KE Holdings Inc. (NYSE:BEKE) Q3 2022 Results Conference Call November 30, 2022 7:00 AM ET

Company Participants

Siting Li - Director of Investor Relations

Stanley Peng - Co-Founder, Chairman and Chief Executive Officer

Tao Xu - Executive Director and Chief Financial Officer

Conference Call Participants

Steven Tsai - Morgan Stanley

Timothy Zhao - Goldman Sachs

Liping Zhao – CICC

Operator

Hello, ladies and gentlemen. Thank you for standing by for KE Holdings, Inc.'s Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. Today’s conference call is being recorded.

I would now like to turn the call over to your host, Ms. Siting Li, IR Director of the Company. Please go ahead, Siting.

Siting Li

Thank you, operator. Good evening, and good morning, everyone. Welcome to KE Holdings for Beike's third quarter 2022 earnings conference call. The Company's financial and operating results were published in the press release earlier today and are posted on the Company's IR website, investors.ke.com.

On today's call, we have Mr. Stanley Peng, our Co-Founder, Chairman and Chief Executive Officer; and Mr. Tao Xu, our Executive Director and Chief Financial Officer, Mr. Peng will provide an overview of our strategies and business developments, and Mr. Xu will provide additional details on the Company's financial results.

Before we continue, I refer you to our safe harbor statement in our earnings press release, which applies to this call as we will make forward-looking statements. Please also note that Beike's earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Please refer to the Company's press release, which contains a reconciliation of the unaudited non-GAAP measures to comparable GAAP measures. Lastly, unless otherwise stated, all figures mentioned during this conference call are in RMB.

With that, I will now turn the call over to our Chairman and CEO, Mr. Stanley Peng. Please go ahead, Stanley.

Stanley Peng

Thank you, Siting. Hello, everyone. Thank you for joining Beike's third quarter 2022 Earnings Conference Call. Against the many uncertainties in the real estate market, we achieved a series of breakthroughs in the third quarter.

We have supported our stores and agents’ network to consistently outperform the market and achieved steady efficiency and profitability improvements in each business line on our platform. This was thanks to the initiatives we implemented beginning last year to enhance efficiencies. I believe ultimately, these achievements stemmed from the enterprising spirit of the organization, from the perseverance of each one of us on the platform in the face of external challenges.

November 12 marked the 21st anniversary of our organization's founding. To celebrate this momentous occasion, we organized a “homelinker” event, witnessed online by over 7,000 “homelinkers” who have stayed with us for more than 10 years, spreading in more than 80 cities across China.Homelinkers are employees who have been with our organization, share the same experience and collective memories and have learned the same methodologies.

Moreover, they believe in the same values and make similar choices.They shape the resilience of the organization. We are not only practitioners, but also disseminators of our spirits. We carry the same mission and responsibilities to influence more people, cementing their convictions during down times and keeping them grounded in the upcycle, while always striving for growth, virtue and positivity.

Moving on to our progress in the third quarter of 2022, in our “one body” -our existing and new home transaction services. We have prominent advantages in our “one body”business thanks to our years of efforts and investments in the initiatives to enhance efficiency.

Now, our “one body” has entered the development stage, where deepened operations are vital for incremental improvements. These strategic measures may look small to outsiders, but only by finding every core area of inefficiency and working on it every day can we continue making our business better.

The store and agent count on our platform have been stabilizing or even growing in some cities. As of the end of the third quarter, the number of connected stores and active stores on our platform reached over 41,300 and 39,700 both about 3% lower quarter-over-quarter.

The number of agents and active agents on our platform surpassed 400,000 and 370,000, respectively with quarter-over-quarter decreased narrowed to 3% and 2%, respectively. The number of active stores grew quarter-over-quarter in nearly 30 cities, including Nanjing, Changsha and Hefei. And the number of active agents increased quarter-over-quarter in 40 cities, including Shenzhen.

The composition structure of stores and agents on our platform has been improving. We now have a higher percentage of agents with longer track records and higher performance results. The proportion of agents with over three years of industry experience rose by about 10 percentage points in the second quarter compared with the first quarter, along with the overall improvement in professional qualifications. Per-store and per-agent productivity also increased.

In the third quarter, the average store commission income of Deyou-franchised stores and connected stores on our platform grew by 25% year-over-year and 13% quarter-over-quarter. Average commission income per agent rose by 25% year-over-year and 9% quarter-over-quarter. The continued improvement in our new home receivables collection also further ensured the certainty of income for store owners and agents.

Our agents are increasingly identifying with their profession. This year, we conducted two nationwide market surveys participated by a total of over 80,000 real estate agents on our platform. Survey results showed that despite a decline in confidence due to major market corrections, agents have developed a greater pride in their profession, supported by the growing acceptance of their profession by family and society, along with its elevated social status.

In terms of the store-agent network and industry development, efficiency and quality need to be improved. Second, the productivity of a single agent has not improved much over the years and the overall income level of agents is low and their churn rate is high. In the next stage, the industry will shift from the pursuit of scale to high-quality development with an accelerated pace, focusing on efficiency and quality. This will undoubtedly force us to grow more and better abilities from inside.

Our existing home transaction services continued to significantly outperform the market. According to data from the Beike Research Institute, nationwide GTV of existing home sales climbed by about 7% year-over-year in the third quarter, while GTV of existing home transactions on Beike's platform was RMB449 billion, up 19% year-over-year, of which existing home sales GTV rose by more than 20% year-over-year.

The strength was partly due to the release of pent-up demand in the third quarter in Beijing and Shanghai after the pandemic flares-ups in the second quarter. In the meantime, our operational and management initiatives have been paying off, giving the industry's service providers a stronger determination to work with us.

Our existing home services, including existing home sales and rental are, becoming increasingly important in terms of both business growth and risk control. We have made efforts on various fronts to accelerate the growth of this business. For instance, we have been closely watching the proportions of new and existing homes in different cities’ strategic goals and driving the development of our existing home services through KPI requirements and so on. We also allocated more to-B personnel to support the existing home business, fortifying system development and ecosystem governance.

Meanwhile, in many cities where new home sales previously dominated property transactions, local brands and store owners have become keen to make organizational and personnel adjustments to shift to the existing home business.

Turning to new home transaction services, according to data from the National Bureau of Statistics, in the third quarter, the nationalwide GTV of new residential home sales was down 21% year-over-year and 7% quarter-over-quarter. The GTV of CRIC's top 100 real estate companies fell by 33% year-over-year and 0.2% quarter-over-quarter.

Although the year-over-year decline in the new home market narrowed in the third quarter, there was no obvious sequential improvement. The new home market is still in a trough, weighed down by a range of factors, including ceased mortgage payments on unfinished projects, pandemic resurgences and fewer developer promotions.

In the third quarter, GTV of new home sales on our platform was RMB261 billion, down 36% year-over-year and up 17% quarter-over-quarter. While the market remains under pressure, we have consistently improved the health of our business operations across the board, as well as gained further market recognition with our efficient sell-through capabilities and our efforts to build a healthier industry ecosystem.

On the consumer side, we mobilized our resources to collect and provide construction progress updates to customers. Our city-based operations and photographer teams collect accurate, comprehensive project updates on construction progress from multiple site locations monthly for ongoing cooperation projects and quarterly for other unfinished projects. Updates are provided to customers and agents on our apps.

This practice also kept us fully informed on the latest construction progress of different developers.As of November 15, we have covered 32,442 housing projects in this initiative. Operationally, we continued to strengthen our “Commission in Advance” model. In September, Commission in Advance accounted for 34% of our nationwide new home sales commission revenue, 44% for private developers in cities excluding Beijing and Shanghai, and 32% for state and centrally owned developers.On top of the commission in the advanced model, we promoted our strategy of focusing on selected high-quality projects and key new home projects.

On the developer side, we collaborated with more high-quality developers and projects. During the quarter, the proportion of new home sales from state and centrally owned developers expanded to 42% from 37% in the second quarter.To really accelerate sell-through in the current market, effective leads generation from brokerage channels and promotional conversion from developers must join forces.

We are proud to stand out from other brokerage channels with our exceptional existing home transaction service capabilities and add many new home customers leveraging our existing homes customer base. In addition, our continuous undertakings to improve the new home industry ecosystem, have helped to reduce the ingrained problem of good industry players being driven out by subpar practitioners. This has further garnered the respect and support of high-quality developers for us. In the future, I look forward to providing an overall review of the efforts we have made to improve the health of the new home ecosystem.

Next, moving to our two wings businesses. Our full-service home renovation and furnishing business is progressing as planned. In the third quarter, the industry started to recover as pandemic resurgences in Beijing and Shanghai subsided. According to data from the China Building Decoration Association, the revenue of leading home renovation and furnishing companies in the third quarter decreased by 4% year-over-year and increased by 13% quarter-over-quarter.

Our home renovation and furnishing business continued to outperform the market , rising more than 40% year-over-year and 34% quarter-over-quarter, generating revenue of close to RMB1.85 billion.Contracted sales in the third quarter reached close to RMB2 billion, an increase of more than 60% year-over-year. Among these, the number of our home renovation contract volume increased by more than 50% year-over-year with average order value up by more than 10% year-over-year.

The percentage of total contract volume attributable to our core business traffic referrals increased from 25% in June to 43% in the third quarter. We have replicated the technological capabilities accumulated in our core business, such as the AI assistant - "Xiaobei",into our home renovation and furnishing business. As of October 31, more than 9,500 service providers, including home renovation and furnishing designers, engineers, foremen, as well as agents from our core business had participated in the "Xiaobei" training and testing.

Our home furnishing, new retail sales accounted for 20% of the total contracted sales in the third quarter, up from 16% in the second quarter. The ratio of home renovation orders that came with needs for customized furniture increased to one out of six from one out of nine in the second quarter.

In the third quarter, Beijing Beiwoo reached quarterly breakeven and monthly contracted sales of over RMB100 million in July and August, becoming the largest full-service home renovation brand in Beijing. This is a significant breakthrough and achievement amid the current headwinds.The underlying capabilities we accumulated in the past have propelled the Beijing business into a positive cycle. We did this by first establishing from the ground up,large-scale home renovation delivery management capabilities; second, our scale and more complete supply chain created a virtuous cycle that has won additional suppliers and enabled consumers to select from a greater choice of better quality products. Third, our proven competencies in delivery management and business operation have become better recognized among service providers. Agents started to actively recommend our home renovation services to customers and accompany them on visits, whereas designers, workers and foremen are proud to join us as they feel confident in their professional development with increased belonging to the platform. Only by attracting and assembling high-quality service providers in the industry can we provide consumers with a superior service experience. With Beijing as an example, we aim to continue to iterate and manifest our capabilities in more cities, bringing better living services to more consumers.

Next, moving to our home rental services, which continued to expand in scale and improve efficiency in the third quarter. In terms of scale, as of the end of the third quarter, the number of contracted rental units managed by our rental services doubled quarter-over-quarter to over 85,000. Among them, the number of units under the decentralized leasing management, "Carefree Rent," reached over 50,000 units, an increase of nearly 70% quarter-over-quarter.The Carefree Rent service is currently available in 13 cities.

To improve our efficiency, we continued to develop and iteratively optimize our sign-up and occupancy models, as well as refine our operational capabilities. In September, both our occupancy rate and average sell-through period improved compared to the second quarter.

It is particularly worth mentioning that this July, we were selected as part of the first group of affordable rental housing operation service enterprises in Chengdu, and we were the only private enterprise among the four selected. Thanks to this opportunity, we were able to become more deeply involved in the improvement and operation of local affordable rental homes.

As of November 21, we have provided high-quality leasing operation services, including leasing brokerage to more than 1,000 rental homeowners and tenants in Chengdu. In the future, we will also strive to participate in the planning and operation of more affordable rental housing, and contribute to the development of a housing system that ensures supply through multiple sources, provides housing support through multiple channels and encourages both housing purchase and renting.

In conclusion, our business performance this quarter demonstrated great vitality and resilience of our organization. Internally, this is due to the people we have and the organizational culture we have formed. We have an unshakable insistence on technology for good, quality service and utmost operation efficiency, which has won us the affirmation of customers and service providers.

Externally, it comes from the solid economic foundation of our nation from the desire of each small family for "joyful living", which together have mounted to the tremendous demand in China's “living” sector.There have been a series of favorable policies unveiled recently to support the future release of rigid and upgrade housing demands,help high-quality developers restore liquidity and boost market confidence.

We will also do our best to make our network of store and agents the warm connect of "homes", to bring better quality and more diversified housing and related services to customers, and play our part to promote the stable and healthy development of the real estate market, as well as to better satisfy the housing needs of all people.

Thank you. Next, I would like to turn the call over to our CFO, Tao, to review our third quarter financials.

Tao Xu

Thank you, Stanley and thank you, everyone, for joining us today. Before discussing more details about our third quarter of 2022 financial results, I'd like to provide a brief update on the recent housing market.

In the third quarter of this year, policymakers maintained relatively easy credit conditions, and local governments continued to introduce city-specific measures to better satisfy demand for housing and home upgrades. Overall, however, the frequency and intensity of supportive policies throughout Q3 weakened compared to Q2. And we also saw some strong relaxations reversed in some several key cities.

Meanwhile, a number of factors disrupted China’s housing market recovery in Q3. These included heatwaves that ravaged a vast swathe of the country, COVID-19 flare-ups, the slowdown in developers’ sales promotions, and the fact that some buyers ceased mortgage payments on unfinished new home projects.

The existing home market maintained a moderate recovery, with GTV ticking up slightly on a year-over-year basis. The new home market also saw a decrease in GTV contraction, but still remained soft. Despite the macro headwinds, our operating efficiency and profitability improved significantly in Q3. The profitability of our new home transaction services, and the Company's gross margin both reached new highs since our IPO in 2020, whereas our DSO and Non-GAAP operating expenses fell to record lows since IPO.

These results did not come about overnight. They are the result of our rapid and resolute implementation of a series of cost management and efficiency enhancing measures launched a year ago in the face of market adjustment. They also embody our courage against setbacks.

Our management team’s humility and involvement in the frontline operations and our decisive will to never give up. These achievements further motivate us to respect the laws of the market, return to the essence of the operation, seek improvement from the refined management and continue to implement our series of efficiency, risk control and the cost management measures.

Against this backdrop, let's turn to our financial details for Q3. Our net revenues were RMB17.6 billion during the quarter, representing a narrowed year-over-year decline of 2.8% and a 28% increase compared with Q2 2022. This quarter-over-quarter revenue improvement was primarily due to increased revenues from existing home transactions as pent-up demand in the mega cities of Beijing and Shanghai translated into higher sales volume at the beginning of Q3 after COVID-battered Q2.

Meanwhile, other factors also helped drive total net revenues. These included more new home revenue recognized in Q3 following a jump in subscriptions in May and June. Our “Commission in Advance” model that drove faster new home subscription to sales conversion as well as our stable monetization ability.

In particular, our net revenues from existing home transaction services increased by 16.6% to RMB7.2 billion in Q3, compared to RMB6.1 billion in the same period of 2021, primarily due to a 18.7% increase in GTV of existing home transactions to RMB449.0 billion in Q3 from RMB378.2 billion in the same period of 2021.

Our net revenues from new home transaction services decreased by 31.3% to RMB7.8 billion in Q3 from RMB11.3 billion in the same period of 2021, primarily due to the decrease of GTV of new home transactions of 36.2% to RMB261.5 billion in Q3 from RMB410.1 billion in the same period of 2021.

Our net revenues from home renovation and furnishing were RMB1.8 billion in Q3 compared to RMB60 million in the same period of 2021 primarily because the Company completed the acquisition of Shengdu Home Renovation Co., Ltd and began to consolidate its financial results during Q2 2022, and the organic growth of the GTV for home renovation and furnishing business.

Our net revenues from emerging and other services increased by 45.8% to RMB801 million in Q3 from RMB550 million in the same period of 2021, primarily attributable to the increase of net revenues from rental property management services, which was partially offset by the decrease of net revenues from financial services.

Cost of revenues decreased by 16.3% to RMB12.8 billion in Q3 from RMB15.3 billion in the same period of 2021. Gross profit increased by 72.8% to RMB4.8 billion in Q3 from RMB2.8 billion in the same period of 2021. Gross margin was 27.0% in Q3, compared to 15.2% in the same period of 2021. The increase in gross margin was primarily due to: a) a shift of revenue mix towards the existing home transaction services with a higher contribution margin than some other revenue streams, b) a higher contribution margin for existing home transaction services led by the increased net revenues from existing home transaction services and the decreased fixed compensation costs for Lianjia agents, c) a higher contribution margin for new home transaction services as a result of an increased number of projects with higher margins and a relatively lower percentage of fixed compensation costs of net revenues from new home transaction services, and d) a relatively lower percentage of costs related to store and other costs of net revenues in Q3 compared to the same period of 2021.

Total operating expenses decreased by 29.9% to RMB3.5 billion in Q3 from RMB5.1 billion in the same period of 2021. General and administrative expenses decreased by 26.4% to RMB1,777 million in Q3 from RMB2,412 million in the same period of 2021, mainly due to the decrease of provision for credit loss along with the decreased accounts receivable balance, personnel costs and overheads along with the decreased headcount, as well as the decrease of conferences and travel expenses, which was partially offset by the increase of share-based compensation in Q3 compared to the same period of 2021. Sales and marketing expenses were RMB1,258 million in Q3 compared to RMB1,202 million in the same period of 2021, mainly due to the increase in sales and marketing expenses for home renovation and furnishing services as the financial results of Shengdu we consolidated since Q2 2022, which was partially offset by the decrease of the brand advertising and promotional marketing expenses and personnel costs for housing transaction services. Research and development expenses decreased by 51.2% to RMB509 million in Q3 from RMB1,043 million in the same period of 2021, mainly due to the decrease of personnel costs and share-based compensation as a result of decreased headcount in research and development personnel in Q3 compared to the same period of 2021.

Income from operations was RMB1.2 billion in Q3, compared to loss from operations of RMB2.3 billion in the same period of 2021. Operating margin was 6.9% in Q3, compared to negative 12.7% in the same period of 2021, primarily due to: a) a relatively higher gross profit margin, b) the decreased in total operating expenses along with the relatively flat net revenues, primarily due to personnel severance and optimized resource utilization in Q3 compared to the same period of 2021.

Excluding non-GAAP items, our adjusted income from operations was RMB2.1 billion in Q3, compared to adjusted loss from operations of RMB1.4 billion in the same period of 2021. Adjusted operating margin was 12.0% in Q3, compared to negative 7.9% in the same period of 2021. Adjusted EBITDA was RMB2.3 billion in Q3, compared to negative RMB550 million in the same period of 2021.

Net income was RMB716 million in Q3 compared to net loss of RMB1,766 million in the same period of 2021. Excluding non-GAAP items, adjusted net income was RMB1,888 million in Q3, compared to adjusted net loss of RMB888 million in the same period of 2021.

Net income attributable to KE Holdings Inc.’s ordinary shareholders was RMB723 million in Q3 compared to net loss attributable to KE Holdings Inc.'s ordinary shareholders of RMB1,765 million in the same period of 2021. Adjusted net income attributable to KE Holdings Inc.'s ordinary shareholders was RMB1,895 million in Q3, compared to adjusted net loss attributable to KE Holdings Inc.’s ordinary shareholders of RMB887 million in the same period of 2021.

Diluted net income per ADS attributable to KE Holdings Inc.'s ordinary shareholders was RMB0.60 in Q3, compared to diluted net loss per ADS attributable to KE Holdings Inc.'s ordinary shareholders of RMB1.50 in the same period of 2021. Adjusted diluted net income per ADS attributable to KE Holdings Inc.’s ordinary shareholders was RMB1.57 in Q3, compared to adjusted diluted net loss per ADS attributable to KE Holdings Inc.’s ordinary shareholders of RMB0.75 in the same period of 2021.

All in all, our profitability strengthened substantially, and we fully demonstrated our strong execution and operational capabilities. Among these developments, I'd like to address the following financial highlights:

First, the profitability and financial health of our new home business further improved. As we cooperated with a greater number of projects with higher margins, and optimized our fixed costs, the contribution margin of new home transaction services increased to a new high of 24.9% in Q3 since our IPO, up 1.4 percentage points from Q2. Meanwhile, our effective risk control strategies helped improve our financial conditions. Cash collection from our new home business totaled RMB9.27 billion in Q3, and that amount surpassed new home revenues for five consecutive quarters. As such, new home DSO shortened by 30 days from Q2 to 78 days in Q3.

Apart from faster collection of new account receivables, we also strove to collect receivables that were previously recorded as bad debt provisions, and it enabled us to write back RMB195 million in bad debt provisions in Q3.Therefore, bad debt provision did not have a negative impact on our P&L during Q3. This reflected the Company's principle of adopting the most prudent accounting treatment, while highlighting the indispensable value of our new home transaction services in bolstering better sell-through for developers and promoting healthy property market circulation.

Second, as we continued to carry out the all-round integration between Beike and Shengdu, our home renovation and furnishing services achieved robust growth, and started to contribute more revenues to the Company in Q3. The business generated revenues of RMB1.8 billion, up over 40% year-over-year and 34% from Q2, on an apple-to-apple basis. For Beijing Beiwoo, Q3 revenues from home renovation and furnishing services rose over 90% year-over-year, while gross margin increased by 8.3 percentage points from the same period of 2021.On that basis, Beijing achieved city level operating break-even for the quarter. Beijing’s advancement in building-up its business model and improvement in financial performance provides a feasible path for us to explore on a larger scale across the country.

Third, every penny counts. In Q3, our ongoing optimization of operating expenses showed results, it fell 30% year-over-year to RMB3.5 billion under GAAP financial measures, driving the recovery of our profitability. Under non-GAAP, our total operating expenses decreased by 35.6% to RMB2.7 billion, including a bad debt provision written back of RMB195 million.

Fourth, we maintained a strong cash position and operating cash flow in Q3. As of end September, the balance of our cash, cash-like items was RMB77.2 billion, or USD10.9 billion. Among which the combined balance of our cash, cash equivalents, restricted cash and short-term investments amounted to RMB57.5 billion, up by RMB7.5 billion from Q2. The balance of our long-term cash-like items, mainly included in long-term investments, amounted to RMB19.7 billion. Our net operating cash inflow was RMB2 billion in Q3, remaining positive for the fourth quarter in a row. This outcome demonstrated our strong ability to generate cash, and in our view, this makes us well- positioned to navigate market fluctuations and future challenges.

Fifth, as we previously disclosed, we established a share repurchase program under which the Company may purchase up to USD1 billion of our Class A ordinary shares and/or ADSs over a 12-month period. Since the launch of the program on September 1, we have spent a total amount of around USD155 million to purchase approximately 11.75 million ADSs in the open market as of November 30. Despite market fluctuations, we continued with the repurchase program, underscoring our management team's confidence in the Company's long-term development prospects and our efficient capital allocation.

Turning to guidance for the fourth quarter of 2022: we expect total net revenues to be between RMB14.5 billion and RMB15.0 billion in Q4, representing a decrease of approximately 15.7% to 18.5% from the same period of 2021. This forecast considers the potential impact of the recent real estate related policies and measures, and the COVID-19 resurgences and containment measures in certain regions, which remains uncertain. It constitutes current and preliminary view on our business situation and market condition, which are subject to change.

Last but not least, in the face of market challenges, we responded quickly and actively with exceptional resilience and execution capabilities, as well as fully proved effectiveness of our operating leverage. Our abundant cash reserves and healthy cash flow also served as a safety cushion against external uncertainties.

Financial security and operational efficiency are capabilities we have forged in confronting numerous difficulties and challenges, which have enabled our fundamentals to remain intact and strengthened our sustainable operations amidst adversities. Our management team has always led by example into the front line, respected every effort and achievement of our service providers, and through it all with pragmatism and honesty. All of us at Beike are making an all-out effort, with heart and soul, and never leave anything to chances.

Setbacks have translated into courage, and the dangers ahead inspire us to push forward. As we stand the test of time, not a single step along our journey will be easy, but we will never stop. Keep going, we will keep getting better.

That concludes our prepared remarks. We would like now to open the call to your questions. Operator, please go ahead.

Question-and-Answer Session

Operator

Thank you. The first question comes from Steven Tsai with Morgan Stanley. Your line is open.

Steven Tsai

Thank you management for taking my question, my question is on market outlook. Could you share with us your view of fourth quarter outlook for each of new home and existing home market? And what are the underline consumption behind your Q4 revenue guidance? Also, I know it's a bit too early, but could you also share with us on the market recovery path next year, if you look through the short-term pandemic impact in the quarter?

I'm asking this because on the one hand, we have seen a lot of supporting policies in the past few weeks. But on the other hand, some of the existing home sales have seen some slowdown in sales recovery, while existing home supply seems increasing fast, but price is also trending down. So just wondering how we should think about the path next year?

Tao Xu

Thank you, Steven, it's Tao. Let me talk about the third quarter review first. For the macro perspective, the real estate market in the third quarter was affected by multiple factors, including an unusually hot summer across country. The pandemic flare-ups in some high-tier cities and new home mortgage payment suspensions, slowdown in developers’ sales promotions as well as households’ concerns about geological tensions, economic downturn, and uncertainty for the income expectations. At the same time, the frequency and magnitude of supportive policies slowed down in Q3 from both the central and local government levels. In the second quarter, the central and local governments introduced close to 100 measures and policies to support market recovery. But in this Q3, there's only 70. And we also saw some strong relaxation reversing in some several key cities.

The reduction of the positive factors and the increase of inhibitive factors both contributed to the recovery slowdown in the housing market in Q3. In terms of the existing home market. Despite the macro headwinds, in third quarter the recovery of the existing home market quickened. The GTV for China’s existing home market increased by 6.6% year-over-year and 8.1% quarter-over-quarter.The GTV in July recorded year-over-year growth for the first time in the past 12 months. Specifically, the existing home market hit a high July and moderated month-over-month afterwards. This trend is consistent with the monthly trend in the third quarters of 2018 to 2021.

City-wise, the first-tier cities benefited from the pent-up demand after pandemic restrictions were lifted, resulting in a significant GTV growth quarter-over-quarter, while the performance in the second and third-tier cities was basically flat versus the second quarter. Among them, cities such as Jinan and Suzhou, which have more supportive policies, and Zhengzhou, which benefited from the demand shift from the new homes, saw steady improvement in the existing home market in third quarter, while cities such as Chengdu were more affected by the pandemic at the end of Q3.

In terms of the new home market affected by multiple macro factors, the new home market’s recovery trend in May and June did not extend to the third quarter. Following the mortgage payment suspension incidents in July, our leading indicator, the number of new home subscriptions plummeted, down 42% week-over-week and 26% month-over-month, and continued to drop in August and September. According to the data of the National Bureau of Statistics, third quarter new residential housing sales fell by 21.3% year-over-year and 7.1% quarter-over-quarter. CRIC's data on the top 100 developers showed a 33% year-over-year drop in the period, and a slight downward trend month-over-month. City wise, according to Beike Research Institute, in the first nine months of the year, new homes GTV was down merely 2% year-over-year for first-tier cities, but dropped 46% and 41% for second-and third-tier cities, respectively.

As the end of September, regarding the home price, the 50 key city existing home price has fallen for 13 consecutive months and is still showing a downward trend. It further fell 1% in September from August, taking cumulative decline to 9%.

Existing home prices in Beijing and Shanghai hit a new high in Q3, and began to adjust slightly in October, while in most other cities, the price declined more notably. Cities with more significant home price adjustments are mostly cities that saw large price increases in the past, like Shenzhen and Dongguan.In summary, there were many unexpected factors in the market during the Q3. It will require additional observation to tell how the market will perform.

Regarding for the Q4 outlook, since the fourth quarter, favorable policies have been introduced continuously. On demand side, policies, including lowering the mortgage rates, tax refunding, and relaxed the first-home recognition to ease down payment for the home upgrade demand have all played a role in promoting market recovery. To address the liquidity crisis of developers, several ministries of the central government have introduced tools to support credit, debt and equity financing of developers, including the famous ‘16 measures from the Central Bank’. The path to credit restoration for developers is getting clearer, and it will help restore market confidence, the ongoing COVID outbreak and the corresponding control measures in many cities still bring great pressure on the market recovery and have a dilutive effect on supportive measures.

For existing home market, at present, among our top 32 cities, over 95% of the stores in Beijing, Zhengzhou, Chongqing and Shijiazhuang are affected and unable to operate normally due to COVID-19 and the related containment measures. More than 60% of our stores in Guangzhou are affected, and the pandemic situation in Chengdu, Tianjin, Xi'an and Suzhou is also intensifying.

During the previous severe flare-ups in Shanghai, Shenyang, Zhengzhou and other cities. The transaction volume was close to zero for about four to eight weeks. Therefore, we prudently assume that roughly 25% of our existing home transactions in the fourth quarter will be affected by the pandemic. However, unlike the discretionary consumption, housing demands are largely rigid. Based on our experience, the demand will be bounce back and be replenished to a certain extent after pandemic resurgence is over.

New home market is more notably driven by the developers' active promotions, easing policies and the National Day holidays, and is expected to see a narrowed year-over-year decline in Q4. In October, Beike new home subscription data rose sharply, by nearly 35% compared with September. The subscription data usually leads the online contract signing by about a month, and the recovery of the leading indicator supports overall the new home market in Q4. Despite the private developers might still experience debt defaults, relentless efforts are being made in debt relief for the industry in the fourth quarter.

Regarding the Company's view for the year of 2023, I would like to say the market trend will be affected by multiple factors, but it is unlikely for the market to weaken further. There's a room for the real estate policies to further relax: guided by the principle of “the housing is for living in, not for speculation”, maintaining the stable development of the real estate market and supporting the release of the reasonable housing demands have become the consensus among the various entities.

Judging from the timing of end-April, September and November, when the central government released easing measures, the current market downturn may reached the point of the triggering more policy relaxations. Considering the housing prices are still falling and the transaction volume is still at a trough, we expect to see increased policy support next year, especially from the local governments, whether it is in the form of purchase funding support or more importantly, further easing of purchase qualifications. These will lay the foundation for the demand to return and stabilize the market.

For other macro factors, that have a relatively large impacts on the market recovery, If saying that, number one, the global economic and political landscape does not experience significant turbulence. Number two, there is moderate economic growth domestically and the pandemic has been effectively controlled with its impact on the economy gradually easing. Number three, the urban employment rates is back on track, as well as the pace of urbanization. Number four, the residents’ income expectations and the consumer confidence are moderately restored. Lastly, on the policy front, the implementation of the property tax will not be rushed in the short term.

Under all these assumptions above, we expect the performance of the existing home and new home markets as follows for the year of 2023. Strong certainties in recovery for the existing home market. the existing home market has undergone deep adjustments in the year of 2021 and has shown a trend of quarter-over-quarter recovery so far in 2022. In the second half of 2022, most cities might be able to return to the monthly transaction averages over the past five years. We expect the existing home market to continue to recover and continue to benefit from the spillover demand from the new home market in the year of 2023. According to the forecast by Beike Research Institute, nation-wide GTV for existing home sales is expected to a stage of mild recovery, rising around 5% year-over-year next year compared with 2022.

Regarding new home, it might take the longer for the new home market to see a mild recovery. The recovery of the new home market next year will depend more on the restoration of the consumer confidence in real estate market and the strength of the supportive policies. According to Beike Research Institute, with the support of the more relaxed policies, developers, especially those state and centrally owned, will increase their sell-through efforts on the supply side next year, bringing a marginal improvement in transaction volume. However, for the consumer confidence and the housing prices, which were more deeply wounded by COVID, and the delayed new home projects, it will take longer to recover. The decline in customer confidence in second half of this year is despite to expected to the first half of next year and begin to repair in the second half of 2023. As such, we expect GTV for the new home market to be largely flat-lined year-over-year in the year of 2023.

Operator

The next question comes from Timothy Zhao with Goldman Sachs. Please go ahead.

Timothy Zhao

I have two questions here. First, could management share some outlook on how our Lianjia store and network store expansion plan in next year? And what is the operating efficiency and net income level of the stores and agents at this moment? And in the third quarter, we achieved very strong profitability and that means the income level of the stores and agents is coming up.

And secondly, it's related to the SOE versus private developers breakdown with new home sales, as I noticed private developers still accounted for over 50% of new home sales on Beike platform. May I check what are the top customers in the private developers? We are seeing ßprivate developers also default on bonds and delayed the interest payment? Are we expecting more risk related to the current account receivables?

Tao Xu

Thank you, Timothy. Regarding your first question, store and agent numbers are stabilizing and even starting to grow in some cities. We see stabilizing store and agent network scale. Since the second quarter, the number of active stores and agents have started to stabilize, and in the third quarter, the quarter-over-quarter decrease in active stores and agents narrowed to 3% and 2%, respectively. Among then, in nearly 30 cities, including Nanjing, Changsha and Hefei, the number of active stores grew quarter-over-quarter and the number of active agents increased quarter-over-quarter in 40 cities, including Shenzhen.

There's no significant network expansion needed going forward in short run: a large number of practitioners left the industry, following the recent round of market corrections, and we believe many of them might not return even when the market recovers. Therefore, looking ahead, we do not expect the rapid growth in the number of stores the agent industry-wide in short to medium-term, and the number of stores and agents on our platform will also remain relatively stable over coming quarters.

The steady improvement in store and agent productivity facilitates organic business growth. We believe increasing per store and per agent income is the key to organic growth. The industry has shifted away from the frenzy of the pure scale expansion towards the pursuit of the refined, high-quality services. Only in such an environment, can service providers who take care of customers to stand out from the pack and to see the improvement in their living conditions.

In 2021, the average income of Lianjia agents nationwide was still far below the average local salary, 77% and 63% of average and median local salary, respectively. Therefore, while maintaining a relatively stable scale of stores and agents on our platform, we hope to support each high-quality store and agent to grow revenue and profit, thereby realizing the high-quality and sustainable growth for the overall business on our platform. The productivity improvement has delivered results.

Overall speaking, we implemented a series of strategies, including reforming loss-making stores, merging for larger stores, facilitating the business shift from the new homes to existing homes and focusing on key new home projects. We insisted on taking care of agents to help agents and store owners transcend cycle. Although it takes time for our efforts to pay off, we have observed clear recoveries in store and agent productivity on our platform.

In the third quarter, while GTV on Beike platform dropped by 11% and our revenue fell by 3% year-over-year. The unit store commission revenue of our franchised stores and connected stores on our platform grew by 25% and 26%, respectively, year-over-year and 14% and 12%, respectively, quarter-over-quarter.

Meanwhile, commission revenue per agent of franchised stores and connected stores rose by 25% year-over-year and 9% quarter-over-quarter. Of course, there are structural reasons that partially explained the increase, but overall, store and agent income on our platform has been improving.

Just take Zhengzhou as an example. Due to the market corrections, our revenue in Zhengzhou decreased by 43% in the first three quarters, and by 23% year-over-year in the third quarter. However, our operating profit margin in the city rose significantly from last year's average of 6% to 24% in the third quarter.

Operating profit grew by 69% for the first three quarters and was 14-fold in the third quarter, compared with the same period of last year. While we improved the profitability in Zhengzhou as a whole, the connected stores in Zhengzhou have also achieved significant improvements in their operational and financial performance. In the third quarter, their unit store commission revenue grew by 57% year-over-year and 14% quarter-over-quarter. Looking for the future in the year of 2023, assuming the market enters a period of steady recovery, we hope to help more agents and stores to reach above the “bread-line”.

Regarding your second question, first, I need to emphasize again the Beike's bad debt risk is minimal mainly for three reasons:

One, as Beike continue to increase cooperation with state and centrally owned developers, they are accounting for an increasingly higher proportion of our new home sales. In third quarter, the proportion of new home sales from state and centrally owned developers further expanded by 5% quarter-over-quarter to 42%.

Two, the news coverage on the debt crisis created a so-called “halo” effect, giving the impression that the majority of the private developers are in a debt crisis, but in the real world, a significant number of local private developers remain crisis free.

Contrary to common perception, these small yet sound developers with low leverage are our important corporative partners. Meanwhile, it is not subject to the concentration risk. We currently serve more than 1,000 private developers, of which only six who each account for more than 1% of the total sales contribution.

The robust health of our local private developers and our low business customer concentration empower Beike to maintain active control of our risk exposure. We continued to increase the coverage of “Commission in Advance” model, particularly among the private enterprise, the percentage of revenues from“Commission in Advance” model to the total private developers new home revenues, in cities excluding Beijing and Shanghai already exceeded 32% in first three quarters and reached 44% in September. As such, a further deterioration in the operating condition of a single, or even multiple, private developers will not have a material impact on our accounts receivable collections.

Three, we are equipped with the industry-leading “risk control strategy” and strong bargaining power: we have never slackened in our new home risk control measures, and the new home receivables collection is a core KPI for this year. This year, we continue to strictly manage our DSO with an emphasis on the detection and the prevention of risks in advance, revenue safety and the settlement of the historical receivables. There are some examples:

Up front risk detection and prevention: we continue to iterate our developer risk assessment system to conduct up front risk detection and classification. We also strictly manage the cooperation with developers in accordance with different risk levels.

Contract with the high-risk developers are completely prohibited and only with advanced commission payments and the settlement of historical receivables, can such cooperation be resumed.

Moreover, safeguard our newly generated revenues: comprehensively expand the scale of “Commission in Advance” payment and the percentage of the cooperation with the state and the centrally owned developers.

In addition, we also resort to the legal remedy as much as possible against the high-risk developers with delinquent accounts to ensure receivables preservation. Conduct corporate-to-corporate cooperation with a low risk developers to reach the settlement agreements on receivable in arrears to expedite the settlement of historical receivables.

As a result of a series of initiatives in Q3, our new home sales cash inflow reached RMB9.27 billion, almost 10% higher quarter-over-quarter. While the book value of our new home receivables decreased to RMB6.15 billion, the receivable collection cycle shortened by 30 days to 78 days in Q3.

In the first three quarters of this year, our cumulative new home transaction revenue reached RMB20.4 billion and our cumulative cash collection reached of RMB26.4 billion. Our accounting treatment against the bad debt has always been “prudent with the maximum provisions”, for almost all the developers who had previously generated default risk, the maximum amount receivable was booked as bad debt provision.

Meanwhile, we are an effective and indispensable channel for developers to generate sales and resume liquidity, we continue to collect receivables the questions from developers, that were previously recorded as bad debt provision. Therefore, in Q1 and Q3 of this year, we were able to write back provisions for the bad debt in the amount of RMB115 million and RMB195 million, respectively. While our cumulative bad debt provision amounted to almost RMB2 billion, covering 32% of all new home account receivables.

We think this is sufficient bad debt provisioning and there is a very little chance for large amount one-time bad debt provision in the future. Given our highly decentralized business and the implementation of the strict risk control, we believe our new home receivables will continue to become more secure, and our bad debt from new home sales will not deteriorate materially any further. Thank you.

Operator

The next question comes from Liping Zhao with CICC. Please go ahead.

Liping Zhao

So since the consolidation of Shengdu in second quarter, the Company has achieved many progresses in terms of home renovation and furnishing capabilities and also the enhanced cooperation with transaction business line. Looking ahead, what's your development strategy of this business? And how will you balance the growth and investment of this sector?

Stanley Peng

Okay. I'm Stanley. Thanks for your question. The home renovation and furnishing industry is relatively capital intensive and faces many iteration opportunities, we have our understandings to such industry that requires high standardization and transformation through technology, our understandings are:

First, we must not rush. It took Beike and Lianjia 20 years of development to get to where we are now. It's the same for home renovation and furnishing. We need to look at growth with a time horizon of three years for the business, and its gradual start does not mean it will not reach greater heights in the future.

Second, to achieve long-term growth, we should cultivate needed capabilities and resolve the major outstanding issues in the industry. We have observed the following areas in the industry where changes are need. One, there is no online service with great home renovation and furnishing experience provided in China. Two, in terms of productization, of localized home renovation and furnishing products tailored for the Chinese market, the industry is still relatively weak. Three, the home renovation and furnishing services are not standardized. Four, professional skills of service providers need to be improved. Five, we need to identify possible areas of innovation through structural changes in technology, materials, processes, and methods.

Facing these industry problems and opportunities, we need to leverage our store agent network traffic, and provide more and better products.

At the same time, we need to upgrade our capability to capture these opportunities and realize long-term growth. Therefore, we need to make steadfast and targeted investments in areas that will enable us to provide more products and iterate our capabilities for long-term benefits, instead of making investment to stimulate short-term growth and expand scale without growing our capabilities:

This is why we are not going to advertise heavily, but rather, invest in service training. For example, our Huaqiao Academy spent months developing courses for home renovation service providers. Our home renovation managers throughout the country all need to take full-time training for three to four days, during which time, we will be missing out on revenue, but this is an investment we must make. Also, we are not going to use large one-time subsidies to stimulate sales, rather we will spend on system development, online content, and home renovation product R&D, among others. We see investments in home renovation products in the industry inadequate.

Going forward, we will engage in more refined development and operations to provide targeted products for different user groups, such as products for old neighborhoods, and upscale residential communities. If we do not invest in these areas, it means we have stopped in our tracks without striving for long-term growth.

These investments are necessary, as they match our vision and expectation for the future. Of course, during our investments, we require our business to manifest its capability in growing from zero to one, and fostering a virtuous cycle of quality, efficiency and scale.

In summary, there are ample opportunities in the industry, as consumers have needs and we want to meet these demands. As such, we will cultivate our capabilities and the harness our resources rationally. In my view, it does not make sense to make an investment in this industry for mere financial gains or short-term revenue growth. Our investments need to drive greater development over a long timeframe. That's my answer to your question. Thank you.

Operator

We are now approaching the end of the conference call. I would now like to turn the call over to your speaker host today, Ms. Siting Li for closing remarks.

Siting Li

Thank you once again for joining us today. If you have any further questions, please feel free to contact Beike's Investor Relations team through the contact information provided on our website. This concludes today's call, and we look forward to speaking with you again next quarter.

Thank you, and goodbye.

Operator

Thank you. The conference has ended. You may now disconnect your lines.