Ke Holdings Inc (BEKE) 2022 Q1 法說會逐字稿

Hello, ladies and gentlemen. Thank you for standing by for KE Holdings Inc's First Quarter 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. 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 first quarter 2022 earnings conference call. The Company's financial and operating results were published in the press release earlier today and are posted on the Company's IR website, investors.ke.com.

For today's call, we have Mr. Stanley Peng, our Chairman and Chief Executive Officer, and Mr. Tao Xu, our Executive Director and Chief Financial Officer. Mr. Peng will provide an overview of our strategy and business developments and Mr. Xu will provide additional details of our financial results.

Before we continue, I refer you to our Safe Harbor statement in our earnings press release, which apply to this call, as we will make forward looking statements.

Please also note that Beike's earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Please refer to our press release, which contains a reconciliation of the audited non-GAAP measures to comparable GAAP measures.

Lastly, unless otherwise stated, all figures mentioned during this conference call are in renminbi.

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

Thank you, Matthew. Hello, everyone, thank you for joining Beike's first quarter 2022 earnings conference call.

Looking back on the first quarter, we were confronted with tremendous challenges, mostly arising from short-term uncertainties. But these uncertainties will not shake our belief in the slightest. We are now more convinced than ever of the positive long-term market outlook, the prospect of achieving our goal and the path together.

We believe, taking care of customers and helping our service providers take care of customers is at the center of everything we do. We are resolved to choose the difficult yet right path when facing multiple options. The market volatilities have made our beliefs more real, more certain, have inspired us to reflect on ourselves, and more importantly, give us the tenacity to survive during the cold winter.

Meanwhile, we must stay optimistic. In the long run, our target addressable market in existing and new home sales will continue to grow steadily, and the broader living sector will usher in new great opportunities. Swimming upstream [onstream] only the brave will succeed.

In the recent round of massive industry productions, we have united, and actually embraced changes. Only the fittest will survive and with impending capabilities at a rapid speed and our strong mindset, our confidence is strong. Knowing that we have all it takes to win when the market recovers.

This year, as the market finds its bottom and a path to recovery, our One Body housing transaction services needs to overcome the mounting difficulties in the short run, and a focus on resolving problems for customers and service providers, as well as improving efficiency. Our two wings, home renovation and furnishing, and home rental services, need to take root and make its primary thing integration and rapid development.

This is especially true now that we have completed our Shengdu acquisition, we are pleased that we have already realized strong synergies, delivering initial results after we announced our One Body, Two Wings strategy at the end of last year. The powerful growth of our home renovation and furnishing services and the home rental services against the weak market trends, further strengthen our belief that we are headed in the right direction by executing our strategy.

Let's move to the details of our progress with our housing transaction services in the first quarter of 2022.

Our housing transaction services is still undergoing a challenging time. During the first quarter, the new home market remained sluggish due to the strain on private developers debt crisis, the lagging impacts from government's buyout policies, and low consumer confidence. Meanwhile the sign of bottoming out and recovery in the existing home market were interrupted by the Omicron outbreaks across various regions toward the end of the first quarter.

Faced with the turbulence of this external environment, we must revere the market, take quick action, and stay focused. [Last] focused on our business and organizational planning. Experience tells us that our solid strategy insists we concentrate on the most fundamental issues, improving the efficiency of our agents, making their services more professional, and their retention rate higher, improving customer experience by protecting them against risks and uncertainties, and accelerating receivable collection, leveraging our data strengths to optimize our services to developers, and enhancing their understanding of end users. By streamlining our operations and reducing discretionary investments, we aim to boost our efficiency and profitability.

The massive market correction has impacted everyone in the industry, but also changed the overly competitive landscape. As the battlefields become less crowded, we are left standing with a war chest to return to our original aspirations. We will take the time and the patience to further refine customer [inaudible], and service providers' capabilities, and build upon our strengths to achieve sustainable development.

At the end of the first quarter, the number of Beike's connected stores were over 45,700, down 10% quarter-over-quarter. The number of active stores were around 43,000, declining 5% quarter-over-quarter. As the market continued to find its bottom, we added fewer new stores on our platform, and strengthened the existing stores via mergers.

The number of industry practitioners continued to fall rapidly. At the end of the first quarter, the number of agents on our platform was 427,000, and the number of active agents was 381,000. Both decreased by approximately 6% quarter-over-quarter. The number of actual stores and agents dropped 30%, and 24% respectively, from the [inaudible] peak level in mid-2021, which is in line with our expectations.

The COVID-19 resurgences in the second quarter may result in further decline of the number of stores and the agents on our platform. In addition to Lianjia, we will continue to optimize low productivity and the loss-making stores, and steadfastly execute our big store model. This will also weigh on the number of Lianjia stores and agents, but at the same time, drive a notable increase improve agent productivity, serving to reduce the agent, the true rates.

In the first quarter, total MAU - MAUs of Beike's app plus mini program, reached approximately 39.7 million, up 6% quarter-over-quarter. We expect online traffic to grow as the market recovers.

Regarding existing home transaction sources, according to Beike Research Institute, nationwide GTV of existing home sales dropped 52% year-over-year in the first quarter. The GTV of existing home transaction on Beike's platform, was RMB374.1 billion, down [45%] year-over-year, for which existing home sales declined 46%, outperforming the overall market. Existing home transaction volumes in some key cities were starting to bottom out in the first quarter, but the market rebound was interrupted by COVID-19 resurging in mid-March.

Confronted with a series of external uncertainties, we are adhering to the principle of efficiency first in our existing home business. First, we will reduce the size of the managing units of our stores and agents, do more refining and agreed based management. We aim to optimize efficiency and better manage our key operating metrics such as collaboration indicators.

Second, we will enhance our capabilities in the existing home sales with a focus on critical notes in a transaction, including the home listings, customer leads and home tours. We will leverage our big data and technical capabilities to find the best listing that we call Beike's Pick, and do our utmost in the listing maintenance, home showing and the sell-through of these listings.

We will also reconstruct our best leads institution to improve homebuyers' coverage and sales conversion.

From the technical point of view, the broader VR application during the pandemic boosted our efficiency. After the lockdown in Shanghai since mid-March due to the COVID-19 resurgence, the weekly online leads generated in VR streams and VR home tools increased by more than 70% and 160%.

Behind these achievements was the immersive virtual home touring [ability] made possible by our VR technology which transcends the limits of time and - space. It has supported real-time interaction between customers and agents with sales consultants on a shared screen throughout the tour providing a more intuitive and enriching experience compared with photos, text or videos. VR is an efficient substitute to part of offline operations and is an ability our peers do not have.

This year, Lianjia will still have productivity and quality enhancement. First, we will be efficiency-oriented and improve agents' productivity. In addition, we will optimize and discontinue low-performing stores. Senior management must personally walk into each store and engage in store level operations.

For customers, we will emphasize our Anxin services commitments and fulfilments. Our efficiency-oriented strategy choices do not mean that we are diluting our beliefs.

Transactions in Shanghai have been suspended for more than two months due to the pandemic. Faced with many choices at this difficult time, we did not waver and [inaudible] on guaranteeing the full base pay and welfare for agents in Shanghai, putting [inaudible] services caring for agents into action. We will brace ourselves through the low return period to reduce agent turnover, which will bring high returns in the future. We believe this is the right choice and what we consider an essential investment.

Most importantly, we will uphold, as always, our business philosophy of community friendly and devote more in community outreach and engagement to do what is within our capabilities for those in need. During the COVID-19 outbreaks since March, our agents have served the community and have become a key team among communities' volunteers.

Beginning on April 23, volunteers from Beijing Lianjia alone provided pandemic prevention and control services [26,500 times]. More than 3000 agents in Shanghai Lianjia volunteered to combat COVID-19 on the frontlines of 1854 communities during the lockdown.

In cities such as Suzhou, agents from connected brands and Lianjia actively participated in voluntary services more than 1900 times, helping with community pandemic prevention, testing, necessities delivery and other services. These volunteers reflect our strong bond with the community.

We believe that community services will infinitely fuel our future as more frequent touchpoints allow our stores and agents to truly integrate into the community. More importantly, this is how we turn our belief of taking care of customers into more practical action.

Turning to new home transaction services. According to National Bureau of Statistics, in the first quarter the overall market GTV of new residential home sales was down 26% year-over-year, marking the second-largest single quarter decline since 1999. Meanwhile, the GTV of CRRC 's top 100 real estate developers fell by 47.6% year-over-year.

Against this backdrop, the GTV on new home sales on Beike's platform was RMB 192.7 billion, decreasing by 44% year-over-year. The new home market continued to decline with no sign of recovery in the first quarter, a trend diverging from that of the existing home market. The ongoing debt crisis that developers face has made home buyers increasingly risk-averse and slow sales lead to the future deterioration of the developer's liquidity condition. On the other hand, land auction prices fell, and the percentage of state-owned developers increased consistently.

In the current period of market correction, we will strike a balance between scale expansion and risk management. First, we are motivating agents to focus on low-risk purchase and reduce high risk purchase collaborations in the short-term, while advancing with commission advanced model to ensure the collection of receivables and accelerate sales from 6our high-quality projects, altogether forcing a [virtuous] business cycle.

In addition, we refine our corporate to corporate collaboration with state-owned developers and high-quality developers to explore good [increasing] incremental sales opportunity as we boost sales standardization and scientific and refined management capabilities with our partners, we endeavor to jointly build a healthy ecosystem.

On top of that, leveraging our advantage with our unique, comprehensive residential housing data, we are extending our reach to the front end of the industry value chain, to develop more services and products to have developers efficiently enhance their customer reach, with research product investments and sales conversion.

Next, moving to our progress and plans for our two wings business. Despite the market headwidns, our home renovation and furnishing services achieved remarkable growth in the first quarter. We also completed the acquisition of Shengdu at the end of April. The synergies 1created between Shengdu and Beike are clearly reflected in the significant improvement in traffic sharing and in supply chain delivery and operational management.

Propelled by this improvement, on a pro forma basis, assuming Shengdu was fully consolidated, home renovation and furnishing revenue in the first quarter would show a 34% increase year-over-year to RM830 million. Contracted sales would have increased by 63% year-over-year, driven by an 8% increase in average contract price, in addition to 50% growth in a number of contracts which reached close to 6500 in the first quarter.

In stark contrast, the total output value of the home decoration and renovation industry declined by 25% to 30% year-over-year in the first quarter, according to China Building Decoration Association. This year, our overall strategy remains focused on building our one stop solution for home furnishing as we continue to leverage traffic directed from housing transaction services, innovate new retail models, and build a better place for home furnishing sales.

Our core business transaction services provide strong support for home renovation and furnishing services. In the first quarter, referral customers from our core business contribute roughly 23% of home renovation and furnishing contract sales, almost all will add increase incrementally to our top line. We expect this ratio to reach over 30% in the second half of the year.

In Shanghai and Beijing, such referrals accounted for a remarkable 77% and 75% of all these contracting sales respectively. Our progress in major cities has been especially exciting. Contracting sales in Shanghai, Wuhan, Shengdu and Beijing increased by approximately [550%\, 290%, 100% and over 130% year-over-year, respectively in the first quarter.

Shengdu's more comprehensive supply chain and massive 4SKUs under management also further boosted our product diversity and scale, assisting us in achieving higher customer satisfaction and average contract price. In the future, we will be leveraging our home SaaS system as a supply chain management tool to expand the scale of bulk procurement and further reduce procurement costs while ensuring supply.

With respect to project delivery, we are enhancing the quality and the craftsmanship of our products and at the same time, we shorten the construction and delivery cycle by utilizing our online Home SaaS system in conjunction with our offline management. Through our systematic and scientific project management, Beiwoo's delivery cycle has reached an industry-leading level of 98 days in the first quarter.

We aim to shorten our overall delivery cycle from 130 days at the beginning of the year to 120 days at the end of the year. Meanwhile, we strive to consistently enhance customer satisfaction through construction butler services, smart construction site, customer NPS management and compensation measures.

Moreover, our home furnishing revenue is consistently growing. In the short term, we will continue to deliver to drive back end sales of customized furniture, appliances and other categories with high gross margins through our home renovation services.

In the first quarter, thanks to our rich SKUs and improved sales tie-ins, Shengdu and Hangzhou average contract price increased by 7% and 21% year-over-year respectively. Home furnishing accounting for 10% of total contracted sales in the first quarter and made up 30% of contracted sales in Hangzhou flagship stores.

With the full integration of Shengdu, our home furnishing and renovation services have entered a more rapid development phase. We target monthly contracted sales to exceed RMB1 billion and the monthly contracted sales in Beijing, Shanghai and Hangzhou to surpass RMB100 million each sometime in the second half of the year.

During the first quarter, our development approach from Beike home rental services become increasingly clear. Our [light] rental property management services, Carefree Rent, achieved groundbreaking progress with over 5000 units acquired in the first quarter. During the first quarter, our units under management have expanded from three cities to eight cities and by 37% quarter-over-quarter increase to reach nearly 70,000.

By the end of this year, we aim to have more than 50,000 units under management in our Carefree Rental model. We believe that our Carefree Rental model can transfer the disperse rental properties in the market into high quality, reliable, professional managed and institutionalized long-term rental properties.

Meanwhile, with respect to centralized apartments, our first use apartments project that we participated in using our light custodial operations approach, Beike New Youth Apartment launched in Shanghai, Xuhui District, in the first quarter. The project has a total of 2978 apartment units, a monthly rental as low as RMB2700 and its occupation rate has reached 98% today.

In March, we launched our Twilight services guarantee program to protect the rights and the interests of both tenants and homeowners. The system provides loss compensation, covers the concerning issues such as commission, rent and property and personal safety throughout, allowing quality and worry-free rental services to be truly accomplished. In the first quarter, Two Light commenced operations in Shengdu and Shanghai, followed by development in more cities.

Finally, I would like to thank all investors for their support. Beike was successfully listed on the main board 3of Hong Kong Stock Exchange by a way of introduction on May 11. This represented the sum of [inaudible] for our journey forward and empowered us for our next destination.

The substantial uncertainty we face right now reflects the challenges our business has always faced from Lianjia to Beike. All our efforts have been centered on reducing the uncertainty of our business and providing value to the industry with sureness. We fought against the uncertainty of information with [authentic listings] against the uncertainty in cooperation with our agent cooperation network and against the uncertainty in customer choice through the optimization of our products.

We reduced uncertainty in service providers capabilities through training certification and examination and combated the uncertainty in service through our steadfast commitment to service quality. Our organization has a spirit. It grows more united when the challenges are greater and at the same time, more confidence about the future.

Therefore, the recent market change, unprecedented though they may be, do not change who we are as an organization and even serve to strengthen our faith to our service in our set direction. There is no doubt that we are being tested this year on multiple fronts.

Our housing transaction services must brave the many challenges in its operations while our Two Wings must build solid underlying capabilities and collaborate. Decisive actions are a must for our whole organization to streamline costs and [inaudible] while maintaining our vitality Fear not a strong pass, ironclad on all sides, we uphold our belief that as we overcome this obstacle, we will emerge stronger with new capabilities and a new structure course established.

We are taking today, we are solidifying our concentrate on the issue, empower our development for the next decade and sustain value creation for our customers, service providers and shareholders.

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

Thank you, Stanley. Thank you, everyone. Before discussing in detail about our first quarter 2022 financial results, I would like to provide a brief update of our recent housing market. During the first quarter, more and more cities have eased curbs for the home purchases to support the ailing property market.

After a variety of policies, with unprecedented frequency and intensity pushed the sector into a deep drill in the second half of 2021. Those measures to boost the market included subsidies, more down payments, reduction in mortgage rates and rule for the home purchase. The easing steps have brought some signs of recovery. According to Beike Research Institute, the decline of GTV on new home sales narrowed to 16%, according to -- compared to 21% and 32% in 2021 Q4 and Q3, respectively, while the new home construction remains soft, as many developers are still facing liquidity challenges.

The first quarter also saw the resurgence of COVID-19 variants in many cities in China, including mounting infections in Shanghai, which went into a city-wide lockdown. With varying mobility restrictions and other local-level control measures in place, our operation in those areas have been adversely affected, under which our local stores have been closed temporarily, and transactions have been disrupted.

However, as we experienced in the first half of 2020, consumers are increasingly demanding higher standards of living conditions. After the outbreak of COVID-19, the demand has become even stronger. Therefore, we believe that the pent-up demand will be released in the subsequent period with the re-opening of the economy in the foreseeable future.

At the end of April, China's top leaders signaled more loosening in a bid to lift the economy. The Politburo meeting expressed support to refining of the local policies and optimizing developers' presale funding regulations. We believe those supportive policies will revive the housing market sentiment and buying demand, and the home sales should be gradually rebounded.

To summarize, although the market recovery was fragmented, and temporarily disrupted by COVID-19 in Q1 with muted overall construction volume, we were able to utilize the opportunity to further optimize our execution, and to lay the groundwork to be better positioned for the market recovery.

Turning to our financial details in Q1, our net revenue decreased by 39.4% to RMB12.5 billion in Q1 from RMB20.7 billion in the same period of 2021, in line with the high end of our guidance and exceeding the Street consensus. The decrease was primarily attributable to the decline in total GTV of 45.2% to RMB586 billion in Q1 from RMB1069.6 billion in the same period of 2021, due to the continuing downtrend of the GTV of the market for existing home transactions and new home transactions since the second half of 2021, the emergence of COVID-19 in certain regions, and the corresponding restrictive measures in Q1, and the relatively high base of the same period of last year.

In particular, our net revenues from existing home transactions services were RMB6.2 billion in Q1, compared to RMB10.2 billion in the same period of 2021, primarily due to a 44.5% decrease in GTV of existing home transactions to RMB374.1 billion in Q1 from RMB673.4 billion in the same period of 2021.

Our net revenues from new home transaction services decreased by 40.5% to RMB5.9 billion in Q1 from RMB9.9 billion in the same period of 2021, primarily due to a 43.9% decrease in GTV of new home transactions of RMB192.7 billion in Q1, from RMB343.4 billion in the same period of 2021, which was partially offset by a moderate increase of the commission rate of the new home transactions.

Our net revenue from emerging and other services were RMB0.5 billion in Q1, compared to RMB0.6 billion in the same period of 2021, primarily attributable to the decrease of net revenues from financial services, which was partially offset by the increase of the net revenue of home renovation services.

Cost of revenues decreased by 35% to RMB10.3 billion in Q1 from RMB15.9 billion in the same period of 2021. Gross profit was RMB2.2 billion in Q1, compared to RMB4.8 billion in the same period of 2021. Gross margin was 17.7% in Q1, compared to 23.3% in the same period of 2021. The decrease in gross margin was mainly due to, (1) a lower contribution margin of existing home transactions resulting from a relatively high percentage of fixed compensation costs for Lianjia agents, and (2) a relatively higher percentage of costs related to the store of net revenues as a result of the decrease of net revenue in Q1 compared to the same period of 2021.

Operating expenses decreased by 17.5% to RMB3.1 billion in Q1, from RMB3.8 billion in the same period of 2021. General and administrative expenses were RMB1528 million in Q1, compared to RMB2108 in the same period of 2021, mainly due to the decrease of provision of credit losses and personnel costs. Sales and marketing expenses were RMB861 million in Q1, compared to RMB1057 million in the same period of 2021, relating to the decrease of brand advertising and promotional marketing activities. Research and development expenses were RMB749 million in Q1 compared to RMB638 million in the same period of 2021, mainly due to increased personnel cost.

Loss from operations was RMB918 million in Q1, compared to income from operations of RMB1013 million in the same period of 2021. Operating margin was negative 7.3% in Q1, compared to 4.9% in the same period of 2021, primarily due to (1) a relatively lower gross profit margin, and (2) and increase of the percentage of total operating expenses of net revenue as a result of the decrease of net revenue in Q1, compared to the same period of 2021.

Excluding non-GAAP items, our adjusted loss from operations was RMB450 million in Q1, compared to adjusted income from operations of RMB1564 million in the same period of 2021. Adjusted operating margin was negative 3.6% in Q1, compared to 7.6% in the same period of 2021. Adjusted EBITDA was RMB341 million in Q1, compared to RMB2015 million in the same period of 2021.

Net loss was RMB620 million in Q1, compared to net income of RMB1059 million in the same period of 2021. Excluding non-GAAP items, adjusted net income was RMB28 million in Q1, compared to RMB1502 million in the same period of 2021.

Net loss attributable to KE Holdings Inc.'s ordinary shareholders was RMB618 million in Q1, compared to net revenue, net income attributable to KE Holding Inc.'s ordinary shareholders of RMB1059 million in the same period of 2021. Adjusted net loss attributable to KE Holdings Inc. was RMB29 million in Q1, compared to RMB1502 million in the same period of 2021.

For the first quarter of 2022, diluted net loss per ADS attributable to KE Holding Inc.'s ordinary shareholders was RMB0.52, compared to diluted net income per ADS attributable to KE Holding Inc.'s ordinary shareholders of RMB0.88 in the same period of 2021. Adjusted diluted net income per ADS attributable to KE Holding Inc.'s ordinary shareholders was RMB0.02 compared to RMB1.25 in the same period of 2021.

Next, I will talk about the recent update regarding our capital market and operation initiatives, as well as our near-term focus on corporate financials. Firstly, Beike successfully dual-primary listed on the main board of the stock exchange of Hong Kong by way of introduction on 11 May. The dual primary (inaudible) secondary listing, which has been adopted by many other US-listed Chinese firms, requires a higher threshold and stricter procedures. It will also allow us to maintain our primary listing status on Hong Kong exchange, even under the most extreme cases. If our Company delists from the New York Stock Exchange two years later. Meanwhile, unlike a typical IPO, we didn't issue new shares or raise additional capital by way of introduction, enabling us to avoud dilution to our shareholders' interest.

The home-coming listing is a solution [from us], with the full responsibility to tackle the external uncertainties and the risks and to protect the best interests of our shareholders.

Secondly, for one of our two wings businesses , home renovation and furnishing services, we successfully completed the acquisition of Shengdu in late April. The combination will further leverage respective advantages on both sides, which will allow us to replicate our model more rapidly at the scale to empower the industry. Shengdu will be consolidated into our financial statements since May of this year. With Shengdu gaining transactions from Beike's strong resources and support, revenues of our home renovation and furnishing services are expected to grow more rapidly in the future.

Thirdly, we have recently carried out personnel restructuring in early May, with a focus on middle and the back offices. We executed a similar initiative for our financial services business back in Q3 of 2021, in order to be more focused on the development of our core business, including approximately RMB250 million in severance provisions for that period. This time, we made the really difficulty choice due to the uncertainties associated with the recovery of the new home market and the re-emergence of the COVID-19 outbreaks in certain cities, and based on our prediction of the medium term market dynamics.

It was a deep change that we made in a preemptive manner and we expect around RMB430 million severance provision may be incurred in Q2. By doing these one-off adjustments, we believe our personnel structure will be further optimized and that we will be able to be better carry on our business during the tough market.

Fourthly, we believe our strong cash conversion capability and sufficient liquidity will ensure the Company can navigate through the market cycles and cope with the fallout from the COVID-19 outbreaks, and the uncertain impact from the relatively stalled recovery of the housing market.

As of 31 March 2022, our cash, cash equivalents, restricted cash and short-term investments were RMB50.2 billion, or US$7.9 billion. The balance of our long-term cash items, mainly including long-term investments, amounted to RMB18.9 billion, or US$3 billion.

In addition, we also announced today that we propose to establish a share purchase program, under which we may be repurchase up to US$1 billion of our ADS over a 12-month period, subject to obtaining a general mandate from our shareholders at a general meeting to be convened by the Company. This move underscores our confidence in the fundamentals and the long-term growth of our business.

Turning to the guidance for the second quarter of 2022, considering the housing construction market is still at the early stage of recovery, and the potential net impact of the COVID-19 containment measures in certain regions, as well as the high base effect of the same period of 2021, we expect overall market GTV of existing home sales to fall over 60% year over year in Q2, and overall market GTV of new home transactions to decrease over 50% year over year in Q2, according to Beike Research Institute.

Based on all of the above considerations, looking forward to Q2 2022, we expect that total net revenues to be between RMB10 billion and RMB10.5 billion, representing a decrease of approximately 56.6% to 58.6% from the same period of 2021. This forecast considers the potential impact of the recent real-estate-related policies and measures, the emergence of COVID-19 in certain regions, and corresponding restrictive measures which remain uncertain and may continue to adversely affect our business, and the Company's current and preliminary view on the business situation and the market conditions, all of which are subject to change.

Today, I'd like to lead with our consistent beliefs. While we focus on weathering the short-term risks, we are devoting more effort to developing and investing in our long-term capabilities, even if it might take time to achieve financial returns on this investment. In fact, the longer it takes, and the more difficult it is, the more excited we become. Although China's housing market has undergone deep adjustment last year and is facing uncertainty from the COVID-19 outbreaks in the first half of this year, we believe that China will eventually win the battle against COVID.

In the long run, we also believe, with the establishment of a long-term housing market mechanism, the ongoing urbanization trend, the change in family structure, the resource mobility among the city clusters, as well as the government's emphasis on improvement of the people's living conditions, there is a tremendous potential for us to explore, transform and upgrade in the thriving sector of better living.

Starting with the vertical penetration to standardize the industry practice and the protocols, followed by horizontal expansion to integrate the entire industry has been our proven path to success. It may not be a short cut, but it is a path that is rooted in our culture of doing the right things over the quick type of things. We lay full faith in it 3as we ignite our One-body, two-wings strategy, I believe we will bring long-term benefits to the industry and our customers.

All in all, we fully embrace the challenge and the changes, and are co-operating with the [commission and the responsibilities 4:08]. We will always be self-motivated, driven by our long-pursued goal to create indispensable value for the industry. To that end, we will never stop.

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

Thank you. (Operator Instructions). Our first question is from Steven Tsai with Morgan Stanley. Your line is now open.

(Spoken in Chinese). Thank you, managers, for taking my question. My question is about industry outlook. Could management share with us your view on the current market conditions and the sales trends on your platform for both existing homes and new homes in the quarter to date?

Also, the pandemic has brought impact to not only just the property and [social] market, but also impacting the overall employment and the consensus sentiment. In that context, how should we think about the timing and the trajectory of our post-lockdown recovery? In the first quarter earnings call, you mentioned that you were expecting the new home market to decline 5% to 10%, and the existing home market to decline over 10% year on year in the full year of 2020. I'm just wondering if there are any changes to that expectation? Thank you.

Thank you, Steven, let me address your question. Since the beginning of this year, public policy signals have been released continuously from the top down, especially for the mortgage rate, which have fallen for nine consecutive months. In April, Nationwide first [setting home] mortgage rate to its lowest level since 2019. LPR and first home purchase mortgage rate has lowered to around the 4.25%. [Inaudible] on commission cycles has also dropped from 73 days at its peak to 29 days in April, making the [inaudible] cycle since 2009.

[Inaudible] measures continue to be implemented at city level. From our observation I believe the [inaudible] city, tier 2 cities, including [Inaudible, Inaudible, Inaudible] etc, [have not released] the easing policies. The policies have been levelling up. The easing steps include relaxing the purchases restriction, reducing the down payment ratio and the issuance of home purchasing subsidies.

These easing policies have been created partly in [inaudible] in promoting market different section, but in fact [inaudible]. I would like to take [Chengdou] as the showcase. The [lengthy] measures to stabilize the market were instituted on 1 March, this means the o restrictive policies and imposts in the past two years all at once.

That demonstrates the government's significant commission to boost the market. As a result, home sales marketing transaction volume rebounded [remarkably]. Nevertheless, in April due to the continuous liquidity crisis faced by the developers and the impact of the pandemic, existing and new home sales markets both began to weaken.

Looking more broadly, while the easing policies were implemented as decided, the market remains sluggish for the following reasons. For example, the restrictive policies have not been loosened in cities with the greatest demand such as Shenzhen, Beijing and Shanghai. At the moment [inaudible] the series of [inaudible] measures in 2021 brought about unprecedented results with mainly one thing lost, that is confidence.

[Inaudible] that crisis faced by developers has made homebuyers increasingly risk averse. The severity and the momentum of the current downturn has ultimately affected the homebuyer's situation, with respect to the future income as well as their risk appetite. The evolving pandemic situation and the respective normalized control measures further aggravated homebuyers' feeling of [inaudible] and the made thie transaction more difficult.

Specifically, as the new home sales market began to pick up after Chinese New Year and the market [broadened] out in the first quarter, but further subsequent recovery was interrupted by the pandemic. According to [Beike Research] Institute, in the first quarter, the GTV of new home sales market in China [fell] by 50% year over year and 60% quarter over quarter.

The price trend shows divergence at [inaudible], rising steadily in first tier cities and evaporating in the second-tier cities, and the third-tier cities. Beike's existing home transactions GTV dropped by 44.5% year over year in Q1. Our [inaudible] home sales volume rebounded in February and March, with month over month growth rate in March reached 45% and the sales returning to level of the [dry] 2021. The COVID outbreak since mid March [interrupted] the case of the housing market recoveries as well.

Regarding the new home sales market trend this is divergent from that of the existing home market. The sales momentum to be lackluster and anticipated [short] builds didn't materialize [inaudible]. In first quarter, the GTV of [inaudible] top 100 real estate companies fell by 47.6% year over year.

According to data from National Bureau of Statistics, the GTV of residential home sales across country were down 56% year over year, making the second biggest market single quarter decline since 1999. So, year over year decline in lower tier cities has been significantly larger than that in high tier cities. Among the same trends the GTV of the new home sales on Beike platform decreased by 44% year over year.

Looking ahead, [inaudible] there are still many uncertainties in the short term, [inaudible] with the new home market, due to the following reasons. The first is the [inaudible] of cash crunch of private developers and secondly it will take more time for the easing policy to take effect and thirdly, we saw the consumers are more concerned about whether these cash strapped developers can deliver houses and the quality of these newly built houses. Number 4 is the evolving pandemic allowing the [inaudible1] control measures.

However, in the long run we still remain quite confident because the residual demand for quality of living remains very strong. We believe that there is still home [inaudible] and as has easing policy takes effect and the pandemic closes the market is [bound] to recover under the transaction and will return to normal.

Regarding, so your second question is actually, resurging pandemic in many cities seems to have [inaudible] this year. [Inaudible] will make a significant impact on the Company's performance in the first half of this year. At the same time, we will continue to monitor the evolving situation of the pandemic to [inaudible] the impact to our full year's performance.

Since March, the COVID outbreak resurgence in most of [inaudible], top tier cities and [inaudible] the pandemic, will continue the measure were put forward. Roughly 60% of the new home sales were impacted by the pandemic in Q1 and the [at least 25%] existing home sales are expected to be affected in Q2. As such, the pace of market recovery was delayed.

In Shanghai and its neighboring cities in the Yangtze River delta, the transaction [inaudible 0] about half of one month in Q1 were affected and the transaction being at least 2.5 months are expected to be 5 in Q2. In April, 100% of the stores in Shanghai were closed. According to our conservative estimates concessions in Shanghai will come nearly to a standstill throughout Q2.

In Beijing at least 30% of transactions are expected to be [inaudible] delayed as the pandemic in Q2. Most of [connected] store are temporarily closed and more than 50% of stores temporary closed in May, meaning areas where we operate approximately 140 communities are under pandemic lockdowns or restrictions.

50% of our new home sales project are suspended for the [inaudible]. However, we'd like to invigorate the housing demand, [with the virtual] demand, which will only be delayed rather than [disappeared], the booming market right after the post-pandemic. Based on our experience in early 2020 as well as more recently, conceptions suspended during the lockdown will be completed after the pandemic subsides.

Locking in this pent-up demand during the pandemic period will help us grow rapidly when the pandemic is over, which means that with the longer time horizon, the pandemic's impact on our business is relatively small. I'd like to take Shenzhen as a showcase, which went under lockdown, beginning on 13 March.

In the two weeks that followed, Beike's weekly new home sales in Shenzhen experienced sequential decline of 65%. However, during the two weeks after lockdown ended in April our weekly volume increased subsequently by 400%. It was also 75% higher in the two weeks pre-lockdown, making up for almost all transactional losses incurred during the lockdown season.

The decrease of demand that will be released post-pandemic will also depend on the meeting of the local easing policies in various cities. This is the fact, as well the home buyer's income is sufficient and other factors. Thank you, Steven.

Our next question comes from Timothy Zhau with Goldman Sachs. Your line is now open.

(Goldman Sachs, Analyst) [Spoken in Chinese] Thank you, management and congrats on the very solid result. My question is regarding the new home transaction [business]. Could management provide any breakdown between [SOE] versus private developers in terms of GTV and any difference in terms of commission rate and what is the impact of [SOE's] concentration rate increase on your business and how its base model is going to change along with that.

Also, on account receivables, also related to the new home business, does management see further need to book provisions as we see the decrease in the [inaudible] provision actually has a perfect impact on the [inaudible] in the first quarter. Thank you.

Thank you, Timothy. Let me address your question. Regarding first question, the state and the central government owned developers concentration ratio has been increasing, this is actual. From the land auction perspective in the first quarter, state and central government owned developers bought 71% of all auctioned land and in terms of the sales, according to Beike Research Institute, of the top 100 developers' GTV in Q1, city owned developers accounted for 28%, representing an increase of 2% quarter over quarter and 5% year over year.

Of the top 10 developers' sales, city owned developers accounted for 37%, representing an increase of 7% year over year. On the bigger platform the percentage of the state and the central government owned developer has increased as well. The state and central owned developers, GTV, as a percentage of Beike new home sales has increased to more than 25% in Q1, from [inaudible 5] around 28% into early [inaudible], representing 1.3% quarter over quarter increase and about 3% year over year increase.

From the impact of the Beike due to the increased concentration of the state and the central owned developers, we want to emphasize that regardless, whether the developer is state owned or private, there are only two factors that could impact Beike. The first is the relative commission rate and the second is bad risk, these two factors largely offset one another.

The trend of the increasing brokerage [inaudible] penetration rate, will remain unchanged. I want to emphasize on this, in the long run, regardless of whether developers, state owned or private, that face the same pinpoints in customer acquisition and have the same strong dependency

of the sales [inaudible]. As such, the continuous increase in the Beike service penetration rate is certain and it will not change. Based on [inaudible] data, Beike's service penetration rate of the state-owned and the private developer are also at the same level of the - [rise] every year. The key factors determine the Beike's service penetration rate and the commission rate is the differing of the new home project and [inaudible]

As the cities continue to expand, new land will become increasingly distinct from the city center which forces increased separation between the new home projects and end user. As a result, whether they are state owned or private, the lack of concentration and connection to the end user will continue to grow.

Self-built - the sales [triangle] have become [inaudible] under the new investment [norm] of the so-called right arm branch of the real estate. Beike's services still are a necessity [inaudible] when it becomes collaboration with the sales triangle, we are the brand of choice. This is [inaudible] and recognition from over 100 million families in China. It will truly help developers to effectively connect and use it and increase the sales [inaudible] gives us unrivaled competitive advantage under the new [inaudible] law.

For the commission rate, state-owned developers commission rate is relatively lower. Similarly, there are [inaudible] ratio. Therefore, the impact of the higher concentrate of the state-owned developer are problematic [inaudible]. State-owned developers average commission rate is 28 per cent lower than that of private developers owing to state-owned developers the project, they are being closed linked with the city center resulting in a low degree of separation between the project and [inaudible].

At the same time developing costs for state-owned developers is relatively low; hence, and their requirement for the selling fees are not as agents. However, from an operating profit point of view, the risks of the [inaudible] from state-owned developers are quite low. The increase of state-owned developers will help to lower our bad debt ratio partially offsetting the impact of the reduced commission rate on the operating profit. Generally speaking, the impact of the higher percentage of state-owned developers profit margin is virtually neutral.

Regarding your second question, we, as always, we perform very prudent accounting treatment and also book the profit position for all [inaudible 3]. So, in the past quarters we almost book all of sufficient provision for all of the potential risks from developers who have negative public opinion or who have some financial crisis.

One more thing to mention is [inaudible]. [inaudible] announced that the increased [inaudible] to US dollars- denominated senior loans was passed through. Based on the principle for the prudency in accounting, we make a bad debt provision on [CMAC] receivable, with the highest provision ratio.

At end of Q1, the balance of account receivable and other receivables of CMAC was RMB1.2 billion of which RMB790 million was fully covered by collection. For the remaining RMB450 million [without collateral] we increased bad debt provision from [inaudible]% to 85% in Q2. As a consequence of this the [inaudible] bad debt provision adjustment of [inaudible] in Q2 could be RMB250 million.

Our next question comes from Peilin Zhou with CICC. You're with us now, Peilin.

(Spoken in Chinese) Thanks, management, for taking my question. Since Shengdu started to consolidate in April this year earlier than previous expectations, could you please share the integration process and is there any updates on this year's revenue contribution considering the tightened Covid control in certain cities in the second quarter. Thanks.

(Interpreted) Yes, this is Stanley let me quickly address your question. I actually mentioned a couple of the metrics as well to update during my prepared remarks and later I will give you more details.

I want to just give you more details in terms of the fundamental thinkings and we truly believe all those kinds of operational results based on those kinds of business philosophies as well as the thinking behind that. We truly believe between our one body homes and transaction business and the two wings, a new business, there are a lot of synergies between that. Especially the results it's sharing.

For example, in the homes and transaction business, we actually had a very strong potential to continue provide a bigger potential customer referral into the housing decoration as well as other services.

Secondly, in the past two decades, experience from the Lianjia to the [inaudible], we actually [has made 1] accumulated a series of the methodology. Especially if you look at the nature for the home decoration and finishing business, there are a couple of the features such as a wall [unclear] extremely prolong. The [participated] rules are very complicated, as well as the customer's decision-making procedures are very [heavy].

So, all those kind of features, which we believe our experience and methodology accumulated from the housing transaction business, we can replicate those kind of experience into the new business. Meanwhile, we also accumulate a bunch of the know-how, in terms of the [unclear] management, data management, as well as the service commitment. We do believe by all those kinds of empowerments, we can provide a different kind of services into the homes and decoration business in the future.

Meanwhile, we truly believe our new business, also, is [era] in the field, which is used via us. We always answer questions by ourselves. If not us, who will be change of in the industry?

So, we do believe -- as I mentioned in the second part -- all those kind of expertise, as well as the inspiration, could be help us to continue bringing a better role in the home decoration, as well as the home rental new business part.

So, we strongly recommend you -- when you look at all those datas, similar like what we're sharing internally, is we want to make a balance between the speed of the growth, as well as quality of the growth. We are an organization always focused on the long term. For example, for the home decoration business, we want to make a balance among the quality, efficiency, as well as the scalability.

So, we look at the data. Such as, for example one per month, the overall contract revenue could surpass RMB1 billion. So, we do believe by all those kind of effort, in the foreseeable future, we can reach to all those kind of goal. In summary, in the long-term, from myself as well as the team, we are not worried about the growth for the business. But beyond that, [we more look at the customer satisfaction and we look at how we can using the online [substitutes], as well as other technical ways to continue bring the difference into the industry.

That's my answer. Thank you for your question. Back to you, Operator.

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's Investor Relations team through the contact information provide our website. This concludes today's call, and we look forward to speaking with you again next quarter. Thank you and goodbye.

This concludes today's conference call. Thank you for participating. You may now 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.