms of Institutional ownership, the largest stakes equate to an overall total of 27.7 million shares and are broken down as follows;
Most recently, Baillie Gifford added BEKE to their market leading Investment Trust, Scottish Mortgage (LSE:SMT). Another validation of the disruptive nature of KE’s business model. Certainly not to be sniffed at.
Landscape
China has the largest housing market in the world in terms of GTV and number of transactions of home sales and home rentals in 2019. The average age of home buyers in China remained at 29.5 in 2018, younger than other countries around the world, according to a report released by RealData, a Chinese real estate research firm.
China’s population as of Oct 2020 is 1,439,323,776.
The housing market in China has experienced prolonged expansion and is expected to enter into a new phase of steady growth, underpinned by continuous urban development, Chinese consumers’ 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.
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.
In China, the annual per capita disposable income in urban areas is expected to grow at a CAGR of 7.7% by 2024. As the disposable income per capita continues to increase, Chinese consumers are gradually shifting from simply owning a home to having quality housing and upgraded living conditions.
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%. The demand for upgraded housing quality and living conditions is expected to continue to drive the growth of China’s residential real estate market.
The penetration rate for brokerage services in China’s existing home sales and home rentals market is high. In 2019, approximately 88.0% of existing home sales and 54.4% home rentals in China were conducted through brokerage service providers in terms of GTV.
According to a report and survey denoted in the F-1 filing, the existing home transactions market is expected to grow with a CAGR of 12.4%, from RMB 8.4 trillion in 2019 to RMB 15.1 trillion in 2024.
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.
So KE / Beike are looking to disrupt the biggest real estate market in the world, in a country where the market is fragmented and underdeveloped, in dire need of disruption, dragged away from tired, traditional methods. The presence of COVID has forced people away from the traditional face-to-face approach and encouraged an online transaction, which can only have worked in their favour, as much as it pains me to find positives amongst a pandemic.
But despite the positive signs that the market is poised to tilt their way, being an ADR carries it’s own element of risk with the Trump Administration’s proposed plans to delist Chinese companies from the big U.S. exchanges if they don’t comply with auditing standards by 2022. This could end up being a shorter hold than we’d like.
Peers / Competitors
In future DD breakdowns I’ll go into this in a little more detail, comparing Revenue, Balance Sheet, and most importantly Gross Margin, but for now I’ve merely compared (arguably) the most key fundamental measurements;
As you can see, 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.
And 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.
NB. As full disclosure, I also have a position in GRBK. 
Re/Max (NYSE:RMAX) does not fit the growth profile any longer and the rest pale by a simple number comparison.
KE Holdings quality is already starting to show through… and they are just getting started.
Analyst Coverage
Price Targets;
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Yahoo Finance - $48.38
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CNN Money - $48.31 with a high of $75.33
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CNBC - $48.45
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MarketWatch - $48.54
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WSJ - $48.31 with a high of $75.33
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Tipranks - $50.75 with a high of $59.00
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Goldman Sachs - $48.00
Ratings;
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BofA Securities - Buy
-
China Renaissance - Hold
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CICC - Outperform
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Goldman Sachs - Neutral
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JP Morgan - Buy
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Morgan Stanley - Hold
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UBS - Hold
Upside
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Largest integrated online and offline platform for housing transactions and services in China
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Pioneer in developing industry infrastructure and promoting digitalization and standardization across data, transaction process and service quality
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Brand of choice for industry participants
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Turned profitable during the first half of 2020, bucking the trend of other money-losing IPOs
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Majority of peers/competitors are US companies with no access to the same housing market, and therefore occupy none of the market share
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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
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Trading volumes of other local peers are vastly inferior
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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
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Similarities between KE’s Agent Cooperation Network (ACN) and the US’ Multiple Listing Service, or MLS, could create positive market sentiment
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Scale and quality of agent and store network
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Majority of IPO proceeds directed to R&D and expansion into new geographies
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Management team that have been around for the long haul, including founders, with proven track record of innovations and execution
Risks
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US / China tensions. Potential de-listing if Trump stays in power
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Adverse effects brought on as a result of future SEC rules
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Over reliance on China’s major cities (Beijing and Shanghai) for revenue
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Home price rises slowing in China’s biggest cities, which could slow revenue growth
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Alibaba recently (Aug 2020) raised their stake in competitor, E-House, to 13.26%, which could bring uncertainty to KE Holdings / Beike’s business, particularly in relation to New house sales, where E-House’s business solely lies
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Long term plans and short-term financials can be incompatible, so future costs should be expected
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Fluctuations in China’s residential real estate market and its regulations
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Limited operating history
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Impact of COVID-19 on offline business centres (second-hand market business)
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Reliance on Tencent (a key backer) on various aspects of operations
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Failure to keep up with technological advances in the industry
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App store relationships turning sour
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Limited existing insurance coverage
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At current price the stock is overweight, so future volatility should be expected
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IPO base has never really been fully formed as yet
Potential Catalysts
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Analysts expect earnings to jump 75% in 2021
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Earnings are forecast to grow 82.8% per year
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Expansion of service offerings
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Development of infrastructure
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Future strategic investments and acquisitions
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Quarterly Earnings. Next ER expected 13/11/20
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If Biden wins the US election this might positively impact Chinese stocks as the risk of delisting mitigates with the dissolution of the Trump Regime
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Further relaxation of COVID-19 restrictions in China
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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, both local (ESPC) and national (PurpleBricks, RightMove, et al). 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.
As of the end of August 2020, BEKE has now appeared on the holdings of my favourite Investment Trust: Baillie Gifford’s Scottish Mortgage. So I’m quite proud to have beaten them to the punch but equally glad to have the validation that industry giants who specialise in innovation have also taken notice.
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 analyst median average 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 I can see BEKE hitting the high forecasts by year end if not much sooner. But that is just in the short term and this, for me, is a long hold as I can see the stock enjoying some tremendous 5yr growth so long as Trump’s administration doesn’t get their way with Chinese stocks.
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 yet to see a single Quarterly Earnings Report. The next is due in November and will dictate the overall sizing of my position in the long run. Currently this comprises 5% of my LT folio, however if the long term price forecasts (est. 1 yr target = $220, while 5yr target = $850) are to be bought into, I can easily see this rising to closer to a 10% position.
I also really love the fact less than 1,000 Robinhooders own this stock!
| Sources | |||||||
|---|---|---|---|---|---|---|---|
| Stockopedia | SEC Filings | Company Websites | |||||
| Yahoo Finance | Tip Ranks | Investor’s Business Daily | |||||
| Fintel | CNN Money | Bloomberg | |||||
| EqualOcean | Global Property Guide | Investopedia | |||||
| SmartKarma | Stockhouse | CNBC | |||||
| Seeking Alpha | Benzinga | AnalystRatings | |||||
| Morning Star | Market Screener | Street Insider | |||||
| WSJ | gov.capital | Motley Fool | |||||
| Statista | |||||||
| Worldometer | SwingTradeBot | Simplywall.st | |||||
| Genuine Impact | Wallmine | Guru Focus | |||||
| Trade Brains | Wallet Investor | MarketBeat |
Thanks in advance!
JOE.
