KE Holdings: 3 Reasons to be Bullish on the “Zillow of China”

One unique development of this bull market is that most countries’ economic and monetary policies are in sync due to facing similar challenges. The economy is recovering but remains in a fragile state, which has led policymakers around the world to implement dovish monetary policy and aggressive fiscal policy. Thus, we are seeing parallel strength in assets such as equities and real estate across the globe.

In terms of real estate, there are a handful of factors that are driving prices higher. The pandemic caused many people to relocate to larger houses, as they needed more space due to working and learning from home. Central banks slashed interest rates which increased affordability. The combination of monetary and fiscal stimulus is also supportive of asset price strength. Further, many traditional outlets for spending (travel, entertainment, etc.) are unavailable.

In China, property prices increased by 6% in 2020 and are at record-highs. Economists are forecasting 5% growth in 2021 and 4% growth in 2022. Currently, real estate accounts for 20% of China’s GDP. Interestingly, the Chinese real estate market is fragmented and dominated by local brokers and agents. For investors, this is an opportunity to invest in KE Holdings (BEKE) which is modernizing and nationalizing the real estate market in China by using technology to increase transparency and lower transaction costs.

KE Holdings

The most convenient comparison for BEKE in the US is Zillow (Z), since BEKE offers similar data on their website, such as recent transactions and estimates of property prices. 

The most exciting part of BEKE is that it’s disrupting a huge market. Real estate services in China is an $800 billion market. BEKE has several ventures such as its online directory of real estate listings, an online platform for transactions, brokers and agents directly employed by the company, and a lead-generation business. 

Its lead-generation business remains its primary source of revenue as interested sellers or buyers are connected to local agents and brokers from BEKE’s website. The company’s platform also connects homeowners with other real estate-based service providers for home renovations, interior design, financing, etc.

Since its IPO in September 2020, BEKE is up 83%. Despite this strong debut, investors should remain bullish on the stock due to its huge market opportunity, earnings growth, and increasing market share. 

3 Reasons to Expect More Gains

Huge Market Opportunity

The Chinese real estate market is completely opaque with local brokers and agents not sharing information about transactions, prices, and fees. This means that most real estate transactions have to take place through local agents and brokers. 

Additionally, there is no equivalent of a Multiple Listing Service that aggregates multiple listings or a standard compensation structure. In most developed countries, these aspects are taken for granted and contribute to a fair and liquid real estate market.

Therefore, the process of finding a home or office in China remains stuck in the 20th century despite the country being technologically advanced in so many other ways. Additionally, the costs and time associated with closing real estate transactions can drag on for weeks with multiple rounds of paperwork.

For BEKE, this inefficient market is an opportunity. Its business is attempting to recreate a Multiple Listing Service for the Chinese real estate market. Additionally, the company has its own set of brokers and agents who are compensated in a more transparent manner so that their interests are aligned with the buyer or seller. 

It’s only a matter of time before the real estate market in China modernizes, and BEKE is at the forefront of this transformation.

Earnings Momentum

BEKE has been operating for 18 years. This gives it an advantage over its competitors since it has formed relationships with agents and brokers across the country as well as developed a strong reputation with consumers. It also means the business is in a much more mature state than other startups who are dependent on external funds to fuel growth.

In contrast, BEKE’s growth is funded by its own business. Last year, BEKE earned $8 billion in revenue. 2021 will mark a return to profitability as analysts expect $110 million in earnings. Over the next 5 years, analysts are forecasting double-digit earnings growth on an annual basis.

Increasing Market Share

BEKE is in the sweet-spot of being a dominant player in a growing market with increasing market share. According to BEKE, in 2020, the company accounted for 8% of the gross transactions in the Chinese real estate market, and it believes this figure will grow to 20% over the next decade. Further, it forecasts transaction volume of the Chinese real estate market to grow by 6.5% over the next decade.

BEKE’s moat is its “Housing Dictionary” which is the most comprehensive and available source of data on real estate in China. This is part of BEKE’s flywheel. It attracts buyers and sellers to its platform which in turn, attracts agents and brokers to BEKE. 

Over time, as consumers become accustomed to having this information available to them and see the benefits of a transparent commission, they are less likely to go back to the old ways of buying real estate with total dependence on an agent or broker. This is especially true for younger consumers who will naturally gravitate towards BEKE’s platform.

Conclusion

BEKE shares many qualities with some of the most successful tech winners of the past decade: It’s disrupting a huge market, it’s creating value for consumers through transparency and lower fees, and, it’s building a huge moat that can’t be easily replicated by other companies.