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l  We endorse Beike’s way of practicing SaaS, which combines traffic (frontend), SaaS (mid-end) and financing (backend) in one ecosystem. We believe this maximizes customer stickiness and thus switching cost;

l  Close to 2/3 of China’s housing stock isn’t transactable. Releasing these housing stock through upgrade and floating presents a major opportunity;

l  We rate the stock Buy, with a US$76 PT.

 

Macro and competitive headwinds present buying opportunity

Government efforts at cooling down property market have already suppressed Beike’s existing home transactions and we expect the similar effect on new homes. Developers have announced entry to brokerage. However, China’s housing stock per household is still low and urban redevelopment demand is huge.  Globally developers’ vertical integration to brokerage has neither succeed nor being significant in the past. Real estate brokerage is fundamentally a retail, service and people business, thereby very different from development.

 

Traffic+SaaS+financing has advantage for short-chain sectors

We argue that only when traffic and financing are very difficult to digitize can SaaS-alone be an effective means to commercialize. Home transaction is a short-chain business and Beike has already established an ecosystem of front-end traffic, mid-end productivity and backend financing. Beike’s competitive differentiation also rests on vigorous business process and enforcement, as well as last-resort/escrow ability derived from its in-house market share.

 

Brokerage penetration and take rate can rise

New home sales will increasingly use brokers, not only to quicken developers’ cash cycle, but also to meet second time home buyers’ need for consultation. Beike’s consolidation of the broker market will also lead to take rate increase, similar to what single listing has done in developed markets.

 

Valuation is attractive…Time of accumulate the stock

Trading at 30x 2021 PE, we expect Beike to grow non-GAAP operating profit at a 3Yr. CAGR of 54%.  Initiation with BUY with PT of US$76.

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