We believe that the company cannot be viewed as a traditional real estate service company that fluctuates with the ups and downs of real estate development activities. The company always remains forward-looking, actively seeking new profit growth points, and leverages the company's unique advantages in empowering workers, standardizing and digitizing low-frequency service industry processes, understanding trends in the housing needs of Chinese residents, and responding to national policy calls in a timely manner. We also appreciate the company's patience in building a foundation.

For example, after clarifying the development goals of the home improvement strategy and investing a large amount of capital in mergers and acquisitions to enhance supply chain capabilities, the company gave priority to optimizing delivery capabilities; in the case of sufficient traffic, reshaping the relationship between industrial workers and platforms, thereby consolidating the positive cycle of satisfaction and worker dignity, rather than prioritizing the rapid growth of GTV. We maintain the company's target price of HK$76.0 and maintain the company's “buy” investment rating.

The company's performance in the third quarter was impressive. In 2023Q3, Shell achieved a total transaction volume (GTV) of 655.2 billion yuan, a year-on-year decrease of 11.1%. Among them, the housing stock business achieved GTV of 439 billion yuan, a year-on-year decrease of 2.2%; the new housing business achieved GTV of 192.1 billion yuan, a year-on-year decrease of 26.5%; and the home improvement business achieved GTV of 3.3 billion yuan, an increase of 65.6% over the previous year. 2023Q3, Shell achieved revenue of 17.8 billion yuan, a year-on-year increase of 1.2%, and non-GAAP net profit of 2.16 billion yuan, an increase of 14.4% year-on-year. 2023Q3 is the bottom of fundamentals where the real estate policy has not yet fully taken effect. The company still showed strong profitability, and its resilience throughout the cycle has been verified once again.

Home improvement business: Light boats have passed through Wanzhongshan. In 2023Q3, Shell achieved revenue from the home improvement business of 3.18 billion yuan, an increase of 72.1% over the previous year and an increase of 21.0% over the previous year. The company recently announced that it plans to acquire iSpace, which is expected to further increase its market share in core cities such as Beijing. In the first three quarters, the company's home improvement business achieved a contract value of 9.4 billion yuan and revenue of 7.2 billion yuan. The company is the first home improvement company in China with a contract exceeding 10 billion yuan, and has already initially completed the construction of a core city team and delivery capacity. We believe that the company's supply chain and delivery capacity accumulation have broken through shortcomings, that significant progress has been made in sorting out work processes, and that the traffic advantage will expand further as the share of the second-hand housing market increases. We have reason to believe that in the home improvement business Blue Ocean, the company will continue to maintain rapid growth starting in 2024. Home improvement is superimposed on new retail, and the business ceiling and profit space have also been fully opened, and it is completely independent of the real estate development cycle.

The basic market share of second-hand housing is expected to increase, while new housing guarantees high-quality repayment and good profitability. The efficiency of the company's single store has improved significantly compared to history. The short-term performance is a marked increase in the company's gross margin and net profit margin. We expect the medium term to show an expansion in market share, a stronger competitive advantage in the second-hand housing brokerage industry, and a larger ACN (Agent Cooperative Network). The new housing business is a revenue monetization channel for ACN infrastructure. Under the premise that the share of quick commissions remains as high as 54% and net receivables continue to decline 23% month-on-month, the new housing rate has been further increased to 3.07%. This shows the company's irreplaceable competitive advantage in selling new homes. Under the new real estate industry chain pattern, on the one hand, the company adheres to the principle of “being good to consumers” and has reduced second-hand housing commission rates in Beijing. On the other hand, the company has shown significant advantages over development companies in terms of ecological location, speeding up helping developers to remove inventory, thereby reducing the overall risk of the industry.

Company characteristics: Long-term commitment to consolidating basic capabilities, always forward-looking to pursue new growth. We believe that the company cannot be viewed as a traditional real estate service company with ups and downs along with the ups and downs of real estate development activities. The company always remains forward-looking, actively seeking new profit growth points, and leverages the company's unique advantages in empowering workers, standardizing and digitizing low-frequency service industry processes, understanding trends in the housing needs of Chinese residents, and responding to national policy calls in a timely manner. We also appreciate the company's patience in building a foundation. For example, after the company clarified the development goals of the home improvement strategy and invested a large amount of capital in mergers and acquisitions to enhance supply chain capabilities, the company gave priority to optimizing delivery capacity and reshaping the relationship between industrial workers and platforms, thus consolidating the positive cycle of satisfaction and worker dignity rather than prioritizing the rapid growth of GTV.

Risk factors: Uncertainty about real estate policies and fundamentals; the company lacks good mergers and acquisitions targets in the home improvement sector, and there is relatively little risk in areas where the company's book capital can be invested; the company has not yet completed mergers and acquisitions, and there is still uncertainty about future progress.

Profit forecast, valuation and rating: Taking into account the company's strong profitability and the slight improvement in the real estate market in the fourth quarter, we raised the company's 2023/24/25 non-GAAP net profit forecast to 99.4 billion/11.05 billion/12.55 billion yuan (the original forecast was 8.79 billion/9.84 billion/10.94 billion yuan). The company's operating performance over the past year shows that even with adverse changes in GTV and fees in the market, the company is able to adjust the cost structure and maintain a steady and strong profitability on a track. At the same time, the home improvement business is becoming more and more mature, which also shows that the company is not just a real estate brokerage company; it will move into a broad blue ocean in the future. We believe that the company is a unique low-frequency complex service provider in China, just as companies such as Meituan are high-frequency service providers with competitive barriers in China. The company attaches great importance to shareholder returns. The scale of repurchases and dividends in the single quarter of 2023 has already surpassed the net inflow of operating cash. We refer to Meituan's valuation of 2.4 times PS in 2023 (forecast by the social service team of CITIC Securities Research Department). Considering that a significant proportion of Shell's operating income actually matches the large GTV amount (that is, the non-chain company portion) and Shell's industrial status, we should consider giving the company a target valuation of 3.5 times PS in 2023. This is also equivalent to 20.7 times PE in 2023 after excluding the company's broad monetary capital (according to the target total market value/non-GAAP net profit excluding broad monetary funds) calculation). We maintain the company's target price of HK$76.0 and maintain the company's “buy” investment rating.