We believe that KE Holdings (Beike) has rich experience in successful mergers and acquisitions (M&As), and also accumulated methodologies and achieved milestone results in the one-stop home renovation & furnishing business. The Company chose to make another acquisition in its home furnishing business, the key new growth point, which we believe implies sustained high revenue growth in the business in the future. More importantly, during its value-driven development and scale expansion, Beike has been widening the moat of service quality and customer satisfaction, while strengthening its supply chain and delivery capacities.
Amid growing visibility of career development channel for service providers, Beike has kept improving the level of scientific management.
We expect that its annual revenue from the home renovation & furnishing business may exceed Rmb10bn in 2023, doubling from 2022, and will continue to grow at a high speed in 2024 and beyond. We retain the target price of HK$76.0 (on 3.5x 2023E PS) and reiterate the "BUY" rating.
Event: Beike released an announcement that it plans to acquire a 7.1% stake in Kongjian Zhihui for US$12.67mn and intends to further acquire the remaining equity interests. Upon the completion of a series of acquisitions, the latter will become a wholly-owned subsidiary of Beike.
Beike boasts methodology advantages and phased achievements.
Developing the home renovation & furnishing business is the most critical path for Beike to expand its residential service footprints. Some important methodological experience in the real estate brokerage business, such as breaking down complex services, improving the net promoter score (NPS) of low-frequency services, and enhancing consumer satisfaction with the dignity of service providers, have high reference value for its home renovation & furnishing business. Beike Research Institute statistics show that only 6.8% of the furnishing demand has nothing to do with home purchasing, and the real estate brokerage business will naturally reduce the customer acquisition cost of the home furnishing business. As developing the supply chain and delivery capacities of home furnishing business are beyond the traditional business capacity of Beike, it enhances the core capabilities of such business through self-development and M&As. This has triggered rapid growth in the Company's revenue from the home furnishing business, and promoted its home furnishing business to break even in core cities.
High M&A success rate backed by mature methodology, fully proved in both real estate brokerage and home furnishing tracks.
Beike conducted high-quality M&As in Dalian, Guangzhou, Shanghai and Chengdu in 2015 to build a nationwide business footprint for its primary business track. Such a move has united outstanding management professionals and popularized an effective methodology. In the home furnishing business track, Beike announced the acquisition of Shengdu Home Decoration in 2021, which effectively expanded the Company's business coverage, and improved its supply chain and delivery capacities, thus elevating the Company's business development to a new level. In summary, Beike's M&As have the following features: 1) Leveraging comprehensive insights into the industry to carry out M&As 2) Only acquiring targets that meet Beike's business capacity and operational norm requirements; 3) Keeping the core personnel of the M&A target, as well as retaining and enhancing the core competence of the acquired target; 4) Retaining the brand of acquired asset-light company to enrich Beike's brand matrix; 5) Not blindly following the trend of the capital market, and refusing to acquire targets with uncertain collaborative prospects in their core businesses; 6) No M&As for the purpose of short-term earnings improvement; and 7) Always having sufficient M&A funds even in the industry's trough period. We believe that Beike no longer has the necessity and feasibility for M&As in its primary business, but there are sufficient opportunities in other tracks. Its M&A capability outshines other asset-light service companies in China, which will be the foundation for the Company to excel in the residential service field.
Expanding the brand matrix and strengthening supply chain and delivery capacities.
We believe this acquisition may further accelerate the growth of Beike's home furnishing business. The positioning of the acquired brand is slightly different from that of Beike's existing brands, which has a higher degree of standardization. This means that after addressing the customer acquisition issue, there will be headroom for improving the acquired target's profitability.
Potential risks: Uncertainties related to the unfinished M&A project; disappointing post-investment integration of this M&A project; and fluctuations in the growth transaction value (GTV) of new homes and pre-owned homes.
Investment strategy: Since Beike entered the home furnishing market, the service quality and customer satisfaction of the home furnishing industry have steadily improved, making the career growth path of some high-quality service providers clearer.
Beike has redefined the entire industry's processes and rules. We believe that the most challenging exploration period for Beike's home furnishing segment has come to an end, and the high-growth phase is now arriving. We expect the annual revenue of the home furnishing business to exceed Rmb10bn, doubling YoY. Furthermore, the Company's furnishing business is likely to maintain rapid growth in 2024 and beyond, highlighting the potential of an industrial internet company. We maintain 2023E/24E/25E non-GAAP ANP forecasts of Rmb8.79bn/9.84bn/10.94bn for the Company. Taking the valuation of 2.4x 2023E PS per our estimates of Meituan (03690.HK) as a reference, and considering positive changes in real estate policies and Beike's industry status, we retain the target price of HK$76.0 (on 3.5x 2023E PS) and reiterate the "BUY" rating.