Ep. 73 KE Holdings: China’s second-largest platform?
In episode 73 of Tech Buzz China, co-hosts Rui Ma and Ying Lu return to the typical deep-dive format you’ve come to expect, with a timely look into recently listed real estate tech platform Beike 贝壳, or KE Holdings (BEKE). In addition to talking about the two-year-young company, we explore the realities of the Chinese real estate industry, which operates completely differently from (and is arguably messier than) the industry here in the U.S. We cover KE Holdings’ founder story, the company’s relationship to traditional real estate brokerage business Lianjia 链家, and the role of government policies in developing China’s real estate sector.
Listen to find out: What are Beike’s core value propositions to its users? How does it make money, and in what ways is it similar to Redfin or Zillow? How apt is the statement “Alibaba is to retail as KE Holdings is to real estate”? Why does this opportunity exist in China, is it even more massive than meets the eye, and what factors within the local market dynamics make it possible?
Yes, Rui is still writing her e-book on ByteDance! You’ll want to get updates on it by subscribing to our newsletter, at techbuzzchina.com. As always, past transcripts and other content are also viewable at pandaily.com and supchina.com.
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And thanks to our ever-talented producers, Caiwei Chen and Kaiser Kuo.
Full Transcript
Y: Hey everyone! Welcome back to Tech Buzz China. So after the experimental episodes of the last few months, in which we had guests on instead of our typical deep dives, we are going to revert back to our old format for a bit, mainly because there are just so many headlines that have accumulated in the meanwhile, and we’ve been doing research on some of them, and it just seems like such a waste not to share it with you!
R: Yeah, there are a few companies that are highly topical, including the one we’re going to discuss today -- real estate tech platform Beike 贝壳 , AKA K-E Holdings, stock ticker BEKE -- but we’re also going to be sharing with you some industry trends that we think are ultra important to understanding China tech but we haven’t seen covered as much as they probably should be in English media. As we get more and more into the territory of companies and industries that don’t have a Western counterpart or analogue, it’s taking us more and more time.
Y: But it’s also getting more and more interesting, so I hope you find the trade-off as worthwhile as we do! And yes, today’s episode is definitely one of those things, where the company is like a mish-mash of a bunch of different things, but somehow kind of works because China just works differently. Actually, it might work the same as in your country, depending on where you’re listening from, but the Chinese real estate market has some fundamental differences from the U.S. one, which is what we know and are comparing it to.
Y: So as of recording today, August 25, 2020, KE Holdings, ticker BEKE, is trading at over $50, giving it a market capitalization of nearly $60Bn. What that number means to you depends on whether you were lucky enough to buy in at its IPO price of $20 a mere two weeks ago, when it raised $2.1Bn dollars on the NYSE.
R: Well, if you’re into paper gains, that is. But even if you aren’t, here are some reasons you might find Beike interesting. First of all, Beike is a realty tech platform, or to use the company’s own, exact words, “leading integrated online and offline platform for housing transactions and services.” Like other platforms, it likes to use things like GTV, or Gross Transaction Volume to give you a sense of its size. And the GTV that went through its platform in the first half of this year? A staggering $1.3Trn RMB, that’s $192Bn USD. For 2019 full year? A bit over $300Bn USD. When you look at the company from a GTV perspective… well, it is the second largest “internet commerce platform” just after Alibaba in China, ahead of JD.
Y: What exactly is “on” this platform? Well, nearly half a million agents and 42,000 stores covering 103 cities in China. And since, yeah, it does have a mobile app, then let’s talk about that too. 39 million monthly active users. Not bad. I mean, it’s nowhere near Zillow’s 218mm monthly uniques this past quarter, but Beike’s number is mobile only, so maybe it is more impressive.
R: Or maybe it’s just thrown in there to make you think you should value it like Alibaba. Why not though? KE Holdings booked $6.5Bn in revenues last year, with a little over half coming from existing home sales, a little under half coming from new home sales, and the rest from emerging services. Although despite the impressive headline revenue numbers, it didn’t manage to make a profit. Its operating margin last year was about negative 4%, although this year, thus far, it’s making a positive net income.
Y: Nothing like the amazing profit margins we see from Alibaba, of course, but hey, let’s throw in the last number of importance to the company. And that is the number, 2. That’s right. Technically speaking, KE Holdings is only 2 years old. The website Ke.com, is only 2 years old. The app, Beike, is 2 years old. This company, everyone, is technically just two years old!
R: OK, before you think this is another Pinduoduo-type fairytale, with a headline of 2 years to $60Bn market cap, let’s be clear. Ying used the word “technically,” because to call KE Holdings a 2 year old company would be a very inaccurate way of describing things.
Y: Right. The holding company that you’re investing into, if you buy Beike stock, is really composed of a few different pieces, and the most important one, Lianjia 链家, began as a real estate brokerage business that was founded in 2001.
R: Now at least in its founding date, it’s closer to Alibaba. But you also heard that right, Lianjia, formerly known as Homelink, began as an offline real estate brokerage business. Yeah, like a Coldwell Banker or something here in the US.
Y: If you are a very sharp-eared listener, you might think the name Lianjia sounds familiar, because we mentioned it briefly in Episode 20, when we asked if co-living startups are behind the rising rents in Beijing. Ziroom or 自如, one of the main companies we mentioned, is actually a spinoff from Lianjia. If you continued to keep an eye on this space, you probably saw that its main competitor, Danke 蛋壳, went public at the beginning of this year under the name Phoenix Tree Holdings. Just helping you connect the dots if you were sensing some deja vu from hearing the name.
R: But back to Lianjia and Beike. As founder and chairman of the board 49-year-old Zuo Hui 左晖 likes to say, KE Holdings is the union of an 18-year-old company Lianjia, and 2-year-old company Beike. Mr. Zuo, by the way, owns a staggering 42% of the company, so if this is the first time you’re hearing his name, if KE’s current stock price continues, then it certainly won’t be the last.
Y: So who is this guy, Zuo Hui? Well, like some of the other founders we’ve covered here on Tech Buzz -- honestly it’s really Jack Ma who stands out the most -- most other Chinese entrepreneurs are pretty low key. They just don’t have his oratory and storytelling skills. And so is Mr. Zuo. We know that he’s 49 yrs old, is originally from Shaanxi province, and went to college in Beijing to study computer science, graduating in 1992.
R: He didn’t get into a Tsinghua or Beida though, and for reasons unknown, when he graduated, he went into customer service, and then sales. The story goes that he was bad at these jobs because of his mediocre presentation and communication skills. For whatever reason though, he decided to go into business with his classmates as an insurance distributor, and I don’t know if it was a timing thing or if he found a role that fit him better, but apparently he made his first fortune in this industry.
Y: But in 2000, he decides to exit his insurance company and go into the real estate brokerage business. Remember, although you could say that the Chinese real estate market began undergoing reform in 1981, when the country’s first real estate developer registered as a business, it wasn’t until 1998 that the practice of getting housing as a benefit of your job was stopped, because pretty much that’s how everyone lived, through your state-owned job. And of course that didn’t make sense as more and more industries privatized.
R: 1998 was also when China issued its first residential mortgage. So while yeah, looking back, it’s super obvious that real estate is a huge industry in China and of course getting into the brokerage business in 2001 is a no-brainer, if you’re actually Zuo Hui at the time, the risk vs opportunity matrix was probably a lot less clear.
Y: It’s always murky when you’re in the moment. But Zuo Hui did a few things. One of the most oft-repeated stories about him is how he was committed to honest transactions. Yeah, he has claimed in interviews that he was screwed over no fewer than 10 times in his 12 years as a renter in Beijing. We’re not totally sure how it worked back then since this was so long ago, but apparently unethical agents would have separate contracts with the different parties, there would be no transparency, and the agents would pocket the difference.
R: Unthinkable, right? Yeah I don’t know how it worked either, but when Zuo Hui started Lianjia, he made a big push for transparency. Well, technically, he made a big push for it in 2004, when the company made all contracts fully transparent, which actually led to a wave of resignations in his staff, because, well, there was less money to be made. But don’t worry, good karma prevailed. Customers were big fans of this transparency, and business grew.
Y: Business probably would’ve grown anyway, just because real estate in China was on fire. But in 2005, there was a correction in the market due to new government policies, including an upward revision of the minimum down payment from 20% to 30%, and instead of retreating like many of his competitors did, Zuo Hui expanded instead, growing from 30 storefronts to 300 storefronts in just 2 years.
R: I mean, he insists that it was because he believed that as China developed, its real estate market simply had to grow as well, but also he was just really really lucky. That’s because if you Google the words “Chinese property bubble” today you’ll know that 2005-2011 is considered one of those super high-growth periods. Sure there was a period of shock in early 2005 when the new policies came out, but the subsequent 6 years saw housing prices in China more than triple. So… yeah. Good timing.
Y: When the market is that hot… it’s pretty easy to grow. And grow Lianjia did. Let’s go straight to the ending and work backwards. You already heard the insane GTV numbers we gave you earlier. Most of that is Lianjia. It’s the largest brokerage in China. In fact, it’s got a pretty dominant lead. In Beijing, its home base, it has over 50% market share in transactions relating to existing homes -- that is, anything that’s not new construction. Even in Shanghai, which is much more fragmented, it was at 20% market share, well ahead of the runner up with just 7%.
R: How did it get there besides just executing the heck out of the business? Well, in Lianjia’s journey, there were three things that Zuo Hui did that are worth talking about. The first is the establishment of the “Housing Dictionary” in 2008. It really should be called a database and not a dictionary, but basically, it’s now a verified collection of details on 226 million homes in over half a million communities in China, accounting for 57% of the country’s total housing stock.
Y: You heard that right. Basically, Zuo Hui saw that the lack of trustworthy data was hurting the real estate business and he just decided to build it himself. He hired the now CEO of KE, Peng Yongdong 彭永东, from IBM consulting in 2010 in an effort to further transform the business into a more “tech-centric” one. In 2014, Peng would launch an online platform called Lianjia Wang 链家网, a sort of predecessor to Beike, but obviously just for Lianjia agents.
R: But if building a database and gradually digitizing the business was the first thing, what were the other things? Well, they were: raising money and acquiring competitors. So in 2011 Lianjia raised its first “Pre-A” round from CDH Fund, a well known Chinese PE firm. At this time, Lianjia was already 10 years old. It subsequently raised money from Bao Fan’s China Renaissance, China’s premier technology investment bank which we covered in Episode 24, as well as the usual suspects, including Tencent, Baidu, Hillhouse, Sequoia, and Softbank Vision Fund. In addition, strategic investors such as real estate developers Vanke and Country Garden also put in some money, but the biggest outside shareholder is Tencent, at 12% ownership.
Y: Always Tencent! It’s really hard to find a company to talk about that they’re not investors in. Anyway, besides raising money -- which they did raise a lot of, $3.6Bn total in their Series D round in 2019 -- Lianjia was also busy acquiring other brokerages. Beginning in 2014, they basically acquired all the top competitors in Beijing, Shanghai, Hangzhou, etc.
R: Yup. Pretty much everywhere you go it was Lianjia-owned. When I sold my apartment in 2015 it was with a Lianjia-owned brokerage. They were everywhere. But this is where you should stop and ask -- if Lianjia was kicking so much butt, why didn’t it just go public a few years back? Why did it need to become KE Holdings?
Y: And that, my friends, is the main question that people are asking and have been asking for the past few years. Why did Lianjia launch Beike? What exactly is the relationship between these two companies? Lianjia’s business model is pretty simple to understand, but what about Beike’s? Don’t worry, you didn’t miss anything, because we didn’t actually get around to talking about that just yet.
R: Yeah. Because where we left off was Lianjia dominating as a brokerage. But so what if it did? Brokerages make for crappy publicly listed companies. Shenzhen listed 我爱我家 had been the top stock for real estate agencies in China and is currently valued at $15Bn and trading around 20 P/E and sometimes much lower.
Y: But even more importantly than that is -- how much bigger could Lianjia get? Does it make sense to expand into lower-tier cities in China with this capex intensive store-opening model? But then how do you grow? And how do you take advantage of the fact that the Chinese real estate market is still growing? I mean, CIC is predicting a 50% increase in GTV from 2019 to 2024, and a more than doubling of existing home sales. So what do you do?
R: You take a cue from the other successful commerce platforms in China of course, and you see what you can do to become one of them. You’re an offline real estate brokerage that also services your users online? No problem. How about expanding your platform to service other brokerages? Boom, you have yourself a platform.
Y: It really is that easy. As KE’s own COO explained, Lianjia to Beike is as JD’s self-operated store is to the greater JD.com marketplace. Or if you’re unfamiliar with JD, then think about Amazon. Remember how Amazon first began by being a direct seller, and then opened up its third-party marketplace services?
R: It’s really a very apt comparison because the same issues that plague Amazon are being raised of Beike. Like… we know Beike is the same as Lianjia, our competitor, why should we be on this platform? How can I expect it to be neutral and fair when you are both the referee and one of the competing athletes? How’s this not kinda sorta monopolistic behavior? Why aren’t the antitrust authorities looking at this? And more immediately, aren’t there a ton of other sites already where I can post my listings? Why am I working with you?
Y: Yeah, I think we should definitely, definitely talk about that last question, because it’s the one thing you really need to understand to decide for yourself whether or not Beike is actually valuable as a platform. And here is the single biggest reason why it is. There is no MLS in China.
R: MLS stands for Multiple Listing Service, and the primary function is this -- it is basically a very organized way to list properties and for brokers to figure out how to cooperate with each other and split that all-important commission fee. Without it, you’ll get a mess.
Y: You’ll get what can happen in China, which is a lot of duplicate, or worse, inaccurate or fake listings, as agents are either just misinformed or are trying to game the system for new leads. I mean, there is a certain amount of fraud here in the U.S. too, especially for rentals, but it’s nothing like how bad it can get in China -- trust us.
R: So think about it, if there is no centralized service making sure everything is accurate and all the contractual rights between all parties and agents are honored, then it can get quite chaotic as everyone tries to fight for a piece of the action. So, sure, there are multiple publicly listed Chinese real estate listing companies, like 58’s Anjuke 安居客 for example, but one of the most common complaints you’ll see about such a site is that many of the listings are fake or inaccurate, because you just need to be willing to pay a listing fee to advertise a property -- no one is responsible for the integrity of the data you’re submitting.
Y: And this is just a bad experience if you’re a prospective buyer. Not only might you stumble upon a listing you like and find out it isn’t even really there, but the duplicate listing issue is so bad you might have trouble even figuring out who to call because multiple listings may look suspiciously alike but have different prices and details.
R: All the platforms know this is a problem so they’re trying to fix it, but it’s still pretty rampant. Like in researching for this episode I just clicked on a random district in Shanghai and picked a few parameters and sure enough, the first page was already showing me duplicate listings from different agents for what clearly looks like the same property with the same identical photos and general details. Maybe the seller is using multiple agents, but the description differs slightly and basically, you are wasting your time trying to figure out who to call when you simply wouldn’t have this problem in the U.S. There would be one listing, and you’d call your agent. Or maybe use the agent the listing service is promoting. Regardless, it would be less confusing.
Y: And this is one of Beike’s core value propositions to the user. That there is no such thing as fake or duplicate listings because everything is centralized through Beike’s systems, which only their employees, after verification, will upload onto the platform. Thus it’s basically like Beike is acting as the MLS, whereby everything is organized and accurate and all contractual relationships are made clear.
R: Why’s Beike doing this? Well, to put it super simplistically, Beike makes money off of the transaction, and not off of the listing itself. So in that way it’s a lot closer to the old Redfin than the old Zillow, if you’re familiar with these companies, so it’s all about getting the transaction to go through, and not to get as many listings as possible. By the way, by “old” business we mean Redfin and Zillow’s original business, since it seems that everyone is trying to get into buying and selling homes directly. Beike, as far as we can tell, isn’t attempting that yet.
Y: KE Holdings’ own materials present the industry as a very messy one, in which there is a lack of “cooperation mechanisms, trust, and industry standards.” So it designed a system to solve all of these. Cue: the ACN, or Agent Cooperation Network. Basically, the work of an agent is broken up into several predefined steps so that multiple agents across different brokerages can work on the same transaction, complete different parts of it, and all get paid accordingly.
R: Right, so like the example they give is you can have a different agent do all of your posting and photo taking, another one to handle your buyer tours, another one to represent and negotiate for you, and yet another one to do your contract preparation for closing. It sounds pretty complicated to me, but I guess it works, because if you recall from the beginning of the episode the platform has been able to sign up almost 35,000 non-Lianjia storefronts and a corresponding 300,000 agents in the two years since Beike’s launch. And more importantly, in 2019, 70% of the transactions on the Beike platform used this model.
Y: These people and stores Beike calls connected agents and stores. And we can see from the prospectus that commission costs for the internal Lianjia agents and external connected agents is almost even, off by 15% or so. So at least for now, the ACN is kind of working. KE’s market share of the entire Chinese residential real estate market was 19% in 2019, up from 12% the year before.
R: And there’s hope that with Beike’s solutions and reach, connected stores can do more business than before. That’s kind of happening already as well. The average GTV per connected store almost doubled from the second half of 2018 to the same period in 2019. And connected stores contributed nearly 60% of GTV in the first half of 2020. What’s more amazing is that connected brands accounted for over three-quarters of new home sales in terms of transaction volume, and just under half of existing home sales.
Y: GTV though doesn’t translate directly into revenues, as you well know, but here, the math actually helps KE. New home sales in China command a higher commission rate than existing ones. The logic is simple -- developers want to sell their inventory ASAP and pay off their debt, and so have a much greater willingness to pay than some individual seller. In fact, as KE’s own prospectus shows, the commission rate for new homes is increasing slowly and approaching 3%. So more net revenues.
R: Conversely, existing home sales have a lower commission rate, and it’s actually decreasing, dropping below 2%. This is because of more and more other brands coming onto the platform, diluting Lianjia’s take rate. That’s right. If it were Lianjia alone, the rate should be higher, because Lianjia actually made waves in the industry a few years ago by increasing, rather than decreasing their commissions, from 2% to 3%, which was in the opposite direction of most of the competitors. Their reasoning? We’re really professional and transparent, and we’re willing to give you real guarantees on your purchase -- almost like an insurance -- so you should be willing to pay that extra percentage point for this most important purchase of your life.
Y: I guess it’s worked out for them, but obviously not everyone who joins the platform will want to do that. In smaller cities where Lianjia doesn’t have a commanding lead, and for smaller franchises as well, it would be too uncompetitive. So that’s why the rate is declining for that segment, and probably won’t rise, unless there is a big change in the market.
R: And despite all of this, KE was lossmaking last year and just reached breakeven this year. It’s a tough industry, man. Gross margins, after you pay out commissions, is just in the mid-twenties, which is typical for this type of business. But hey, it’s a “tech” platform right, so yeah, insert random statement about scale and enabling new business opportunities with higher margins here.
Y: You mean the less than 3% of current revenues that come from things like financial services and home renovation? And “technology” like VR viewings of properties?
R: That’s right. It’s clearly important to the company because the statistic about 420 million VR viewings of properties in 2019 is highlighted alongside numbers like total number of agents at the very beginning of the prospectus.
Y: Instead, I feel like they should have made a bigger deal about their brand and training. They really do have the reputation in China for having a more professional team than many other brokerages, who are kind of all over the place. Unlike some competitors, Lianjia pretty early on began recruiting college graduates and having a formal training program for their agents.
R: Yeah. The partner from China Renaissance who made the investment into KE said a large reason for his doing so was the fact that the company had over 1,000 employees who had been there for at least 10 years. That actually is quite impressive, given how high the churn is in these jobs overall, especially in China. I think it does say something about the company’s success in retaining and developing talent. And this is one of their revenue streams. Smaller brokerages just really need a lot of help, not just on the data and software side, but also branding and management. They can get help with this by paying a franchise fee to Beike.
Y: Alright, I think there’s actually a lot more we could talk about for KE Holdings, but it would involve a lot more real estate industry dynamics and a lot less tech and I think that’s far less interesting. There’s a lot of players too, all doing something slightly different, and we just don’t have the time to go through them all, even if we fully understood what they’re all doing, which we don’t.
R: So, to summarize, KE Holdings is basically the 2-year old tech platformization of a nearly twenty-year old real estate brokerage business in China called Lianjia. Through a series of smart moves such as focusing early on data integrity and strategic acquisitions, the business became the market leader by the early 2010s. The management supposedly attempted to go public then, but didn’t. Most are guessing it’s because the brokerage business is just not sexy enough. Also, the founder Zuo Hui saw an opportunity to become the commerce platform for housing transactions in China, a nearly $3.5 trillion dollar industry last year.
Y: Yes, like Alibaba is to retail, Zuo Hui wants KE Holdings to be for real estate. It’s how the company is positioning itself. Although in reality KE Holdings is more like JD, because Lianjia is still a very large portion of its revenue and transaction volume, so that’s like its own proprietary brand and products, and at the same time the platform, called Beike, or ke.com, allows other brokerages to list and sell as well.
R: And the whole reason this opportunity exists is because China doesn’t have an MLS or multiple listing system, and so all of the listing platforms, especially those driven by promotional versus transaction fees, are a mess and often have inaccurate or just straight up fake data. KE Holdings centralizes this process and verifies everything, therefore basically building a MLS for China, for the listings it shows, anyway.
Y: But beyond integrity, one of the core things KE replicates about the MLS is the ability for agents to work together on a transaction. Arguably, this goes beyond the MLS as it works in the U.S. because it modularizes, down to the specific task, who gets paid to do what, allowing for multiple agents across multiple brokerages to work on the same transaction without having to negotiate anything, because the process is fully transparent. The idea is that this is great for everyone involved, including the customer.
R: So, this has kind of been working. 70% of the transactions on the platform are now done through this ACN or Agent Cooperation Network system. A ton of new brokerages and agents -- we’re talking about over 200 brokerages and 300,000 agents in 70 new cities -- outside of Lianjia have signed up and are actively contributing revenue, especially in the new housing space where commissions are higher.
Y: But remember, this whole experiment is like just 2 years old. Real estate in China is one of those things that is pretty sensitive to new government policy, so that’s always a risk. But also, all the things that KE Holdings sees, like working more in new housing versus existing, going into value-added services with very high margins, its competitors see as well, and are going after, too.
R: As Beike grows though, so does an “anti-Beike alliance,” the companies who don’t trust that they should be on a platform where Beike is both the platform operator and the biggest seller and think that this amounts to basically monopolistic behavior. On a very high level, it’s not unlike folks who don’t want to sell on Amazon and have Amazon see all of their data and perhaps use it against them. But hey, what KE is doing is not all that weird if you look at how many marketplaces have evolved, like JD, like Amazon. And bullish investors are betting that with KE’s leading position in the market, and just the ginormous potential of the addressable market opportunity, the sky’s the limit. And what antitrust worries? KE is still just at 19% market share.
Y: Or we think that’s what’s happening behind the stock price skyrocketing. Or it’s just because everything is at an all-time high. Who knows? It’s too early to tell, I think, where KE goes. It does need to prove that it can be consistently profitable, although if you look at its Adjusted Income non-GAAP numbers it actually is profitable, but margin-wise, it’s no Alibaba, no matter how much it wants you to believe it is. I mean, Alibaba’s net margins are basically the same as KE’s gross margins. And of course, the business models are different.
R: It’s an interesting way to position the company though. So tell us, what do you think of KE Holdings? Like we said, it’s been dominating the headlines in China for most of the past few weeks, and there are a lot of skeptics, with even the fans being pretty measured, because you know, running an online platform for brokerages selling houses just seems a lot more difficult than selling clothes or food. And those margins … not sexy.
Y: And yeah KE has a ton of good data and what seems to be a good process, but is it as defensible as the company thinks? Is having the equivalent -- or better -- of an MLS in China, along with a transactional platform and software and services worth $50Bn? How much market share will this thing ultimately command? Is it going to be as outsized as an Alibaba in retail? And does that even matter when your margins are so low? What do you think? Let us know!
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And my Twitter is spelled RUIMA. Tech Buzz China by Pandaily is powered by the Sinica Podcast Network on SupChina. Pandaily.com is an English language site that tells you “everything about China’s innovation.” Our producers are Caiwei Chen and Kaiser Kuo. Thank you for listening!
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