KE Holding: Recent Rally Has Priced In Stimulus Effect, Downgrade To 'Hold'

seekingalpha11-05

BEKE's stock price has risen significantly since the Chinese government's stimulus package.The Chinese government's stimulus package has positive short-term effects but limited long-term effects.BEKE'...

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The Good Brigade  I published my initial investment thesis for KE Holding (NYSE:BEKE) in July of 2024, and followed up with another article in August. In both articles, I’ve argued that BEKE is undervalued based on its moat and growth potential. Since my initial write-up, BEKE has been up almost 50%. I believe the rise in BEKE’s stock price is mostly due to the Chinese government’s plan to rescue China’s faltering economy, particularly the real estate segment. The stimulus plan will likely have very positive short-term effects but limited long-term effects on BEKE’s main business. Furthermore, BEKE’s valuation has almost reached my 2025 target. Therefore, I am downgrading BEKE to a “hold” rating.  Recent developments in China’s real estate market  It is widely known that China's real estate bubble burst in 2021. The annual sale of residential property by value declined by more than 36% from the peak of RMB 18.2 trillion in 2021 to RMB 11.6 trillion in 2023. Things got worse in 2024. During the first three quarters of 2024, China’s real estate market completely collapsed. The U.S. News reported that “China's new home prices fell at their fastest pace in nine years in July, as a slew of support policies failed to stabilise prices and restore confidence in the struggling property sector\".  Reuters also reported that  \"property sales by floor area in January-July fell 18.6% from a year earlier, compared with a 19.0% slump in January-June.” China’s economy is heavily dependent on the real estate market. And Chinese citizens’ asset allocation is disproportionately weighted in real estate. Therefore, the downward spiral of the real estate market has not only dampened consumer confidence but also caused social unrest. After stubbornly refusing to acknowledge the government's failure in reviving China's real estate market for three years, Chinese President Xi Jinping finally realized that the government’s previous measures to stabilize the real estate market were not enough. In late September, President Xi called to halt the real estate decline at the Politburo meeting. What's noteworthy is that for the first time in a few years, the Chinese government explicitly removed its long-held stance that “the houses are for living in, not for speculation” from the official government website. Xi Jinping’s message had an immediate effect on China’s real estate market. The Asia Live reported that in October, China’s property market \"experienced the first year-over-year increase in 2024\". Notably, new home sales “increased 7.1% among the country’s top 100 real estate firms”.  Policy impact on China’s property market and Beike’s business  While I applaud the Chinese government’s latest real estate stimulus package, I am not convinced that there will be a sustainable recovery of the property market because China’s property market is still facing the issue of oversupply. Macrotrends’s data shows that China's urban population is about 910 million. The average size of a household in China is 2.76, per Statista. Simple math suggests that there are 330 million urban households. According to a report by the prominent Chinese real estate expert Ren Zeping, in 2023, China “has approximately 374 million urban housing units and the percapita urban residential area is about 35.9 square meters”. This means there are 1.13 housing units per urban household. As China’s population continues to shrink, the urban population is likely to decline as well, which could potentially worsen the oversupply issue. No policy can reverse this long-term trend.  In terms of the policy impact on Beike’s main business, I have argued in my previous articles that even though China’s property market is unlikely to return to its previous peak level, Beike can still grow its housing transaction services business by gaining market share due to its competitive advantages. In the short term, the stimulus package may boost Beike's housing transaction services for a few months, or even a few quarters.  For Beike’s new businesses, namely the home renovation and furnishing business and the rental property management business, I think the stimulus package will accelerate their growth rates because both businesses are highly correlated to China’s economic growth. In aggregate, the recent stimulus package by the Chinese government is very likely to boost the short-term financial results for Beike in the next few quarters. We’ll find out whether this is the case next year. Financial Projections And Valuation For Beike’s financial projections, I have updated my model to reflect the effects of the Chinese government’s stimulus package. Specifically, I have increased my revenue growth projection for Beike. I am assuming that new home sales in China will decline in 2024 but will rebound in 2025. I am also assuming Beike can maintain its current market share in both existing and new home markets, even though Beike has grown its market share so far in 2024. My margin assumptions remain the same. Based on these assumptions, I have revised my 2025 revenue and adjusted net income projections for BEKE.   author's estimates In terms of valuation, I am still applying a 14 times P/E multiple, which is a 60% discount to the sector median P/E multiple to account for BEKE's risk as a Chinese ADR.   author's estimate Based on these assumptions, it looks like BEKE is almost fairly valued at the current level with limited upside. Conclusion  BEKE will benefit from the recent stimulus package by the Chinese government as new home sales have shown signs of stabilization in October, while China's existing home sales continued to grow. At the same time, BEKE's new business initiatives will continue to grow very rapidly in the next few quarters. However, after the recent rally, BEKE's valuation has reflected much of the optimism with only a double-digit upside from today's price. Therefore, I am downgrading BEKE to a \"hold\" rating.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"-1","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2481555589"}