Fangdd Network Group Ltd (DUO) 2021 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to FangDD Network Group Limited First Quarter 2021 Earnings Call. (Operator Instructions) Please note that this event is being recorded.

Now I'd like to hand the conference over to your speaker host today, Ms. Linda Li, the company's Director of Capital Markets. Thank you. Please go ahead, Linda.

Thank you, operator. Hello, everyone, and thank you for all -- all joining us on today's call. The company has announced its first quarter 2021 financial results today. Our earnings release is now available on the company's IR website.

Today, you will hear from our Co-CEO, Mr. Zeng Xi, who will start the call with an overview of the current industry dynamics and the details of our development strategies in the quarter. Afterwards, our CFO, Mr. Pan Jiaorong, will go over the financials, before we open up the call for questions.

Our management team will deliver their remarks in Chinese, and I will provide English translation.

Before we continue, we would like to refer you to our safe harbor statement in our earnings call release -- earnings press release. Please apply this call as we will be making forward-looking statements. Please also note that we will discuss non-GAAP measures today, which are more thoroughly explained and reconciled to the most comparable measures reported under the Generally Accepted Accounting Principles in our earnings release and filing with the SEC.

With that, I will now turn the call over to our Co-CEO, Mr. Zeng Xi. Please go ahead, sir.

(foreign language)

Let me translate this part.

[Interpreted] Hello, everyone, and welcome to our first quarter 2021 earnings call. I would like to start off the call with a view -- review of the real estate market in the quarter. We'll begin -- or we observed a series of changes and opportunities.

First, the scale of the new construction properties is massive and has maintained its growth. Under the guidelines of the 3 red lines policy, real estate developers are increasingly focused on improving their turnover rates and utilizing various channels to reduce their inventories.

According to the National Bureau of Statistics, the scale of China's commercial housing sales reached RMB 17.4 trillion in 2020, up by 8.7% year-over-year. Meanwhile, scale of the new construction property market continues to grow.

Looking ahead, the target growth rate for average sales in 2021 is 11.85%, according to a group of 44 developers, which is still quite a high level.

Under the guidelines of the 3 red lines policy, developers are focused -- will focus more on enhancing their ability to leverage various market channels in order to reduce their inventories and further accelerate their turnover rates.

Second, the regulations implemented, the loan restrictions -- purchase restrictions and the sales restrictions as well as centralized line of sales, which had led to a rapid decline in developers' profit margins. As a result, developers' home demands now include lowering their market expenses and reducing their reliance on distribution channels.

According to the wind data, the real estate industry's overall net profit margin in 2020 was 9.85%, down by 1.49 percentage points to the prior year period.

Meanwhile, the industry's net profit margin continued to decline in 2020 to reach its lowest level since 2015. Introduced in the first quarter, the minister -- the Ministry of Natural Resources' centralized land sale, online supply has continued to drive up land price. According to Kerry data, it monitors city, the premium rate of the land transaction jumped to over 25% in April 2021.

Against the backdrop of declining net profit margins, increasing land cost and the rising rates in the sales channels for new construction properties, developers' increasing need to improve their efficiencies while reducing their costs.

Thirdly, developers are actively trying to transform their business models from real estate development to real estate services. Now to accomplish this, developers are focused on strengthening their digitalization capabilities while cultivating more synergies and the derivative within their digital services as the nature of the real estate industry centers around property inventories.

The profit drives of the real estate accountants are shifting from property development and sales to asset operations and services. This transition requires real estate companies to transform their traditional development businesses into a more refined, service-oriented model and thus significantly depend on their company's digitalization capabilities. Typical real estate companies, such as Country Garden, Seazen Holding and Longfor Properties, have all set up a digital development centers to build their own digital ecosystem.

Fourth, in the resale property market of the first- and second-tier city, commission-based and city renovation businesses are starting to mature and it generates consistent profits.

As China's real estate market continue to mature, resale property transactions will become the main growth driver for real estate marketing in increasing number of cities. For example, as the only mega city in Yangtze River Delta, Shanghai's resale property transaction volume was RMB 1.2 trillion in 2020, accounting for 16.5% of the country's total resale property transaction volumes.

Shanghai's resale properties -- populations rate were 2.7%, which was also much higher than the national average of 1.1%. In fact, Shanghai ranked first in the country in terms of the market volume and transaction activities in 2020.

Also in the Yangtze River Delta region, Nanjing, Hangzhou and Ningbo were among China's top 10 cities in terms of resale property transactions in 2020. With Shanghai as its leader, the Yangtze River Delta region's resale property market has shown immense potential for the future growth of the commission-base and city renovation businesses.

In the first quarter of 2021, we remained committed to our growth strategies and thus continued to focus on the development of our platform and the 3 core businesses. By leveraging our platform, we successfully upgraded our new construction property business to provide real estate developers with superior services.

Meanwhile, by utilizing our technology-enabled franchise system, we also accelerated the off-line expansion of our resale property business. We remain focused on providing an open, independent and technology-enabled platform to our partnered agencies while offering them a complete process of standardization SaaS solution to enhance their stickiness.

In the first quarter, we had 221,000 active agents on our platform, up by 1.2% from the first quarter of 2020 during the pandemic.

First, for our new transaction property sale bridge business, we remained focused on utilizing our asset-light model to improve our efficiencies and profitability. Currently, our competitors are boosting their closed-loop transaction volume mainly due to the use of the advanced commission payments. However, we have chosen not to use our own fund for advanced commission payment.

This decision impacts the number of active agents on our platform as well as our closed-loop new transaction property transactions volume, leading to a direct decline in our new transaction property revenue growth in turn. Nevertheless, we believe that our decision to forgo the advanced commission payments will allow us to avoid the bad debt and low IRR from advanced commission payment in the long term, which is more conducive to the healthy development of our company going forward.

In the first quarter, we actively searched the financial supply chain for a new path to advanced commission payments. Meanwhile, we strengthened the service and operational efficiency of our platform distribution, allocated our resources to key projects and pursued the effective growth of our gross profit.

In the first quarter, the number of new construction property projects on our platform was 1,941 and distribution revenue was RMB 270 million.

Second, we launched our property cloud SaaS solution to address developers' increasing needs for digital marketing solutions. In the first quarter, we continued to refine and upgrade our SaaS solution as well as launched pilot partnerships with thousands of key developers. We expect this partnership will start generating revenues in the second quarter of 2021.

In the first quarter, we introduced a series of new features to enable developer to offline sales teams to quickly assess agent services. This data includes smart agency recommendations, agency information and agent online stores.

And meanwhile, we still rolled out multiple new features on our property cloud app, including private network marketing tools to help support developers with the generation of leading streaming and soft -- short-form video continent (sic) [content] for customer acquisitions as well as the creation of online and VR property viewings.

As a result, we continue to expand our cooperation with several key developers in pilot project, billings. As a result, billings through our public cloud solution by the end of the first quarter, we had adapted partnerships to our property cloud solution with 24 of the top 100 real estate developers in China, including 22 of the top 30 domestic real estate companies such as the Country Garden, China Vanke, Sunac China Holdings and the Poly Group -- China Poly Group, Greenland Holding and R&F Properties.

Third, our resale property business initiatives have expended rapidly. In the first quarter, our closed-loop resale property GMV reached RMB 13.56 billion, representing an increase of 81.8% from the first quarter of 2020.

In addition, Yuancui pioneered an industry-leading technology-enabled franchising system. While we established an innovative service model in the resale property transaction service space through our Tinghaozhu project. Both of these initiatives achieved rapid business expansions in the period.

During the first quarter, revenue from our resale property segment reached RMB 18.8 million and increased by 183.6% under increased store basis. Looking ahead, we expect this segment to maintain its rapid growth trend in the quarter -- in the second quarter of 2021.

In the first quarter, Yuancui expanded its Shanghai-centered network to cover 565 cooperatives and franchise agencies national-wide as well as 5,086 agents. Meanwhile, there are 41 resale property transaction service centers, which provides post-transaction service for 1,441 partner -- partnered agencies.

In the first quarter, our Tinghaozhu products began to gradually expand its service scale with a single-month revenue exceeding RMB 5 million for the first time ever and its property asset premium rate reaching 15% to 20%.

Meanwhile, our platform average turnover period of the property listing was 22 days, while our property appreciate -- appreciation rate and the transaction efficiency was also significantly higher than the industry average level.

As we continue expanding our businesses, we also recognize the importance of corporate governance. Now please allow me to provide a few updates for everyone on this mentioned critical front.

During the first quarter, we further optimized our management team, which was in line with our business development. In resale property business, we appointed Mr. Liu Tianyang to the position of Senior Vice President. As a young industry leader and Chairman of China's real estate agent union, Mr. Liu will keep charge of our resale property business.

Our new business initiatives under the Yuancui business. In this role, Mr. Liu plans to focus on integrating both internal and external resources to accelerate our business expansion.

For our new construction property business, we have appointed 6 outstanding talent from generation Z to serve as general managers at our operations in different cities. This appointment will further enhance our ability to adopt to arrive to digital evolution of the new construction property market.

Lastly, please allow me to share an update on our current outlook and expectations. For second quarter of 2021, we will optimize our product and services to maintain the stable development of our new construction property business as well as improve our transaction efficiency and gross margins. Therefore, we expect our new construction property business revenue go between CNY 340 million and CNY 370 million in the second quarter.

As we continue to establish more collaborations with real estate developers to our property cloud SaaS solutions, we expect to help 50 developers to further strengthen our service capabilities and launch more offline partnership with key developers in 18 cities. As such, we expect our SaaS solution to start generating revenues in the second quarter of 2021.

As our resale property business is entering a period of growth and development, we believe that this business' store scale and the closed-loop GMV will achieve positive growth in the second quarter. Meanwhile, we expect that our resale property business will generate revenues in the range of CNY 40 million to CNY 50 million in the second quarter.

Based on these expectations, we are currently forecasting our total revenue to be between CNY 380 million to CNY 420 million in the second quarter of 2021. This is based on our current review of the market environment, which are subject to change.

With that, I will turn the call over to our CFO, Ms. Pan Jiaorong, to review this quarter's financial result.

(foreign language)

[Interpreted] Thank you. I will provide a close look into our first quarter financial results. Before I begin, please note that all numbers are in RMB terms unless otherwise stated.

Revenue in the first quarter of 2021 increased by 6.9% to CNY 291 million from CNY 272.1 million in the first -- in the same period of 2020.

During the quarter, we continued to optimize our revenue mix and prioritized the generation of revenue from value-added services and new business initiatives such as our SaaS solution for various platform participants. And at the same time, in response to market competition, we are actively exploring digital supply chain financing product to fulfill the market demand for advanced commission payments.

Cost of revenue in the first quarter of 2021 increased by 15.7% to CNY 257.7 million to -- from CNY 222.7 million in the same period of 2020. This increase was due to higher commission fee payable to agent for the services they rendered resulting from the increase in commissions from transactions. In addition, we also recorded increased costs related to the various SaaS solutions that we offer to marketplace participants in the first quarter of 2021 to further diversify our revenue -- our future revenue streams.

Gross profit in the first quarter of 2021 decreased by 32.6% to CNY 33.3 million from CNY 49.4 million in the same period of 2020.

Gross margin in the first quarter of 2021 decreased to 11.4% from 18.2% in the same period of 2020. On a sequential basis, gross margin in the first quarter of 2021 increased by 3 percentage points.

Going forward, we will continue to focus on developing SaaS solutions and improving our efficiencies to expand our gross margin.

Operating expenses in the first quarter of 2021 decreased by 25.9% to CNY 140.3 million, which included share-based compensations expenses of CNY 11.9 million from CNY 189.4 million in the same period of 2020, which included share-based compensation expenses of CNY 26.4 million.

Sales and marketing expenses in the first quarter of 2021 increased to CNY 37.9 million from CNY 1.4 million in the same period of 2020. This increase was mainly due to our increased spending on brand promotion and marketing activities related to our new SaaS solutions that we offered to various platform participants during the period.

Product development expenses in the first quarter of 2021 was CNY 37.3 million compared to CNY 95 million in the same period of 2020. This decrease was due to the decreases in share-based compensation expenses and personnel-related expenses following our decision to shift our focus from expanding our product development team to optimizing our product development team's operating efficiency and prioritizing the development of our SaaS solutions.

General and administrative expenses in the first quarter of 2021 was CNY 65.2 million compared to CNY 93.1 million in the same period of 2020. This decrease was due to the decrease in the -- in share-based compensation expenses and our implementation of cost control initiatives.

Net loss in the first quarter of 2021 was CNY 104.8 million compared to CNY 136.4 million in the same period of 2020. Non-GAAP net loss in the first quarter of 2021 was CNY 93 million compared to CNY 110 million in the same period of 2020.

Basic and diluted net loss per ADS in the first quarter of 2021 was both CNY 1.27. In comparison, our basic and diluted net loss attributable to ordinary shares -- ordinary shareholders per ADS in the same period of 2020 were both CNY 1.75. Each ADS represents 25 of our Class A ordinary shares.

As of March 31, 2021, we had cash and cash equivalents, restricted cash and short-term investments of CNY 872.3 million; short-term bank borrowings of CNY 374.5 million; as well as unutilized bank facilities of CNY 495.5 million.

For the first quarter of 2021, net cash used in operating activities was CNY 4.8 million.

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

(Operator Instructions) Your first question comes from the line of Lisa Thompson from Zacks Investment.

Congratulations on a good quarter.

Thank you, Lisa. Thank you.

I'd like to ask a little bit of -- okay. I would like to ask about, you talked about getting supply chain financing. How far off would that be to put that in place? And how much of an improvement do you think that would make to your current business?

Okay. Let us introduce your questions to our managers. (foreign language)

Our CFO will give you the answer to your questions. Thank you, Lisa.

(foreign language)

[Interpreted] Last year, cooperation with the banks of supply chain financial, we have cooperated with about 7 banks. And it's about CNY 2 billion. And we will go -- sorry.

Sorry. No, go ahead.

Yes, that's the answer from our CFO. Is that clear for you?

So you have it in place now and you're already using it with 7 banks? Or is that something new?

(foreign language)

(foreign language)

[Interpreted] Okay. It is also expanding our cooperated institutions, and the form of cooperation, including the ADS form. So we still try to find some new ways to do this supply chain financial.

And how much do you think that will help business? Will it have a big impact or not so much?

(foreign language)

(foreign language)

[Interpreted] Okay. In the short term, the interest of these large companies have forced the market to expand the coverage of advanced commission payments, increased -- and increased commission rates and stimulated the price war between agents and agencies. For the long term, we used the company's own fund for advanced commission payments will boost its closed-loop transaction of new transactions, a transaction -- new construction properties.

However, considering the bad debt -- bad debit from commission repayment and the low IRR of the payment, the company will focus on this supply chain financial product. This product is a combination of the risk control and development. These are all high-quality brand developers and high-quality project, we will use these products as it will give better impact to our business, but we have to do a great job on the risk control.

Okay. About the second quarter, I expect -- we should expect increasing gross margins, but are you also going to be spending or will the net loss decrease from Q1?

(foreign language)

(foreign language)

[Interpreted] In the second quarter, we will adjust a proportion of the revenue in our business structure. Like SaaS, we began to generate revenue. For the second -- for the resale property construction business, we will also grew rapidly.

For the new construction business, construction business, we're also pursuing efficiencies like we mentioned in the year -- in the script, gross profit will be raised. The company's profitability will go up.

Okay. Well, that's good to know. Given what you know now, what do you think the revenue level for the quarter would have to be to be at breakeven? And what gross margin does that assume?

Lisa, sorry. The -- we didn't get quite full your question. Could you ask that again, please? Thank you.

Okay. Given what you know now, what quarterly revenues would you need to break even? And what gross margin assumption is that?

(foreign language)

(foreign language)

[Interpreted] It's not quite convenient to answer with respect to a specific forecast now. The proportion of the SaaS solution and the resale property constructions of our business, the gross profit is relatively high. So we can announce that in the future. Our gross margin will be increased and the revenue will go better.

(foreign language)

[Interpreted] Increasing the investment in the SaaS business and the high-margin investment in the resale construction business, I think this is a big market and that, that is the window of the digitalization. So we think in the future, after we've more invested in these 2 rapid increased business, we still -- we will enjoy a better earnings and future -- in the future.

Okay. As far as the SaaS business, do you feel already that it's going to be successful? Or is there still some risk that customers won't be interested?

(foreign language)

(foreign language)

[Interpreted] We believe that in the new construction business, the market has entered sales competition. And the market scale will enter a bottleneck period and the developer build its own digitalized channel, but we will insist to our -- per our gross profit, gross margin and distribution effect -- efficiencies. And that way, invite more in the SaaS solution, we'll invest in this field of R&D and market-oriented production. But innovation is still uncertain, but we still have confidence about this field.

In the resale of construction business from the cultivation period to the growth, it has stayed from the cultivated period to growth period. The urban renovation -- the city renovation has also entered to a state of both income and profit growth. So we think that is the answer for your questions.

(Operator Instructions) As there are no further questions, so with that, ladies and gentlemen, we will conclude our conference for today. Thank you for participating. You may all disconnect.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]