Ke Holdings Inc (BEKE) 2022 Q2 法說會逐字稿

Thank you, Operator. Good evening and good morning, everyone. Welcome to KE Holdings Inc, or Beike's second quarter 2022 earnings conference call. The Company's financial and the operating results were published in the press release earlier today. and are posted on the Company's IR website, 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 include discussions of unaudited GAAP financial information, as well as unaudited non-GAAP financial measures. Please refer to the Company's press release, which contains a reconciliation of the unaudited 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, Stanley.

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

In the second quarter, under proactive easing policies for the industry and effective pandemic controls, China's real estate transaction market saw a series of positive changes, especially in the existing home market. Meanwhile, we improved our platform's operating efficiency and stability in the scale of our stores and agents, as well as their productivity, but the internal and external environment we live in remains full of challenges.

Macro uncertainty continues to increase and our businesses are becoming more diverse and complex as we advance our "one body, two wings" strategy.

Faced with such a complex internal and external environment, to command and control our diversifying business, our organization needs to have deeply rooted beliefs. At the center is that we need to believe "service providers - the real estate agents, renovation workers and foremen, designers, customer service representatives, rental housekeepers - they're our customers and our valuable assets."

In times of market corrections, our tried-and-true practice over the years is to seek answers from the industry's front line, finding strength from the day-to-day work of ordinary service providers. This is even more necessary today, because we face market adjustments with greater than usual magnitude, and the scale and complexity of our organization have also reached a new level.

First, going to the front line will help us to avoid the potential big company disease, as we grow in scale. By our management and platform teams connecting with those we serve as equals, instead of from the top, while the front line remains at a distance, we can bring everyone's heart together, and establish a true understanding amongst one other.

Second, we need to be of help to our front line. To be an industrial Internet platform requires deep industry insights. It is only through our complete industry immersion that we can leverage the advantage of the platform, formulate useful rules and mechanisms and develop helpful functions and products.

To that end, close to half of the 147 middle-and-senior management members on the Beike platform, myself included, spent 1 to 2 months working on the front line over the past few months, as a junior agent, intern designers, or rookie housekeeper.

Going back to the front line has filled our organization with the energy to fulfill our mission of "admirable service". Prompting us to again think about how to truly help our service providers improve their productivity, job security and enhance their sense of happiness at work.

It has also urged us to streamline our process and get our organization lean. At the same time, by going to the front line, we are more convinced than ever of our positioning to become the industry's spokesperson. Our opponents are not the other high-quality providers in the industry but all the low-quality service providers that hurt the industry's reputation and customer experience. We will make the industry better by accelerating the elimination of these subpar players.

Going to the front line, we have gained more confidence in our "one body, two wings" strategy.

Our infrastructure foundation, the agents and store network in the communities, is already complete. Like a high-quality road, it's now open for more vehicles, best positioning us as a full living-services platform, providing a complete range of services, including home purchase and sales, home rental, home renovations, and other home-related services.

Moving on to our progress in the second quarter, with our "One Body" part, existing and new home transaction services.

At the end of the second quarter, the number of stores and active stores on Beike's platform was over 42,800 and 41,100, down 6% and 4% quarter-over-quarter, respectively.

At the same time, the number of agents and active agents on our platform was over 414,000 and 380,000, respectively, with a moderated quarter-over-quarter decline of 3% and 0.4% respectively.

The number of stores and agents in most cities stabilized in the second quarter, with the churn rate for Lianjia agents dropping to just 1- 3% in Beijing and Shanghai.

Non-Lianjia store's active agent churn rate fell to only 5.6% in June, significantly better than the industry average of over 12%.

In cities, where existing homes showed a stronger recovery trend on our platform, such as Suzhou and Fuzhou, the number of agents even started to grow. Total MAUs on Beike's platform reached 43 million, up 8% quarter-over-quarter.

Our existing home transaction services continued to outpace the market. According to data from the Beike Research Institute, nationwide GTV of existing home sales dropped 45% year-over-year in the second quarter, whereas GTV of existing home transactions on Beike's platform was RMB393.5 billion, down 40% year-over-year, of which existing home sales declined 41%, outperforming the market.

Throughout the second quarter, the year-over-year decline of our existing home GTV continued to narrow, from 51% in April to 17% in June.

In 21 out of 32 Beike key cities, existing home GTV exceeded the average 2021 level in June. The frequent release of easing policies in second-and lower-tier cities brought the pent up, rigid, home upgrade demands back to the market and spurred the recovery of existing home market in these cities. Reflected in our Q2 existing home transactions, GTV of non-Lianjia connected stores increased by as much as 33% quarter-over-quarter.

In Beijing and Shanghai, effective pandemic controls firmly took root in June, and we saw transactions recover rapidly and return to normal levels in the final week of the month. Our firm investments in infrastructure and products have supported a more stable network of stores and agents, and higher operating efficiency, allowing us to substantially outpace the market in the recovery cycle.

On the infrastructure side, we constantly iterate our fair and competitive platform operation mechanism to motivate and retain high quality service providers. In the second quarter, we optimized our business leads allocation mechanism to prevent cheating and enhance the sense of fairness. We also iterated our business leads matching model to make it more accurate and the operations more focused.

In terms of operations, we continued to refine our operations of existing home sales that centered on home listings, improving home listing maintenance, listing promotion and conversion effectiveness.

For Lianjia, this year, Lianjia has focused on improving operations to solidify the foundation for quality services and organizational development. In the second quarter we rolled out several major initiatives.

First, we reduced the number of loss-making stores, through more granulized management and by establishing single store P&L models. As a result, the proportion of loss-making stores in Lianjia's 20 pilot cities dropped by a significant 18% from January.

Secondly, we further improved Lianjia agent's productivity by establishing a 5A productivity management model, to enhance overall management perspective and capabilities.

Apart from Beijing and Shanghai, in the other 27 cities, Lianjia agents versus connected stores agents' per agent productivity ratio expanded by more than 21% from the 2021 level.

Thirdly, Lianjia agents actively participated in community pandemic prevention services and won recognition from community residents, which further supported the rapid recovery of our business after the pandemic resurgence passed.

Since July, there have been some corrections in the existing home market, affected by the unusually hot temperatures in southern cities and macro market fluctuations. But we are more convinced than ever that existing home services will be the core of our future, and we will strategically redouble our focus on existing home services.

Turning to new home transaction services, according to data from the National Bureau of Statistics, in the second quarter, the GTV of new residential home sales was down 36% nationwide year-over-year. It expanded from the first quarter, and was the second largest single-quarter decline since 1999. The GTV of CRIC's top 100 real estate companies fell by 53,4% year-over-year. The new home market remained in a trough with weakness on both the supply and the demand side.

Amidst the market headwinds, GTV of new home sales on our platform was RMB222.7 billion, down 55% year-over-year and up 15.6% quarter-over-quarter. Positive changes emerged at the end of May, and the number of new home purchase offers on Beike's platform materially increased on a sequential basis in May and June. But the industry continues to face significant challenges in the short term, lacking improvements in financing and consumer demand, with mounting pressure on sell through.

As the industry undergoes rapid and powerful changes, high-quality developers have begun to establish new understandings, that is, long-term advantages will be built through better and comprehensive utilization of qualified sales channels.

Against this backdrop, first, in terms of new home listings, we have been vigorously carrying out Corporate-to Corporate Collaboration with high-quality developers, increasing our share of sales by state-and central-owned developers to 37% in the second quarter, 7 percentage points higher quarter-over-quarter. This has improved the quality of our new home listings and made our sales easier and more risk resistant.

Second, with respect to channels, during the recent round of market corrections, agents placed more emphasis on operational safety, preferring to collaborate with platforms with high-quality listings, strict risk control and safe, fast receivables collection. Channels with weak risk control, inadequate receivable collection management and a single-minded pursuit of scale are being weeded out by the market. This will result in higher concentration for new home sales channels, and our higher coverage of new home agents and stores.

Third. Operationally, we continued to promote and reinforce execution of the Commission-in-Advance model and other focused sales strategies. The Commission-in-Advance model offers developers the opportunity to pay in advance. Projects with commission in advance consistently delivered higher sell-through efficiency, making it widely accepted by the developers.

Agent's and our receivable collection were further secured, setting in motion a positive cycle. In the first half of this year, Commission-in-Advance accounted for 22% of revenue from new home sales from our platform.

Despite the short-term challenges, we expect a stable new home market, with higher certainty, in the long term, after this round of correction. We will continue to strengthen our strategic focus and increase cooperation with high-quality, state and centrally owned developers iterate our risk control protocols, data products and other value added products and services, while further reducing costs and enhancing efficiency.

Moving on to the home renovation and furnishing business of our "two wings". July 6th this year marked the first anniversary of our official announcement of Shengdu's acquisition. Our financials were officially consolidated with the Shengdu during the second quarter this year. Over the past year, Beike and Shengdu have carried out efficient all-round integrations of teams, organizational structure, operations, and systems.

The process has progressed very smoothly, driving diverse synergies. For example, the supply chain advantage brought by Shengdu has helped raise Beiwoo's ARPU by 33% year-over-year, and referral customers from our core business contributed to over 25% of home renovation and furnishing's contracted sales.

In the second quarter our home renovation and furnishing business achieved robust growth against challenges of the pandemic. According to data from the China Building Decoration Association, the gross output value of leading home renovation and furnishing companies declined 21% year-over-year in the second quarter, while our home renovation and furnishing business generated pro forma revenue of RMB1.37 billion, rising more than 10% year-over-year, and 58% quarter-over-quarter, and our contracted sales reached close to RMB1.7 billion.

Meanwhile, we established organizational structures as well as ground rules and systems to support a better connection between core and emerging businesses. Real estate brokerage store owners can receive commissions within five days after their referred traffic to home renovation and furnishing signs contract, fully incentivizing traffic referrals.

In June, contracted sales from our housing transaction traffic referrals accounted for over 25% of home renovation and furnishing's contracted sales. Home renovation and furnishing is a low transaction frequency industry. To improve the quality and consumer experience, we started with the industry role that interacts with the platform with higher frequency the service providers.

Only happy service providers can bring quality services and happy consumers. Service providers in the industry have many pain points, including unstable order dispatching, untimely settlement and that good service does not necessarily yield good income. We built transparent frameworks and systems that covered the service providers' qualification admissions, ranking, promotion and rewards all on the basis on service quality, to address these pain points.

In terms of project delivery, we carried out refined process management to ensure on time construction completion, established systematic online-offline closed-loop management and promoted standardization of construction technology, project acceptance, and other actions.

For consumers, we further advanced our service commitment of 10 promises for 10 worries. Our construction process can be monitored online by customers in real time, and after-sales maintenance can be completed within six days. As a result, the absolute construction delivery period was shortened, and the customer satisfaction NPS of construction completion increased from 14% in January to 35% in June.

We are exploring how to raise our topline potential and profitability beyond the range usually seen in the traditional home renovation business.

The nature of home renovation is a service business. It is about quality service with a high entry barrier but carries relatively low profitability. Furniture and home furnishing, on the other hand, is a manufacturing business. With good traffic acquisition, significant economies of scale can be shown.

We are trying to find out if it is possible to drive the sales of furniture and home furnishings including customized furniture, soft furnishings, electrical appliances etc. through home renovation. We are assessing this by tracking furniture and home furnishings sales as a percentage of full-service contracted sales.

We believe on a single city basis, and for our overall business unit, 30% represents the initial validation milestone of this model's feasibility and 50% will represent the mid-term milestone of its maturity. Today, we are rapidly growing our furniture and home furnishings sales as a percentage of full-service contract sales, raising it from 11% in the first quarter to 16% in the second quarter. Yet there is still tremendous upside potential.

Moving to our home rental services. Creating social value as a socially responsible enterprise, we achieved rapid, high-quality development in our home rental services in the second quarter, while attaching great importance to cost control and sell-through efficiency. Our aim is to achieve long-term operational sustainability of this business.

As of the end of the second quarter, the number of contracted rental units managed or co-managed by our rental services exceeded 42,000, an increase of nearly 22,000 units from the end of the first quarter. Among them, there were 31,000 units under "Carefree Rent". We also took various measures to improve staff productivity and occupancy rate, aiming to balance scale and profitability. Through business model iterations, scientific management, systemic incentive mechanisms, we strive to sign up the right units, set the right price, realize fast sell through, all with enhanced service quality and productivity.

With these initiatives, the occupancy rate of our "Carefree Rent" continued to improve as the pandemic resurgence passed. In addition, we jointly launched the New Youth Initiative in June to provide fresh college graduates with favorable rental rates and commission reductions, or exemptions, to help them address the difficulty of renting houses at affordable prices. As of July 31, 2022, over 8,000 transactions were completed under the "New Youth Initiative", saving the graduates approximately RMB12 million.

Lastly, I'd like to go back and talk about our return to the front line. All businesses boil down to be about people. It is especially the case for the housing related services industry, which points to both consumers and service providers. For managers on the platform and myself, it's easier to connect and relate to consumers, because everyone of us is a consumer at some point, but it's more difficult to identify with service providers.

By going back to the front line, many of us found the power to empathize with service providers. Relating to consumers convinced us that their quest for joyful living will never change. By the same token, identifying with service providers enables us to understand and strengthen our conviction that, to service providers, the need for long-term practice and pride in their occupation remains a constant.

As the poem goes, "When the water ends, clouds will rise". The business world of the future may never stop changing, presenting us with one challenge after another. But as long as we connect with the constant elements, while continuing to iterate ourselves, we will only get better and help the industry get better.

Thank you. Next, I would like to turn the call over to our CFO, Tao, to review our second quarter financials.

Thank you, Stanley, and thank you everyone for joining us today. Before discussing more details about our second quarter of 2022 financial results, I would like to provide a brief update of the recent housing market.

The past quarter saw more supportive policies rolled out to shore up demand in the real estate market in China. Such steps include the central government's tone setting, lower mortgage rates guided by the central bank, and stepped up easing measures from lower-to-higher tier cities across the country. The property market has shown some signs of improvement, with the existing housing market especially responding quickly to the policy relaxation.

While the new home market was still clouded by debt crisis among developers and weak homebuyer sentiment. Recently the reemergence of COVID-19 outbreaks and the mortgage boycott threats on unfinished new home projects have disrupted the recovery of China's housing market. However, we would like to address that those short-term hurdles will not impact Beike's business directly, as we believe the government will properly resolve the issue and ensure the delivery of property projects.

In addition, the uncertainty of the new home market in some cities could drive part of demand to the existing housing market, where we have a stronger presence and incomparable competitiveness, well positioned to serve the shift in demand.

Although the market was still on a rocky way of recovery, we were able to take concrete measures to continue building up our market presence, and maximize our strengths including the collaboration network and the digitalization capability to enhance operating efficiency. Here we would like to extend sincere gratitude to the employees who have been impacted by the Company's personnel structure optimization in Q2, for their dedication and professionalism in the challenging period. Their contributions are extremely valuable to the Company and will always be a source of inspiration for our future development.

In addition, we updated our segment reporting from Q2 as a result of the acquisition of Shengdu, which was closed in late April. We consequently updated our business structure resulting in four lines of businesses, which were existing home transaction services, new home transaction services, home renovation and furnishing, and emerging and other services and updated the financial measures accordingly.

Turning to our financial details in Q2. Our net revenues decreased by 43.0% to RMB13.8 billion in Q2 from RMB24.2 billion in the same period of 2021. However, it beat the high-end of our guidance by over 30% and exceeded the street consensus. The better-than-expected revenues were fueled by the following factors.

Firstly, Beijing and Shanghai, the core first-tier city markets and where offline operations operation ground to a halt due to the COVID induced lockdowns in April and May, saw transactions rebound rapidly in June after the pandemic eased, which was much quicker than what we expected previously.

Secondly, existing home market in many higher-tier cities was able to stage a solid recovery supported by policy easing. This was proved by a 33% quarter-over-quarter jump of GTV of existing home transactions served by connected agents on the Company's platform in Q2.

Thirdly, although new home market remained weak, we have strengthened cooperation with high quality developers and further enhanced sell-through ability, which enabled us to seize the opportunity as developers rushed to shore up mid-year sales performance. However, the year-on-year revenue decrease was primarily attributable to the decline in total GTV of 47.6% to RMB639.5 billion in Q2, from RMB1,220.8 billion in the same period of 2021.

In particular, our net revenues from existing home transaction services decreased by 42.5% to RMB5.5 billion in Q2, compared to RMB9.6 billion in the same period of 2021, primarily due to a 39.6% decrease in GTV of existing home transactions to RMB393.5 billion in Q2 from RMB652.0 billion in the same period of 2021.

Our net revenues from new home transaction services decreased by 52.0% to RMB6.7 billion in Q2 from RMB13.9 billion in the same period of 2021, primarily due to a 55.3% decrease in GTV of new home transactions to RMB222.7 billion in Q2, from RMB498.3 billion in the same period of 2021.

Our net revenues from home renovation and furnishing were RMB1.0 billion in Q2, compared to RMB43 million in the same period of 2021, primarily because the Company completed the acquisition of Shengdu Home Renovation Co., Ltd. and directed business opportunities to it. We began to consolidate Shengdu's financial results during the second quarter of 2022.

Our net revenues from emerging and other services decreased by 9.6% to RMB557 million in Q2 from RMB616 million 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 net revenues from rental property management services.

Cost of revenues decreased by 41.3% to RMB11.1 billion in Q2, from RMB18.8 billion in the same period of 2021.

Gross profit was RMB2.7 billion in Q2, compared to RMB5.3 billion in the same period of 2021. Gross margin was 19.7% in Q2, compared to 22.1% in the same period of 2021. The decrease in gross margin was mainly due to a relatively higher percentage of costs related to store of net revenues as a result of the decrease of net revenues in Q2 compared to the same period of 2021.

Operating expenses remained flat at RMB4.2 billion in Q2, compared to the same period of 2021. General and administrative expenses were RMB2,250 million in Q2, compared to RMB2,202 million in the same period of 2021, mainly due to the increase of share-based compensation expenses and additional severance payment incurred in Q2, which was partially offset by the decrease of recurring personnel costs and overheads along with the decreased headcount, as well as conferences and travel expenses as a result of the COVID-19 outbreaks in certain regions in Q2 compared to the same period of 2021.

Sales and marketing expenses were RMB1,122 million in Q2, compared to RMB1,241 million in the same period of 2021, mainly due to the decrease of the brand advertising and promotional marketing expenses for housing transaction services, which was partially offset by sales and marketing expenses of Shengdu.

Research and development expenses were RMB779 million in Q2, unchanged from RMB775 million in the same period of 2021, mainly due to additional severance payment incurred in Q2, which was mainly offset by the decrease of recurring personnel costs and share-based compensation as a result of decreased headcount in research and development personnel in Q2, compared to the same period of 2021.

Loss from operations was RMB1,518 million in Q2, compared to income from operations of RMB1,116 million in the same period of 2021. Operating margin was negative 11.0% in Q2, compared to 4.6% in the same period of 2021, primarily due to (1) a relatively lower gross profit margin and (2) an increase of the percentage of total recurring operating expenses of net revenues in Q2, primarily due to the decreased net revenues and (3) additional severance costs of RMB438 million incurred in Q2 compared to the same period of 2021.

Excluding non-GAAP items, our adjusted loss from operations was RMB690 million in Q2, compared to adjusted income from operations of RMB1,669 million in the same period of 2021. Adjusted operating margin was negative 5.0% in Q2, compared to 6.9% in the same period of 2021. Adjusted EBITDA was negative RMB104 million in Q2, compared to RMB2,555 million in the same period of 2021.

Net loss was RMB1,866 million in Q2, compared to net income of RMB1,116 million in the same period of 2021. Excluding non-GAAP items, adjusted net loss was RMB619 million in Q2, compared to adjusted net income of RMB1,638 million in the same period of 2021.

Net loss attributable to KE Holdings Inc.'s ordinary shareholders was RMB1,868 million in Q2, compared to net income attributable to KE Holdings Inc.'s ordinary shareholders of RMB1,112 million in the same period of 2021.

Adjusted net loss attributable to KE Holdings Inc.'s ordinary shareholders was RMB622 million in Q2, compared to adjusted net income attributable to KE Holdings Inc.'s ordinary shareholders of RMB1,635 million in the same period of 2021.

Diluted net loss per ADS attributable to KE Holdings Inc.'s ordinary shareholders was RMB1.57 in Q2, compared to diluted net income per ADS attributable to KE Holdings Inc.'s ordinary shareholders of RMB0.93 in the same period of 2021.

Adjusted diluted net loss per ADS attributable to KE Holdings Inc.'s ordinary shareholders was RMB0.52 in Q2, compared to adjusted diluted net income per ADS attributable to KE Holdings Inc.'s ordinary shareholders of RMB1.37 in the same period of 2021.

We maintained strong cash position and sufficient liquidity in Q2. As of end June, the combined balance of our cash, cash equivalents, restricted cash and short-term investments amounted to RMB50.0 billion or USD7.5 billion. The balance of our long-term cash items mainly including the long-term investments, amounted to RMB24.0billion or USD3.6 billion.

In addition, we reported positive operating cash flow, despite the challenging environment and the cash to income ratio of our new home services was 1.27 in Q2, demonstrating our strong cash generation ability.

Next, I will talk about the recent development regarding our operational and capital markets initiatives, as well as our near-term focus on corporate financials.

First of all, we did not sit idly by in the face of a market headwind. Nearly half of our mid-and senior-level directors went to the front line in the past months to work and experience as agents, home decoration client managers, or other roles, holding the firm belief that-only if you become one of them, can you understand them.

By working side by side with our service providers and engaging day-to-day interactions with customers, we have a deeper understanding of how to truly help service providers improve their productivity and sense of security, as well as better satisfy customers' demand. It also encouraged us to fully embrace the challenges and create indispensable value for the industry.

Secondly, we took a series of cost savings measures and focused on efficiency in our daily operations to enhance profitability. Part of the efforts were reflected in the improvement of contribution margin of new home transaction services, which was at two-year high of 24% in Q2, despite the still sluggish new home market.

Moreover, as we carried out further organization optimization initiatives in Q2, we have gained a larger operating leverage for our housing transaction services against the challenging market environment. We expect operating expense savings for housing transaction services in the second half of this year to reach up to approximately RMB300 million to RMB400 million in each quarter and the absolute dollar amounts amount of operating expense to be decreased to the same level of the second half of 2019.

Followed by the expected market recovery in the coming quarters, we believe our profitability for the housing transaction services will gradually recover in the second half of this year.

Thirdly, we will continue to make investment in our 'two wings' businesses, home renovation and furnishing services and the Beike rental services, in spite of the tough market environment. We will especially make necessary and sufficient investment in the home renovation and furnishing services, which enjoys a much larger。 Total addressable Market compared to the housing transaction services.

We firmly believe these investment will yield long-term economic benefits, and the trust we gained from our customers and the capability we accumulated in our core business will well position us to capture the rising demand in the burgeoning sector.

Fourthly, we obtained a general unconditional mandate to repurchase the shares from our shareholders at the Annual General Meeting held on August 12. After that we will execute the share repurchase program of up to US$1 billion of our ADSs over a 12-month period. This highlights the confidence we have in our long-term growth and the capability of our capital allocation, which prioritizes the balance of financial flexibility with an efficient capital structure.

Turning to guidance for the third quarter of 2022, we believe while new home market is still groping in the dark, existing housing market is already seeing light at the end of the tunnel and is expected to stage a larger-scale recovery in the second half of this year.

Based on above considerations, combining the factors of the potential negative impact of COVID-19 containment measures in certain regions, and the base effect of the same period in 2021, we expect total revenues to be between RMB16.5 billion and RMB17.0 billion in Q3, representing a decrease of approximately 6.1% to 8.8% from the same period of 2021. This forecast constitutes the Company's current and preliminary view on the business situation and market condition, which are subject to change.

Lastly, we'd like to highlight that a recovery of the property market is on the horizon and the government policies have been on the supportive side, with a focus on meeting demands for better housing. We will seize the opportunity to further improve efficiency through a range of cost management to boost synergy, allocate resources more efficiency oriented and risk aversion, and strike a balance between profitability and investments in new businesses.

As we continued to reiterate, China's housing market is shifting gear from the new home sector to the existing home market at an accelerated pace. With home prices stabilizing and the need for better living of the Chinese people continuing to increase, home upgrade demand will serve as a prominent driver, turbocharging a continued expansion of the market and resulting higher derived demand for a range of services, including home renovation and furnishing and rental services. We believe our unique competencies and solid business layout in those sectors will support us to take the fast ride and achieve rapid growth in the long run.

This is what we have been doing, not perfect, but we are on our way. That concludes our prepared remarks. We would like now to open the call to your questions. Operator, please go ahead.

Thank you. As a reminder, to ask a question, please press star-one-one. For the benefit of all participants on today's call, please limit yourself to one question. If you have additional questions, you can reenter the queue. If you are going to ask a question in Chinese, please follow up with English translation. One moment while we compile the Q&A roster.

Your first question comes from Jiong Shao with Barclays. Your line is open.

Thank you very much for taking my questions. I have a couple questions, if I may. The first question is that you briefly mention about the policy relaxation in your prepared remarks, and I was just wondering, could you talk about the extra affect you have seen from those policy relaxations and any comments about the potential for further relaxation for the second half of the year.

My second question is that you also highlighted in your prepared remarks about very nice rebound of the existing home sales, particularly in Shanghai and Beijing. Could you just talk about your expectation for further recovery? For the second half, what have you seen in the third quarter? Thank you very much.

Thank you, Mr. Shao. Let me address your first question. Guided by the supportive tone set by the central government and the central bank's liquidity support from low to higher tier cities, we actually saw the local government continue to step up the policy relaxation. Since the beginning of this year, about 220 province-and city-level, authorities have loosened real estate restrictions nearly 600 times, exceeding the total of 400 tightening policies issued last year.

In particular, after Politburo meeting at the end of April, the frequency with which the local relaxation policies were introduced in some core second-tier cities significantly accelerated, reaching more than 110 times for each month from April to June. These policies are aimed at ensuring the normal operation of real estate and the stability of market transactions.

There are mainly four types of the easing measures. The first is the relaxation on loan restriction, including interest rate. The mainstream first and second home purchased mortgage interest rate we monitored in 103 cities dropped to 4.35% and 5.07% in July respectively, hitting new lows since the year of 2017.

Relaxation on loan restrictions also included the reduction of down payment ratio, lowered recognition standard for second-home, lowered restriction on the use of housing provident fund, etc. Cities that issue such relaxation include in Suzhou, Taiyuan, Jinan and Chongqing.

Second, the relaxation of the home purchase restrictions, including encouragement for the city residency, relaxed purchase restrictions for nonlocal house holders, expansion of non-restricted areas and also the added purchase quota for the family members with more than one child. This were implemented in the cities such as Nanjing, Hangzhou and Changsha.

The third type is the subsidy incentive, including talent settlement subsidies, house purchase subsidies, relief of value added tax and deed tax, etc., were implemented in cities such as Suzhou and Changsha. The fourth type is promoting home upgrade.

In the first half of 2022, 19 cities recommenced the measures such as the shanty town revamps by using housing coupons as a mandatory compensation. These are easing policies with stronger intensity, implemented in cities such as Zhengzhou and Nanjing. We observed that after the introduction of above policies, multiple cities saw substantial recovery in some leading indicators, this including the number of new property listings, new home customers and also the property tools, as well as the agent confidence index. Those cities also saw the substantial recovery in the transaction volume in June.

In the second half of 2022, we expect various cities to continue introducing easing policies to support the steady market recovery. There is still substantial room for more policy easing. In last year, 2021 marked the year of the tightest policy control in past 12 years. Through the relaxation and the support this year, these restrictions are gradually being loosened.

Nevertheless, at the end of June, most of the key second-tier cities will far less relaxed compared to the most relaxed period in the past 12 years. Under the basic principle of "housing is for living in, not for speculation", there is still a lot of potential for the further policy easing in different regions, both in terms of the diversity and the intensity of the easing policies.

The central government has set the tone to encourage the local governments to actively introduce the policies to ensure the market stability. With the recent new home market risk emergence, the Politburo meeting held at the end of July emphasized the full and effective utilization of a policy toolbox and the city-specific policy to support the rigid housing demand and the home upgrade demand.

Local governments are asked to fulfill their responsibility to ensure the delivery of the home projects and protect people's livelihoods. So from our perspective, we believe that the first-tier cities have a strong housing demand and solid fundamentals, and that their local finances are less- dependent on the real estate. The local property market can recover to a healthy level even without the policy support while further supportive policies are expected to be introduced in the second-tier and the lower-tier cities during the second half of the year to actively reduce risk and restore the market confidence and support the continued recovery of the market transaction.

Regarding your second question, in the second quarter, many cities opened the policy toolbox and actively introduced the easing policies with the existing home market being the first to benefit. Negative market sentiment bottomed out, generally speaking, although Beijing and Shanghai were severely affected by the pandemic, a large number of consumers who had taken a wait and see stance began enter to the market, as evidenced by clear recovery signs in the transaction volume of the existing home market.

Overall, according to Beike Research Institute, in the second quarter GTV for China's existing home sales market increased 9.8% quarter over quarter and declined 45% year over year. A series of leading indicators monitored by Beike, such as the home tour index, number of new customers and the new listings and the price index, suggest that the market expectations rebounded in May and June from the bottom.

For existing home prices in June, there was slight year over year increase in the first-tier cities, except for Shenzhen, while the prices in 20 key second-tier cities have recovered to the level of the same time last year. But the prices in the third tier and the fourth tier cities continue to trend down.

In different type of cities, the key second-tier cities led the recovery due to less impact from the pandemic and strong policy support. Existing home sales GTV on Beike platform excluding Beijing and Shanghai increased sequentially by 23% and the 20% month over month, in May and June, respectively.

In June, existing home sales volume, excluding Beijing and Shanghai, rebounded to 105% of the average transaction volume of 2021, and the year-over-year decline narrowed to2%. Transaction volume of the 21 major cities, such as Chengdu, Suzhou, Hangzhou and Taiyuan, surpassed the 2021 average level in June. Cities such as Qingdao, Wuhan, Hefei have also rebounded to a level similar to 2021 average. We expect that in the second half of the year, the key second-tier cities will quickly return to year-over-year growth given the continued introduction of the easing policies and stabilizing market sentiment.

For Beijing and Shanghai, there were significantly impacted by COVID in April and May, but they delivered strong market resilience in June with the transaction volume rapidly picking up as the pandemic came under control. Transactions volume for Beijing and Shanghai in the last week of June returned to 2021 average levels. This is a very good signal.

We expect that in July, Beijing and Shanghai will benefit from the release of the pent-up demand caused by the pandemic disruption and that the monthly transaction volume is likely to return to year-over-year growth. Starting from the fourth quarter, Beijing and Shanghai will enter a healthy and normalized range in terms of transaction volumes, together restoring the confidence in existing home market nationwide.

For the recovery pace of national existing home market. As we have repeatedly emphasized, the China real estate market is transitioning from predominantly new home driven to the existing home driven. The recent emergence of a series of problems in the new home market will divert a substantial amount of the demand to the existing home market. This is increasingly evident in a number of key second-tier cities.

For example, in Wuhan, existing transactions accounted for 40% of the total transactions in the first half of the year, compared to roughly 30% in 2020. In Zhengzhou, the proportion of existing home transactions increased to nearly 38% in the first half of 2022, from 28% in 2020. It is certain that the existing home market will continue to recover on a greater scale in the second half of the year.

We normally break down the entire cycle of the real estate transaction into four stages - the down cycle, including the stage of the price stable and the volume down, and the price-volume both down. The up cycle includes the stage of price stable and volume increase, and the price and the volume both up. During the past half year, the existing home market has started to shift from hovering at the bottom towards the recovery, while some strong second-tier cities have gradually entered the recovery stage.

It may take more than six months for the market to fully recover in this round. Beike Research Institute data demonstrates that the overall] existing home sales market delivered a year-over-year growth in July. The August market was temporarily impacted by the unusual high temperatures beyond the normal seasonality, but this will not change the recover trajectory.

We expect the home prices in some weaker second-tier cities to stabilize in this Q3, while the home prices in the third and lower-tier cities will be stabilized by the end of this year. Okay, thank you.

Very helpful. Thank you so much, Tao Xu.

Thank you.

Thank you. One moment. Our next question comes from Harry Cheng with Citi. Your line is open.

(Spoken in Chinese). My first question is about mortgage boycott and the provision for the receivables. Starting from 9 June, there has been mortgage boycott for new homes, with construction suspended in various cities in China. Could management share your views of the impact for Company's business. Besides, could management give us an update on collection and the provision of the account receivables?

My second question is to ask management's views of current new home markets and the outlook after local governments find tools on the second quarter of this year. Thank you.

Hello, Harry. Glad to hear from you. Let me address your first question. Firstly, we want to continuously reiterate that it is the bank and the risk of mortgage payment revolt threats. There is no direct impact on Beike. Most of the developers suffering from the mortgage revolt were identified by us early on as high-risk. So we have made sufficient bad debt provisions for the receivables concerned.

Secondly, stalled new home construction and the mortgage payment suspension are the events that happened under the extraordinary circumstances at extraordinary times, and we believe the Chinese Government has sufficient capability and the determination to resolve the issue. Recently, from our observations, local governments in several cities already implemented various initiatives to ensure the project delivery, and as a result, multiple projects with the potential mortgage payment revolt risk resumed construction.

Under most circumstances, home buyers halt mortgage payments only when the new home construction is stalled as a protest to get construction to resume, rather than refusing to pay outright. We also believe the mortgage payment suspension will prompt local governments to help the industry and address its difficulties at a faster pace and stabilize the consumer expectations, which will be instrumental for the industry to return to its normal operation.

Thirdly, if the mortgage payment suspension were to spread, it may indeed negatively affect new home market sentiment in some cities and disrupts the new home market recovery in the second half of this year. This is very bad. However, as existing homes, do not carry any risk of the stalled construction. They may fulfill the spillover demands from the new home market, which could benefit Beike, given our wider presence in the existing home market and existing homes' higher profitability compared with the new home.

It could also offsets to some extent the mortgage payment suspensions' negative effect on the new home market. For Beike's new home bad debt provision, we have made adequate bad debt provisions for the new home receivables. At the end of Q2, our cumulative balance of the bad debt provision was RMB2.21 billion, covering 31% of the original value of the corresponding total receivables. Especially for the 41 high-risk developers, including Sunac, we made a bad debt provision at the upper limit of 83% of their historical unsecured receivables balance cumulatively, amounting to RMB1.32 billion.

We made a bad debt provision of 49% of the receivable of a dozen developers and projects with a cumulative amount of RMB160 million. As to the remaining developers who are at a low risk, we also made a bad debt provision at a ratio of 10% to 20%. We believe the current identified list of the property developers with the high bad debt provision already covered nearly all the high-risk developers in the industry, with little chance of incurring subsequent large bad debt provisions.

While making a sufficient reserve against the bad debt, we have also consistently reinforced the collection management of the receivables. In the second quarter, we collected a total RMB8.45 billion of new home sales receivables, 1.27 times of the RMB6.67 billion new home sales revenue in this quarter.

The new home DSO of the quarter also fell from 152 days in the first quarter to 108 days in this quarter. At the same time, we have maintained our selection criteria and risk control mechanism for collaboration with developers. Iterated the developer risk evaluation models, optimized settlement terms and increased the percentage of projects with developers' commission in advance, creating a favorable condition for the subsequent receivable collections.

In addition, we incorporate with new home receivable quality into our manager's performance evaluation system at every level. We believe these initiatives combined will consistently lower the collection risk of our new home receivables.

Regarding your second question, I'd like to say in the first half of this year, the national new home market was weak, both on the supply and the demand side. The GTV of Q2 new home sales from the National Bureau of Statistics recorded a year-over-year decline of 36%, while the GTV of CRIC's top 100 real estate developers fell by 53.4%.

Developers' investment confidence was weak in most cities. The industry was in the deep water, faced with the sluggish consumer demand, the pandemic resurgence and the mortgage payment boycott. While there were some positive changes in the new home market since May, the number one is the market recovery propelled by multiple parties.

Starting in May, stepped up local supportive policies, developers racing for the half-year performance and the catalyst of the holiday have brought a series of positive changes to the market. Positive changes verified by the front-end numbers.

The numbers of the offers to buy new home on Beike platform achieved consecutive growth in May and June, up 50% and 27% month over month respectively. Beike's new home onsite sales index in 50 key cities has also risen for two consecutive months and has come out of the freezing cold range. Also, active promotion by developers, the channel penetration rate in the second quarter increased significantly quarter over quarter.

The new home market recovered in June with a year-over-year decrease narrowed down to 23% according to the National Bureau of Statistics. There are still uncertainties in the new home market in the second half of the year. The macroeconomy and the income expectation are under pressure.

the geopolitical situation is facing uncertainties and there are repeated pandemic resurgences. Mortgage payment boycotts, developers' debt defaults and uncertainty in new home project delivery are affecting the restoration of the market confidence.

The short term overdraft of the new home demand in certain regions is also a constraint for the recovery of the new home market. The industry is still facing the huge downward pressure and the recovery of the new home market will take time. We can monitor the subsequent promotion of developers and effort on the policy relaxations to estimate the slope of the recovery trajectory and the sustainability going forward.

There were short-term corrections in the new home sales in July and August as developers' middle year promotion effect moderate from June. Meanwhile, the combined efforts of usually high temperature] in China this summer and also the mortgage payment suspension have also led to a notable decline in the new home market in July and August compared to June.

Starting from September, we expect developers to again enter into an active promotional cycle under the pressure of the full-year sales target. Therefore, the market is more likely to enter to a weak recovery period by then. Thank you, Harry.

Thank you, management.

We have a question from Steven Tsai with Morgan Stanley. Your line is open.

(Spoken in Chinese). Thank you, management, for taking my questions. My question is about the home renovation business. Could management share with us if there is any update on the business strategy or geographic expansion plan post the consolidation of Shengdu? And if there is any guidance on this business for the coming quarters?

Also, is there any update on the timing of your launching platform model for renovation which you mentioned in 2025 or 2026 before? Any milestone related to that that you are looking at internally? Where are we now and what's the biggest bottleneck you think? Thank you.

(Interpreted) This is Stanley, let me quickly address your question. So, firstly, as I mentioned during the prepared remarks, during the second quarter if you look at the leading industry companies in the home renovation and furnishing business has been declined over 20% year over year, but whereas our home renovation and furnishing business actually has increased significantly on a year-over-year basis.

So, the revenue is the one dimension as we mentioned. Another dimension we can describe for that business is if we look at the referral rate of our core business, which is the housing transaction business. So, when we look at the second quarter result, we actually see more than 25% of the referring and conversion coming from the housing transaction business already.

In some of the specific cities such as Beijing, the conversion rate actually also has been reached to over 80% or even higher. Some of the cities didn't do very well, but we do believe there is a huge space to continue to improve. So, overall, we do believe the customers' referral and the conversion from the main business is also another dimension to look at the progress for that.

So, when we look at the future revolution for the home decoration and furnishing business, we actually look at in the four business elements or the three major reasons. Firstly is coming from the policy side. So, we recently noticed four of the central government department, they actually been drawn to promote so-called high-quality of the living trends into the nationwide. So, that will provide the additional policy drivers for the overall industry environment.

Secondly, we look at overall so-called industrial partnership as well as the industrial correlation, which is linked into the home decoration and furnishing business. We look at both the upstream and downstream, so from the downstream, rather than the existing home, we should have the continued furnishing and the improvement of the services of the demand.

Rather than that, we also noticed for the new home, we also have the decoration and furnishing demand, so we do believe that it will create additional market opportunities.

From the upper stream, we also look at the correlation of the partnership from the home decoration business itself into the furniture and home furnishing sales business together.

We do believe that the leveraging of the good quality of the home decoration business, that means that will bring the additional potential to further boost our furniture and the home furnishing business going forward.

Thirdly, from the consumer's perspective, they all prefer more full coverage and one stop services, which is from the previously pure construction services into the full coverage of the services, which is covered from both of the construction part as well as the home furnishing and decoration business as a whole. So, we do believe by promoting of those kind of full services, it also will create additional opportunity for us.

So looking into the future development for the home decoration and furnishing business, we do believe there are three quantified elements as well as additional, more exciting and quantified of the elements to think about that part of business.

So in terms of the quantified of the elements, so firstly we look at the scale. Until now we don't see any of the companies in the industry can surpass RMB10 billion scale in the home decoration and furnishing industry in China, right. So whether there could be one sole company, which its annual revenue could surpass RMB10 billion, we do believe that is one of the quantified of our elements.

Secondly is we look at, as I've mentioned before, is conversion rate from the core business into the home decoration and furnishing business. We do believe in the future these kinds of customer referrals and conversion rate could surpass 40%, from our housing transaction business into the home decoration and furnishing business and it will be continued growth. So that's what would be the second quantified of the elements.

The third factor, quantified factor, is the correlation between the home decoration business with furniture and the home furnishing sales. Starting from the beginning of this year we would look at the correlation is about 1.08. But is has been increased to roughly 1.1 and we do believe the mid- to long-term goal will be 1.5, which means every $1 of construction revenue will come with roughly $0.5 of furniture and home furnishing sales of the revenues. So that is -- we do believe is three of the quantified factors we can continue to monitor.

Beyond that we do believe another quantified of the factors is, as you mentioned, is a platform business model. Because if you look at our execution in the past two decades, through Beike's successful execution, we have been proven of the platform business model in our housing transaction business.

So we do believe for the home decoration and furnishing business, definitely it also could gradually grow to the platform business model in the long-term goal. But in the next couple of years, especially in the next two to three years, we do believe we will focus our 1P business development, because we do believe there are a lot of things we can continue to grow, including the teams, maturity, including the delivery quality, in terms of supply chain, in terms of the design, in terms of the on- and off-line correlation as well as the offline sales market, or other kind of offline events. Definitely for all those kind of things, we can continue to grow and continue to show the solid progress in the next two to three years.

So we do believe, we are not in a rush to run to the platform business model. So during that kind of time, what we're trying to do is build up more solid progress for our 1P business. Then two to three years later we can gradually develop into the platform business model. That is the answer to your question. Thank you.

Back to you, Operator.

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

Thanks. Thank you for taking my questions. I have got a few questions on the cost savings. I think you mentioned in the second half you expect around RMB300 million to RMB400 million cost savings per quarter. Could you further elaborate on the Company's measures how to cut costs and improve efficiency as well as what would be the future impact of these measures on your financial performance? That would be helpful. Thank you.

Okay, thank you Timothy. As I mentioned in my previous remarks, we took a series of cost saving measures and focused on enhancing the efficiency and profitability in our daily operations in Q2. Meaningful progress was delivered, once again, reflecting our organizational strong execution and operational quality. We adjust our organization's structure and adjust the proportion of the junior and senior agents according to the different conditions in different cities and amongst the regional teams. In addition, we prioritize the existing home business and higher profit-making new home business on our city level.

In terms of the cost control, we will reform and shut down the loss-making stores and drove the rent reduction for stores and office space. With these measures, our fixed costs and expenses, as well as our city level breakeven points continue to fall.

In Q2 the fixed costs for Lianjia decreased by more than 25% year-over-year and we expect operating expenses of the saving for the housing transaction services in the second half of this year to reach up to approximately RMB300 million to RMB400 million in every quarter and the absolute dollar amount of the operating expenses to be decreased to the same level of the second half of 2019. As we caried out further organization restructuring initiatives in Q2, we have gained larger operating leverage and profitability for our housing transaction services against the challenged market environment.

Our Shenzhen business, for example, turned to profit in June for the first time in past 15 months in face of the very weak market. Another example is the part of effort will also reflect in the improvements of our contribution margin of new home business, which was at a two-year high of 24% contributed margin in Q2 despite the still sluggish new home market. Followed by the spike in the market recovery in the coming quarters, we believe our profitability with the housing transaction services will gradually recover in the second half of this year. Thank you.

Back to you, Operator.

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

Yes, 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, Thank you and goodbye.

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.