To The Moon

Stocks continued their climb during a light-volume week. The best-performing concepts are Tencent concept, health care tech and real estate operation.

Considering the different perceptions of the stock, this time TigerPicks choose $KE Holdings Inc.(BEKE)$ to have a fundamental highlight to help users understand it better.

$KE Holdings Inc.(BEKE)$

• KE Holdings reported strong Q2 2023 earnings, with GTV and revenues growing 22% and 44% respectively.

• The company is well-positioned in the Chinese real estate market, targeting affluent consumers and expanding into rental and home renovation sectors.

• The recent stimulus policies, including loosening restrictions on purchasing new homes, permitting real estate developers to lower prices, and continuing to loosen the interest rate environment, support BEKE's growth prospects.

KE Holdings holds a leadership position in the China real estate market and was expanding into high-growth sectors such as rental and home renovation. Rental demand is more stable than home sales and can provide a more steady income stream for the company. Home renovation is supported by affluent Chinese consumers.

BEKE's Q2 results reinforce our thesis, as top-line growth was fueled by the high-growth home renovation and emerging services businesses, with renovation revenues up 260% and rental/financial services up 213% year-over-year.

Policy Stimulus

(1) Loosen restrictions on purchasing new homes.

The new policy "recognizes home ownership without recognizing mortgage" - Recognizing home ownership or mortgage is the reference standard for banks to determine whether it is the first home when issuing mortgage loans. "Recognizing home ownership" refers to the bank referencing the number of housing units actually owned by the homebuyer family in the local area; "recognizing mortgage" refers to the bank determining whether it is the first home based on whether the homebuyer family has a history of housing loans nationwide.

For those with mortgage records from other places, no local housing, and "sell one to buy one" replacement demands, the down payment ratio and mortgage interest rates will decrease significantly, while real estate-related taxes and fees are also expected to be executed as first home purchases. This policy reduces the threshold for families purchasing homes while also reducing home purchase costs, which facilitates the release of demands.

The policy is executed first in top-tier cities. We think this policy is a stimulus for affluent consumers as this policy gives them more leverage to buy houses. As a result, BEKE as the industry leader is well-positioned to cater to this demand.

(2) Permit real estate developers to lower the price

Real estate market demand and supply are extremely unbalanced for restricted the supply of house sales through price control. The policy released the restriction on price control this month.

We think it will lower the price of the house and act as a stimulus for housing transaction volume. Real estate transaction volume is likely to pick up as liquidity is improving as a result of the policy. BEKE as the middleman, who earns commission rather than profits from the appreciation of home prices, is better positioned to profit from this beneficial policy as well.

(3) Continue loosening interest rate environment

The real estate market price index has been trending down since 2021, signaling sluggish real estate demand to the restriction policy and pessimistic consumer sentiment.

Nominal Residential Property Price Index in China

On August 29, the rate to lower the mortgage rate by 60 bps to 4.18%.

As a loosened purchase policy and lowered mortgage rate, combined with the relatively loosened monetary environment for the past 12 months, we think the real estate market is prepared for the bottom and stabilization.

Financials and Execution

BEKE as the industry leader in the space with no debt on the balance sheet is better positioned to double down its investment when the market is about to bottom. The company had $7.4 billion USD cash and cash equivalents as of June 2023 with zero long-term debt. Its impressive growth amid the real estate environment during H1 2023 is a strong testimony to its capability of execution.

Its operating expense was flat during Q2 2023, suggesting strong cost control discipline. Its adjusted income from operations was RMB 2.1 billion an increase from the loss of RMB 690 million last year. The company is also shareholder friendly as they sized up the share repurchase program to $1 billion USD and had returned value to shareholders of $605 million USD through share repurchase. In addition, the company announced a special dividend of 0.17 per ADS to reward supporting shareholders.

Valuation

We start with the valuation analysis as follows:

Its forward P/E ratio was 16.9x. When compared to a 60% growth rate, this appeared to be appealing.

Valuation multiple

Its current P/S ratio, which is trading at 1.8x, is below the historical average.

P/S ratio

We conducted the DCF analysis and used the following assumptions:

1. WACC: 15% (cost of equity: 15.8%, cost of debt 7.4%)

2. Free cash flow margin: 13% (2022 data)

3. Terminal growth rate: 3%

4. Net debt:-$6656 million (Q12023 data)

5. Shares outstanding: 1217 million (Q12023 data)

Through the DCF model, we arrived at a $17.7 billion equity value ($14.6 per share), which is 4% below the current price.

Based on the sensitivity test below, the stock is likely undervalued if the company can improve its free cash flow margin to above 15%, its WACC falls below 13%, or its terminal growth rate is over 5%.

Sensitivity analysis

Stock Price Forecast:

Here are the target price forecasts for the next 12 months from analysts on CNNMoney.com.

The 21 analysts offering 12-month price forecasts for Ke Holdings Inc have a median target of 24.30, with a high estimate of 31.46 and a low estimate of 9.22. The median estimate represents a +31.36% increase from the last price of 18.50.

Resource:

https://seekingalpha.com/article/4632593-ke-holdings-q2-affluent-consumer-focus-buoyed-by-government-stimulus

https://seekingalpha.com/article/4609243-ke-holdings-easing-us-china-tensions-and-growth-potential

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