Ke Holdings Inc

HKEX:2423

Q2-2025 Earnings Call

[Operator]

Hello, ladies and gentlemen. Thank you for standing by for KE Holdings, Inc.'s Second Quarter 2025 Earnings Conference Call. Please note that today's call, including the management's prepared remarks and question-and-answer session will all be in English. [Operator Instructions] Today's conference call is being recorded.

I will now turn the call over to your host, Ms. Siting Li, IR Director of the company. Please go ahead.

[Siting Li, executive]

Thank you, operator. Good evening, and good morning, everyone. Welcome to KE Holdings Inc., or Beike's Second Quarter 2025 Earnings Conference Call. The company's financial and operating results were published in the press release earlier today and are posted on the company's IR website, investors.ke.com.

On today's call, we have Mr. Stanley Peng, our Co-Founder, Chairman and Chief Executive Officer; and Mr. Tao Xu, our Executive Director and Chief Financial Officer. Mr. Xu will provide an overview of our business updates and financial performance. Then Mr. Peng will share more strategic thinking on our current and future developments.

Before I continue, I refer you to our safe harbor statement in our earnings press release, which applies to this call as we will make forward-looking statements. Please also note that Beike's earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Please refer to the company's press release, which contains a reconciliation of the unaudited non-GAAP measures to comparable GAAP measures.

Lastly, unless otherwise stated, all figures mentioned during this conference call are in RMB. Certain statistical and other information relating to industry in which the company is engaged to be mentioned in this call has been obtained from various publicly available official or unofficial sources. Neither the company nor any of its representatives has independently verified such data, which may involve a number of assumptions and limitations, and you are cautioned not to give undue weight to such information and estimates.

For today's call, management will use English as the main language. Please note that the Chinese translation is for convenience purpose only. In the case of any discrepancy, management statements in their original language will prevail.

With that, I will now turn the call over to our CFO, Mr. Tao Xu. Please go ahead, Tao.

[Tao Xu, executive]

Thank you, Siting , and thank you, everyone, for joining our 2025 half year results conference call. In Q1, the real estate market continues the recovery momentum we saw at the end of last year. However, as we entered Q2, as the momentum softened and the slowdown was largely due to international trade friction and the feeding impact of the early policy measures.

Because of the high base rate intensive earning policy in the middle of last year, the real estate market recorded a year-over-year decline in Q2. Turning to our business performance. Our platform's agent and store network continued to scale along with refined operations and ecosystem improvements.

Our existing home and new home business significantly outperformed the market in the first half of 2025. The proportion of the number of housing transactions from existing home sales reached a record high. At the same time, our home renovation and furniture business and the home rental service business both achieved high-quality growth.

Revenue from non-housing transaction services accounted for 41% of total revenue in Q2, highlighting our diversified growth drivers. Regarding our overall financial performance in Q2, our total GTV was RMB 878.7 billion, representing a year-over-year increase of 4.7%. The revenue reached RMB 26 billion, up 11.3% year-over-year. Gross margin declined by 6 percentage points year-over-year to 21.9%. GAAP net income was RMB 1.31 billion, falling 31.2% year-over-year. Non-GAAP net revenue reached RMB 1.82 billion, down 32.4% year-over-year.

Next, I'd like to elaborate on the operational updates and the financial performance of our business segments. Looking at our housing transaction services, the momentum from our proactive growth efforts has been clearly evident. During the first half of the year, the number of existing home sales on our platform rose by 26%, outpacing the market growth rate of 19% estimated by Beike Research Institute, both year-over-year.

New home orders on our platform increased by 19%, outperforming the market, which according to Beike Research Institute, declined by 6%, both year-over-year. The share of our existing home sales continue to rise with a proportion of total home transaction orders on platform increasing from 51% in the first half of 2021 to 76% in the same period of this year.

Our competitive edge in the existing home market led to more stable and solid overall business performance. Our agent and store network further expanded. In the first half of the year, various high-quality industry brands joined our platform, including Guangzhou Hope Real Properties, [indiscernible] Properties, [ WuXiongsh ] Real Estate Services and Shenyang [indiscernible] properties. The number of active stores on our platform increased by 30% in the first half of the year, of which active non-Lianjia stores soared by 36.8%, both year-over-year.

The number of active agents on our platform lifted by 19.5% in the first half of the year, including a nearly 24% increase in the number of non-Lianjia agents, both year-over-year. For our existing home transaction services, we continue to deepen and refine our operations, leveraging our scientific management system for form-based operations and AI-driven technology application to boost the store and agent productivity throughout home listing, customer acquisition and conversion process.

On home listing side, we have tools like home maintenance score and exceptional home products to help agents better marketing home listings while focused on top listing to increase transaction conversion. On conversion side, we also implemented measures to strengthen store level operation and network operation to enhance matching and transaction efficiency.

These measures included a mechanism like incorporating competition into our store scientific management system, deepening the operation of core governance consoles, store point-based incentive program and designating quality and efficiency business districts. In terms of financial performance, revenue from existing home transactions reached RMB 6.7 billion in Q2, down 8.4% year-over-year and remaining relatively flat quarter-over-quarter.

GTV was RMB 583.5 billion, remaining relatively stable year-over-year. And quarter-over-quarter, the GTV growth outpaced revenue on a year-over-year basis, mainly due to a higher GTV contribution from existing home transaction services facilitated by connected agents for which revenue are recorded on a net basis. The contribution margin for the existing home transaction services was 39.9% in Q2, a decline of 7.5 percentage points year-over-year, primarily due to higher fixed labor costs resulting from an increase in the number of Lianjia agents and the lasting impact of the agent welfare improvement strategy we implemented since last year.

Sequentially, the contribution margin grew by 1.8 percentage points due to stronger leverage as our series of cost reduction and efficiency enhancement initiatives conducted this year led to a quarter-over-quarter decrease in fixed labor costs, while revenue remained generally flat. For our new home transaction services, the scale of our collaborative project remained steady. Through our AI-driven agent, Sheniu we refined the management of new home projects, revitalizing more existing projects.

On customer front, we reinforced business synergies between existing new home and rental services and fine-tune operations while launching our AI assistant, Sheniu to help service providers, stimulated customer demand and improved matching efficiency. In terms of the financial performance, our new home GTV reached RMB 255.4 billion in Q2, up 8.5% year-over-year and 10% quarter-over-quarter.

Revenue from new home transaction was RMB 8.6 billion in Q2, rising by 8.6% year-over-year and 6.7% quarter-over-quarter. Revenue growth was in line with GTV growth year-over-year, demonstrating our steady monetization capabilities in new home transactions, while GTV growth outpaced the revenue growth sequentially due to the seasonal fluctuation of the take rate.

The contribution margin from the new home transaction services fell by 0.6 percentage points year-over-year to 24.4% due to an increased variable costs resulting from our agent welfare improvement last year. Sequentially, the new home contribution margin rose by 1 percentage point, largely attributed to the quarter-over-quarter decline in variable cost, thanks to our refined operations and the focusing sales strategy to maximize unit sales for property projects this year.

For our home renovation and furniture business, we're focused on enhancing the operations to build up our underlying capability to support our sustainable growth. On product capabilities, we analyze the customer data and insights to understand their core needs, leveraging smarter designs and R&D. We introduced home renovation modules that can be flexibly configure and quickly iterated.

By combining these models with design adjustment, we provide customers with a one-stop home renovation solution. On the supply chain side, our digital infrastructure enables us to significantly streamline partner, brand selection and SKU counts based on customer needs. The proportion of centralized procurement rose markedly, while the overall unit purchase price declined significantly.

To further improve our delivery quality, we identified over 2,600 high-quality project managers on our platform, improving their efficiency and income, while elevating the end user experience. Operationally, we implement quality and efficiency business district strategy. We scored business district based on the multiple indicators such as building age and the housing transaction volume.

This allows designers, project managers and other service providers to focus on high score districts, enabling them to gain better, to gain deeper insight to the customer and the property conditions. By introducting the upfront site measurements and other process, we reshaped the workflow to improve operational efficiency. We also accumulated and refined design solutions on the construction guidelines, ultimately enhancing the customer experience.

In terms of the financial performance, revenue from our home renovation and furniture business reached RMB 4.6 billion, increasing by 13% year-over-year. This was mainly driven by the increase in home renovation orders alongside with the high average revenue per order, stemming from an increase in the average price of furniture and home furniture retail.

Contribution margin for the home renovation and furniture business reached 32.1%, up 0.8 percentage points year-over-year, primarily driven by a larger proportion of centralized procurement and enhanced order dispatch efficiency. Sequentially, the contribution margin fell by 0.4 percentage points, mainly attributable to a structural shift with an increased revenue contribution of furniture and home furniture retail, which has a relatively low contribution margin.

In our home rental service business, we continue to iterate our products and apply AI to recontract our business process and operational funnel. On product front, we expanded our differentiated product portfolio, launching product [ 09 ] in the first half of the year to meet homeowners' various needs around the vacancy period and retail income while balancing risk and returns for our business.

For unit sales and occupancy, we implemented quality-driven lease allocation rules so that a better listing and a better service provider gets more leads. Customers will also benefit. We also leveraged AI capability for the intelligent collection and identification of the rental housing conditions as well as intelligent pricing to explore a unit model led by the platform AI.

In terms of the operational management, we leveraged AI massive computing power to optimize resource dispatching, inventory, unit sales and occupancy which enhanced both personnel productivity and the rental occupancy rates in our pilot regions. In overall personnel productivity improved remarkably in the first half of the year. The average number of rental units managed per property manager rose significantly, with the number of unit staff growing by over 50% in June compared with the same period of last year.

Regarding the financial performance, revenue from our home rental services business reached a record high of RMB 5.7 billion in Q2, up 78% year-over-year, mainly benefiting from the rapid growth in the number of rental units under management. By the end of Q2, we have over 590,000 rental units under our management. compared with over 310,000 in the same period of 2024.

The contribution margin for home rental service was 8.4%, up 2.5 percentage points year-over-year and 1.6 percentage points quarter-over-quarter, largely due to the improved gross profit of our Carefree Rent business. As we continue to refine the Carefree Rent business model based on the extent of the service contract, the revenues from the some newly managed rental units were recorded as net revenues derived from the service fee.

For Beihaojia business, our strategic direction is very clear and firm. We will never be a developer. Our commitment to an asset-light business model is absolute. Other than Chengdu, Beijing and Shanghai Fengxian project, we will not independently operate any other projects. Our role is to deliver CM product solution and marketing service for developers and other partners in industry, and we categorically do not provide any form of fund solutions.

In Q2, our revenue from emerging and other services decreased by 50.6% year-over-year and grew by 23.5% quarter-over-quarter to RMB 432 million. Now moving to other costs and expenses, profitability, cash flow and other financial metrics in Q2. Our store costs reached RMB 762 million, increasing by 11.9% year-over-year and remaining relatively stable quarter-over-quarter.

The year-over-year growth was mainly from higher store repair and maintenance costs. Other costs were RMB 588 million, up 15.2% year-over-year and 7.5% sequentially, primarily due to a higher basic maintenance costs of our home rental service business. Gross profit dropped by 12.5% year-over-year to RMB 5.7 billion.

Gross margin was 21.9%, down 6 percentage points year-over-year, primarily due to the decrease in contribution margin from leasing home caster services. Gross margin increased by 1.2 percentage points sequentially in Q2, mainly due to the greater revenue contribution from the home renovation and furniture business, which has a relatively high contribution margin. In Q2, our GAAP operating expenses totaled RMB 4.6 billion, up 3.1% year-over-year and 9.7% sequentially.

Notably, G&A expenses were RMB 2.1 billion, remaining flat year-over-year and increasing by 11% quarter-over-quarter, primarily attributed to an increase in bad debt provision. Sales and marketing expenses amounted to RMB 1.9 billion, remaining relatively stable year-over-year and growing by 7.1% quarter-over-quarter, primarily resulting from the increased sales and marketing expenses for home renovation and furniture business.

Our R&D expenses were RMB 633 million, up 25.6% year-over-year and 8.5% sequentially, largely driven by higher personnel costs and technical service fee. In terms of the profitability, GAAP income from operations totaled RMB 1.06 billion in Q2, down 47.4% from the same period of last year and up 79.4% sequentially. GAAP operating margin was 4.1%, dropping by 4.5 percentage points from Q2 2024 and rising by 1.5 percentage points quarter-over-quarter. Non-GAAP income from operations totaled RMB 1.61 billion, falling by 42.9% from the same period of last year and increasing by 40% sequentially.

Non-GAAP operating margin reached 6.2%, down 5.9 percentage points from Q2 2024, mainly due to a year-over-year gross margin decline. Non-GAAP operating margin rose by 1.3 percentage points from the previous quarter, mainly attributed to a sequential gross margin improvement. GAAP net income totaled RMB 1.31 billion in Q2, down 31.2% year-over-year and up 52.8% quarter-over-quarter. Non-GAAP net income was RMB 1.82 billion, falling 32.4% year-over-year and increasing 30.7% quarter-over-quarter.

Moving to our cash flow and the balance sheet. We generated a net operating cash inflow of RMB 826 million in Q2. New home DSO reached 51 days in Q2, remaining a healthy level. On top of spending approximately USD 254 million for share repurchase and distributing USD 400 million for 2024 final cash dividend during Q2.

Our total cash liquidity, excluding customer deposits payable, remaining at a high level of around RMB 70 billion. With our robust cash reserves, we will continue to augment shareholder return throughout active share buyback to further enhance capital allocation and capital operation efficiency.

At the end of Q2, we repurchased around USD 394 million worth of shares this year, which accounted for around 1.7% of the company's total share outstanding at the end of 2023. We have consistently delivered on our promise to reward shareholders. Since launch of our share repurchase program in September 2022, we have repurchased around USD 2 billion in shares as of the end of June 2025, accounting for about 10.3% of our total share outstanding before the program began.

Today, we are pleased to announce that our Board has approved an expansion of existing share repurchase program. The authorization has been increased to USD 5 billion, and the program has been extended to August 31, 2028. Going forward, we will continue to reward our shareholders who have grown with us and share the value we create.

Despite fluctuations in macro environment, we have delivered a top line performance that significantly outperformed the market, underpinned by our solid business fundamentals and a diversified portfolio. We are actively driving operational improvement to maximize the company's long-term value.

AI-driven refined operations and ecosystem optimization are continuously unleashing the platform's long-term potential. Our healthy cash flow and proactive shareholder return policy demonstrate our firm commitment to long-term value creation. Looking ahead, we will join force with our partners and shareholders to seize opportunities and create great value together. Thank you.

Next, I would like to turn the call over to our Chairman and CEO, Mr. Stanley Peng. Go ahead, sir.

[Yongdong Peng, executive]

Thank you, Tao. For the overview of our updates for the first half of the year. Now I'd like to share the reasoning behind our initiatives and address some key interests and concerns. First, I'd like to talk about scale and efficiency. For our housing transaction services business, we have expanded our agent and store network very rapidly over the past few years. In the first half of the year, a large number of new brands, stores and agents joined our network.

However, we saw some softness in our efficiency indicators in housing transaction services in the second quarter. Our ACN and authentic listing were originally built to solve the key consumer pain points of that time. But as China's real estate market evolved, consumer needs changed dramatically and our response didn't fully meet those emerging needs. This created an urgent need for us to shift our growth engine from scale to efficiency.

The main challenge we cleared was clear how would we raise productivity per store and per agent and increase platform efficiency while maintaining the scale of our agent and store network. Resolving this will define the next stage of our development. To begin with, I want to state that scale and efficiency are not a zero-sum trade-off.

Gaining efficiency doesn't mean sacrificing scale. Reaching the current scale of our agent store network was no small feat. You'll be hard-pressed to find a comparable example anywhere in the world of a company that has reached such a large presence in a single city through its own operations. So how did we accomplish it? In the past, the scarcest resources in the market were high-quality assets and transaction security guarantees.

That is why we built our ACN and introduced authentic listings and service commitments integrating online platform innovation, offline business execution and disciplined scientific management to support them by providing what was scarce, we achieved a breakthrough in scale and built a deep competitive moat.

So how do we move from scale to efficiency? First, by looking at our history, we need to find out the existing strengths that we can leverage while anchoring new capabilities for today's context; second, by responding to consumers' evolving needs in China's changing real estate market.

The new scarce resources are accurate market insights to help buyers make the right decisions, operational capabilities to help sellers market properties effectively and the emotional value that comes from emphasizing with customers. Buyers want professional advice, homeowners need skilled marketing support and in the edge of AI, consumers emotional connection.

Our task is to create clear pathways to deliver these values. As we seek a new growth parity, we start by challenging paradox. Large organizations often sacrifice efficiency to pursue scale. We already have the drives for efficiency improvements. First, the transformation of customer demands acts as a natural form of selection. Second, AI-led innovation is delivering real productivity gains as a new means of production, AI is becoming increasingly powerful, capable of replacing traditional means of production. These two factors -- two forces enable us to raise efficiency while maintaining the scale of our agent and store network. Our end game is clear, but how we get there is still being defined.

Going forward, we will commit our energy and resources to those areas to reshape our growth path. Now I'd like to dive into the logic behind some of the business initiatives we are working on. I will start with the home renovation business. As Tao mentioned, our strategy centered on community-centric operations and our full services premium store model. Our rationale reflects a major emerging trend. It's a shift from a traffic-driven mindset to a local community-centric approach.

We have begun piloting this model throughout our first full-service home renovation premium store in Beijing. In the premium store, we put in showrooms with our modular renovation products, so potential customers can see real replicable home renovations based on typical local floor plans in the community. Our organizational structure has adapted accordingly.

Designers, project managers and workers are now dedicated to specific communities, gain knowledge and experience of both properties and customers there. The key here is to deepen our engagement, locking in high-value areas and strengthening our presence to become customers' first choice in the region, ultimately occupying their mind share. Our goal is to bridge the distance between our services and the users.

We want to bring them closer physically, psychologically and in decision-making. So we can evolve from a city level renovation service provider to a community level partner whose interests are deeply aligned with the customers specifically. By opening our home renovation premium store adjacent to our existing home transaction contract signing centers, we have reduced the physical distance to our customers.

This tell our customers, we are the right down the street, not a large distance company, they have to drive an hour to reach. This builds trust and convenience at the same time. Our community-based premium store and community specific with providers are well versed in the floor plans and customer needs, so they can offer tailored home renovation design plans even before customers purchase homes. This shorten the decision-making distance for customers. Why is it? Because the biggest pain points in traditional home renovation is uncertainty. Customers often don't know the final cost, what their homes will look like, or whether the service will be reliable.

We solved this with two innovative services, community showroom design designs and pre-signing measurement and drawing. Community showrooms design say to potential customers, your neighbors home with the same floor plan as yours has already been renovated with visible results, clear prices and proven satisfaction. No guesswork is needed. Our pre-signing measurement and drawing flips the traditional payments first service letter model.

We demonstrate value upfront by providing professional measure measuring and design renderings before customers commit. This gives people great security and confidence right from the start. Our strategy also reduced the psychological distance for users with a physical store, proven cases and a professional consulting team in the community. Our brand is no longer a code in personal advertisement. It becomes a real tangible presence customers can interact with any time.

The assets we gain from this kind of deepen operational are more powerful than marketing, turning onetime transactional customers into long-term interactive community users. These are just some of the way we think about our initiatives in the home renovation business. Next, I'd like to talk about how we view the home rental business. Tao has already covered much of our progress in this segment, including product interaction and a broader user of AI to boost property management efficiency and streamline other operations.

Why do we pursue maximum efficiency in this business? Because under the traditional management model, our carefree rental business inevitably faces this economics of scale. Once the numbers of units reach a certain level, complexity may rise sharply due to the nonstandard nature of our products, the service provider abilities and scale and sales negotiations.

At the same time, the rental business operates on the service fee profit margin, which cannot absorb losses from nonstandard operations and low efficiency. These 3 major challenges from iron triangle that compels us to break through the traditional model and pursue maximum operational efficiency. So how do we achieve maximum efficiency? In Phase 1, we restructured our organization, moving away from the all-in-one manager model to 6 specialized roles, fully aligned with the logical of our ACM. This division improved professional skills, reduced service variance and embedded its capabilities into our platform.

In Phase 2, we optimized our product model, shifting from the high-risk nonstandard vacancy room lease-out model to a steady rent pass-through model with unified service fees. This stabilized revenue per property, aligned team goals and remove the obstacles for scaling growth. We also digitalized process through our SaaS system, accumulating structured data to fill AI applications.

In Phase 3, we began to build intelligence into operations, deploying our AI human model where AI handles standardization, pricing, auditing and 24/7 virtual services. We hope that AI could cover 80% of standardized work, while people can focus on trust in regular cases and high-quality -- the logic tying all of this together is about transforming a nonstandard offline industry full of uncertainty into a data and intelligence-driven business with more certainties.

At its core, our system reduced reliance on individual experience, smoothing our fluctuations in service quality and customer experience, efficient operations and consistent service quality create a growth flywheel, reinforcing the synergies across the home rental business. home renovation and housing transactions. Our vision is to build an AI-driven rental platform by combining AI, IoT hardware and operating processes.

We hope this platform will give the rental industry a proven and scalable profit model. Meanwhile, the pursuit of operational excellence will inevitably compel our whole organization to develop more efficient operational mechanisms. We also hope it can be an example for the traditional service industry showing how structure, model design and technology can solve issues like nonstandardized natural and diseconomics of scale.

Now moving to our Beihaojia business. Why are we pursuing this business? We will not be developers. To be clear, we will not be adopting an asset-heavy model. The traditional real estate developer business used to depend on land and money. In today's market, there is a new variable, a customer-oriented mindset because we are so close to our customers, we can collect more customer insights and data to add value to this third variable. In the early stage of this business, we run two self-operated projects to test our understanding and to see what value we could create for this third factor.

Genuine customer needs are at the very core of our product design and construction. We leverage our robust data and AI-powered capabilities, including pricing prediction, unit mix optimization and potential customer insights to deeply understand our target customer needs. Our project positioning, product design and construction adheres to the authentic customer needs, including many small details traditional developers might overlook, but that we consider crucial -- critical to long-term living experience.

In our Chengdu Beijing project, we have dedicated meticulous design and construction efforts to over 108 quality-driven details that many things minor yet meaningful. This spans from urban integration of architecture design, landscape planning, homecoming journey experiences, interior special planning to AI IoT-enabled sensory system covering sites, sun, smell test touch consciousness as well as lifestyle scenarios and property services. This productization capability is something that's becoming crucial as the market shift to buyers.

This means the supply side must offer differentiated, not homogeneous products. And this is how we add value to the industry through the third variable of production beyond land and money. Finally, we now stand at a crucial turning point, balancing scale and efficiency, adapting to evolve customer demands and keeping pace with rapid technology development are all issues we must address. we have already started exploring and testing new approaches across our business.

While maintaining the scale advantage of our platform, we aim to revamp our service interface through community-centric operations, unlock organizational efficiencies with AI, rebuild our product logic with a customer-centric mindset and continuously shed new paradigms in the residential service industry. This concludes my prepared remarks for today.

Operator, we are now ready to take questions.

[Operator]

[Operator Instructions] Your first question comes from Timothy Zhao from Goldman Sachs.

[Timothy Zhao, analyst]

Congrats on the solid results and very excited to hear about your new approach in growing the business in the future. I think my question is on the secondary home. Just wondering if management can provide us any overview on the second quarter secondary home market. And how should we expect the trajectory into the second half of this year? What kind of policy tools that we can expect for the rest of this year?

[Foreign Language]

[Tao Xu, executive]

Thank you, Timothy. Let me first take a brief look on the market in the first half. The total value of the housing transaction nationwide was stable overall. The market was off to a good start in Q1, sustaining the recurring momentum from the Q4 of last year, but both number and the price of transaction weakened significantly in this Q2. Divergence also intensified.

Based on NBS data, New home sales nationwide dropped by 5.2% year-over-year in the first half. Research indicates the top 100 developers saw steeper declines posting a 10.9% in the first half sales, plant that intensified to 14.5% year-on-year in this Q2. The home market holds up relatively well according to Beike Research Institute in the first half, the total value of online registered transaction for its new homes rose 8.3% year-over-year. This was driven by a 19% increase in the number of transactions. Even though average price grew by 9%, both year-over-year.

Satisfied momentum slowed in this Q2. The transaction volume growth rate date to just 2%, and the number of transactions also slipped to a 12% gain. In June, the number of transactions decreased by 8% year-over-year. And the home prices dropped further month-over-month by 1.7%. Rent has been more stable to home prices nationwide rental yield has been steadily rebounding since the year of 2021.

In June this year, it reached a higher of 2.5%, about 40% higher than its lowest point, creating value support for the home prices. Structurally, returning home continued to perform better than new homes. The new home transaction tended to have a large average GFA lower total price and the higher share of the nearly new existing homes.

Population movements from lower to higher tier cities remain steady, and we continue to see wild differences across cities in terms of the housing price inventory sell-through and the line auction premiums. Our key indicators like homeowner price adjustments, perspective impacts on agent confidence index shows a weak market sentiment.

The feeding efforts of the new policies. China U.S. trade tensions, shortened the policy volumes and the seasonal market correction sets to market momentum. Reinforced the expectations for price declines, constrained market recovery, all of this adds to a strong downward pressure for the market.

Since the beginning of July, the market downturn has picked up speed. The number of list in home transaction fell by over 5% month-over-month while the prices dropped by 1.5%. New home subscriptions fueled by 25% month-over-month signaling a period of sharp correction. Looking ahead, the market path will still depend on the pace of the future policies on the supply-demand balance improvement. Both are key to restore the conference to restore confidence, which in turn influence buying behavior and the price trend.

On June 30, the State Council executive meeting once again set the need to double down on stabilizing the market, signaling the potential for stronger policy support. On top of current policies that remain in place, there is still room for new stronger policies aimed at boosting demand and improved supply.

On demand side, leading cities have further relaxed the purchase restrictions, Urban renewal, relocation motors and purchase subsidy can also unlock potential home buying demand. On supply side, high-quality housing from the fourth generation houses and nearly new existing home supply enables the easing of sales restrictions could elevate supply side quality and potentially market sentiment and transaction volume. Proactive policy can help counteract the market downward trend and support a shift towards recovery.

[Operator]

Your next question comes from John Lam from UBS.

[John Lam, analyst]

[Foreign Language] So let me translate my question in English. So could management share about under the backdrop of the sector downturn regarding the property sector, is there anything that the management team has done to deliver the to the investors? For example, would be like the market share, agent productivity or store productivities? And also how does the management think about the growth strategy for both the agents and also the number of stores?

[Tao Xu, executive]

We hope to outperform the market for a long time to come and have taken steps to achieve that. I will answer your question from two angles: scale and efficiency. First, the continuous expansion of our platform agent store network over the past few years has fueled the fast business growth. Going forward, we will slow the pace of our store and agent growth and focus more on efficiency for sustainable development.

This strategy will vary by city. In places where store network coverage is already high, we will impose higher quality and ROI requirements to onboard new stores. In few cities where store network coverage is still relatively low, we'll continue to make strategic investments. By the end of the year, we expect to keep our store and agent number stable outside of Beijing and Shanghai. In those 2 cities, where agent growth has been strong over the past few years, we are consolidating lower-performing stores and phasing out lower-performing agents.

I believe it's time to shift our growth focus from scale to efficiency, starting with deeper operation efforts in the short term. In long term, we expect the technology to drive the industry-wide gains in total factor productivity. In details, we will implement in-depth systematic scientific management operations, particularly by enhancing operations that add competitive dimensions.

This involves manual process that influence competitive outcomes such as focusing on properties, customers and improving collaboration and matching to enhance the competitiveness of individual store on our platform. And we will also continue to strengthen our key operation initiatives such as our points-based store incentive system, regional core governance council, management of high-quality business districts and separation of agent role for homeowners and buyers, which we piloted in Shanghai.

These projects are helping us improve our ecosystem and guide service provider behavior. For example, store in high-quality business district had 1.44x the average productivity of other stores compared with less than 1.4x in the second half of 2024. Over the long term, technology will be key to enhancing our efficiency and consistently deliver alpha. We advance in large AI module technology, combined with our unique scenarios and data in residential service sector have strong potential in reshaping user experience, boosting efficiency, spring transformation in the real estate industry.

We have established the AI project matrix that develop different AI applications simultaneously for different roles on our CM and BM on both strategic and operational levels. Some of these applications have demonstrated good results. One example is our AIGC marketing and AI-driven CRM products that drives customer acquisition and the conversion of agents. We have built an intelligent AIDC marketing agent for real estate agents to support customer acquisition through self-media, private domain traffic operations and lead conversion.

It offers a full site of tools help agents create multimodal content for multichannel customer acquisition, perform better data analysis and lead identification, analyze leads and create breaker scripts and generate price trend automatically. Our intelligent AI-powered CRM agent strengthen customer acquisition and conversion for all customer-facing roles.

Here, I refer to the brokerage agent as brokers to avoid any confusion. For home brokers, our AI CRM improves customer management through our constantly evolving multi-agent system powered by our user data. It gives the brokers personal guidance ranging from market insights and customer strategy to recommended actions. This input helps brokers understand users' needs, gauge their intentions and sport new opportunities.

It also automates personalized follow-up tasks to drive transactions. At the end of June 2025, Sheniu, one of our AI-driven CRM product application was in use across 59 cities with over 335,000 brokers. The product penetration rate exceeded 75% across Beijing and Shanghai. In Xian, for example, brokers who use Lianjia extensively achieved a 30% higher conversion rate for final customer mandates and about 20% higher conversion rate for showing compared with brokers that use the product less frequently.

For new homes, we have AI-driven CRM agent, Sheniu and [ “Xiao Hui ] that help new home sales managers improve listing management efficiency and strengthen both matching and marketing for new home products. On our consumer side, for example, our Pudding AI online service system now provides real estate market analysis, citywide home search, regional analysis, hub listing comparisons, preliminary matching for home listing and agents.

We began group testing in May, making Pudding available to select users in 11 cities. In July, its MAU reached 780,000, up 10% from June. Commercial volume grew by 59% and average time spent per user was up 14%. Pudding now supports marketing language, multimodal services. We're also transforming Pudding to allow it to proactively explore customer needs and handle tasks while providing more precise, high-quality instructive answers.

This enhancement will help users make decisions and move transaction forward. Pudding is our first AI trial in offering AI-powered services, and we are making extensive efforts to offer more important services to the industry. We believe AI is the most crucial driver for our next-generation productivity improvements. We will keep you updated on our internal progress. Thank you.

[Operator]

Your next question comes from Griffin Chan from Citi.

[Griffin Chan, analyst]

[Foreign Language] So my question is about how will the property now develop models such as companies property sales or promote of the quality house create new opportunities for Beike, for example, in demand forecast or even for the quality side?

[Tao Xu, executive]

Thank you, Griffin. This year, supply side policy in real estate have accelerated push better living quality, especially through high-quality homes and moving ready new homes. These measures are being implemented at a fast pace. Residential products that meet new national standards have performed well and the pilot sales of the moving ready new homes in Xinyang have set a good example.

Surveys show that among the factors holding back buyers, price expectation accounted for nearly 50%, while home suitability accounts for around 20%. As new home products better meet home upgrades suitability demands and the system for selling moving ready new home gradually expands, we expect to see reduced quantity and improved quality supply.

This new model set much higher requirements on developers from securing funding and ensure project returns to understanding upgrade needs, product positioning and pricing and sales through marketing. This will further highlight the value of Beike bring to developers. In terms of the impact of the current brokerage model, in the short term, in fourth-tier cities, new home products that met the new standard will have a lower brokerage sell-through proportion and the commission rate than the products under the old standard.

Nevertheless, in most cities, new products currently only accounted for around 10% of units and their presence will push on products to reach their brokerage service penetration ratio. As a consequence of this, the overall impact on the brokerage channel sales market is relatively small. new standard products make up over 30% of the project launch in the city.

For example, at [ Xian ], the brokerage penetration and commission rate will match those of old standard products. The fast sell-through of the new regulation products can boost agents' confidence in new home products forming a virtuous cycle. Opportunities for cooperation model upgrades. The industry new model will also drive upgrades in how we work with developers beyond the broker channel sales model.

Our goal is to offer the tailored service for managing the full project life cycle based on each developer's needs and project type. This will further highlight the value of Beihaojia business from its CRM product solution to its integrated online, offline marketing services.

Pricing forecast capability. We leverage a systematic modeling approach, including a subjective factor eliminated pricing model with a rolling review and calibration mechanism and the comparable price trend analysis based on authentic home market data. Our algorithm out structure factors so that the prices are comparable both across market and over time.

This pricing capability helps developers objectively access price trends and set accurate prices, avoiding profit loss from the mispricing. When competition in selling moving ready new home intensifies, it can also improve the project value for money positioning. For example, in Nanjing and Wuhan, new standard products are noticeably more competitive, exhibiting independent price trends.

Beike's price forecasting capability enable granular segmentation analysis to better characterize some market dynamics. Today, our pricing model already have a fairly high level of accuracy. Regarding the unit mix forecasting capability, we apply matching learning algorithm to model and forecast customers' housing unit needs, drawing on both potential customer behavior and historical transaction data.

In June 2025, the compliance rate of our sample simulations continue to rise. Our goal for the year of 2026 is to have a full product and market coverage to help developers unit mixes more accurately, a wide inventory buildup and speed up sales of moving ready new homes. Regarding the customer insights, we can clearly define and pinpoint potential customer for building projects in specific district along with their needs and profiles.

This includes identifying their purchasing power, preferred housing unit type, location, age, purchase purpose, filing size and so on. Using our potential customer model, we can forecast the high-price intent buyers in the next 90 days for any given district and their specific needs. This gives developers the information they need to enhance competitiveness by targeting the right demographic and design, optimizing products that meets the new standard requirements.

At the current stage, we hope to help developers position their products accurately at early stage, reducing the cost of the later-stage adjustments and improving product alignment with the market demand. Looking ahead, we will focus on building customization and community operation capabilities to help developers stand out in the moving ready new home market.

By complementing developers with our strength in moving ready new home sell-through, regulatory adoption and bottom line protection, our value to developers will extend from brokerage to product source. Thank you.

[Operator]

Your next question comes from Daniel Chen from JPMorgan.

[Qi Chen, analyst]

[Foreign Language] So my question is on the home renovation and furnishing business. We have seen that the margin improvement has been strong on a year-over-year basis, and revenue growth is healthy. So what's the key growth driver behind? Is there further room for cost optimization. Meanwhile, are we going to expand the CT coverage? Or are we going to further optimize our store network?

[Tao Xu, executive]

Thank you, Daniel. The home renovation for business maintained a relatively high growth rate in the first half of this year. SKU-wise, with revenue reached RMB 7.51 billion, up 16.5% year-over-year. On the profitability front, the segment profit margin was 32.3% in the first half of the year, rising by 1.3 percentage points from the same period of last year.

Operational efficiency also improved significantly at a city level in Q2. Operational efficiency enhancement is a focus of our home renovation business this year. We have implemented a series of initiatives aimed at enhancing fundamentals like our product and delivery capability, streamlining our organizational structure and amplifying management and operational efficiency. These efforts have led to continuous improvement in our performance. Here, I'd like to elaborate. In terms of cost, the home renovation business expense mainly include material and labor costs.

For materials, we cut procurement costs by consolidating brands and SKUs and moving to centralized procurement. By leveraging customer insight to streamline brand selection and SKU counts, we have consolidated procurement to 3 or few brands for most category and achieved significant SKU reduction. Centralized procurement rate for primary and auxiliary materials reached more than 60% in Q2 2025 compared with over 20% in the same period of last year.

This increased procurement volume per SKU in each category has led to a significant decrease in the unit price of some products that were awarded contracts. On the labor side, we have improved service providers' work efficiency by optimizing our order dispatching routes, enhancing the system order execution capability and focusing project manager service area on specific business districts.

Also, we are allocating more resources to high-quality service providers. In Q2 2025, average monthly order intake per professional project manager was more than double last year's average, driving significant improvement in both their efficiency and income. In terms of the sales and marketing expenses, this mainly covered the sales personnel cost for designers and customer managers and the store and broker channel costs.

As a percentage of revenue, sales personnel cost for designers and other roles significantly decreased year-over-year, primarily due to our agile transformation of the home renovation business organization structure. We streamlined the design team, optimized the overall home renovation business workflow, eliminated certain roles in sales process and shifted the functions towards agents. Our digital tools such as AI proposal and lightweight beam have significantly improved operational efficiency in the sales process.

The average monthly order volume for designers has increased from around 0.8 orders last year to over 1.2 orders in the second quarter of this year. To optimize store cost, we closed some underperforming large stores and pilot small-sized premium home renovation store near our home transaction contract signing center, where we integrated master design product type showrooms.

We hope to strengthen the synergy between our housing transaction business and the new initiatives, reducing store costs and improving sales per unit area while exploring a new one-stop full-service home renovation model. For G&A expenses, we also made some structural enhancements, expanding service scope of middle and back office personnel. The average number of orders supported by each middle and back office personnel increased by 70% year-over-year in this Q2.

These initiatives enable us to achieve a better operational results while continuously improve the service quality. In Q2 this year, the customer compliance rate of our home renovation and furniture business dropped to below 10% from over 25% in the same period last year. We have seen a significant improvement in the unit economies at the city level.

In Beijing area, revenue increased from over CNY 700 million in the first half of 2023 to CNY 1.15 billion in the first half of 2024 and exceeded CNY 1.5 billion in the first half of this year, representing a year-over-year growth rate of 30%. The gross profit margin in the first half of 2023, 2024 and 2025 were 35%, 36.1% and 36.3%, respectively. The operational margin at the city level rose from around 5% in the first half of 2023 to over 11% in the same period of 2025.

The remarkable improvement in the model cities UE has boosted our confidence in the business continuous operation and the future success. There are still plenty of room for the operational efficiency improvement. Moving forward, our focus will shift from organizational structure optimization this year to implementing ongoing innovation in business models, products and technology.

[Operator]

Your next question comes from Xiaodan Zhang from CICC.

[Xiaodan Zhang, analyst]

[Foreign Language] And we know that since its launch in the end of 2023, Beihaojia has brought a number of projects to the market. Drawing on the operational experience accumulated over the past year or so could management share the future plans for Beihaojia and specifically, what business model will it adopt? And will there be an upper limit on the investment budget for individual projects.

[Tao Xu, executive]

Thank you, Sophie. We have been very clear about our Beihaojia strategic direction, we're adamant about not being developers. In terms of business models who are dedicated to asset light business model, except for our Chengdu Financial City project, on the Shanghai Fengxian project. We will not independently operate other projects.

The C2M model do not provide funding solutions. We will continue to explore platform model that offers from to back-end service booking reference, construction contractors, product owners and asset partners, including product solutions and marketing services.

Our product solutions cover C2M product positioning on the design clients fed by AI and big data. Our marketing services are integrated the online off-line promotional service for more efficient customer acquisition. Regarding the data capital, which I know is a concern from all of you, we will set a strictly miss on the peak total investment from our own funds.

Based on the amount already deployed by group as of June 30, we will invest no more than RMB 1 billion in additional self-owned funds. After the exit of two proprietary development projects in Chengdu and Shanghai, the limit of our capital occupation for this business will be reduced by the investment amount of these two projects, further lowering our aggregate self-owned funding cap. Thank you.

[Operator]

Thank you. We are now approaching the end of the conference call. I will now turn the call over to your speaker host today, Ms. Siting Li, for closing remarks.

[Siting Li, executive]

Thank you once again for joining us today. If you have any further questions, please feel free to contact Beike's Investor Relations team through the contact information provided on our website. This concludes today's call, and we look forward to speaking with you again next quarter. Thank you, and goodbye.