Ke Holdings Inc (BEKE) 2021 Q3 法說會逐字稿

Hello ladies and gentlemen, thank you for standing by for KE Holdings Incorporated's third quarter 2021 earnings conference call. At this time all participants are in a listen only mode. Also, today's conference call is being recorded. I will now turn the call over to your host, Mr. Matthew Zhao, IR Director of the Company. Please go ahead, Matthew.

Thank you operator. Good evening and good morning everyone. Welcome to KE Holdings Inc. or Beike's third quarter 2021 earnings conference call. The Company's financial operating results were published in the press release earlier today and our post on the Company's IR website, www.investors.ke.com.

On today's call we have Mr. Stanley Yongdong Peng, our Co-founder, Chairman and Chief Executive Officer and Mr. Tao Xu, our Executive Director and Chief Financial Officer. Mr. Peng will provide an overview of our strategies and business developments and Mr. Xu will provide additional details on the Company's financial results.

Before we continue, I refer you to our safe harbor statement in our earnings press release, which applies to this call, as we will make forward-looking statements. Please also note that Beike's earnings press release and this conference call includes discussions of audit GAAP financial information, as well as audit non-GAAP financial measures.

Please refer to the Company's press release which contains our reconciliation of the audit non-GAAP measures to comparable GAAP measures. Lastly, unless otherwise stated, all figures mentioned during this conference call are in RMB.

With that, I will now turn the call over to our Chairman and CEO, Mr. Stanley Peng. Please go ahead, sir.

Thank you, Matthew. Hello everyone and thank you for joining us today on our third quarter of 2021 earnings conference call. Before I go into more details, let me first provide a big-picture view of our industry. During the past quarter, the entire housing transactions and services industry, including ourselves, faced a series of challenges in the new and existing home and land market experienced substantial corrections and transaction froze, making a historical quarter.

The industry collectively made difficult but correct adjustments. Not only is economic growth driven by high leverage not sustainable, but it will also negatively affect people's lives and create systematic risks. Without correction, creating the developers' business models that were based on high turnover, high leverage and a high housing price.

Our national policy goal of 'housing is for living, not for speculation', that encourages both housing purchase and renting will become a castle in the sky. If the housing transactions and services industry blindly expand in scale without offering sound professional services, it will be unable to ensure service quality, not adequately protect our consumer rights and an efficient housing market will be impossible.

When we talk about 'do the right things, even if it is difficult', we are referring to instances where there is an opportunity to undertake daunting tasks with a weak payoff in the short term but will prove to generate great value in the long term. As a participant in an industry in need of reform and under guidance of the Chinese Government's policy to correct market instability and create more equitable housing circumstances, it's Beike's duty to shoulder the responsibilities for the greater good, rather than solely serving our business needs. We firmly believe China's housing industry is facing crucial development opportunities, a promising era for existing homes and better living is coming upon us at an accelerated pace.

With that backdrop in mind, let's talk about the industry and overall performance of our Company in more detail. A series of policies, such as purchase restrictions, loan quota limits, sales restrictions, reference prices, financing limitation, payment restrictions and the recent alerts from several developers have also dragged down market sentiment. The result has been a significant downtrend in the existing home transaction market in first tier cities and most second tier cities. GTV of existing homes sales market declined 41.6% year-over-year, while GTV on new home sales market declined 14.1% year-over-year.

In Q3, during a sharp market downturn, the ecosystem of the brokerage industry worsened quickly. The total number of brokerage agents on platform shrunk and the brokerage stores faced severe challenges. In Q3 the number of our stores on our platform with a trailing 12 month GTV is exceeding the line of RMB50 million, decline 3.3% quarter-over-quarter, accounting for 33.7% of total stores. Our mission is to promote admirable services and joyful living in China. We have come to a point where our corporate culture, organization capabilities and our two decades of successful operations play a pivotal role as we move ahead.

We have a strong team of seasoned senior managers, taking charge of divisions, provincial and city levels. These dedicated leaders average more than 10 years each of services at Beike. They see better industry development as their personal responsibility. With this seasoned team and great determination, we are confident we can navigate the tough market cycle and come out even stronger.

During the third quarter, we implemented a range of measures to ensure stable operations and sufficient income for high-quality store owners and agents. We strive to inspire owners and agents to make the right choices, provide quality service in the face of challenges and deliver on their commitment to take care of customers against interferences.

We believe the key is focus and collaboration. First, we have resolutely promoted our agents' specialization strategy, increase in productivity through remaining focus. Second, we are diverting more resources to new home sales and rental services. Third, we further encourage cross-brand, cross-store collaboration and cooperate among existing and new home sales and rentals. We also promote joint efforts between new and seasoned agents, as well as between functional teams and the business teams. Together we keep our feet on the ground and carry on.

During the third quarter, the number of connected stores on our platform increased 2% quarter-over-quarter to 53,946 and only 1.7% of stores on our platform closed due to market correction. We also facilitated some store mergers to improve productivity, advise low-efficiency stores based on target diagnostics and dropped some non-cooperative stores from our platform. This also demonstrates that there is increasing stickiness among connected stores on our platform and a growing number of stores outside of our ACN have joined us for support during the downcycle. 29% of new stores that joined our ACN network in Q3 were from external Fang jiang hu stores compared with 22% in Q2.

The number of agents on our platform was 515,000 at the end of Q3, 6% lower than the prior quarter end. The decline was a result of increasing agent attrition resulting from the market correction. For the most part, this has been industry norm but also due to our initiatives in some cities to improve overall agent quality. As we implemented various mitigating measures in Q3, the agent attrition rate in Beijing and Shanghai remained lower at 3.9%, better than the 4.7% we saw during the same period last year.

Despite these broad challenges, our collaborative sprit continue to be the foundation of our business. In Q3, transactions on our platform completed through cross-store collaborations and the proportion of existing home listings contributed by non-Lianjia connected stores, both remained stable at 76% and 85.5% respectively.

Moving to our quarterly performance and the measures we have taken with each of our business lines. With respect to existing home transaction services, according to Beike Research Institute, nationwide GTV for existing home sales declined 41.6% year-over-year in Q3. GTV for our existing home transaction was RMB378 billion with a year-over-year decrease of 34.3%. Specifically, GTV for our existing home sales decreased by 36.8% year-over-year, demonstrating the relative resilience of our business in the downcycle.

Function allocation is the foundation of our ACN. Division of labor brings focus, focus brings professionalism and competitiveness and cooperation bonds these all together. To this end, we executed our agent specialization strategy in over 31,000 stores in Q3, covering over 300,000 agents. Transactions completed collaboratively by specialized agents on our platform accounted for 29.6% of the total transactions in Q3, up from 14.4% in Q2.

We are also making strides in digital empowerment. We launched the Xiaobei existing home sales training camp, which is an online standardized and intelligent system for vocational training. The Xiaobei training camp simulates the interactions between agents and customers in VR and offline property showings and provides performance evaluations. Leveraging our AI capabilities, we can identify best practice in the process, as well as each agents' weakness for targeted training. In Q3 more than 120,000 agents took Xiaobei existing home sales training in more than 1.2 million effective sessions.

In the future, as we accumulate more data in existing home sales services, Xiaobei training camp can be used for broader vocational training fields such as new home sales and home renovation services.

Turning to new home transactions, as we mentioned, the degree of correction in the new home market in Q3 exceeded our expectations. According to the National Bureau of Statistics, GTV of property sales decreased by 14.1% year-over-year in Q3. Our new home sales GTV was RMB410 billion, down 2.5% year-over-year, performing much better than the broader markets.

The overall industry continued to trend downwards from July to September, leading to a further buildup of pressure on sell-through. On the other hand, brokerage penetration bottomed out in Q3 as developers became more reliant on brokerage channels to accelerate sales, to preserve liquidity. This, in turn, benefited those new home sales channels that provide quality services, protect the interests of consumers and hold strong agent mobilization capabilities.

We can see this by looking at the increase in the number of new home projects for sale on our platform, which rose 13% from June to September. While our platform has been well recognized by developers, we continue adhering to high standards for project cooperation and performing end-to-end risk control to ensure timely and healthy payment collections.

In our new home business, we have prioritized timely payment collections over scale expansion or any other metrics. In our view, payment collection always trumps commission rates.

We strictly implemented an end-to-end risk management processes and control system, which enable response measures within 24 hours after a risk warning is triggered. We do not expect to have significant risks in our new home business.

We operate in a highly independent fashion and have never relied on resources endowments or relationships for our growth. Our confidence comes from the thousands of excellent stores and agents on our platform and a strong customer recognition they have gained by performing high quality services.

We are also forging ahead in digitalization and enriching online content for our new home business. To provide consumers objective, neutral, personalized online content that narrows information gaps, we are encouraging occupationally-generated content, or OGC. We are building an open platform to enable those professionals to supply comprehensive commentaries positive or negative and empower customers with more informed decision-making capabilities.

This will further enhance the platform-generated-content, such as our housing dictionary. At the end of Q3, our housing dictionary has achieved 100% coverage of the targeted new home listings on the market.

Notably, in Q3, we created China's biggest database, describing unfavorable factors of new home projects. This lays the groundwork for Beike to bridge the information gap and provide truly reliable and useful new home content.

We will never stop our persistent pursuit of top-quality services. During market corrections we believe it is more important than ever to emphasize the governance of new home business conduct.

At the end of Q3, our Five Don'ts commitment to developers have covered all developers in 66 cities, 11,191 new home projects in total. By mid-October we identified a total of 47 misconducts and provided newly RMB2 million in compensation to developers, fulfilling our commitments to them.

Moving to emerging services. In Q3, we steadily progressed home renovation business, including self-operated Beiwoo and Shengdu, which we are in the process of acquiring.

Beiwoo completed the renovation of 1,127 home units in Q3, up 35% quarter-over-quarter. While the contracted sales of Shengdu also increased more than 35% year-over-year by the end of Q3.

Regarding its operations, Beiwoo achieved breakthroughs in empowering both service providers and customers in Q3. For service providers, Craftsman Academy, the industry first full services on a casual training base opened in September.

It aims to cultivate renovation professionals across industry chain, nurturing designers, foremen, workers and more. The focus is on general and professional competencies and leadership.

In September 394 foremen took part in the training. Long plagued by the shortage of high-quality service providers, industry infrastructure such as Craftsman Academy is designed to upgrade renovation services standards and help industry practitioners achieve personal growth.

Meanwhile, we upgrade our home SaaS system to manage and empower both foremen and workers. This upgrade allows even the construction processes to be standardized, modularized, assessed, distributed and managed to the finest granularity.

Labor and materials are centrally deployed by the platform, with an accurate, controllable budgeting process.

For customers, Beiwoo launched its 10 heart-to-heart service commitments in September to address the renovation industry's key pain points for customers. Our pledge includes double compensation for malicious increase beyond the scope of the contract, double refund for under the table charges, triple compensation for using fake materials.

Compensation for delays and six others covering areas of budgeting, materials, construction, timelines and services.

In summary, in this round of corrections, we are accelerating our thinking on the additional value we can create for society and our social responsibility we should take. The answer has become increasingly clear.

In China, people's yearning for a better life is reflecting in their desire to live and work with joy. (Spoken in Chinese) To facilitate joyful living, we hope to provide a rich variety of high quality and affordable housing services and products for those who needed most, including the fresh college graduates, low income groups, new urban citizens. Therefore we are devoting more talent and resources to innovations in our rental services and regeneration of old residential communities.

To facilitate work that is rewarding and fulfilling, with the government's support of vocational education, we have established a multi-layered training and education system for housing services providers. These include the Original Force Academy for brokerage brand owners, Huaqiao Academy for store owners and Beike Brokerage Academy for agents, as well as Craftsmen Academy for renovation services providers as we mentioned earlier.

Our goal is to have more home related service providers build a path for long-term career development and cultivate more high-quality professionals and technical experts for the industry.

All in all, despite the short-term impact on our business and the industry at large during the market downturn, the overall trend in the housing market remains healthy.

Lately, the regulatory authorities have responded multiple times to market concerns. Consumers' reasonable funding needs are gradually being met. Meanwhile, by the accelerated introduction of a property tax pilot program, we believe that a long-term regulatory mechanism can be quickly formed.

In turn, we see this prompting the emergence of a new age of existing homes and the quality services sooner than we expected. The real estate sector in major developed countries accounts for approximately 10% to 12% of a country's GDP.

Housing investment market makes up only about 5% and the rest comprises a broader array of housing services. In contrast, the real estate sector contributes to merely 7% of China's GDP.

This housing investment makes up the majority of China's real estate sector. This indicates massive potential for our domestic housing service industry.

If the past five years has been a golden age of real estate developments, then the next five years will be the age of joyful living, characterized by quality housing services.

Short-term fluctuation imposed on long-term secure trends are simply noise. We follow our inner compass and will persist to become the leading comprehensive home services providers for the 300 million families in China.

With that, I would like to turn the call over to our CFO, Tao Xu for a closer review of our third quarter financials. Thank you.

Thank you Stanley. Thank you everyone for joining us. I would like to provide a brief overview for our third quarter of 2021 financial results.

As we guided in the second quarter's call, in past several months we saw a deep, sharp drop of the overall property market, including land market, new home market and the existing home market, amid unprecedented crackdown on speculation with an array of cooling measures from credit tightening to reference home price being rolled out.

This factor adversely impact our operational and financial result in Q3. Though we are experiencing an unexpected and sharp market downturn. We still want to emphasize our three fundamental beliefs towards this industry.

First, housing is one of the largest and the most complex industries in China and a prime candidate for the digital disruption.

Second, agents are, and will continue to be, indispensable to transaction and can be empowered to thrive.

The third, professional and quality services build customer trust and transcend market cycles.

We are confident that our continuous efforts in maintaining the best cost service, by supporting our agents and further upgrading the infrastructure in housing transactions and services, will help us grow through these cycles and further improve our service quality, efficiency and business scale.

We maintain our long-term view in pursuing our mission to transform the housing transaction and services industry in China by leveraging our people, data insights, technology and platform.

Turning to our financial details in Q3. Our net revenue was RMB18.1 billion in Q3. Compared to RMB20.5 billion in the same period of last year. Exceeding both the high end of our guidance and street consensus.

The year-over-year increase was primarily attributable to the decline in total GTV of 20.9% to RMB830.7 billion in Q3 from RMB1.05 trillion in the same period 2020.

In particular, our net revenue from existing home transaction services was RMB6.1 billion in Q3, compared to RMB8.8 billion in the same period 2020, primarily due to a 34.3% decrease in GTV of existing home transaction to RMB378.2 billion in Q3 from RMB576.1 billion in the same period 2020 led by a slowdown of existing home market, which was affected by a series of market cooling measures. Especially loan quota limits in Q3.

Our net revenue from new home transaction services increased by 2.5% to RMB11.3 billion in Q3 from RMB11.1 billion in the same period of 2020, primarily attributable to a moderate increase of new home transaction commission rates. While the GTV of new home transactions was RMB410.1 billion in Q3, compared to RMB420.7 billion in the same period of last year.

Our net revenue from emerging and other services was RMB610 million in Q3 from RMB625 million in the same period of 2020, primarily due to a decrease of net revenues for financial services around the existing home transaction services which was partially offset by a 29.4% increase of net revenue from the renovation services.

Cost of revenues was RMB15.3 billion in Q3 compared to RMB16.2 billion in the same period of 2020. Gross profit was RMB2.8 billion in Q3 compared to RMB4.4 billion in the same period of last year. Gross margin was 15.2% in Q3 compared to 21.3% in the same period of 2020.

The decrease in gross margin was mainly due to a lower contribution margin of existing home transactions led by a decrease in net revenue from existing home transactions and the relatively flat fixed compensation costs for Lianjia agents.

Operating expenses were RMB5.1 billion in Q3 compared to RMB4.5 billion in the same period of 2020. General and administrative expenses were RMB2,412 million in Q3 compared to RMB2,649 million in the same period of 2020 mainly due to the decrease in share-based compensation expenses which was partially offset by the increase of personnel costs and the bad debt provision.

Sales and marketing expenses were RMB1,202 million in Q3 compared to RMB1,026 million in the same period of 2020 mainly due to the increase of headcount in business development personnel.

Research and development expenses were RMB1,043 million in Q3 compared to RMB789 million in the same period of 2020 mainly due to the increase of headcount in experienced research and development personnel.

In addition, we have recognized the impairment of goodwill of RMB397 million in Q3 compared to nil in the same period of 2020 based on a more conservative and longer term view of outlook of the business of previously acquired assets. We conduct a comprehensive risk assessment and asset evaluation and made sufficient impairment provision accordingly.

Loss from operations was RMB2.3 billion in Q3 compared to loss of RMB81 million in the same period of 2020. Operating margin was negative 12.7% in Q3 compared to negative 0.4% in the same period of 2020 primarily due to, 1) a relatively lower gross margin in Q3 compared to the same period of 2020, 2) the increase of percentage of total operating expenses as of net revenues in Q3 primarily due to the decrease of net revenue along with the relatively flat recurring operating expenses and additional impairment of goodwill as well as the severance provision of RMB250 million incurred in Q3 compared to the same period of 2020.

Excluding non-GAAP items our adjusted loss from operations was RMB1,435 million in Q3 compared to adjusted income from operations, RMB1,740 million in the same period of 2020. Adjusted operation margin was negative 7.9% in Q3 compared to 8.5% in the same period of 2020. Adjusted EBITDA was negative RMB550 million in Q3 compared to RMB2,248 million in the same period of 2020.

Net loss was RMB1,766 million in Q3 compared to net income RMB75 million in the same period of 2020. Excluding non-GAAP items our adjusted net loss was RMB888 million in Q3 compared to adjusted net income RMB1,858 million in the same period of 2020.

Net loss attributable to KE Holdings Inc's ordinary shareholders was RMB1,765 million in Q3 compared to RMB271 million in the same period of 2020. Adjusted net loss attributable to KE Holdings Inc was RMB887 million in Q3 compared to adjusted net income attributable to KE Holdings Inc RMB1,857 million in the same period of 2020.

Diluted net loss per ADS attributable to KE Holding Inc's ordinary shareholders was RMB1.5 in Q3 compared to RMB0.33 in the same period of 2020. Adjusted diluted net loss per ADS attributable to KE Holdings Inc's ordinary shareholders was RMB0.75 in Q3 compared to adjusted diluted net income per ADS attributable to KE Holdings Inc's ordinary shareholders, RMB1.38 in the same period of 2020.

As of September 30, 2021 the combined balance of our cash, cash equivalent, restricted cash and short term investments amounted to RMB52.7 billion or $8.2 billion. Additionally, as of September 30, 2021 the balance of our long term cash items mainly included in the long term investments amounted to RMB15.9 billion or $2.5 billion.

As we mentioned at the beginning, although there has been some turbulence in the housing market recently which brought significant impact to our business in the short term, it is also a chance for us to take moments and look inward, focus more on the essence of our business and refine our maintenance and that this builds the resources more effectively, paving the way for us to assess opportunities and allocate for the long run.

Our decades of experience going through numerous challenges would give us the capability to remain steadfast against the market volatilities while cope with it with agility. In face of market downturns we closely observe market change and timely adjust our business strategy to ensure the rapid implementation of those adjustments.

Our initiatives includes more focus on efficiency, cost management to boost synergy and allocate resources more efficiency-oriented and risk averted. There are some measures in these three aspects to ensure the company's better operation under the new normal. For example, we introduced the new operation metrics including the number of active store and active agents on our platform to better reflect our business progress.

Furthermore, we attach great importance on accounts receivable collection by building a comprehensive risk central mechanism to closely monitor and evaluate the developers credit quality changes. In the third quarter we have both better provision for all remaining receivables related to Evergrande and several other developers with negative popular opinion in order to reflect recent credit quality changes.

Turning to Q4 guidance according to Beike Research Institute nationwide GTV offering in home sales market is expected to fall over 47.4% year-over-year in the fourth quarter. Meanwhile, nationwide the GTV of new home transaction market is expected to dip 20.1% year-over-year in the fourth quarter.

Based on all the above considerations, looking forward to the fourth quarter of 2021 we expect our net revenue to be between RMB14.5 billion and RMB15.5 billion representing a decrease of approximately 31.6% to 36% from the same quarter of 2020. This guidance reflects a potential impact of recent property market related policy measures and the Company's current and preliminary review of the business and the market condition which is subject to change.

Over the course of this year despite many challenges we have encountered we have been and will continue to weather the turbulence. This has provoked us to focus on ourselves, neglect the noise, inspiring every individual in our organization to fight, fight, fight and to never ever give up. We will never give in. We will not back down and never stop doing what we know is right.

We fully embrace the policy change and strongly believe that the insistence of "houses are for living in, not for speculation" will bring long term favorable environment for the industry. We will stick to our path with full commitment to serve our clients better. We are confident that we would stay resilient and have our values recognized. This is what we have been doing, not perfectly but we are on our way.

That concludes our prepared remarks. We would like now to open the call for your questions. Operator, please go ahead.

Thank you. Ladies and gentlemen if you wish to ask a question please press star one on your telephone and wait for your name to be announced. For the benefit of all participants on today's call, please limit yourself to one question and if you have additional questions you can re-enter the queue. If you are going to ask a question in Chinese please follow with English translation. Thank you.

The first question we have is from Liping Zhao from CICC. Your line is now open.

Stanley, (spoken in a foreign language) I will translate for myself. I have two questions here. Firstly, we have seen marginal improvements in terms of falling housing market rates recently. What do we think of these positive signs? Can we expect the real estate market to bottom out regulation-wise in the near term? Speaking of transactions, when will we see a rebound in terms of transaction volumes?

Secondly, investors are concerned about the state owned property listing systems which are regarded by some as replacements for third party brokerage platforms. What do you think of the government's attitude towards the neutral positioning of the united brokers? Thank you.

Thank you Liping. Let me address your question. Regarding your first question, the decision and deployment on the long-term mechanism of the real estate market are accurate and effective. We have witnessed the largest ever regulatory package in terms of the quantity and the type of the policy including restriction on property purchase, loan, sales, pricing, land auction, irrational price cuts, financing and the payment as well as the potential property tax.

Accordingly, the property markets across China quickly froze in Q3. The existing home sales market dropped 41.6% year-over-year in GTV on par with our guidance in last [earnings] call. The decline of the new home market was larger than our previous expectation, down around 14.1% year-over-year.

The downturn in Q3 was across the board rather than one single segment showing a chain effect from the credit tightening to the cooling off of existing home sales, and then to the new home sales and land market where price cuts in turn further weighed on existing home sales expectation.

And the expectation and behaviors market participants resonated, led to a pattern of credit crunch, impeded transaction and downward revision of expectations. In particular, transaction volume of existing home sales market continues to drop month-over-month in Q3 to a long term historical low with some cities to a 10 year low record. Housing prices fell widely and our home buyers enthusiasm index has fallen to a low level since 2019.

The largest impact comes from sharp fluctuation in loan origination paces. As the first year adopting the housing loan concentration management, we saw a mismatch between the credit supply and the marketplace.

The average loan origination cycle continued to extend in Q3; 77% longer than the same period of last year. A large number of downstream transactions have also been affected. In the same time, a total of 14 cities introduced the existing home reference price policy.

Down payment requirement for the house purchase were raised, while residents' expectations on property price and overall market sentiment has been significantly dampened. On the other hand, new home sales in China also dropped sharply in Q3, from July to September, the new home sales area sold in China decreased by 9.5%, 17.6% and 15.8% year-over-year respectively.

Market in September was the worst one in 7 years. The new home sales market and the existing home sales market are highly correlated. In China, around 40% of new home buyers come from the improvement demand of existing homeowners.

The extended loan cycle and the wait-and-see sentiment for the existing home sales market affect the purchase plan for the new homes. The new home price falling and the heightened risk in certain developers further deepened the wait-and-see sentiment amongst buyers, led to new home sales market cooled down promptly.

As to the new home sales channel in Q3, a season during the so-called "cash is king", developers were motivating sales channel more widely to accelerate sell-through and leading to an increased penetration rate for the sales channel.

However, risks in new home sales channel are also mounting up, because developers squeezed their suppliers for working capital, resulting in the delayed payment of accounts payable, or so-called the accounts receivable to the suppliers, due to some industry chain suppliers.

Looking to the incoming policy on the regulations, in short term, policy issuances are expected to peak-off and the market enters a period to digest the previous market curbs, and we believe it is unlikely for further policy tightening up. In terms of the housing price, according to Beike Research Institute, as of the end of September, housing price dropped 1.5% on average from the highs this year, with some cities capping on the price cut.

In terms of deleveraging to improve the financial health in 2020, 40% of 100 listed developers successfully lowered their risk grades versus 2019. In Q3 2021, residential housing leverage reported a 9 years' low. In October, our Vice-Premier of State Council, Liu He, stated that reasonable capital demand in real estate industry is being met and China will stick to an unchanged path towards healthy environment.

At the same time, other financial regulators also responded to market concerns. Given the effective regulation result and falling transaction volume and prices, we foresee a significantly lower frequency of the policy tightening ahead in Q4 versus last quarter, with the pace of the real estate credit supply be stabilized, which may bring some marginal changes to the market.

But policy impact on the market sentiment will last for a considerable period of time. From the long-term perspective, amid China's economic upgrade from a high-speed growth model to a growth and sustainability balanced one, we still see an all-around tightening of real estate financial policies.

The acceleration of pilot property tax reform signals the advancement of long-term mechanism and unchanged pursuits of de-leveraging and de-risking both at resident and developer ends, despite the inevitable short term pains. With that, we expect to see a healthier and more orderly real estate market in the future.

So based on our observation, as I mentioned, the downward pressure on the existing home and new home market will continue beyond Q3. Looking to our Q4 2021, the GTV of existing home sales market is estimated to further decline down nearly 50% year-over-year and 25% quarter-over-quarter.

Meanwhile the GTV of the new home sales market will drop by 20% year-over-year. For 2022, GTV is expected to drop by more than 10% for existing home sales market and slightly for new home sales market. The absolute GTV levels for existing home and new home market are expected to bottom out in Q1 2022.

In the second half of 2022, as the market fully prices in the regulatory policies and has stabilizes, rigid demand will come in and the natural market recovery process could start. Therefore, Beike want to reiterate our position to the market.

Don't underestimate the power of the policy to correct market deviations and don't underestimate the supporting power of market supply-demand dynamics. Regarding the new home sales market faced by the mounting short-term debt repayment pressure, developers will push themselves to promote the sales and collect cash.

From the long-term perspective, as developers shift from financing-driven to operation-driven in a sales-focused approach, they will face higher requirements on product development and targeted sales.

Given the increasing divergence across cities, developers' increasingly customized sales strategy and a comprehensive usage of sales channels should be a clear long-term trend; namely an increasing penetration rate of new home sales channels will comes in as a clear long-term trend. It also presents more opportunities for Beike to pursue full cycle partnership with developers.

In short, the unprecedented policy regulation and rapid market cooling off in 2021 brought a profound market correction. Over a longer horizon, the market is not as bad as what we perceive at this moment.

In terms of annual volume, the market-wide transaction volume this year will still post a growth versus last year, while the policies such as existing home reference prices have not changed the long-term supply and demand dynamics, and the mismatch between land, credit supply and home purchase should be gradually improved. So from long-term perspective, market fluctuations are normal. As the long-term mechanism being in place, either an overheated or overcooled market will normalize to the pivot of supply-demand balance.

Regarding your second question, so we would like to say, at the central government level, a "well-established administrative information system" is a crucial step to standardize real estate market orders.

A robust real estate transaction administrative system can help governments to effectively collect property listing and transaction data, take effective decisions and regulatory actions and avoid wide swings in swings in market, due to potentially lagged policies.

Also, it can help governments to address the issue of fake property listing and vicious competition haunting the industry, thus contributing to better performance of the service providers and benefit for those who commit to quality services like Beike.

As a consistent advocator and beneficiary of the regulated and collaborative market, Beike firmly supports government to upgrade E-administrative systems and is working with government departments in Beijing, Nanjing and several other cities.

At the government level, local real estate E-administrative systems dated back to 2012. Since then, real estate E-administrative systems with similar functions have been established in nine cities including Beijing, Shanghai, Chengdu and Xiamen, according to current statistics.

So from the purpose of this system, we want to clarify, firstly, governments have no intention to directly intervene in transactions, and are in a better position to govern market through well-regulated commercial institutions to navigate through various transactions.

Transaction process involves significant risks which can be shouldered by commercial players for governments. On the contrary, direct engagement in transactions by associations of governments requires a significant commitment of talent and financial resources including formulation of rules, research and development investment and continuous system maintenance and iteration, and is also exposed to the risks in transaction process.

Secondly, governments are digitalizing livelihood services, including social security, housing, vehicles, healthcare modules. A property listing module has been included in the local E-administrative systems of Hangzhou and Shenzhen which is introduced as a part of normal local e-administrative system upgrades.

Thirdly, there have been "hand-in-hand" transactions without intermediaries across country. Taking Hangzhou for instance, from 2019 to September of 2021, on average 20% transaction volume comes from "hand-in-hand" type of brokerage-free transactions, mostly between family and friends. Through upgrades, the E-administrative system in place, can steer those transactions into a more convenient and safe process.

In terms of outcome, the deliverables of a complex information system or transaction system depend on the level of improvement of consumer experience and transaction efficiency as well as the talent and financial resources committed and the operational experience accumulated over time.

Beike's proven track record across cities that have deployed online E-administrative information systems for years also demonstrates that a standardized market actually contributes to the rise of the quality agents.

A standardized marketplace with authentic property listings has the most direct impact on those who attract traffic through fake listings and those who rely on malicious competition and unethical order or customer stealing to parasitize on a quality service management platform.

We believe that along with upgrades of E-administrative systems and further market standardization, inefficient supply will be further squeezed out, thus benefiting quality service providers. And for Hangzhou, brokerage-free transactions tend to remain stable, in terms of absolute volume, as most of them are not affected by the change in the market conditions like the transfers between family members.

So we reasonably foresee, in Hangzhou, the upgrade of the government's online existing home listing system has an insignificant impact of local transactions, like Woaiwojia and Beike's brands locally.

For Shenzhen, based on what we know so far, the function of Shenzhen Real Estate Information System mainly include, first, only a QR code generated for a property firstly listed on the government information system, can the property owner publishes the listing on other websites. In this way, it ensures that fake property listings frequently seen on other platforms can be further dispelled; this is good for Beike, bad for so-called amazing website.

And the property owner is required to engage an exclusive sell-side agent within a given period of time. This transformation against the multiple listing agent model in the industry helps to solve the problems of unethical order stealing and low-quality, low-price competition that have been plaguing the industry. The system is designed to purify the industry environment and standardize the home transaction market.

Now, on Beike's platform, consumers are accessible to more home listings and agent information while agents can seek efficient collaboration supported by the platform's rules and infrastructure.

Beike's core platform value and operational capability are benefiting from those launched government e-administrative system. Thank you Liping.

Thank you, Tao Xu, that's very clear.

Thank you. We have the next question from the line of Miranda Zhuang from Bank of America. Your line is now open.

Thank you. (Spoken in foreign language). Thanks, Management, for the sharing today and for taking my question. Can you please elaborate more on the latest development and expectation for the home renovation business and other new initiatives? Thanks. Xie xie.

(Spoken in foreign language) Let me quickly translate. So this is Stanley. Let me quickly address your question. So firstly, the whole renovation decoration business is very similar. Like the housing transaction business, meaning the overall industry size are very big but overall the user experience extremely are worse.

So we do believe in this industry, we have a lot of opportunities, we can continue leverage what we have accumulated in the past two decades. So for the home decoration business, we do have a couple of takes in terms of the overall outlook.

Firstly, the overall China customers will continue more focus on the quality. We do believe that will be the fundamental, because if you look at the recent policy trend, definitely that the golden times for the new homes pretty much has been passed. So the next era definitely will be that the people with more focus on the joyful living. So we do believe the opportunities will be arising from this kind of transition period.

Secondly, we do believe the scientific management will continue help us and also help the industry to upgrade, especially followed by some of the other initiatives, for example like more digitalization we do believe we can restructure and continue our practice above those kind of scientific management into the home decoration and renovation business.

Thirdly, it's about value, about the service providers in the home decoration and renovation business. If you look at the overall--the conditions for the service providers in the home decoration and the renovation industries, it's still relatively low.

So by doing the continuously training as well as upgrade for those kind of professionals, we do believe it will be help us to continue to help those kind of service providers to further improve their professional career as well as the whole professionalism for the whole industry.

So in summary, we do believe the home decoration and renovation business is not a naturally so-called fast industry. It means we continue dedicate doing the things are difficult but right.

Behind that, that means we will have a lot of challenges as well as difficulties we will be facing, but we do believe our faith as well as our opportunities as well as a method we actually have been accumulated in the past two decades, we will bring the continuous value into this industry.

Meanwhile, from the quatitative side, I think some people are talking about the difficulties for the home decoration business, whether it could be surpass like RMB1 billion revenue in one city, and whether a company could achieve like a RMB10 billion of the revenues overall.

We do believe, definitely there will be some of the new players emerging from that industry, and to reach of those kind of RMB10 billion of revenue milestones in the foreseeable future, and definitely Beike, also we have a lot of opportunity to achieve that as well.

In summary, as I mentioned before, we do continue to focus on the three parts of our efforts for us. So, firstly, how we can, a rounding of the home services, we can further improve the SOP management as well as by upgrading the whole service procedures by the continuously digitalization.

Secondly, the scientific management will be our key focus as well. By doing this we can continuously improve the efficiency for the whole industry. Our third part and most importantly is how we can continue to bring the value to the service providers into the home decoration and renovation services and continue to improve their professionalism as well as improve their dignity for the work.

So, all in all, as I mentioned, generally speaking, in terms of our home renovation and decoration services, we will continue to focus on how we can further improve the overall customers' user experience. We do believe there's a very tough campaign for us, but we have the trust as well as the confidence we can continue to bring our mission into reality, which means the service provider with dignity as well as joyful living ultimately. Thank you.

This is Stanley. I also want to give you additional color in terms of the previous question regarding the so-called e-government administrative systems rumor, right. So, what we do believe is definitely there is always be a bigger problem underneath of the smaller platforms.

In order to better see what the intention behind of the government, we need to look at the policy trend in China, if we look at the general policies in China, definitely there are two major parts. One is house for living in not for speculation, another one is the encouraging of both of the housing purchase and renting.

So, based on those two of the fundamental policies as well as add on the recent new trends such as a pilot program for the property tax, we do believe during that kind of -- the stability of the policy trend that Beike's value will continue to shine, since we can provide the very comprehensive solutions and which is quite in line with those kinds of policies trends going forward.

In the meanwhile, we do believe our--as we mentioned before, our--the fundamental orientation for our business is also quite in line with two of the policies' direction, and under those kind of assumptions we do believe some of the rumors will be definitely fade away in the market.

And as far as we can continue to hold on--adhere to the policy, continue to improve the efficiency as well as improve the user experience, we do believe the Beike's value will continue to shine and will continue to bring the value into the whole industry. Thank you. Back to you, operator.

Thank you. We have the next question from John Lam from UBS. You may proceed with your question.

Thank you, xie xie. (Spoken in foreign language) I have two questions. The first question is mainly on the property tax. So, how the property tax affects the buyers' and also the sellers' sentiments and also their purchase behavior, and also not sure if Management hear anything regarding on the implementation details of the property tax. Second is regarding on the competitive landscape.

So, first, on the one hand we have seen Centaline have massively laid off people, about 7000 people, and also the senior management also left the company, but at the same time a major online news media company, TouTiao, they also announced to enter into the property agency sector. So, how the management feel the over the agency competitive landscape? Thank you, xie xie.

Thank you, John. Let me address your first question regarding the property tax recently as indicating as see published by President Xi on the journal "Qiu Shi". China should strengthen the regulation and adjustments over the high-income class, proactively and prudently promote legislation and reform of property tax and ensure effective implementation of a pilot program.

We believe that the government will definitely and duly expand the scope of pilot property tax to more cities. In October, the State Council is authorized to carry out a parallel property tax reform in certain regions.

Property tax as a new local tax package well plays a fundamental role to narrow down the gap between the rich and the poor. Considering the requirements on proactively and prudently promoting the legislative reform on property tax coupled with the current market correction since late September, amid falling existing home sales volume and the price as well as the mounting risk in developers.

We recently see a current focus on stabilizing expectations and preventing an overcooled market. As expected, the scope of pilot property tax will extend to more cities, applicable to all existing residences than incremental.

Nevertheless, the focus of the property tax should be on multiple residences or the residences with the higher total value or the high unit price, fully considering the affordability of the household to ensure the basic living needs while attaching importance to turning the wealth gap among the households to better achieve the goal of common prosperity.

The introduction of a property tax will have a significant short-term impact on the market. Some owners of the multiple residences may sell part of their properties, leading to a higher market supply and hence wait-and-see sentiment among the buyers in the short term.

However, from a long-term perspective transaction volume is predicated on housing supply and demand fundamentals. The rational launch of the property tax by laying a solid foundation for effective common prosperity will contribute to stable long-term market expectation of prices.

Only such a scenario will stabilize the price, rationalize the market, and smoothen the fluctuation in the long run can rigid demand be further unleashed, resulting in a higher home turnover rate, better affordability, and the roofs for everyone and hence a potential growth in transaction volume.

Regarding the current market situation for Bytedance and Centaline, let me talk about separately. Let me talk about the Bytedance first. Obviously, for the country like Bytedance with a cross-industry traffic advantage, it is a natural impulse for them to try to monetize their traffic in different areas.

We believe that both investment community and Xingfuli fully understands that industry with a low frequency, high-value transaction, and a long decision-making process. The value provided by the online traffic model is relatively limited and cannot truly meet customer demand for information.

Without a thorough understanding of the customer and the industry, even traffic advantages are difficult to convert to the transactions. To integrate the online module with the offline module, one cannot resolve to a short alternative such as unfair competition and a capital based disorderly dysfunction including setting low commission rate, high rebates, unrealistic binding evaluation promise. This is definitely false proposition which will not sustain and it could cost anti-trust of our relations.

Impact in the last year, meant internet companies and developers entered into the industry with the high profile. All walked away later with the rationale disapproved. Tmall Haofang and Fangchebao are good showcase for their reference.

In this industry, there must be more than one best model and more than one company that can be successful. Although for us there is only a one-way road to success. We believe in the value of taking good care of the consumers. We believe in the value of sharing successful experiences and infrastructure to the industry and it empowers and enhances industry efficiency.

We believe in the value of protecting the interests of the service providers, paying commission in time and to work with the sense of both security and fairness. We believe in the value of the hundreds of thousands of excellent service providers who have been serving the committee for many years and established this unique amount in their home services. We believe in the value of time. This is what we have been doing, not perfectly but we are on our way.

Last but not least, if Beike does still decide to move to the offline transactions, especially on this current market moment, we believe they will have their lessons learnt from the market and the players who truly understood this industry like Beike.

For Centaline, I do (inaudible) and I cannot comment on market players' decisions and their behavior but I would like to say the key and the high-quality service providers represent the most valuable assets of the industry.

During the period of downturn, Beike will firmly support the retention of key and high-quality service providers through our compensation and the benefit system, team culture and the organization capability and the business strategies developed over years.

Meanwhile, Beike's ACN's commission mechanism and network effect, allowing each agent to have much more opportunities to participate in transactions and secure more stable income than those -- on other platforms and enabling collaboration and shared success.

As a result, the overall turnover rate of agents and the percentage of store closures on the platform are significantly lower than the industry average. We are more resilient in the downturn and have the ability to outperform when the market recovers.

As the market is in doldrums, the industry's production capability is shrinking and it's the performance of stores on Beike's platform also have some impact.

In the third quarter, the number of stores below the minimum sustainable level of turnover, the so-called breadline is the annual GTV of about RMB50 million on the platform, continued to rise and the percentage of stores above such level decreased from 37% in Q2 to 33.7% in Q3. Though we don't know the overall turnover rate of the industry but we can imagine how depressed the industry is.

In the downturn cycle, the trend of "huddling together to keep warm" in the industry is more evident. We noticed that the cooling of the market prompted more stores and agents who were reluctant to join platform, finally joins the Beike platform.

So the number of brands connected to Beike [exceeded] (by company after the call) 300 in the third quarter and also the percentage of newly added stores from external new home sales channels increased greatly from 22% in the second quarter to 29% in the third quarter.

So the percentage of stores closed due to poor management, poor operation in Beike, only 1.7% in Q3, compared to 1.1% in the second quarter, indicating no large-scale store closure.

Most third-party store owners chose to stay with platform in downturn cycle and operate conservatively by dismissing inefficient personnel and some by merge store and the percentage of store merge on the platform increased from 0.8% in the second quarter to 1.4% in the third quarter.

In the third quarter, our number of connected stores and agents [decreased] (corrected by company after the call) --and the [overall] turnover rate was 8.8% compared with 8% in first quarter. The turnover rate of Lianjia in Beijing and Shanghai remains stable. While the turnover rate of non-Lianjia agents increased by 1% quarter-over-quarter, then remained flat compared to last Q3.

So the average turnover rate of the industry is 15% on normal days and will get worse in downturn cycle. The turnover rate of agents on Beike's platform is still considerably lower than the industry average. So based on our judgment on the market, the industry's production capability will continue to shrink and it is expected that the turnover of agents will bottom out in the first quarter of 2022.

Consequently, we would like to see the turnover rate of poorly performance store and agents increase increased significantly, in-line with market trend, but outperformaned the market conditions. Okay, thank you, John.

Thank you. Xie xie.

Thank you. We are now approaching the end of the conference call. I will now turn the call over to your speaker host today, Mr. Matthew Zhao for closing remarks.

Thank you, Operator. Thank you once again for joining us today. If you have further questions, please feel free to contact Beike Investor Relations Team through the contact information provided on our website.

This concludes today's call and we look forward to speaking with you again next quarter. Thank you and goodbye. You can disconnect. Thank you.

Ladies and gentlemen, that does conclude our conference for today. Thank you all for participating. You may now all disconnect.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.