Shell Finding a House: Out of the darkest hour, but spring has not yet arrived

Introduction: Although it is recognized as a good enterprise, the industry is irreversible, and shells still need to wait for spring.

Li Ping| Written by Gravel Business Review | produce

1 Revenue stopped falling, turning losses into profits in the fourth quarter

On the evening of March 16, Shell, the largest real estate transaction and service platform in China, announced its financial report and annual results for the fourth quarter of 2022. Data show that in the fourth quarter of last year, Shell House Search achieved revenue of 16.7 billion yuan, down 5.8% year-on-year; The net profit was 377 million yuan, compared to a net loss of 933 million yuan in the same period last year.

Affected by the impact of the new crown epidemic and the downturn in the real estate market, Shell's revenue has declined year-on-year for seven consecutive quarters since the second quarter of 2021. Especially in the first two quarters of 2022, the year-on-year decline in shell revenue was as high as 39.37% and 43.01%, respectively. Since then, the decline in Shell's revenue has narrowed significantly, with single-digit declines in the third and fourth quarters.

Under the continuous promotion of cost reduction and efficiency increase, the profit side of shell has shown signs of warming. In the third quarter of 2022, Beike achieved a net profit of 723 million yuan, ending four consecutive quarters of losses in the fourth quarter, and continued to maintain profitability in the fourth quarter.

For the whole year of 2022, Beike achieved revenue of 60.7 billion yuan, a year-on-year decrease of 24.9%; The net loss was 1.397 billion yuan, an increase of 872 million yuan over the previous year. Due to the large deficit pulled down in the first half of last year, Shell still failed to avoid the embarrassment of falling into losses for two consecutive years.

The main business of Beike is divided into stock housing business, new housing business, home improvement and home furnishing business, emerging business and other four parts. For the whole year of 2022, Shell's net income from existing housing decreased by 24.5% year-on-year to RMB24.1 billion, net income from new housing business was RMB28.7 billion, down 38.3% year-on-year, comparable contract value of home improvement and home furnishing business was RMB6.9 billion, up 31% year-on-year, and net income from emerging business and other businesses was RMB2.8 billion, up 33.4% year-on-year.

Under the cold winter of real estate, the revenue of the two major sectors of shell stock housing business and new housing business has declined significantly, and the rapid growth of home improvement and home furnishing business is mainly caused by the acquisition of Shengdu Home Decoration, which is also a major attraction for the company's future development.

According to the latest data from the National Bureau of Statistics, from January to February 2023, domestic commercial housing sales increased by 3.5% year-on-year, which is the first cumulative year-on-year increase in residential sales since last year.

In terms of outlook, Beike expects total net income in the first quarter of 2023 to be between RMB18.0 billion and RMB18.5 billion, an increase of 43.4% to 47.4% over the same period of the previous year.

In a conference call after the earnings release, Peng Yongdong, co-founder and CEO of Shell, said that the industry has faced unprecedented challenges in the past two years, "This round of market volatility is the first big test we have experienced as a platform, and we have delivered answers with more stable profitability and broader scalability than before."

Peng Yongdong also said in the conference call that as of the end of February, the stock housing transactions on the Shell platform rebounded sharply year-on-year, and the transaction volume reached close to the level of the same period in 2021 and the transaction level of the most active year for stock housing transactions. New home underwriting data also showed a significant year-on-year recovery, returning to close to the post-pandemic transaction level in 2020.

Overall, since the second half of last year, with the recovery of real estate industry policies, Shell's operating performance has improved significantly. After the earnings report, the stock price of Shell Hong Kong stocks opened higher. As of the close of the latest trading day, the share price of Shell Hong Kong stock was HK$49.75, and the latest market value rose to HK$185.1 billion.

However, from the perspective of the US stock market, investors in Shell are still deeply in the red. In November 2020, Shell's share price rose as high as $79.4. After four consecutive quarters of losses, Shell's share price fell as low as $7.31, with a maximum drop of more than 90%.

Since this round of bottoming out, Shell's latest stock price is $17.995, an increase of more than 100%, but it is still close to 80% from its all-time high. Under the pressure of the main business and rigid expenses, there is still great uncertainty in the future development prospects of Shell.

2 Rigid expenses, mitigation of bad debt receivables

In the first half of 2022, due to the frequent occurrence of "supply cuts" in various places, Beike made full bad debt provision for the accounts receivable involved in the high-risk developers it identified. As of June 30, 2022, the accumulated bad debt reserve balance reached 2.21 billion yuan, which directly led to a huge loss of 2.485 billion yuan in the first half of the year.

In order to avoid the risk of payment collection, Beike took the initiative to shrink business cooperation with some private housing enterprises and shift its focus to state-owned enterprise developers. In the fourth quarter of 2022, state-owned enterprises accounted for 45% of the transaction value of new houses in Shell, an increase of 15 percentage points over the first quarter. By the end of 2022, Shell's accounts receivable fell to 4.163 billion yuan, a significant decline from the beginning of the year.

However, although Shell's strategy of optimizing new home partners has reduced the company's risk of bad debts, it has inevitably had an impact on sales scale. According to the financial report, the total transaction volume of shells in 2022 will be about 2.61 trillion yuan, down 32.3% year-on-year, of which the total transaction volume of stock housing will be 1.58 trillion yuan, down 23.4% year-on-year; The total transaction value of new homes was 940.5 billion yuan, down 41.5% year-on-year.

According to the National Bureau of Statistics, the national sales of commercial housing in 2022 will be about 13.33 trillion yuan, a year-on-year decrease of 26.7%. It is not difficult to see that the decline in platform transaction volume in 2022 exceeded the industry average, especially the decline in new housing transaction volume exceeded 40%.

On the other hand, in the face of operating loss pressure, Beike has begun to compress expenses since the second half of 2021, and continues to optimize and adjust personnel. Especially on the eve of last year's listing in Hong Kong, some media revealed that the new round of layoffs of Shell reached up to 50%.

According to the annual report data, as of December 31, 2022, the number of shell brokers was 394,020, a decrease of 13.3% from the previous year; The number of active brokers was 349681, down 14% from the previous year. The number of stores was 40,516, a decrease of 20.6% over the previous year; The number of active stores decreased by 17.4% from the previous year to 37,446.

Under a series of cost reduction measures such as layoffs and store closures, the expense ratio during the third and fourth quarters of Shell decreased significantly compared with the second quarter, but the change was not obvious from a year-on-year perspective, because the shrinkage of revenue was greater. Among them, in the fourth quarter, the company's marketing, sales and management expenses were 3.125 billion yuan, an increase of 113 million yuan over the same period last year (3.012 billion yuan), and the expense ratio increased by 1.7 percentage points year-on-year.

For the whole year of 2022, the total market, sales and management expenses of Shell were RMB11.92 billion, a year-on-year decrease of about 10%, and R&D expenses were RMB2.546 billion, a year-on-year decrease of 20%, both of which decreased significantly lower than the decline in revenue (24.9%), resulting in the general expense ratio of Shell climbing from 20.83% to 22.86%, an increase of 2 percentage points from a year ago.

It is not difficult to see that due to the greater decline in the denominator (revenue), the expense ratio during the shell period is still climbing, which also shows that in the context of expense rigidity, it will be increasingly difficult for shell to continue to rely on the strategy of cost reduction and efficiency increase to boost profits.

3 Enter home improvement, ideal plump but realistic skinny

Of course, once the growth rate of the revenue side picks up sharply, the expense ratio will decline significantly during the shell period, and the company's profitability is expected to be further repaired. Especially since entering 2023, the small Yangchun of the real estate market has made the outside world have more expectations for the recovery of the real estate industry.

However, what needs to be seen is that although the sales of commercial housing in the first two months of this year have returned to positive year-on-year, it is largely due to the low base. In this regard, Great Wall Securities pointed out in the latest research report that the low base factors led to the growth rate of real estate sales in March this year may further pick up, but throughout the year, real estate may still be in the adjustment period, and the cumulative year-on-year growth rate for the whole year may be about -10%.

In fact, even Liu Lijie, a market analyst at the Shell Research Institute, believes that the current recovery of the real estate market is partly due to the compensatory release of the backlog of housing purchase demand in the early stage, which does not mean that the real estate market has entered a rapid heating stage. In fact, the area for sale of new houses across the country is still increasing, the pressure of market delocalization is still large, and the confidence of housing enterprises in financing and land acquisition has not fully recovered.

According to performance guidance, Shell's revenue growth in the first quarter of this year is expected to be between 43.4% and 47.4%. However, the rapid growth of Shell's revenue in the first quarter corresponds to the low base of last year. In absolute terms, the revenue forecast for the first quarter of Beike (18 billion yuan to 18.5 billion yuan) has not yet recovered to the level of the same period in 2021 (20.7 billion yuan).

Shell's operating income mainly comes from the B-side (developer) channel fees and the C-side (buyers) transaction commissions, in addition to the platform service fees of intermediary brokerage companies. Since 2018, Beike has risen rapidly with its online and offline dual-channel network layout and broker cooperation network (ACN network) mechanism, and has become the leader of domestic online real estate trading platforms. The data shows that from 2018 to 2021, the market share of second-hand housing & leasing of Beike (chain home + third party) increased from 12.6% to 27.8%, and the market share of new housing increased from 10.4% to 30.9%.

From the perspective of revenue composition, the second-hand housing business and the new housing business account for nearly 90% of the total revenue of Shell, which belongs to the company's basic business and is also the key to the soaring revenue of Shell from 30 billion yuan to 80 billion yuan.

With the first-mover advantage and scale effect, Shell has strong bargaining power in both the commission ratio and the cooperation of real estate developers, which has also been questioned by the outside world about its monopolistic competition, and the commission expenses and channel sharing are ultimately borne by the buyer.

In the past 2022, the shell second-hand housing business and the new housing business have suffered heavy setbacks. In particular, the new housing business, which is regarded as an important growth point of Shell, has reduced its revenue proportion from 57.55% to 47.22%, and is still facing uncertainty in real estate sales and accounts receivable pressure with housing companies.

At the beginning of this year, there were rumors that China Overseas Real Estate had more than 100 million yuan in commissions that had not been settled with Lianjia. At the same time, Lianjia removed almost all of Beijing Zhonghai's projects from the app, requiring brokers to stop bringing customers to Zhonghai's real estate.

According to follow-up reports, both parties involved denied the matter, "It was a misunderstanding to stop cooperation on the Internet." Behind this "misunderstanding" is not difficult to recall the increasingly delicate relationship between developers and intermediaries.

In response to the risk of relying too much on the real estate industry, Peng Yongdong quickly proposed the "one body, two wings strategy" after taking the helm of Shell. "One" refers to the real estate brokerage business group, that is, the transaction service of second-hand houses and new houses; The "two wings" are the complete home furnishing business group and the huiju business group, representing the emerging business of shell. Among them, the home improvement and home furnishing business has attracted much attention from the outside world.

In April 2022, Beike spent 2.489 billion yuan to complete the acquisition of the remaining 49% equity of Shengdu Home Decoration, and Shengdu Home Decoration became a wholly-owned subsidiary of the company. After the consolidation, the shell home improvement and home furnishing business achieved revenue of 5.047 billion yuan in 2022, an increase of more than 20 times over the same period in 2021 (197 million yuan).

However, it's still too early to say that the home improvement business is the second curve of the shell. On the one hand, from the perspective of revenue composition, the revenue of home improvement and home furnishing business in 2022 will only account for 8.32%. On the other hand, it is not easy for Shell to make achievements in the "small and scattered" home improvement industry.

In addition, Shell's choice of home improvement business is mainly due to the extension of real estate transactions to home improvement, but the home improvement business still has a large dependence on the real estate industry. Therefore, shell's entry into home improvement may promote revenue growth in the short term, but it is difficult to hedge the risk of the main business.

Peng himself seems optimistic about the future of Shell, saying in a conference call that the industry has faced unprecedented challenges in the past two years, and that every winter will pass and spring will come as promised.

However, in the context of the weak recovery of real estate, the main business of shell that has been hit hard may be repaired, but it is difficult to return to the previous high growth trend. It is not a one-day achievement to open up new growth space in the highly competitive home improvement market. Although the shell has come out of its darkest hour, spring seems to be far from coming.