Ke Holdings Inc

NYSE:BEKE

Earnings Call Transcript 2022-Q3

[Operator]

Hello, ladies and gentlemen. Thank you for standing by for KE Holdings Inc.'s Third Quarter 2022 Earnings Conference Call. [Operator Instructions] Today's conference call is being recorded. I would now like to turn the call over to your host, Ms. Siting Li, IR Director of the company. Please go ahead, Siting.

[Siting Li, executive]

Thank you, operator. Good evening, and good morning, everyone. Welcome to KE Holdings or Beike's Third Quarter 2022 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. Peng will provide an overview of our strategies and business developments, and Mr. Xu will provide additional details on the company's financial results. Before we 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. With that, I will now turn the call over to our Chairman and CEO, Mr. Stanley Peng. Please go ahead, Stanley.

[Yongdong Peng, executive]

Thank you, Siting. Hello, everyone. Thank you for joining Beike's Third Quarter 2022 Earnings Conference Call. Against the many uncertainties in the real estate market, we achieved a series of breakthroughs in the third quarter. We have supported our stores and agents' network to consistently outperform the market and achieved steady efficiency and profitability improvements in each business line on our platform. This was thanks to the initiatives we implemented beginning last year to enhance efficiencies. I believe ultimately these achievements stemmed from the enterprising spirit of the organization from the perseverance of each one of us on the platform in the face of external challenges.

November 12 marked the 21st anniversary of our organization's founding. To celebrate this momentous occasion, we organized a homelinker event, witnessed online by over 7,000 homelinkers, who have stayed with us for more than 10 years, spreading in more than 80 cities across China. Homelinkers and employees, who have been with our organization, shared the same experience and collective memories and have learned the same methodologies. Moreover, they believe in the same values and make similar choices that shape the resilience of the organization. We are not only participate -- practitioners, but also disseminators of our spirits. We carry the same mission and responsibilities to influence more people, [ cementing ] their convictions during downtimes and keeping them grounded in the upcycle, while always striving for growth, virtue and positivity. Moving on to our progress. In the third quarter of 2022 in our One Body, our Existing and New Home Transaction Services, we have [ prominent advantages ] in our One Body business, thanks to our years of efforts and investments in the initiatives to enhance efficiency. Now our One Body has entered the development stage, where deepened operations are vital for improvements. These strategic measures may look small to outsiders, but only by finding every core areas of inefficiency and working on it every day, can we continue making our business better.

The store and agent count on our platform have been stabilizing or even growing in some cities. As of the end of the third quarter, the number of connected stores and active stores on our platform reached over 41,300 and 39,700 both about 3% lower quarter-over-quarter. The number of agents and added stores -- and active agents on our platform surpassed 400,000 and 370,000, respectively, with quarter-over-quarter decreased, narrowed to 3% and 2%, respectively. The number of active stores grew quarter-over-quarter in nearly 30 cities, including Nanjing, Changsha and Hefei. And the number of active agents increased quarter-over-quarter in 40 cities, including Shenzhen. The composition structure of stores and agents on our platform has been improving. We now have a higher percentage of agents with long track records and higher performance results. The proportion of agents with over 3 years of industry [ experience ] rose by about 10 percentage points in the second quarter compared with the first quarter. Along with the overall improvement in professional qualifications, per store and per agent productivity also increased. In the third quarter, the average store commission in income of the [ Deyou ] franchise stores and connected stores on our platform grew by 25% year-over-year and [ 13.3% ] quarter-over-quarter. Average commission income per agent rose by 22 -- 25% year-over-year and 9% quarter-over-quarter. The continued improvement in our new home receivables collection also further ensured the certainty of income for store owners and agents.

Our agents are increasing, identifying with their profession. This year, we conducted 2 nationwide market surveys, participated by a total of over 80,000 real estate agents on our platform. Survey results showed that despite a decline in confidence due to major market [ corrections ], agents have developed a greater pride in their profession, supported by the growing acceptance of their profession by family and society, along with its elevated social status in terms of store agent network and industry development, efficiency and quality is needed to be improved. The productivity of a single agent has not improved much over for the years and the overall income level of agent is lower -- is low and their churn rate is high. In the next stage, the industry will shift from the pursuit of scale to high-quality development with an accelerated pace, focusing on efficiency and quality. This will undoubtedly force us to grow more and better abilities from inside.

Our Existing Home Transaction Services continue to significantly outperform the market. According to data from the Beike Research Institute, nationwide GTV of existing home sales climbed by about 7% year-over-year in the third quarter, while GTV of Existing Home Transaction on Beike's platform was RMB 449 billion, up 19% year-over-year, of which existing home sales GTV rose by more than 20% year-over-year. The [ strength ] was partly due to the release of pent-up demand in the third quarter in Beijing and Shanghai after the pandemic flare-ups in the second quarter. In the meantime, our operational and management initiatives have been paying off, given the industry's service providers a strong determination to work with us. Our existing home services, including existing home sales and rental, are becoming increasingly important in terms of both business growth and risk control. We have made efforts on various front to accelerate the growth of this business. For instance, we have been closely watching the proportions of new and existing homes in different cities' strategic goals and driving the development of our existing home services. We also allocated more to B personnel to support the existing home business, [ fortifying ] system development and ecosystem governance. Meanwhile, in many cities, where new home sales previously dominated property transactions, local brands and store owners have become keen to make organizational and personnel adjustment to shift to existing home business. Turning to New Home Transaction Services. According to data from National Bureau of Statistics, in the third quarter, the nationwide GTV of new home -- residential home sales was down 21% year-over-year and 7% quarter-over-quarter. The GTV of CRIC's top 100 real estate companies fell by 33% year-over-year and 0.2% quarter-over-quarter. Although the new -- the year-over-year decline in the new home market narrowed in the third quarter, there was no obvious sequential improvement. The new home market is still in a [ trough, weighed ] down by a range of factors, including ceased mortgage payments on unfinished projects, pandemic resurgences and a few developer promotions.

In the third quarter, GTV on new home sales on our platform was RMB 261.5 billion, down 36% year-over-year and up 17% quarter-over-quarter. While the market remains under pressure, we have constantly improved the health of our business operations across the board as well as gained further market recognition with our efficient sell-through capabilities and our effort to build a healthier industry ecosystem. On the consumer side, we mobilized our resources to collect and provide construction progress updates to customers. Our city-based operations and [ photographer ] teams collect accurate comprehensive project updates on construction programs from multiple site locations monthly for ongoing cooperation projects and quarterly for other unfinished projects. Updates are provided to customers and agents on our apps. This practice also kept us fully informed on the latest construction progress of different developers. As of November 15, we have covered 32,442 housing projects in this initiative.

Operationally, we continue to strengthen our commission-in-advance model. In September, commission-in-advance accounted for 34% of our nationwide new home sales commission revenue, 44% for private developers in cities, excluding Beijing and Shanghai, and 32% for state and centrally-owned developers. On top of the commission in the advance model, we promoted our strategy on focusing on selected high-quality projects and key new home projects. On the service side, we collaborate with more high-quality developers and projects. During the quarter, the proportion of new home sales from state and centrally-owned developers expanded to 42% from 37% in the second quarter. To really accelerate sell-through in the current market, [indiscernible] generation from brokerage channels and promotional conversion from developers must join forces. We are proud to stand out from other brokerage channels with our exceptional Existing Home Transaction Service capabilities and add many new home customers leveraging our existing home customer base. In addition, our continuous undertaking to improve the new home industry ecosystem have helped to reduce the [ ingrained ] problems of good industry players being driven out by subpar practitioners. This has further garnered the respect and support of high-quality developers for us. In the future, I look forward to providing an overall review of the effort we have made to improve the health of the new home ecosystem. Next, moving to our Two Wings businesses. Our full-service home renovation and furnishing business is progressing as planned. In the third quarter, the industry started to recover as pandemic with resurgences in Beijing and Shanghai have subsided. According to data from the China Building Decoration Association, the revenue of leading home renovation and furnishing companies in the third quarter decreased by 4% year-over-year and increased by 13% quarter-over-quarter. Our home renovation and furnishing business continued to outperform the market, [ rising ] more than 40% year-over-year and 34% quarter-over-quarter, generating revenue of close to RMB 1.85 billion. Contracted sales in the third quarter reached close to RMB 2 billion, an increase of more than 60% year-over-year. Among this, the number of our home renovation contract volume increased by more than 50% year-over-year with average order value up by more than 10% year-over-year.

The percentage of total contracted value attributable to core business traffic reference increased from 25% in June to 43% in the third quarter. We have replicated the technological capabilities accumulated in our core business, such as AI-assisted Xiaobei into our home renovation and furnishing business as of October 31, more than 9,500 service providers, including home renovation and furnishing designers, engineers, foremen as well as agent from our core business has participated in the Xiaobei training and testing. Our home furnishing new retail services accounted for 20% of the total contracted sales in the third quarter, up from 16% in the second quarter. The ratio of home renovation orders that came with need for customized furnishing increased to 1 out of 6 from 1 out of 9 in the second quarter. In the third quarter, Beijing, Beiwoo, Chengdu reached quarterly breakeven and monthly contracted sales of over RMB 100 million in June -- July and August, becoming the largest full-service home renovation brand in Beijing. This is a significant breakthrough and achievement in the current headwinds. The underlying capabilities we accumulated in the past have propelled the Beijing business into a positive cycle. We did this by first establishing from the ground up large-scale home renovation delivery management capabilities; second, our scale and more complete supply chain created a virtuous cycle that has won additional suppliers and enables customers to select from our great choices of better-quality products; third, our proven competencies in delivery management and business operations have become better recognized among service providers.

Agents started to actively recommend our home renovation services to customers and accompany them on visits. Whereas designers, workers and the foremen are proud to join us, and they feel confident in their professional development with increase belonging to the platform. Only by attracting and assembling high-quality service providers in the industry can we provide consumers with a superior service experience. With Beijing as example, we aim to continue to integrate and manifest our capabilities in more cities, bringing better living services to more customers. Next, moving to our home rental services, which continue to expand in scale and improve efficiency in the third quarter. In terms of scale, as of the end of the third quarter, the number of contracted rental units managed by our rental services doubled quarter-over-quarter to over 85,000. Among them, the number of units under the decentralized leasing management, CareFree Rent reached over 50,000 units, an increase of nearly [ 17% ] quarter-over-quarter. The CareFree Rent services is currently available in 13 cities.

To improve our efficiency, we continued to develop and iteratively optimize our sign-up and occupancy model as well as refine our operational capabilities. In September, both our occupancy rate and average sell-through period improved compared to the second quarter. It is particularly was mentioned that this July, we was selected as part of the first group of affordable rental housing operation, service, enterprises in Chengdu, and we were the only private enterprise among the [ 4 ] selected. Thanks to the opportunity, we were able to become more deeply involved in the improvement and operation of local affordable rental homes. As of November 21, we have provided high-quality leasing operation services, including leasing brokerage to more than 1,000 rental homeowners and tenants in Chengdu. In the future, we will also strive to participate in the planning and operation of more affordable rental housing and contribute to the development of a housing system that ensures supply through multiple sources, provides housing support through multiple channels and encourage both housing purchase and renting.

In conclusion, our business performance this quarter demonstrated great vitality and resilience of our organization. Internally, this is due to the people we have and the organization culture we have formed. We have an unshakable insistence on technology for good, quality service and utmost operational efficiency, which has won us the affirmation of customers and service providers.

Externally, it comes from the solid economic foundation of our nation from the desire of each small family for joyful living, which together have mounted to the tremendous demand in China's living sector. There have been a series of favorable policies unveiled recently to support future release of [ rigid ] and upgrade housing demands, help high-quality developers restore liquidity and boost market confidence. We will also do our best to make our network of store and agents, the warm connect of homes, to bring better quality and more diversified housing and related services to customers and play our part to promote a stable and healthy development of the real estate market as well as to better satisfy the housing needs of all people. Thank you. Next, I would like to turn the call over to our CFO, Tao, to review our third quarter financials.

[Tao Xu, executive]

Thank you, Stanley and thank you, everyone, for joining us today. Before discussing in more detail about the third quarter of 2022 financial results, I'd like to provide a brief update on the recent housing market. In the third quarter of this year, policymakers maintained relatively easy credit conditions, and the local government continued to introduce city-specific measures to better satisfy demand for housing and home upgrades. Overall, however, the frequency and the intensity of supportive policy throughout Q3 weakened compared to Q2. And we also saw some strong relaxations reversed in some several key cities. Meanwhile, a number of factors disrupted China housing market recovery in Q3. This included heatwaves that ravaged a vast swath of country. COVID-19 flare-ups and the slowdown in the developers' sales promotion and the fact that some buyers ceased the mortgage payment on unfinished new home projects. The existing home market maintained a moderate recovery, with GTV ticking up slightly on a year-over-year basis. The new home market also saw a decrease in GTV contraction, but still remain soft. Despite the macro headwinds, our operating efficiency and profitability improved significantly in Q3. The profitability of our New Home Transaction Services and the company's gross margin both reached new highs since our IPO in 2020, whereas our DSO and the non-GAAP operating expenses fell to record lows since IPO. This result did not come about overnight. They are the result of our rapid and resolute implementation of a series of cost management and efficiency enhancing measures launched a year ago in the face of market adjustment. They also embody our courage against the setbacks. Our management team's humility and involvement in the frontline operations and our decisive will to never give up. This achievement further motivates us to respect of laws of market, return to the essence of the operation, seek improvement from the refined management and continue to implement our series of efficiency, risk control and the cost management measures. Against this backdrop, let's turn to our financial details for Q3. Our net revenues were RMB 17.6 billion during the quarter, representing a narrowed year-over-year decline of 2.8% and a 28% increase compared with Q2 2022. This quarter-over-quarter revenue improvement was primarily due to the increased revenue from [ existing ] home transactions as pent-up demand in the mega cities of Beijing and Shanghai translated into the higher sales volume at the beginning of Q3 after COVID-battered Q2.

Meanwhile, other factors also helped drove the total net revenues. This included more new home revenues recognized in Q3 following a jump in subscriptions in May and June. Our commission-in-advance model that drove faster new home subscriptions to sales conversion as well as our stable monetization ability.

In particular, our net revenue from [ existing ] home transaction services increased by 16.6% to RMB 7.2 billion in Q3, compared to RMB 6.1 billion in the same period of 2021, primarily due to an 18.7% increase in GTV of existing home transactions to RMB 449 billion in Q3 from RMB 378.2 billion in the same period of 2021.

Our net revenues from New Home Transaction Services decreased by 31.3% to RMB 7.8 billion in Q3 from RMB 11.3 billion in the same period of 2021, primarily due to the decrease of GTV of new home transaction of 36.2% to RMB 261.5 billion in Q3 from RMB 410.1 billion in the same period of 2021.

On net revenue from home renovation and furnishing were RMB 1.8 billion in Q3 compared to RMB 6 million (sic) [ RMB 60 million ] in the same period of 2021 primarily because of the company completed the acquisition of Shengdu Home Renovation Co. Limited and began to consolidate its financial results during the Q2 '22 and organic growth of GTV for the home renovation and furnishing business.

Our revenue from emerging and other services increased by 45.8% to RMB 801 million in Q3 from RMB 550 million in the same period of 2021, primarily attributable to the increase of net revenue from the rental property management services, which was partially offset by the decrease of net revenue from financial services.

Cost of revenues decreased by 16.3% to RMB 12.8 billion in Q3 from RMB 15.3 billion in the same period of 2021. Gross profit increased by 72.8% to RMB 4.8 billion in Q3 from RMB 2.8 billion in the same period of 2021.

Gross margin was 27% in Q3 compared to 15.2% in the same period of 2021. The increase in gross margin was primarily due to: a, by shift of revenue mix towards the existing home transaction services with a higher contribution margin than some of other revenue streams; b, a higher contribution margin for Existing Home Transaction Services led by the increased net revenue from Existing Home Transaction Services and the decrease of the fixed compensation cost for the Lianjia agents; c, a higher contribution margin for the New Home Transaction Services as a result of an increased number of projects with higher margin under a relatively lower percentage of base compensation cost of net revenue from New Home Transaction Services; and d, relatively lower percentage of cost related to the store and other cost of net revenue in Q3 compared to the same period of 2021.

Total operating expenses decreased by 29.9% to RMB 3.5 billion in Q3 from RMB 5.1 billion in the same period of 2021. General and administrative expenses decreased by 26.4% to RMB 1,777 million in Q3 from RMB 2,412 million in the same period of 2021, mainly due to the decrease of the provision for the credit losses along with the decreased accounts receivable balance. Personnel costs and overhead, along with the decreased headcount as well as the decrease of the conference and the traveling expenses, which was partially offset by an increase of the share-based compensation in Q3 compared to the same period 2021.

Sales and marketing expenses were RMB 1,258 million in Q3 compared to RMB 1,202 million in the same period of 2021, mainly due to the increase in the sales and the marketing expenses for the home renovation and furnishing services as the financial results of Chengdu will consolidate since Q2 2022, which was partially offset by the decrease of the brand advertising and the promotional marketing expenses and the personnel cost for housing transaction services.

Research and development expenses decreased by 51.2% to RMB 509 million in Q3 from RMB 1,043 million in the same period of 2021, mainly due to the decrease of personnel costs and the share-based compensation as a result of the decreased headcount in research and development personnel in Q3 compared to the same period of 2021.

Income from operations was RMB 1.2 billion in Q3 compared to loss from operations of RMB 2.3 billion in the same period of 2021. Operating margin was 6.9% in Q3 compared to negative 12.7% in the same period of 2021, primarily due to: one, a relatively higher gross profit margin; two, the decrease in total operating expenses along with the relatively flat net revenue, primarily due to the personnel severance and optimized resource utilization in Q3 compared to the same period of 2021. Excluding non-GAAP items, our adjusted income from operation was RMB 2.1 billion in Q3 compared to adjusted loss from operation of RMB 1.4 billion in the same period of 2021. Adjusted operating margin was 12% in Q3 compared to the negative 7.9% in the same period of 2021. Adjusted EBITDA was RMB 2.3 billion in Q3 compared to the negative RMB 550 million in the same period of 2021.

Net income was RMB 716 million in Q3 compared to net loss of RMB 1,766 million in the same period of 2021. Excluding non-GAAP items, adjusted net income was RMB 1,888 million in Q3 compared to adjusted net loss of RMB 888 million in the same period of 2021.

Net income attributable to KE Holdings Inc.'s ordinary shareholders was RMB 723 million in Q3 compared to net loss attributable to KE Holdings Inc.'s ordinary shareholders of RMB 1,765 million in the same period of 2021.

Adjusted net income attributable to KE Holdings Inc.'s ordinary shareholders was RMB 1,895 million in Q3 compared to adjusted net loss attributable to KE Holdings Inc. ordinary shareholders of RMB 887 million in the same period of 2021.

Diluted net income per ADS attributable to KE Holdings Inc.'s ordinary shareholders was RMB 0.6 in Q3 compared to diluted net loss for ADS attributable to KE Holdings Inc.'s ordinary shareholders of RMB 1.5 in the same period of 2021. Adjusted diluted net income for ADS attributable to KE Holdings Inc's., ordinary shareholders was RMB 1.57 in Q3 compared to diluted net loss per ADS attributable to KE Holdings Inc.'s ordinary shareholder of RMB 0.75 in the same period of 2021. All in all, our profitability strengthened substantially, and we fully demonstrate our strong execution and operational capabilities. Among these developments, I'd like to drive the following financial highlights.

First, the profitability and the financial health of our new home business further improved as we cooperate with a greater number of projects with higher margins and optimize our fixed cost. The contribution margin of the New Home Transaction Services increased to a new high of 24.9% in Q3 since our IPO, up 1.4% from Q2. Meanwhile, our effective risk control strategy helped improve our financial situation. Cash collection from our new home business totaled RMB 9.27 billion in Q3 and that amount surpassed new home revenue for 5 consecutive quarters. As such, new home DSO shortened by 30 days from Q2 to 78 days in Q3.

Apart from the fast collection of the new accounts receivables, we also strove to collect receivables that were previously recognized bad debt provisions, as it enabled us to write back RMB 195 million in bad debt provision in Q3. Therefore, the bad debt provision did not have a negative impact on our P&L during Q3. This reflected the company's principle of adopting the most prudent accounting treatment, while highlighting the indispensable value of our New Home Transaction Services in bolstering better sell-through for the developers and promoting healthy property market circulation.

Second, as we continue to carry out all-round integration between Beike and [ Shengdu ], our home renovation and furniture services achieved a robust growth and started to contribute more revenue to the company in Q2. The business generated revenue of RMB 1.8 billion, up over 40% year-over-year and 34% from Q2. On an apple-to-apple basis, for Beijing Beiwoo, Q3 revenue from the home renovation and furnishing services rose over 90% year-over-year, while the gross margin increased by 8.3 percent points from the same period of 2021. On that basis, Beijing achieved a city level operating breakeven for the quarter. Beijing's advancement in building up its business model and the improvement in financial performance provides a feasible path for us to further explore a larger scale across the country.

Third, every penny counts. In Q3, our ongoing optimization of the operating expenses showed the results. It fell 30% year-over-year to RMB 3.5 billion under GAAP financial measures, driving the recovery of our profitability. On the non-GAAP, our total operating expenses decreased by 35.6% to RMB 2.7 billion, including bad debt provision written back of RMB 195 million.

Fourth, we maintained a strong cash position and operating cash flow in Q3. At the end of September, the balance of our cash, cash-like items was RMB 77.2 billion or USD 10.9 billion, among which the combined balance of our cash, cash equivalents, restrict cash and short-term investments amounted to RMB 57.5 billion, up by RMB 7.5 billion from Q2. The balance of our long-term cash-like items mainly included in the long-term investments amounted to RMB 19.7 billion. Our net operating cash inflow was RMB 2 billion in Q3, remaining positive for the fourth quarter in a row. This outcome demonstrates our strong ability to generate cash. And in our view, this makes us well positioned to navigate the market fluctuations and future challenges.

Fifth, as we previously disclosed, we established a share repurchase program under which the company may purchase up to USD 1 billion of our Class A ordinary shares or ADS over a 12-month period. Since the launch of the program on September 1, we have spent a total amount of around USD 155 million to purchase approximately 11.75 million ADS in the open market as of November 30. Despite the market fluctuations, we continue with the repressive program underscoring our management team's confidence in the company's long-term development prospects and our efficient capital allocation. Turning to the guidance for the fourth quarter of 2022. We expect the net -- total net revenue to be between RMB 14.5 billion and RMB 15 billion in Q4, representing a decrease of approximately 15.7% to 18.5% from the same period of 2021. This forecast can see the potential impact of the recent real estate related policy and measures and the COVID-19 resurgence and the containment measures in certain regions, which remains uncertain. It constitutes the current and the preliminary view on our business situation and the market conditions, which are subject to change.

Last but not last, in the face of market challenges, we respond quickly and actively with exceptional resilience and execution capabilities as well as fully proved effectiveness of our operating leverage. Our abundant cash reserves and the healthy cash flow also served as a safety cushion against external uncertainties.

Financial security and operational efficiency, our capability, we have forged in confronting numerous difficulties and challenges, which have enabled our fundamentals to remain intact and strengthen our sustainable operations amidst adversities. Our management team has always led by example into the front line, respect efforts and the achievements of our service providers, and through it all with the pragmatism and honestly. All of us at Beike are making an all-out effort with heart and the soul, and then never leave anything to chances.

Setbacks have translated into courage, and the dangers ahead inspire us to push forward. As we stand the test of time, not a single step along our journey will be easy, but we will never stop. Keep going, we will keep getting better.

That concludes our prepared remarks. We would like to now open the call to questions. Operator, please go ahead.

[Operator]

[Operator Instructions] The first question comes from Steven Tsai with Morgan Stanley.

[Steven Tsai, analyst]

[Foreign Language] My question is on market outlook. Could you share with us your view on the fourth quarter outlook for each of the new home and existing home markets? And what are the underlying assumptions behind your Q4 revenue guidance? Also, I know it's a bit too early, but could you also share with us your thoughts on the market recovery path next year if we look through the short-term pandemic impact in the quarter?

I'm asking this because, on the one hand, we have seen several supportive policy in the past few weeks. But on the other hand, some of the core cities of our existing home business also have seen some slowdown in sales recovery. While existing home supply seems increasing fast, but price is also trending down. So just wondering how we should think about recovery path next year.

[Tao Xu, executive]

Steven, it's Tao. Let me talk about the third quarter review first. From the macro perspective, the real estate market in the third quarter was affected by multiple factors, including [ Euro ] hot summer across country, the pandemic [indiscernible] in some high-tier cities and the new home mortgage payment suspension, slowdown in developers' sales promotions as well as household concerns about the geopolitical tension, economic downturn and uncertainty for the income expectations.

At the same time, the frequency and the magnitude of supportive policies slowed down in Q3 from both the central and the local government levels. In the second quarter, the central and the local government introduced close to 100 measures and policies to support market recovery. But in this Q3, there's only 70. And we also saw some strong relaxation reversing in some several key cities.

The reduction of the positive factors and the increase of the negative factors both contributed to the recovery slowdown in the housing market in Q3. In terms of the existing home market, despite the macro headwinds in third quarter, the recovery of the existing home market quickened.

The GTV for China existing home market increased around 6.6% year-over-year and 8.1% quarter-over-quarter. The GTV in July recorded year-over-year growth for the first time in the past 12 months. Specifically, the existing home market hit a high [ and dry ] and moderated month-over-month afterwards. This trend is consistent with the monthly trend in the third quarter from 2018 to 2021.

City-wise, the first-tier cities benefited from the pent-up demand after pandemic restrictions were lifted, resulting in a significant GTV growth quarter-over-quarter, while the performance in the second and third-tier cities was basically flat versus the second quarter, among them, like city at [ Guiyang ], [ Suzhou ], which have the most supportive policies; and [ Zhengzhou ], which benefited from the demand shift from the new homes. So steady improvement in the existing home market in third quarter. While cities such as Chengdu were more affected by the pandemic at the end of Q3.

In terms of the new home market, affected by multiple macro factors, the new home market recovery trend in May and June did not extend to the third quarter. Following the mortgage payment suspension incident in July, our leading indicator, the number of new home subscription counted down around 42% week-over-week and 26% month-over-month and continued to drop in August and September.

According to the data from National Bureau of Statistics, third quarter new residential housing sales grew by 21.3% year-over-year and 7.1% quarter-over-quarter. CRRC's data on top 100 developers showed a 33% year-over-year drop in the period and a slight downward trend month-over-month. City-wise, according to Beike Research Institute, during the first 9 months of the year, new home GTV was down nearly 2% year-over-year for the first-tier cities but dropped 46% and 41% for second-tier and the third-tier cities, respectively.

As of September, regarding the pricing for the 50k cities existing home price has fallen for 13 consecutive months and is still showing a downward trend. It further fell 1% in September from August, taking cumulative decline to 9%. Existing home prices in Beijing and Shanghai hit new highs in Q3. And it began to adjust slightly in October, while in most other cities, the price declined more notably. Cities with more significant home price adjustments are mostly cities that saw large price increase in the past like Shenzhen and Dongguan.

In summary, there were many unexpected factors in the market during the Q3. It will require additional observation to tell how the market will perform.

Regarding for the Q4 outlook, since the fourth quarter, favorable policy have been introduced continuously. On demand side, policies including lowering the mortgage rate, tax refunding and relaxed the home recognition, to ease the down payment for the home upgrade demand have all played a role in promoting market recoveries.

To attract the private developers, several ministries from the central government jointly introduced tools to support the private -- the debt financing of the private developers, including the framework [ 16 measures ] from the central bank. The path to the restoration for developers is getting clear, and it has played a role in the restoration of the market confidence. Nevertheless, the ongoing COVID outbreak and the corresponding control measures in many cities still brings great pressure on the market recovery and have a dilutive effect on supportive measures.

For existing home market, at present, among our top 32 cities, over 95 of the store in Beijing, Zhengzhou, Chongqing and Shijiazhuang are affected and unable to operate normally due to COVID-19 and the related containment measures. More than 60% of our store in Guangzhou are affected. And the pandemic situation in Chengdu, [ Tianjin ], Xi'an and [ Suzhou ] is also intensifying.

During the previously severe [indiscernible] in Shanghai, Shenyang, [ Changzhou ] and other cities, the transaction volume was close to 0 for about 4 to 8 weeks. Therefore, we prudently assumed that roughly 25% of our existing home transaction in the fourth quarter will be affected by the pandemic. However, unlike the discretionary consumption, housing demands are largely [ rugged ]. Based on our experience, the demand will bounce back and be replenished to a certain extent after pandemic resurgence is over.

New home market is more notably driven by the developer's active promotion, easing policies and the National Day holidays and is expected to see a narrowed year-over-year decline in Q4. In October, Beike new home subscription data rose strongly by nearly 35% compared with September. The subscription data [ led ] to the online contract signing by about a month. And the recovery of the leading indicator supports overall recovery of the new home market in Q4. Despite the private developers might still experience [indiscernible], relentless efforts are being made in that [ review ] for the industry in the fourth quarter.

Regarding the company's view for the year of 2023, I would like to say the market trend will be affected by multiple factors, but it is unlikely for the market to weaken further. There's a room for the real estate policies to further relax, guided by the principle of the housing is for living, not for speculation. Maintaining the stable development of the real estate market and supporting the release of the reasonable housing demand have become the consensus among the various entities.

Judging from the timing of April, September and November, when the central government released easing measures, the current market downturn may reach the point of triggering more policy relaxation. Considering the housing price are still falling and the transaction volume is still at the trough, we expect to see increased policy support next year especially from the local government. Whether it is in the form of purchase [ foundry ] support or, more importantly, further ease the purchase qualification, this will lay the foundation for the demand to regain and stabilize the market.

For other macro factors that have a relatively large impact on the market recovery, you think that we would like to say, number one, the global economy and the political landscape does not experience significant turbulence. Number two, there is a moderate economy growth domestically, and the pandemic has been effectively controlled with this impact on the economy gradually easing. Number three, the urban employment rate is back on track as well as the pace of urbanization. Number four, the rise in income [indiscernible] and the consumer confidence are moderately restored.

Lastly, on the policy front, the implementation of the property tax will not be rushed in the short run. Under all of this assumption above, we expect the performance of the existing home and the new home market has followed for the year of 2023.

Strong certainties in recovery of the existing home market. The existing home market has undergone deep adjustment in the year of 2021 and show a trend of quarter-over-quarter recovery so far in 2022. In the second half of 2022, most cities might be able to return to the monthly transaction average over the past 5 years. We expect the existing home market to continue to recover and the continued benefit from the spillover demand from the new home market in the year of 2023.

According to the forecast from Beike Research Institute, nationwide GTV for existing home sales is expected to a stage of mild recovery, rising around 5% year-over-year next year compared with 2022. Regarding new home, it might take longer for the new home market to see a mild recovery.

The recovery of the new home market next year will depend more on the restoration of the consumer confidence in real estate market and the strength of the supportive policies. According to Beike Research Institute, the support of the more relaxed policy developers, especially those state and centrally owned, will increase our sell-through efforts on the supply side next year, bringing a marginal improvement in transaction volume. However, the consumer confidence and the housing price, which were more deeply wounded by COVID and the delayed new home project, it will take longer to recover. The decline in some customer confidence in second half of this year is expected to extend to the first half of next year and begin to repair in the second half of 2023. As such, we expect GTV of the new home market to be largely flatlined year-over-year in the year of 2023. Thank you.

[Operator]

The next question comes from Timothy Zhao with Goldman Sachs.

[Timothy Zhao, analyst]

[Foreign Language] I have 2 questions here. First, can you maybe share some outlook on how our Lianjia store and store network expansion plan into next year? And what is the operating efficiency and income level of the store and agents at this moment? And in the third quarter, we achieved very strong probability, but that's -- that means that the income level of the stores and agents is coming down.

And secondly, it's related to the SOE versus the private developers breakdown with new home sales. As I noticed that private developers still accounts for over 50% of the new home sales on Beike platform. May I check what are the top customers in the private developers? And considering that some of the private developers recently also default on bonds or delayed the interest payment, are we expecting more risk related to the current receivables?

[Tao Xu, executive]

Thank you, Timothy. Regarding your first question, store and agent numbers are stabilizing and even start to grow in some cities. We see stabilizing store and agent network scale. Since the second quarter, the number of active stores and agents have started to stabilize. And in the third quarter, the quarter-over-quarter decrease in active store and agent narrowed to 3% and 2%, respectively. Amongst it, in nearly 30 cities, including Nanjing, Changsha and [ Hefei ], the number of active stores grew quarter-over-quarter. And the number of active agents increased quarter-over-quarter in 40 cities including Shenzhen. There's no significant network function needed going forward in [ Shangrao ].

A large number of practitioner left the industry following the recent round of market corrections. And we believe many of them might not return even when the market recovers. Therefore, looking ahead, we do not expect the rapid growth in the number of stores and agent industry-wide in short to medium term. And the number of store and agent on our platform will also remain relatively stable over coming quarters. The steady improvement in store and agent productivity facilitates organic business growth. We believe increasing per-store and per-agent income is a key to the organic growth. The industry has shaped the way from the front seat of the pure skills function towards the pursuit of the refined high-quality services.

Only in such environment can service providers who take our customers to stand out from the pack and to see the improvement in their living conditions. In 2021, the average income of real estate agents nationwide was still far below the average local salary, 77% and 63% of average and medium local salary, respectively.

Therefore, while maintaining a relatively stable scale of the store and agent on our platform, we hope to support each high-quality store and agent to grow revenue and profit, thereby realizing the high-quality and sustainable growth for the overall business on our platform.

The productivity also improvement -- the productivity improvement has delivered results. Overall speaking, we implement a series of strategy, including reforming loss-making stores, merging to large stores, facilitating the business shift from the new homes to existing homes and focusing on the key new home projects. We insisted on taking care of agents and help agents and store owners transcend the cycle. Although it takes time for our effort to pay off, we have observed a clear encouraging store and agent productivity on our platform.

In the third quarter, while GTV on Beike dropped by 11% and our revenue fell by 3% year-over-year, the unit store commission revenue of our franchise and the connected store on Beike platform rose by 25% and 26%, respectively, year-over-year and 14% and 12%, respectively, quarter-over-quarter.

Meanwhile, commission revenue per agent of [ connected ] store grew by 25% year-over-year and 9% quarter-over-quarter. Of course, there are structural regions that partially expand increase, but overall store and agent income on Beike platform has been improving.

Just take [ Zhengzhou ] as a showcase. Due to the market corrections, our revenue income growth decreased by 43% in the first 3 quarters and 23% year-over-year in the third quarter. However, our operating profit margin in the city rose significantly from last year's average 6% to 24% in the third quarter.

Operating profit grew by 69% for the first 3 quarters and was 14 points in the third quarter compared with the same period of last year. While we improved the profitability in [ Zhengzhou ] as a whole, the [ connected ] store in Zhengzhou have also achieved significant improvement in their operational and financial performance. In the third quarter, their unit store commission revenue grew by 57% year-over-year and 14% quarter-over-quarter. Looking for the future in the year of 2023, assuming market enters a period of steady recovery, we hope to have more agent and store to reach above the flat line.

Regarding your second question, first, I need to emphasize again the Beike's [indiscernible] risk is minimal mainly for 3 reasons. Number one, as Beike continue to increase the cooperation with the state and centrally owned developers, they are accounting for increasingly higher proportion of our new home sales. In third quarter, the proportion of the new home sales from state and centrally owned developers further expanded by 5% quarter-over-quarter to 42%.

Number two, the news coverage on the debt crisis created a so-called halo effect, giving the impression that the majority of the private developers are in debt crisis. But in the real world, a significant number of the local private developer remained crisis free. Contrary to the common perception, this is more [ yet strong ] developers with low leverage are our important [indiscernible] partners. Meanwhile, Beike is not subject to the concentration risk. We currently serve more than 1,000 private developers, of which only 6 who each count for more than 1% of the total sales contribution.

The robust policy of our local private developer and our low business customer concentration empower Beike to maintain active control of our risk exposure. We continue to increase the coverage of the commission in the box model, particularly among the private enterprise. The percentage of the revenue from the commission in the box model to the total private developer new home revenue in cities [indiscernible], Beijing and Shanghai already exceeded 32% in first 3 quarters and reached 44% in September. As such, a further deterioration in the operating condition of a single or even multiple private developers will not have a material impact on our accounts receivable collections.

And number three, we are equipped with the industry-leading risk-control strategy and strong partnering power. We have never [ slackened ] in our new home risk-control measures. And the new home receivable collection is a core KPI in this year.

This year, we continue to strictly manage our DSO with an emphasis on the detection and prevention of risk in advance, revenue safety and the settlement of the historical receivables. There are some examples. From risk detection and prevention, we continue to iterate our developers' risk assessment system to conduct upfront risk detection and classification. We also strictly managed the cooperation with developers in accordance with different risk levels.

Contract with the high-risk developers are completely prohibited and only with advanced commission payments and the settlement of the historical receivables can such cooperation be resumed, moreover, safeguard our newly generated revenues, comprehensively expand the scale of the commission in the box payment and the percentage of the cooperation with the state and the centrally owned developers.

In addition, we also resort to the legal remedy as much as possible against the high-risk developers with delinquent account to ensure receivable preservation, conduct corporate-to-corporate cooperation with the low-risk developers to reach the settlement agreement on receivable in arrear, to expedite the settlement of historical receivables. As a result of the several initiatives in Q3, our new home sales cash inflow reached CNY 9.27 billion, almost 10% higher quarter-over-quarter. While the book value of our new home receivable decreased to CNY 6.15 billion. The receivable collection cycle shortened by 30 days to 78 days in Q3.

In the first 3 quarters of this year, our cumulative new home transaction revenue reached RMB 28.4 billion, but our cumulative cash collection reached RMB 26.4 billion. Our accounting treatment against the bad debt provision has always been prudent with the maximum provision. For almost all of developers who had previously generated important risk as the maximum amount receivable was booked as a bad debt provision. Meanwhile, we are effective and indispensable channel for developers to generate sales and resume liquidity.

We continue to receive the collections from developers which were previously recognized as bad debt provision. Therefore, in Q1 and Q3 of this year, we were able to write back provisions for the bad debt in amount of RMB 150 million and RMB 195 million, respectively, while our cumulative bad debt provision amounted to almost RMB 2 billion, covering 32% of the new home accounts receivable. We think this is a sufficient bad debt provision and that there is a very little chance for a large amount, onetime bad debt provision in the future.

Keeping to our highly decentralized business and the implementation of the strict risk control, we believe our new home receivable will continue to become more secure. And our bad debt from the new home sales will not deteriorate [ maturely ] any further. Thank you.

[Operator]

The next question comes from Liping Zhao with CICC.

[Liping Zhao, analyst]

[Foreign Language] So since the consolidation of Chengdu in second quarter, the company has achieved many progresses in terms of home renovation and furnishing infrastructure capabilities and also the enhanced cooperation with transaction business line. Looking ahead, what's your development strategy of this business? And how will you balance the growth and investment of this sector?

[Yongdong Peng, executive]

Okay. I'm Stanley. Thanks for your question. The home renovation and furnishing industry is relatively capital intensive and has many integration opportunities. We have outstanding [ textile ] industry that require high standardization and transformation through technology or understanding -- outstanding. First, we must not rush. It took Beike [indiscernible] 20 years of development to get to where we are now. It's the same for home renovation and furnishing. We need to look at growth with time horizon of 3 years for the business. And its gradual start does not mean that we will not reach greater heights in the future.

Second, to achieve long-term growth, we should cultivate needed capabilities and resolve the major outstanding issues in the industry. We have observed the following areas in the industry with challenges. One, there is no online services with a great home renovation and furnishing experience provided in China. Two, in terms of production of localized home renovation and furnishing product seller for the Chinese market, the industry is still relatively weak. Three, the home renovation and furnishing services are not standardized. Four, professional skills of service providers need to be improved. Five, we need to identify possible areas of innovation through structural changes in technology, materials, process and methods.

Presented with industry problems and opportunities, we need to leverage our store and agent network traffic and provide more and better products. At the same time, we need to upgrade our capability to capture these opportunities and realize long-term growth. Therefore, we need to make -- stay fast and target investment in areas that will enable us to provide more products and iterate on capabilities for long-term benefits instead of making investment to stimulate short-term growth and expand scale without growing our capabilities.

This is why we are not going to invest heavily, but rather invest in service training. For example, our Huaqiao Academy spend months developing courses for home renovation service providers. Our home renovation managers throughout the country all need to take full-time training for 3 to 4 days, during which time we will be missing out on revenue, but this is the investment we must make. Also, we are not going to use large onetime subsidiaries to stimulate sales, rather, we will spend on system development, online content and home renovation product R&D, among others.

We see investment in home renovation products in the industry inadequate. Going forward, we will engage in more refined development and operations to provide targeted products for different user groups such as products for old neighborhoods and upscale residential communities. If we do not invest in these areas, it means we have stopped in our tracks without driving for long-term growth. These investments are necessary as they meet our vision and expectation for the future.

Of course, during our investment, we require our business to manifest its capability in growing from 0 to 1 and fostering a virtuous cycle of quality, efficiency and scale. So in summary, there are ample opportunities in the industry as customers have needs and we want to meet their demand. As such, we will calculate our capabilities and harness our resources rationally. In my view, it does not make sense to make investment in this industry for mere financial gains or short-term revenue growth. Our investment need to drive better development of a long time frame. That's my answer to your question. Thank you.

[Operator]

We are now approaching the end of the conference call. I would now like to 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.

[Operator]

Thank you. The conference has ended. You may now disconnect your line.