3 Important Things Investors Should Know About Beike’s Latest Earnings

KE Holdings ( BEKE -13.57% )also known as “Beike” and considered the red fin of China, recently announced its fourth quarter and full year 2021 results. Quarterly revenue fell 22% year-on-year to 17.8 billion yuan ($2.8 billion). dollars), while net profit showed a loss of 933 million yuan, reversing the 1.1 billion yuan net profit of the year-ago quarter.

While far from inspiring, these headlines only tell half the story. Digging deeper into the earnings announcement reveals three key takeaways.

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2021 has been an eventful year for Beike

There are two parts to Beike’s performance in 2021. In the first half of the year, the company grew revenue by 65%, beating analysts’ expectations for both quarters. However, things turned south after the Chinese government expanded its regulatory scrutiny of major industries including real estate, education, technology and more. Worse still, the company’s founder and chairman, Zuo Hui, died suddenly in May 2021 following an illness.

China’s real estate sector has entered turmoil after the government pushed forward its policy that houses are for living in, not speculating. Beike, China’s leading real estate platform, suffered a major blow as a result of this policy change: gross deal value fell 35% year-on-year in the fourth quarter, leading to a decline of 22 % revenues.

Operational metrics were also weaker as the number of stores, agents and mobile monthly active users fell quarter over quarter. People were too scared to buy a new home or were unable to get loans as banks tightened their lending criteria, leading to an industry-wide slowdown. Beike responded by closing stores and reducing its number of agents.

In short, 2021 has been a tumultuous year for the Beike and the Chinese real estate industry as a whole.

Acquisition is a beacon of hope in difficult times

Despite the headwinds of the past year, there have been some positive developments for the company.

One of Beike’s biggest initiatives in 2021 was to double down on its renovation and furnishing services. It acquired Shengdu Home Renovation – a leader in full-service home renovations in China – to accelerate its growth in this sector. The acquisition of Shengdu will bring cost synergies and shorten Beike’s learning curve in the renovation industry. After all, Beike only entered this industry in 2019 through its self-launched service Beiwoo, while Shengdu already has nearly two decades of experience.

Another point worth mentioning is the fact that Beike has a fortress-like record. After generating 3.6 billion yuan in operating cash flow last year and spending 8.0 billion yuan to acquire Shengdu in 2021, the company ended the year with around 50 billion yuan (7, $8 billion) of cash and short-term investments, and almost zero debt. This puts the company in a good position to invest and grow its home improvement business – and other initiatives – in the future.

First results in 2022 still under pressure

Unfortunately, the difficult real estate environment in China will persist well into 2022. To that end, Beike forecast revenue declines in the first quarter of 2022, down 40% to 44% year-over-year. However, there are signs that the market has bottomed out and will recover from now on.

While Beike’s traditional property sales business is likely to face another tough year, its property rental and home renovation services are expected to grow. The company plans to maintain spending in these growth areas, which will also affect its profitability in 2022.

May 2022 will mark one year since Beike lost its founder. CEO (and incoming chairman) Peng Yongdong has kept the company focused on its long-term direction, but the coming months will be critical as they shed more light on Peng’s leadership without Zuo.

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