xijian
xijian
My investment rating for KE Holdings Inc. (NYSE:BEKE) [2423:HK] shares is a Hold.
With my prior write-up published on November 10, 2023, I reviewed BEKE's financial results for the third quarter of last year. The focus of this update is KE Holdings' recently disclosed Q4 2023 financial numbers and its business outlook.
KE Holdings' latest fourth quarter top line and bottom line surpassed expectations. The company's dividends and buybacks for fiscal 2023 translated into an impressive 8.7% shareholder yield (sum of buyback yield and dividend yield). On the flip side, BEKE's management comments and the recent property sector numbers indicate that the company's near-term financial performance might potentially be unfavorable. Taking into both its commitment to shareholder capital return and its negative outlook for the short term, I retain a Hold rating for KE Holdings.
KE Holdings issued its most recent quarterly earnings press release on March 14, 2024 before trading hours. I have a favorable view of the company's financial performance for Q4 2023 and its latest shareholder capital return initiatives.
The company's actual Q4 2023 revenue and normalized net profit in local currency or RMB terms came in +7.5% and +2.2% above the analysts' consensus financial projections, respectively, as per S&P Capital IQ data. Top line for BEKE rose by +20.6% YoY to RMB20,204 million in the final quarter of the previous year. KE Holdings' actual Q4 2023 non-GAAP adjusted net income amounting to RMB1,713 million implied that it had achieved a +11.6% bottom line growth on YoY terms.
In its March 14 earnings release, BEKE cited "the low base effect on existing home transaction market" for Q4 2022 and "the recovery of existing home transaction market due to supportive polices" as the main factors driving its strong YoY revenue and earnings growth in the recent quarter.
An earlier September 25, 2023 Fitch Ratings research article had noted "the recent wave of policy easing in China" like the loosening of "restrictions on home purchases" is expected to boost "existing homes for sale" which indeed benefited KE Holdings' Q4 2023 results. The company's Gross Transaction Value or GTV for its existing home (second-hand home) transaction services segment expanded by +30.1% YoY in the most recent quarter.
Separately, KE Holdings continued to return a meaningful amount of capital to the company's shareholders through dividends and share repurchases.
BEKE's full-year FY 2023 dividends per ADS (American Depositary Shares) were $0.522 (including the latest dividend of $0.351 per ADS), which was equivalent to a 3.7% dividend yield.
Also, BEKE allocated around $719 million to share buybacks last year, which implies a buyback yield of approximately 4.1%. In other words, KE Holdings' FY 2023 shareholder yield (sum of buybacks and dividends divided by market capitalization) was as high as 7.8%. As of end-2023, BEKE still had about $1.1 billion (roughly 6% of its market capitalization) remaining from its current share buyback authorization which expires at the end of August this year.
It will be realistic to think that KE Holdings will still distribute a significant proportion of its excess capital and earnings to its shareholders going forward. BEKE emphasized at its Q4 2023 earnings call (transcript sourced from S&P Capital IQ) that "we are developing a long-term, proactive, stable total shareholder return plan" so as to "provide our shareholders with certainty of returns."
BEKE's shares declined by -2.5% on March 14, 2024 even though the company announced better-than-expected quarterly results and meaningful buybacks and dividends in the morning before the market opened. It is likely that investors have unfavorable expectations of KE Holdings' performance for the short term.
In prior quarters, BEKE had a "Business Outlook" section as part of the company's results press releases outlining its expectations for the subsequent quarter's revenue. But KE Holdings' latest Q4 2023 earnings release didn't share the management's Q1 2024 top line guidance unlike its previous quarterly results announcements.
At the company's most recent fourth quarter earnings briefing, KE Holdings acknowledged that there are "ongoing uncertainties in the (Mainland Chinese residential property) market" and highlighted that "market confidence has yet to recover."
BEKE made reference to data from China Real Estate Information Corporation or CRIC at the latest quarterly results briefing which indicated that the aggregate new home sales of the largest 100 Mainland Chinese property companies witnessed a -49% YoY drop for the first two months of 2024. Notably, KE Holdings' GTV (Gross Transaction Value) for new home transactions decreased by -9.7% YoY in Q4 2023. As such, the recent industry data suggests that the performance of the company's new home transaction services segment, that accounted for 39% of its FY 2023 top line, is likely to remain weak for Q1 2024.
On the other hand, KE Holdings' existing home transaction services segment, which represented 36% of the company's net revenues last year, might also underperform in the first quarter of this year as explained below.
As per a March 15, 2024 research article published by ING, 68 out of 70 key Chinese cities tracked by China's National Bureau of Statistics saw lower second-hand home prices on a Month-on-Month basis in February 2024. This is also the 10th straight month running that the overall mean selling price of second-hand homes transacted in these 70 cities had decreased on Month-on-Month terms. In its mid-March research article, ING noted that "both primary and secondary (housing) markets (in Mainland China) are seeing poor levels of liquidity, as building sales have slowed as buyers have turned cautious."
The sell side analysts currently estimate that BEKE's top line in RMB terms will fall by -22.6% YoY (source: S&P Capital IQ) in the first quarter, which seems reasonable considering industry statistics and management commentary.
I have a positive opinion of KE Holdings' shareholder capital return initiatives for 2023, but I am concerned that BEKE's near term financial performance might be poor. Also, the stock's current valuations seem to be reasonably fair. As per S&P Capital IQ's consensus data, KE Holdings' consensus next twelve months' normalized P/E multiple and its consensus FY 2024-2027 normalized EPS CAGR estimate are 12.8 times and 12.5%, respectively. This implies that BEKE is now trading at a PEG or Price-to-Earnings Growth ratio of 1.02 times, which is roughly 1 times that is indicative of fair valuation.