Fangdd Network Group Ltd (DUO) 2019 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to Fangdd Network Group Limited's Third Quarter 2019 Earnings Call.

At this time, all participants are in a listen-only mode. After the management's prepared remarks, we will have a question-and-answer session. Please note, this event is being recorded. I'd now like to hand the conference over to your speaker/host today, Ms. Jing Meng, Capital Markets Director of the company. Please go ahead, Ma'am.

Thank you, Operator. Hello everyone and thank you all for joining us today. Fangdd announced its quarterly financial results after market close today. Our earnings release is now available on the company's I.R. website.

Today you will hear from our Chairman and the CEO Mr. Yi Duan who will start the call with a review of recent company highlights and the current industry dynamics. He will be followed by the company's COO, Mr. Xi Zeng who will address our development strategies in more detail. Both Mr. Duan and Mr. Zeng will deliver their remarks in Chinese, and I will provide the English translation.

After I will go over our third quarter financials before we open up the call for questions. Before we continue, I would like to refer you to our Safe Harbor statement in our earnings press release, which applies to this call as well as we will be making forward-looking statements. With that, I will now turn the call over to our Chairman and the CEO, Mr. Yi Duan. Please go ahead, Sir.

(Speaking in Foreign Language)

Hello everyone and welcome to our third quarter 2019 earnings call, which is our first earnings call as a public company following our IPO in November.

(Speaking in Foreign Language)

First, I would like to highlight some key metrics that demonstrate our leadership as China's largest online real estate marketplace. As of September 30, 2019, our platform boasted approximately 1.16 million registered agents, up 36.5% from 850,000 as of September 30, 2018. In particular, in the first nine months of 2019, active agents on our marketplaces reached 355,000, representing a 41% a year-over-year increase. We also recorded 51,000 agents that completed transactions on our platform, which also known as closed-loop agents during the first nine months of 2019, up 114% from the same period of 2018.

In the third quarter of 2019, our total GMV of closed-loop transactions increased by 75% year-over-year to RMB55.1 billion, while our revenue increased by 71.9% year-over-year to RMB948 million. We also improved our profitability in the third quarter as our net income grew by 204.9% year-over-year to RMB80.3 million.

(Speaking in Foreign Language)

Before, our COO, Mr. Xi Zeng elaborates on the main drivers of our robust growth, I would like to explain the current macro dynamics of China's real estate industry, which will help to provide a clearer picture of the development and the implementation of our business strategies. Let's take a moment to consider a few key metrics from the National Bureau of Statistics of China, Frost & Sullivan and Vanke research institute that helped to illustrate the four emerging trends in the Chinese real estate market.

(Speaking in Foreign Language)

After 20 years of development, as housing prices in China cease to constantly rise and the transaction volumes stabilize, we are embracing our market that centers on transaction services, instead of the developments of new housing projects. According to Frost & Sullivan and the Vanke research institution, the total market size of China's real estate property transaction market is expected to remain stable at approximately RMB20 trillion. Transactions of new property and the secondary properties are expected to account for RMB13 trillion and RMB5 trillion, respectively.

(Speaking in Foreign Language)

In addition, the penetration rate of agent services in China's RMB20 trillion housing market have continued to increase. According to Frost & Sullivan, the penetration rate of agent services for new property transactions increased to 15.3% in 2018 from 10.7% in 2016. As real estate developers in China are increasingly dependent on agent services, we believe there are immense market opportunities for the solution that can improve agents' service capabilities.

(Speaking in Foreign Language)

According to Frost & Sullivan, there were approximately two million real estate agents in China as of the end of 2018. In the future, as the market for transaction services in China continues to develop, the number of real estate agents and the quality of their services are also expected to grow significantly.

(Speaking in Foreign Language)

With the increasing demand for agent services, we expect that agents will come to rely upon online and SaaS solutions to improve their service efficiency. We believe that SaaS solutions leveraging technology and data will be the key to agents improving their service capabilities going forward.

(Speaking in Foreign Language)

Now I will let Mr. Zeng provide more details on our growth strategies and business developments in the third quarter.

(Speaking in Foreign Language)

Thank you, Mr. Duan, and hello everyone. I will now explain our growth strategies in three key areas based on our observations and the perceptions of market trends.

(Speaking in Foreign Language)

First of all, we are committed to the continuous optimization of our SaaS solutions. In order to attract more agents to our marketplace and ensure that they are effectively capitalizing our transaction opportunities. We will provide our services free of charge to all real estate agents.

(Speaking in Foreign Language)

Secondly, we are also actively expanding our property listings to create more business opportunities for agents, which will help us to generate higher GMV and revenues.

(Speaking in Foreign Language)

And thirdly, through our ability to help real estate sellers to improve their sales performance, we continue to attract more real estate sellers onto our marketplace to list their properties. Consequently, we are able to provide agents with access to more properties. The combination of such assets and our efforts to continually enhance our A.I. algorithms helped us ensure that our agents are provided with optimal leads and complete more transactions.

(Speaking in Foreign Language)

Now let me explain our first growth strategy at the level of business operations. In the past three quarters, we have remained committed to the continuous optimization of our SaaS solutions. We provide agents with free access to our solutions, allowing us to attract more agents onto our marketplace to conduct their business. Our third quarter operating metrics reflect the success of this strategy.

As of September 30, 2019, we had accumulated approximately 1.16 million registered agents on our platform, which accounted for over half of the total real estate agents in China. By constantly updating and improving the capabilities of our SaaS solutions, we have further strengthened our competitive differentiation. We are now developing online shops for real estate agents that will include a series of innovative features.

For example, our housing sales via WeChat will enable agents to connect with and manage potential clients in their social media network through automatically generated posts and the documents. These functions also utilize big data analysis to produce client profiles for agents on our platform.

In September 2019, over 50,000 agents used this feature to reach almost one million potential property buyers. As for real estate agency owners, we also rolled out new features that helped them to supervise their agents more effectively and thus improved their operating efficiencies. These unique value propositions have enabled us to earn the loyalties of the agents. As a result, active agents on our marketplace reached 355,000 in the first nine months of 2019, up 41% from the same period of 2018.

(Speaking in Foreign Language)

After achieving a high level of agents' engagement in our marketplace, our second strategic focus is to make it easy for more agents to conduct the business. To do this, we are taking steps to ensure that we have enough property listings on our platform to increase the likelihood that agents will facilitate a transaction. As of September 30, 2019, we listed over 2,000 new developments projects for sale on our platform. We observed that real estate developers in China have been facing increasing sales pressure in the third quarter of 2019.

To better serve their needs, we also provide them with performance-based services, which offer higher marketing efficiency and a precision compared with the traditional advertising channels. In addition, as agents on our platform currently cover 155 cities across China, real estate developers are more willing to establish strategic collaborations with us at the national level.

This year, for example, we forged a partnership with a top-five real estate developer in China in the third quarter of 2019. Following the establishment of our partnership, the developer listed all of its development projects in China onto our platform, which has further demonstrated that attractiveness of our marketplace.

With the expansion of our property listings, we are creating more opportunities for agents to complete transactions on our platform, which has enabled us to generate higher GMV and revenues in turn. Illustrating this progress, the total closed-loop GMV completed on our platform increased by 75% year-over-year to RMB51.1 billion in the third quarter of 2019. Driven by such growth, revenue increased by 72% year-over-year to RMB948 million in the third quarter.

(Speaking in Foreign Language)

Our third growth strategy is to improve transaction conversion by utilized A.I. algorithms and increasing our property listings. Due to our leading capability in facilitating property sale for real estate sellers, our platform has become the ideal destination for real estate sellers to list their properties. The expansion of our listings has successfully provided more transactions opportunity for our agents. In addition, we have continuously enhanced the capability of our A.I. algorithms to match clients with the most relevant properties and improve transaction conversions. After matching, we then utilize the profile analyses of agents to ensure that each transaction is facilitated by the most suitable agency, which has helped us to generate more transactions with higher client satisfaction on our platform.

During the third quarter, we further enhanced our algorithm to include a multi-property recommendation function. While our agent uploads the profile of a prospective property buyer, our system will automatically recommend a list of properties that meets the buyer's specific requirements. Our new function has further improved our agent's efficiency and our conversion rates for marketplace transactions. As a result, we recorded a total of 51,000 closed-loop agents in the first nine months of 2019, representing a 114% year-over-year increase compared to the same period of 2018.

(Speaking in Foreign Language)

At the same time, in order to maintain our current level of agency engagement and retention, we strive to provide a stable and attractive commission scheme for our agencies. Currently, we allocate around 70% to 80% of the total transaction service amount as commissions to our agents.

(Speaking in Foreign Language)

All our aforementioned growth strategies are built upon the expansion of our agents base and property listings. These two growth engines are the core of our business development and financial performance. With our revenue on a rapid growth trajectory and the maintenance of our growth margins at a healthy level, we continue to invest in technology enhancements to drive our operational efficiency.

(Speaking in Foreign Language)

With that, I would like to hand the call back to Mr. Duan who will provide an overview of our competitive differentiations and expectations for the coming quarter.

(Speaking in Foreign Language)

As we move forward, we will remain committed to executing our growth strategies to capitalize on the emerging opportunities in the rapid developing real estate service industry. Meanwhile, we will also focus on bolstering our co-competitors in the following three key areas to further enhance our competitive differentiation.

(Speaking in Foreign Language)

First, we aim to build an independent, secure and reliable platform for agents to conduct their businesses by leveraging our advantage as a neutral third party marketplace. Consequently, we do not hire our own agents or develop any agency services in order to avoid any conflicts of interest with these agents in our marketplace.

(Speaking in Foreign Language)

Secondly, our SaaS solutions can optimize the efficiency of agents and to create a strategic advantage for our platform. We are continuously refining our offering for agents to improve their services, including, for example, the development of infrastructure like property and the agency registries. Moreover, in the third quarter, our optimized A.I. algorithms enable agents to engage their clients in real-time through the Internet to learn about their preferences and recommend suitable properties.

(Speaking in Foreign Language)

Finally, we are dedicated to improving the efficiency and the capabilities of our agent service teams through the development of internal management tools. In the third quarter, for example, we launched our instant messaging tool for agents to discuss their needs with our agent service team online and receive immediate responses. Such tools have further improved our effectiveness in providing services to agents. Each member of our agent service team is now capable of serving over 100 agents simultaneously.

(Speaking in Foreign Language)

Looking ahead into the fourth quarter of 2019 and the full year of 2020, we believe that uncertainties will persist in China's microeconomic condition and the US-China trade war. Such uncertainties will likely result in lack of confidence in the market.

As for the real estate industry, we expect that the government's implementation of policies designed to stabilize prices for land parcel and the new properties will help the industry to remain secure. As these policies will serve to moderate price fluctuations in the market, we expect the real estate sellers and the property developers to face the increasing amount of sales pressure due to their high-turnover business models.

(Speaking in Foreign Language).

Under this market condition, the increasing sales needs of the property developers will accelerate the development of transaction services. At the dawn of the new era of transaction services, we are well-positioned to capture the enormous market opportunity and to launch our business onto a robust trajectory of growth.

That concludes Mr. Duan's remarks. Now, as the Capital Markets Director of the Company, I will provide a closer look into our third quarter financial results. Before I start, please note that all numbers are in RMB terms unless otherwise stated.

Revenue increased by 71.9% year-over-year to RMB948 million in the third quarter from [RMB551.4 million] (corrected by company after the call) in the same period last year. As Mr. Zeng and Mr. Duan mentioned earlier, our revenue growth was driven by the increasing number of agents and the property listings on our platform, enabling us to facilitate a higher commission-based GMV during the quarter.

Cost of revenue in the third quarter of 2019 increased by 69.2% to RMB749.1 million from RMB442.6 million in the corresponding period of 2018, mainly due to an increase in commission fees payable to agents for the services they rendered, which is in line with the increased commission from transactions resulting from business -- from our business growth.

Gross profit increased by 82.7% year-over-year to RMB198.8 million in the third quarter. Operating expenses increased by 39.6% year-over-year to RMB122 million in the third quarter from RMB87.4 million in the same period last year.

Let's now take a look at the breakdown of operating expenses for the third quarter. Sales and marketing expenses decreased by 71.4% to RMB3.8 million or 0.4% of total revenue in the third quarter from RMB13.3 million or 2.4% of total revenue in the same period last year.

The decrease in the sales and marketing expenses was primarily due to the reduced spending on branding promotion and the marketing activities to attract property listings from real estate sellers.

Product development expenses increased by 44.2% to RMB73.4 million in the third quarter from RMB50.9 million in the same period last year, which was primarily due to a higher personnel-related expenses resulting from the increased average compensation during the period.

As a percentage of total revenue, product development expenses decreased to 7.7% in the third quarter from 9.2% in the same period last year.

General and administrative expenses increased by 93.1% to RMB44.8 million or 4.7% of total revenue in the third quarter from RMB23.2 million or 4.2% of total revenue in the same period last year.

Such growth in our general and administrative expenses was mainly caused by an increase in personnel-related expenses resulting from an increase in the Company's employee headcount as well as the average compensation during the period.

Income from operations increased significantly to RMB76.8 million in the third quarter from RMB21.4 million in the same period last year. Net income more than tripled to RMB80.3 million in the third quarter from RMB26.3 million in the same period last year. Basic and diluted net income per ADS were RMB2 and RMB1, respectively, for the third quarter of 2019.

Turning to our balance sheet and the cash flow items as of September 30, 2019, we have cash and cash equivalents, restricted cash, and short-term investments of RMB764 million. Net cash from operating activities was RMB35.6 million in the third quarter of 2019.

Looking forward to the fourth quarter of 2019, we expect our revenue to be between RMB900 million and RMB950 million. This forecast reflects our current and the preliminary views on the market and operational conditions, which are subject to change.

This concludes our prepared remarks for today. Operator, we are now ready to take the questions.

Thank you. We will now start the question-and-answer session. (Operator Instructions). At this time, we will pause momentarily to assemble the roster.

Your first question comes from the line of Kara Zhu from Morgan Stanley

(Speaking in Foreign Language). I'm translating my question into English. My first question is, we noticed a significant drop in the Company's third quarter sales and marketing expense. Can management shed colors on the expense trend for the next quarters? And my second question is about the Company's business strategy and the market outlook for 2020. Thank you.

Hello. Hi, thanks, Kara. The first question will be answered by our Company's Financial Controller, Mr. Wen Huaxin, and the second question will be answered by our CEO Mr. Duan.

Hi. Hello, everybody. My name is Wen. And I will address the first question. We believe that -- we believe that sales and marketing expenses in relation -- in relation to the third quarter of 2019 is largely one-off and related to the sales strategy of that quarter.

And as mentioned before, the decrease of our sales and marketing expenses is largely because the Company reduced the spending on the branding and the marketing activity and so that we believe the -- in the coming future, in the years to come, the sales and marketing expenses will be increased more or less in line with the revenue for the coming quarters and that is it.

And the second question will be addressed by our CEO Mr. Duan.

(Speaking in Foreign Language).

So for the operating strategies in the future we have three main -- we have three main metrics which we will follow. First, we will continue to enhance the property listings and also we will promote the efficiency of the agents to do business such as providing more SaaS solutions to them in order to increase our operational efficiencies.

And second, we will promote the A.I. algorithms which will help the agencies to match their -- match the property listings with their clients. And the second, we believe that we will develop more products which can be monetized to give it to the agents to generate revenues to make more complete transactions on our platform.

And the second -- to answer your second question for the competitiveness aspect, first, we believe that we are independent. We will insist to be an independent marketplace. We will not hire any agents for our own.

And also we believe that in the future in China, there will be more and more independent agents to work and also more and more excellent agents will be -- will get more independence. By giving good SaaS solutions and products to the agents, we believe we will attract more agents to be on our platform. And also this means that as a third -- as a neutral third-party platform, we will get more independent agents to join us.

And also we can see that in China, the house marketing -- the house -- the residential property market is about RMB20 trillion and the new house market is about RMB13 trillion. And this number is still very large and we believe that we are the first company to attract agents to sell new property -- properties. And since we have been doing this for eight years, we have the advantage to attract -- to attract to attract the agents to join us and to do the business.

Okay, next question please.

Thank you. Your next question comes from the line of Wei Xiong of UBS. Please ask your question.

(Speaking in Foreign Language). So congratulations on the solid first set of results. Thank you, management, for taking the question. I mainly wanted to follow up on the outlook of primary housing market.

So Duan also mentioned just now that many developers will continue to face pressure to sell houses next year. So could management share more comments about how this will -- this trend will impact our commission from developers as well as our revenue sharing with agents on our platform? Thank you. (Speaking in Foreign Language).

(Speaking in Foreign Language).

(Speaking in Foreign Language).

(Speaking in Foreign Language).

So for your first question, you are asking about the take rate. We believe that the take rate now in China is still market activities, which means that in the past 20 years, the Chinese real estate developers have a large land reserve and also their model is the high-turnover model, which means they need -- they have to sell their houses in a more quicker way, which means maybe in some of the areas, the real estate developers try to raise the take rate in order to sell the house.

But we believe that in general, the take rate is around 2% to 3% on average and we also say this is very normal. And probably for some of the real developers because they want to -- in some areas, they want to sell the house more quickly and they may make a little bit rise over 2% to 3%.

(Speaking in Foreign Language).

With regard to your question on how we split commissions with the agents, first, we can see that some of the companies who are doing the similar thing as our platform, they provide a subsidized allowance to the agents to do business.

But we believe that in the real estate market if using the subsidizing way to do, it cannot last long. And also for us, we have been doing the business for eight years. We have developed a good relationship with the real estate developers as well as the agents.

And for very long time, we insist to have 70% to 80% split commissions with the agents. And we believe that agents who join us -- who join our platform is thinking for the long, long relationship, long lasting business opportunities, that's why they join us. And also, we are developing more monetization products which can help the agents to make more money. And that's the way how we retain the real estate agents on our platform. And we will not use the subsidized way to do the business.

Okay, next question, please.

Your next question comes from the line of Kai Qian of CICC. Please ask your question.

(Speaking in Foreign Language).

(Speaking in Foreign Language).

(Speaking in Foreign Language). So I have two questions. The first one is related to personal finance services to agents, how we control the risks for this kind of business. The second one is related to the new property we have acquired firstly and then sell to third party so how we would strategy this kind of business in the future?

(Speaking in Foreign Language).

(Speaking in Foreign Language).

The answers are provided by our COO, Mr. Zeng Xi. So your first question is about how we do the -- how we do the business. We can give the -- we can give the agents the commissions in advance before the real estate developers pay us the commission.

In this model actually, we are doing -- we are doing this kind of a business by getting a business relationship with the outside fund companies. These companies provide the fund and also we are -- we are as the middle to provide this -- to provide the bridge between the fund companies as well as the agents.

And for your second question, because we believe that in China now, the macroeconomic conditions are now quite clear especially in the real estate market and that's why we haven't -- we ceased to do the business model like we bought a building and then to sell the building by using our own money. You can see that in the third quarter we have already ceased this kind of business.

Okay. I think -- I think we finished the questions.

Thank you, everyone. We have now reached the end of our conference call today. Thank you, all, for joining, and now, you may disconnect.