KE Holdings Inc. (BEKE) Earnings Call Transcript & Summary

Hello, ladies and gentlemen. Thank you for standing by for KE Holdings, Inc.'s Fourth Quarter and Full Year 2022 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to your host, Ms. Siting Li, IR Director of the company.

Thank you, operator. Good evening and good morning, everyone. Welcome to KE Holdings or Beike's fourth quarter and fiscal year 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.

Thank you, Siting. Hello, everyone. Thank you for joining Beike's fourth quarter and full year 2022 earnings conference call. For the past 2 years, the industry has faced unprecedented challenges, but every venture will pass and the spend will come as promised. In January and February, people around the country quickly emerged from the pandemic. At the same time, the various end market begins to recover. By the end of February, existing home sales on our platform had rebounded sharply, reaching a level close to the same period in 2021, the most active year for existing home transactions. Sales of new homes have also increased significantly year-over-year, returning nearly to the post-lockdown level in 2020. As we transitioned this round of market correction, our firmly held views have been proving correct and our underlying capabilities are being validated. First, our market neutral view and persistencies in that view has been proving. As part of our digital service platform for the housing industry, professional agents must act as a counterbalance of herd mentality in up and down market cycles. This means they must not likely follow the crowd or engage in herd and not evaluate the market objectively, multi-dimensionally and rationally. There must be a stabilizer for the market and never magnifying anxiety. The market has been in a downward trend since the middle of 2021. But through it all, we have always believed that the consumer desire for better lead will not change and the market will return to a normalized level. We also see opportunities in the market recovery. Therefore, with a stable state of mind, we quickly managed series of employee adjustments to cope with short-term fluctuations and prepare for market recovery. We launched our one body 2 wings strategy, transforming from scale expansion to quality crews and implemented a series of measures to reduce costs and enhance efficiency. We protected the commission collection and operational security of service providers on our platform, providing them with tools and capabilities in order to support them through the truth of the cycle. In addition, handlers of our management members went to the front line to help [indiscernible]. Our market neutral view has allowed us to strengthen our muscles and watch for recovery when the market was in a downturn. Facing the current market recovery, we will continue prioritizing our market neutral view, acting as a counterbalance against the market changing behaviors. Since significant market volatility haunts the industry in the long run, we hope to facilitate a healthy and orderly market recovery. Second, the capability of Beike as a platform have been further validated during the large market saturations. We established the Beike platform in 2018 in order to open up the capabilities we have accumulated nearly 20 years to the industry. We have constantly refined our protocols, ecosystems and digital infrastructure to further unlock the ACN network effects and the scale effort of our platform, providing support for customers, service providers and industry partners, such as developers, helping them to better interact, cooperate, learn from one another and achieve win-win results. This round of market vitality is the first major test we have experienced as a platform. We have delivered more stable profitability than before, proving our ability to expand our business, which demonstrates our strength as a digital service platform for the housing industry. We have also prepared the momentum needed for the industry long-term development, high-quality industries [ suppliers ] have been protected and stabilized. And the low quality and efficient supplies not only on our platform, but also outside of our platform has accelerated their asset, which is a good thing for the entire industry. We improved our more stable profitability. In 2022, the national existing home market GTV fell by 31% year-over-year and sales of the top 100 new home developers fell by 42% year-over-year. However, our annual non-GAAP net profit backed the trend and achieved a year-over-year increase of 24%. Our operating cash inflow grew by 135% in 2022 against the significant fluctuations in the external market. We have demonstrated the stability of profitability and power of our platform model. We also tested our testing out our platforms with a stability. In 2022, the first year for us to advance our one body 2 wing strategy, our home renovation and furnishings contracted sales reached RMB 6.9 billion, increased 31% year-over-year on a pro forma basis, also backing the market trend is benefited from our network infrastructure of stores and agents, our digital transformation capabilities for low frequency, complex and heavy decision-making industries and our full integration in Shengdu in Beijing. 2 wings accounted for more than 10% of our revenue in 2022, increasing from less than 3% in 2021, while our one body provided more than 90% of their customer leads. The ability of our platform to extend to a wide range of services around the sector of meeting has been initially validated, showcasing the high replicability of our industrial capabilities and our ability to meet more and more complex needs of our customers. This represented a solid step in our never-ending innovation and development. Third, our view on the [indiscernible] of the era, our agent empowerment and the quality service has been validated. With accelerated set of low-quality and efficient supply in the industry, we expect an increase in unit store productivity in the future. The trend of large stores will become more pronounced given their wide coverage of both home listings and communities customer leads and more diversified business operations, leading to stronger risk resistance. As such, store efficiency has become a key management variable and high-quality agents are crucial to our operations. Store owners' abilities in store operations, team management as well as recruiting and energizing agents have become differentiating factors in successful operations. With respect to agent, the industry will not and should not be flat with excess capability. In the future, the industry will enter the era of the efficiency improvement of existing capability and agent empowerment. The productivity of high-level agents is 2x the industry media, which shows that the mid-level group of agents will become the most vital force in the industry in the future. We have always been and will continue to be committed to helping agent improving our efficiency, obtain [indiscernible] and stable income, realized long-term employment and pride themselves of their professionalism on our platform. Therefore, we have been firmly moving forward with our large store strategy. In 2022, we supported and empowered the reorganization of over 3,000 stores on our platform. We also consistently strengthened the professional competencies of store owners. At the end of 2022, more than 6,900 store owners completed the study in our Beike Huaqiao Academy. Moreover, we build out the store and agent ranking infrastructure with competencies ranking standards, which improved the management and the operating capabilities of the platform and store owners assisted in building agent talent pipeline. We also advanced the governance of existing and new home business conducts, resolutely cracking down on incidences of wrong behavior. We setup a comprehensive monitoring mechanism to encourage customers, business partners and platform employees to supervise and report violations such as off-platform transactions. We also fully implemented and jointly promised with new home developers that there will be no customer information leakage, customer poaching and so on and promoting the customer contact information to be private throughout the showing process. All this work to enhance security in agents operations. While the store and agent comp on our platform declined in 2022 with a number of actual stores and actual agents at around 37,400 and [ 3,500 ] respectively. The structure and efficiency of store and agents on our platform continued to improve throughout our efforts. In the fourth quarter, the proportion of 8 active stores in cities, excluding Beijing and Shanghai, increased by 5.5 percentage points year-over-year and the monthly agents true rate dropped to less than 5% for [ non-lean general stores ] and only 3.1% for lean general stores. Together as the group, we have gone through a difficult winter, and this experience has given us a lot of strength. Our team will be more determined than ever and become the backbone of the industry. It's also the most available assets of Beike. One who possesses a piece should have his peace of mind. Turning to our [ one body ], our existing and new home transaction services. In 2022, we transitioned to a stage of quality growth from one-off scale expansion. We quickly adjusted our operations to improve efficiency and cut expenses, scaling down the P&L units for operation and management. With digital tools, we can check gross margin on a per order and personnel basis as well as profit for each store, which encourages business team to focus on profitability indicators as well as cultivate cost-effective mindset among managers at all levels. Driven by these initiatives, we significantly enhanced our platform's operational efficiency and optimized cost and expenses. Moving to existing home transaction services. According to data from the Beike Research Institute, full year GTV of existing home sales in China were [ RMB 4.93 trillion ] in 2022, growing by about 31% year-over-year, a decline by about 3% year-over-year in the fourth quarter, whereas existing home transaction GTV on Beike's platform fell by only 23% year-over-year in 2022 and rose by 1.5% year-over-year in the fourth quarter. We outperformed the industry amidst challengers. Thanks to our empowerment and the retention of high-quality store owners and agents, enhance the ACN network events, continuously deepening platform operations and increased user value delivered to end customers and business partners. For example, we reviewed our platform's lead allocation mechanisms for existing homes in 2022. The new mechanism allocates leads based on store performance scores, raising the percentage of agents mentioned with familiar home listing by 10%. It's reduced the number of unproductive actions agent to acquire leads, allow them to be more focused. And as such, agent provided customers with more professional services. Next, moving to new home transaction services. On the market front, according to data from National Bureau Statistics, GTV on new residential home sales in China amounted to RMB 11.7 trillion in 2022, down 28% and 27% year-over-year for the full year and the fourth quarter respectively. GTV of CRIC's top 100 real estate companies fell by 42% and 30% year-over-year in 2022 and the fourth quarter respectively. In comparison, GTV of new home sales on our platform declined by 42% year-over-year in 2022 and by 26% in the fourth quarter, while our full year GTV performance was in line with the market. We realized a write-back of our new home and debt provision for the year. And our DSO was the lowest, while our profitability reached a record high since our listing. This represents the excellent results of our core strategy, which is not compromising items and consumers' interest in exchange for expansion. At the same time, we proactively strengthened our risk controls, security and profitability specifically. We consistently interacted our developer risk evaluation system to manage business risk in pre-emptive way. In the fourth quarter, Commission in Advance model accounted for 44% of our total commission, doubling from the beginning of the year. It ensures the security of agents' receivable collection. Moreover, the average number of homes sold by projects under the Commission in Advance model was 35% higher than general new home projects, reflecting the developers' sell-through were also accelerated. The proportion of state-owned developers continue to rise with their projects accounting for 45% of our new home revenues in the fourth quarter. Next, moving to our 2 wings businesses. Over the past years, we have validated the authenticity of our strengths and capabilities in the 2 wings industry and further demonstrated that our 2 wings business are not only natural fit for our core business, but also feedback to it. 2022 was also a challenging year for the home renovation and furnishing industry. According to data from China Building Decoration Association, the total revenue of leading home renovation and furnishing companies in 2022 decreased by about 9% year-over-year. Our home renovation and furnishing business generated contracted sales of RMB 6.9 billion in 2022, rising by 31% year-over-year on a pro forma basis. Among our contracted sales, 33% was attributable to core business customer referrals. On top of this, in April 2022, we launched our new retail sales of home furniture and furnishing strategy, which leverages our full service renovation offerings. New retail home furnishings contribution to our total contracted sales grew from 12% in the first quarter to 26% in the fourth quarter of 2022, further retaining the platform's business beyond low frequency transactions. With respect to our rental services, in 2022, the number of rental units managed by our home rental services exceeded 120,000 with over 17,000 units under centralized leasing management or Carefree Rent, more than 90% of this was contributed by core business customer referrals. Clearly, the mobilization and the empowerment of our core business has enabled our 2 wings business to substantially outperform the market. Meanwhile, the broad market space of the 2 wings business as well as the recognition from customers and society, gradually boosted adding professionals value, and more importantly, fresh enduring mortality into our organization, setting the stage of boundless possibilities for us to unleash our potential. Leveraging our digitalized transformation endurance in decision heavy industries with low transaction frequencies, complex processes and our focus on offline operations, we have been looking to reshape the home renovation and furnishing industry through digitalization and online operations. We also standardized the construction [ pads ] when restructuring the home renovation construction and customized furniture delivery process. We established our quality-based service, service provider management and the incentive mechanism as well as our order dispatching system as part of our scientific management capabilities. Additionally, our Home SaaS 2 will also take part in these initiatives to lead and implement the industry digital transformation. In December 2022, 80% of our orders in key cities were automatically dispatched. Our renovation delivery cycles were shortened by 5 days from previous year. And our [indiscernible] service providers' retention rate reached 97%. These capabilities will help us to grow with quality. In 2022, we worked even harder to fulfill our society responsibilities and be an enterprise of the era as the only private enterprise set among the first group or affordable rental housing operations service enterprises in Chengdu. We have provided more than 11,700 rental homeowners and the talent business superior leasing operation services, including leading brokerage services as of the end 2022, leaving behind a year of challenges and also the loss. We have relatively embarked on our new journey in 2023, facing the recent notable market recovery. We will maintain a consistent strategy for our core business based on our market neutral view that is on top of cost reductions, efficiency enhancement and risk controls. We will continue to deepen our operations and improve our ecosystem to capture high-quality growth opportunities. In 2023, we will work to enhance our long-term capabilities, which require position and continuous investment in areas such as business conduct government services and product delivery for home renovation and incremental efficiency enhancement of our existing core of agents. Through these efforts, we will seek and fill the gap between our capability and the needs of consumers and service providers, fulfilling our society responsibilities to be a great company in the heart of the society and the people. Thank you. Next, I would like to turn the call over to our CFO, Tao, to review our fourth quarter and full year financials.

Thank you, Stanley, and thank you everyone for joining us. Before discussing in more detail about our first quarter and the full year 2022 financial results, I'd like to provide a brief update on the housing market in 2022. In 2022, China housing market encountered unprecedented challenges, affected by the frequent disruptions from pandemic, macro economy softened and the customers' uncertainty around the future expectations heightened. These factors dampened buyers home purchase willingness and the ability to pay. We're also impeding transaction process. Additionally, in the new home market, consumers' confidence in the housing product delivery hit a troll given the risk among the real estate developers. All of that quickly diluted the positive effects of the favorable policies, resulting in a performed and sustained market correction. Facing the predicament, we took decisive actions and seek answers from the frontline operations. Sharpening our focus on the sense of business, risk control and efficiency enhancement, we managed to achieve a strategic transformation in 2022 through high-quality growth from scale expansion. Particularly, we reported a smaller contraction in net revenue compared with the market adjustment, realized significant year-over-year gross margin increase and [indiscernible] non-GAAP net income growth, effectively mitigating the impact of the macro conditions, especially in profitability and cash flow, further strengthening our leading position in the industry. Now let's turn to the financial details for Q4. Our net revenues were RMB 16.7 billion in Q4, exceeding both the end of our guidance and Street consensus, mainly because, first, people's day-to-day life as well as existing home transaction normalized after the pandemic peak in some core Chinese cities at the end of December. Second, the existing home market in Chengdu and some cities in Yangtze River Delta performed well in Q4, leading to a year-on-year increase for [ non-Lianjia ] existing home revenues from the lower base in 2021. Third, new home sales settlement performed well in Beijing and Shanghai in Q4 under our sales conversion initiatives. In particular, our net revenues from this in-home transaction services decreased by 11.8% year-over-year to RMB 5.3 billion in Q4. Our GTV of this in-home transactions actually increased by 1.5% year-over-year in Q4 with the GTV by connected agents increased by 24.3% year-over-year in Q4. Nevertheless, we recorded our net business in revenue, while GTV from Lianjia decreased as top-tier cities took a heavier blow of COVID in Q4 and that we recorded on a gross basis in revenue. Our net revenues from the new home transaction services decreased by 26.8% year-over-year to RMB 8.3 billion in Q4, primarily due to the decrease of new home GTV of 26.1% to RMB 263.5 billion in the period. Net revenues from the home renovation and furnishing were RMB 2.1 billion in Q4 compared to RMB 58 million in the same period of 2021, primarily because we completed the acquisition of Shengdu as well as organic growth of this line of business. Our net revenues from emerging and other services increased by 152% year-over-year to RMB 1.1 billion in Q4, primarily attributable to the increase of net revenues from our rental property management services and financial services. Gross profit increased by 40.4% to RMB 4.1 billion in Q4. Gross margin increased to 24.4% in Q4 from 16.4% in Q4 2021. The increase was primarily due to, A, a shift of revenue mix towards its in-home transaction services and home renovation and furnishing with a relatively higher contribution margin than new home transaction services. B, higher contribution margin for both existing and new home transaction services as a result of effective cost control. And C, a relatively lower percentage of cost related to store and other costs of net revenues in Q4. Operating expenses decreased by 9.6% year-over-year to RMB 3.7 billion in Q4. General and administrative expenses decreased by 18.6% to RMB 1,792 million, mainly due to the decrease of the provision for credit loss and the personnel cost and overhead. Sales and marketing expenses were RMB 1,333 million in Q4 compared to RMB 809 million in the same period of 2021. This increase was mainly due to the consolidation Shengdu. Research and development expenses decreased by 31.1% to RMB 509 million, mainly due to the decrease of personnel costs and share-based compensation as a result of decreased high cost. Income from operations was RMB 387 million in Q4 compared to loss from operations of RMB 1,184 million in Q4 2021. The increase in gross margin and the decrease in operating expenses have brought about the increase in operating margin to 2.3% in Q4 from negative 6.7% in Q4 2021. Our non-GAAP income from operations was RMB 1,339 million with non-GAAP operating margin reached 8.0% in Q4 compared to negative 2.2% in the same period of 2021. Adjusted EBITDA was RMB 2,164 million in Q4 compared to RMB 484 million in Q4 2021. Net income was RMB 372 million in Q4 compared to a net loss of RMB 933 million in the Q4 2021. Non-GAAP net income was RMB 1,547 million in Q4 compared to RMB 42 million in the same period of 2021. Turning to our financial detail in fiscal year 2022. Our net revenue decreased by 24.9% year-over-year to RMB 60.7 billion, while the GTV declined by 32.3% to RMB 2,609.6 billion due to the soft market sentiment and the COVID-19 disruptions. Our gross profit reported a narrower decrease of 12.9% year-over-year to RMB 13.8 billion. Gross margin increased by 3.1 percentage points to 22.7% in 2022. Our loss from operations was RMB 333 million in 2022 compared to a loss from operations of RMB 1.4 billion in 2021. Operating margin was negative 1.4% in 2022 compared to negative 1.7% in 2021, primarily due to a relatively higher gross profit margin, which was partially offset by the increased spending in home renovation and furnishing and emerging and other services in 2022 compared to 2021. Non-GAAP income from operations was RMB 2.3 billion in 2022 compared to RMB 1.4 billion in 2021. Non-GAAP operating margin was 3.8% compared to 1.7% in 2021. Our net loss was RMB 1,397 million in 2022 compared to RMB 525 million in 2021. Non-GAAP net income was RMB 2,843 million in 2022 compared to RMB 2,294 million in 2021. Now I'd like to highlight the following financial highlights for the full year. Firstly, China's real estate market experienced a severe adjustment in 2022. According to Beike Research Institute, this new housing market fell 31% in the year, while data from CRIC showed new home sales from the country's top 100 developers tumbled 42%. However, due to our diversified business structure and the better retention of high-quality service capacity, our annual GTV saw a milder fall of 32%. Thanks to the stronger market vision strategy of our new home and this in-home business as well as the increase in the proportion of the home renovation and furnishing services with the higher monetization rate. Our revenue declined by only 25% year-on-year, a much smaller contraction compared with the market adjustments. More encouragingly, our non-GAAP net profit saw a [indiscernible] growth of 24% for the full year of 2022 on the series of the cost optimization measures. The value of the platform has supported us in achieving impressive results in profit quality management. Secondly, our one body business, which is the home construction services, delivered a strong performance in profitability and financial health and achieved remarkable results in cost and expense optimization. In terms of the cost control, the fixed cost of our one body business fell by over 1/3 year-on-year in Q4 and the variable cost as a percentage of revenue dropped around 6 percentage points year-over-year. In face of the market downturn, we also made a forcible measures to scale down the P&L unit for operation management, encouraging the business team to focus on the profitability indicators through the performance evaluations. For Lianjia, we made a considerable effort in 2022 to deepen this operation and achieve notable results. Proportion of loss-making stores declined by 7 percentage points in 2022 from 2021. On the Lianjia to connected stores, agent productivity ratio in cities, excluding Beijing and Shanghai, increased to 1.3% in 2022 versus 1.2% in 2021. The adjusted improvement in agent compensation and efficiency also helped reduce our cost. In addition, in 2022, we continue to expand strategic collaborations with the state-owned developers with purchase from those partnerships accounting for 45% of our sales in Q4, rising from 28% in Q1. The proportion was 41% for the full year of 2022. On top of this trend, we still managed to have a new home acquisition rate increase moderately in 2022. Although the profitability of our in-home transaction services saturated quarter-over-quarter due to the pandemic impact, on a full year basis, the contribution margin of its in-home business reached 39.8%, up 2.8 percentage points from 2021 driven by stronger operating leverage due to the fixed cost optimization and higher revenue contribution from platform services. As our revenues from this in-home service continues to expand, we expect this business while input further in profitability. In the full year for 2022, the contribution margin of new home transaction services reached 23.6%, up 4.4 percentage points from 2021, mainly driven by the increased percentage of high profitability projects and a significant fixed cost reductions, validating our strategy of strictly balancing risk and profits in a high volatile market. In particular, new home contribution margin climbed to 26.2% in Q4, keeping another record high since our listing, supported by incremental improvements in the new home market in some high-tier cities. With the increase in its in-home and new home contribution margin, our gross margin for the full year of 2022 responded notably to 22.7%, up 3.1 percentage points year-over-year. Thirdly, in terms of the operating expenses, while maintaining our investment in new business, including home renovation and furniture, our total non-GAAP expenses in 2022 declined by 20% year-over-year to RMB 11.8 billion. The productivity of the platform operation teams in terms of their support to frontline agents increased by 20% year-over-year end of 2022. For new home business, we continue to promoting Commission in Advance model to ensure more secure commission collected by platform and agents and speed up the project sell-through. Commission in Advance accounted for 44% of our total commission in Q4, up from 20% in Q1. In Q4, Commission in Advance accounted over 36% of commissions from state-owned developers and 49% of that from private developers. Under such efforts, in 2022, we had a better provision written-back of RMB 206 million for the new home business and RMB 21 million for the whole group compared with a better provision of RMB 1.3 billion in Q1. Just to reflect our principle of adopting most prudent accounting treatment, while oversizing the treatments on the risk management with a sharp focus on receivable collections and improving the sense of the security of agents. Fourthly, our home renovation and furnishing business has gained considerable traction, benefiting from powerful synergies between Beike and Shengdu, our pro forma revenue for 2022 amounted to RMB 6.2 billion. Revenue totaled RMB 2.1 billion in Q4, up 13% quarter-over-quarter. Specifically, full year contract sales in Hangzhou and Beijing exceeded RMB 1 billion with Hangzhou achieving city level profitability and Beijing breakeven in the second half of 2022. Our leading growth in these top cities demonstrate our ability to achieve the fast break-throughs in scale during the dry cell stage, while making notable improvements in profitability. Aided by our total supply chain build-out, product delivery and digitalization capabilities, we are confident that we will accomplish the high quality function in most cities. Fifthly, our cash position and cash flow remained robust and sufficient and we have a strong capital management. At the end of 2022, the combined balance of cash, cash-like items totaled RMB 78.3 billion or $11.4 billion, up by RMB 1.1 billion from end of September and RMB 7.3 billion from end of 2021. Among which, the combined balance of our cash, cash equivalents, restricted cash and short-term investment was RMB 51.1 billion. The balance of our long-term cash-like items that included in the long-term investments amounted to RMB 70.2 billion. Our net operating cash flow was RMB 2.6 billion in Q4, remaining positive for the fifth quarter in a row. Moreover, we have a zero deposit in [indiscernible] and Credit Suisse. We have maintained a steadfast commitment to risk control and receivable management. Cash collection from new home business has exceeded the new home revenue for 6 quarters in a row, totaling RMB 35.9 billion for the full year with cash to revenue ratio at 1.25. New home DSO was at 64 days in Q4, shortening by 14 days from Q3 and 28 days from the same period of 2021. Turning to the guidance of the first quarter of 2023. We expect total net revenues to be between RMB 18.0 billion to RMB 18.5 billion in Q1, representing an increase of approximately 43.4% to 47.4% from the same period of 2022. This forecast consists of potential impact of the recent real estate-related policies, the macro economy recovery status as well as release of the pent-up demand in 2022. It constitutes current and preliminary view on our business situation and market conditions, which are subject to change. Entering Q4 of last year, policy relief initiatives were rolled out on a large scale on both supply and demand side. In early December, COVID-19 curves were optimized, and since then, infection have quickly picked out, driving an opportunity in market. Notably, since the beginning of this year, home prices added sequential decline, transactions started to rebound. We think this should be viewed rationally and objectively. The recent uptick can be attributed to 2 factors. One, the higher sales volume partly generated by the released pent-up demand once the pandemic situation eased, which further illustrates that the housing demand can only be defaulted not eliminated. The other reason is that the market expectation has gradually improved against the backdrop of macroeconomic recovery and the success in introduction of supportive policies. As an eventful 2022 passed in the week of numerous unexpected shocks, demand policy in this year will be priced forward with a pragmatic approach to promote economic recovery and the revised the market confidence. Supporting the house upgrade is on the top of initiatives for expanding domestic demand. As an enterprise, we will remain equally practical and rational and always uphold market neutral view, that is steady long-term market development is aligned with the fundamental interest of the consumers, the government and the industry. It has been and will continue to be our belief that the industry enduring value is built up on stable transaction volume and prices rather than fluctuations. As market stability leads to sustainable transactions, which accentuate the value of agents and agents should be the counterforce to the market's ups and downs. This is our social responsibility as well as professional dignity. In 2023, our one body 2 wings strategy will drive more diversified developments and the continued securities function, which post a higher requirement for our operational stability, resources allocation and profitability. As such, our financial strategy will remain focused on the sense of business operations on the basis of optimized cost expense structure in 2022. This year, we will reap profits from efficiency of our business goals and continue to improve the service quality. At the same time, we will continue to strictly control the risks, balance the relationship between the efficiency, receivable collection and the skill growth and promote cooperation with upstream and downstream under the condition of safe accounts receivable. Under the neutral market view, we are fully confident in the housing market's stable development in the long run. This does not provide a stable environment for our long-term development, but also offers a great opportunity for us to further elevate the quality of our operations. Going forward, we will continue to forward to head with the enduring strength in our hearts and face hard headwinds with the tenacity and optimism, powered by our relentless pursuit of creating [ expensable ] value for the box-leading service sector and our specialty. That concludes my prepared remarks. We would like now to open the call to your questions. Operator, please go ahead.

[Operator Instructions] Today's first question comes from Timothy Zhao with Goldman Sachs.

Congratulations on the strong results to end of the year. My question is on the industry outlook. Could management share your updated outlook for the existing home and new home market for '23? And especially related to the strong growth of the existing home volume in China over the past 2 months, could you share some color on how much about the rebound is from the pent-up demand? And how sustainable do you think is the current run rate in the existing home market?

Regarding the recent market performance to the uncertainty caused by COVID-19, we see this, the Chinese resident mortality has a shift back to the pursuit of the wealth, security and growth from precautionary saving and risk aversion. In terms of the real state policies, there were over 1,000 similar policies released across country in 2022 compared to roughly 450 tightening policies into year of 2021. As a result, support for market recovery is accumulating, we saw increased policy support in December and January, with almost the strong second-tier cities, loosening their home purchase and mortgage restrictions. Among cities, for example, Dongguan and Foshan implemented the full relaxation. [ 2010 ], this policy change has a support of bolting out in the market. According to recent real estate market data, consumer sentiment towards the housing market also has significantly improved on the demand side. For existing home sales, weekly transaction on our platform before the Chinese New Year holiday in January were close to those in July 2021. And the monthly is in-home GTV, our platform in February was close to the historical high in March 2021. Among that, the GTV of Tier 1 cities in February was just 8.6% lower than the peak of March 2021, while the GTV for the stronger Tier 2 cities and the weaker Tier 2 cities plus Tier 3 and Tier 4 cities grew 11.3% and 5.5% from the 2021 peak, respectively. Particularly, stronger Tier 2 cities showed a strong momentum with the Chengdu, Suzhou, Nanjing, Zhengzhou and Tianjin all exceeded the high point of March 2021 by 20%. This strength was partly due to the onetime release of the pent-up demand accumulated during the pandemic. For new home sales, it has also demonstrated a notable recovery trend. Our new home subscription growth turned positive in January, growing 20% year-over-year. In February, our new home subscription increased by 148% year-over-year from the lower base in 2022, reaching the level of June 2021, driving a year-on-year new home sales growth since February of this year. Regarding housing prices, despite very strong momentum in transaction volume, fortunately, we haven't seen significant fluctuation in housing prices. In January, prices for both existing and new home ended a long state of the monthly decline across the country. And in February, existing home price grew 1.6% quarter-over-quarter, but it still posted a year-over-year decline of 5%, as the increased number of customer visits to our homes were upgrading demand amid relaxed government policies this year. The number of [indiscernible] hitting home nationwide grew 10% year-over-year. The ample existing home listing keeps the market supply and demand relatively balanced. We still hold the neutral market view. The recent rebound in transaction volume demonstrates the housing market high resilience and elasticity on the demand side. This strong change rebound was driven by several factors, including normalized transaction demand, onetime covering of the accumulated pent-up demand during the pandemic that flares up and even earlier release of the future purchase needs from the customers who are concerned with the potential housing price run. These factors led to the sales volume being built up within a very short time. Speaking to a market neutral view, we believe the market will gradually normalize and will enter into a more stable growth stage over the long run. Since March, we have also noticed that the weekly transaction volume of existing and new home subscriptions on platform began to steadily normalize. Regarding the future market in terms of the market sustainability based on our analysis of top 30 cities, we view that market to be relatively stable in the future for fourth-tier cities. The average floor space of the house transact and the home buyers demographic since this year was very similar to the prior 3 years. These transactions have been driven mainly by the home upgrade and the ready demand for the property within the floor area of 90 square meters. In addition, the distribution of purchase by local and nonlocal residents has also been stable. For second tier cities, home upgrade demand was significantly stimulated just drove a 3% increase in share of transacted house over 90 square meters and a 5% increase in percentage of customer age over 35 and a 4% increase in percentage of nonlocal homebuyers. Going forward, such market metrics might experience volatilities in the short term due to the structural change. Nevertheless, with the nonlocal taking root in the cities, more supportive policies and stabilizing housing prices, home upgrade demand from the local resident might follow up and might bring solid demand support and help the market stabilize in the long run. For existing home market in 2023 based on our neutral market view, we prudently believe that the in-home market will grow by around 15% year-over-year in 2023, where prices remain relatively stable. We believe there is plenty of upside for the market given the transaction unit of the existing and the new home in China accounted only for 3.5% of the total number of existing homes in 2022. And the [ transactional ] rate for its new homes was only 0.7% versus the normal rate, at least 1% historically. We need to consider the potentially unfavorable factors, such as the impact from the global economy slowdown, growing geopolitical tensions and muted export growth on the macro economy and housing demand. For new home market in 2023, we expect the total GTV of the market in 2023 to remain at the same level as in 2022. Housing project delivery has become less of a concern for consumers with the deployments of the financing policies for developers and the improvement of their funding status as well as gradually resumption of the project construction. In the meantime, with the price stabilizing, home upgrade demand will return back to its new home market. The new home market recovery will further ease relative to developers cash flow constraints. Recently, land auction went well in the city like Hangzhou and Suzhou where several private developers appear on the land auctions list. Private developer renewed in [indiscernible] but land auction in more areas is also a critical indicator. Over the past few years, China's housing market has seen great highs and lows. Looking back, certain uncertainties are inevitable, and we mustn't be overly optimistic or pessimistic about the sub trends. Yet as we navigate through the highs of market volatility and cycles, our unwavering belief in the long-term outlook for the China housing market remains steadfast. We firmly believe that against the backdrop of the housing [indiscernible] regulation, the existing home market will increasingly take center stage, while new home operations demand among refined approach as [indiscernible] service will come to the forefront. The time forces change this approach. Thank you, Timothy.

And our next question today comes from Harry Chen with Citigroup.

And this is Harry Chen from Citigroup. Thanks management for the question opportunity and also congratulations on the very solid results for the fourth quarter and also for the whole year. So my question would be that both the new home and existing home markets will be entering a healthier and a more stable development stage in 2023. Can management share with us whether the company will dynamically adjust its strategies in response to changing market conditions, such as channel expansion to gain more market share? Where are you targeting markets this year? And will you expand through Lianjia or online just stores? What is expansion strategy in markets where you have relatively low market share, such as Shanghai, [indiscernible] and Fujian? And how will you deal with the competition with the local leaders?

Our view on the market share is we don't operate with market share as our KPI. The management team has always been adhering to the core principle of taking care of the customers and helping service providers to be good to customers. Nevertheless, we must reach a certain skill threshold citywide to realize the network [indiscernible] of our core business. and to fully benefit from the extensibility of our agents and store network as infrastructure around the leading services. Therefore, we need to pay attention to skill and the need to achieve the sufficient skill through connecting and empowering our connected store and agents. For its in-home transaction services, this round of massive market correction has presented us with opportunities to secure faster, and we anticipate a greater number of customers while enjoyed quality service offered by Beike this year. In past 2 years, the market correction was long and deep, resulting in significant industry supply side reductions in various regions. Still, we have better capacity retention, the number of active agents in 25 key cities even increased year-over-year at the end of 2022. Moreover, we have focused on retaining high-quality agents, which also to benefit more from the market rebound during the recovery cycle. Specific initiatives in different cities. For our top-performing cities, we will continue to explore the opportunity in specific market segments such as middle to high-end market, suburban market, et cetera. in the cities with a competitive environment, we saw a business responder at a relatively fast pace starting in the second half of last year as our better capacity retention, our business conduct governance, our focused operations and our community as per training generated remarkable results. We have even bigger opportunities in the cities where there's still a lot of room for improvement in our skill and the market is relatively fragmented. For example, in Shanghai, our trading on the market, our market penetration is still significantly lower in Beijing. To expand our business into cities, we will actively implement a series of initiatives such as establishing more connections to the high-quality service providers investing in our brand and service quality and strengthening operational efficiency. Regarding new home concerned services. This year, we will persistently advertise the risk aversion as a top priority as we did in the year of 2022 and 2021. We were not proactively loosening our risk controls or compromise business security, especially the security of agents' receivable collection in exchanges, so-called platform scale expansion, but we will also make a dynamic adjustment depending on the market and the recovery of the developers. As [indiscernible] cash flow situation improves, the receivable payment tours will improve as well, which will lead to the upgrade they're reaching in [ Beike ] credit ranking system. That improved credit ranking will allow us to respond our cooperation and the addressable market for our new home transaction services may also respond. Meanwhile, new home channel sales market has seen significant increase in concentration in the recent bounce of market correction. Our better and safer receivable collection and health of new home business conduct gain the trust from a large number of service providers and agent on the sectors. The connect with [ ACA ] and the [indiscernible] channel, becoming the cornerstone of the continued function of our new home transaction services as the market recovers.

And our next question today comes from Jiong Shao with Barclays.

And let me add to my congratulations on the very strong results and the guidance. And you talked about improving efficiencies of your agents and of your stores. I was just wondering, could you talk about your target, if you have any for the stores and agents for this year? And you have already improved their productivity quite a bit last year, how can you improve the productivity further from here while sort of not losing the very strong cultural and the performance element of the equation?

Overall, we have no plans for significant function for our stores and agents. As we mentioned last quarter, our focus is on improving per-store and per-agent efficiency while enhancing the agent income rather than pursuing a large scale function. This approach will not change. Only when the income of stores and agents increase steadily as the industry retain high-quality people and achieve healthy development. Furthermore, given the current trend of balanced supply and demand market and the broader emphasis on the housing is for the mean of speculation, we do not anticipate a significant increase in industry capability following this market recovery. Our plans for the agent and stores this year including foreign, regarding the scale store-wise, we plan to focus on the large and high-quality stores and the drive the onboarding of [indiscernible] stores for new home sales to our platform as connect stores. Agent-wise, we plan to recruit agents during the spring recruiting season in 2023, after which, we expect to maintain a stable agent count. This is increasing of the proportion of middle level agents and the increasing the number of agents in a few cities, which need skills function. Regarding the cost and efficiency, let me talk about the store productivity first. In 2023, we expect to see a significant improvement in store productivity as a result of our ongoing efforts in large store and agent ranking system with conduct governance and [indiscernible]. We are committed to improving the management on loss-making and inefficient stores, and we believe that the inefficiency could be temporary. Regarding the agent productivity, the general agent productivity has a huge room to improve in the long run. Beijing could be a benchmark where our agent productivity is 3 to 4x higher than the industry average. For Lianjia, in 2022, excluding Beijing and Shanghai, Lianjia's agent productivity was 1.3x that of connected agents and our target this year is to further increase its ratio to 1.4x. For [indiscernible] connect stores, also, we will not set a specific target for agent productivity this year. We will improve a range of operating metrics to improve the agent productivity, such metrics include cross-stock, cross-brand cooperation ratio, accompanying the home tools by home listing agents, price difference management between the listing and transaction prices and the [indiscernible] ratio for one transaction. In terms of the [indiscernible], we believe in the value of taking good care of customers. We believe in the value of sharing successful experience and infrastructure to the industry to empower and enhance industry efficiency. We believe in the value of protecting the interest of the service providers, paying commission timely. We believe in the value of improving the industry code of conduct and help developers and all participants to work with a sense of security and fairness. We believe in the value of our hundreds of thousands of excellent service providers who have been serving the communities for many years and established this unique mode in home services, and we believe in the value of time. This is what we have been doing, not perfectly, but where [indiscernible].

And our next question today comes from John Lam at UBS.

And also, congratulations for the results. So my question is regarding on the cost optimization. So we have seen that in the third quarter last year, the cost optimization was very effective. Is there any room for further improvement in the cost optimization? And also, can the expense ratio from the third quarter last year 2022 could be used to infer the subsequent profitability?

Thank you, John. For cost expense for our one body business, we quickly implemented a series of cost reduction and efficiency enhancement initiatives in 2022. Consequently, the cost and expenses for our one Body business were optimized to reach the level in the year of 2019, which we believe is relatively sustainable. In terms of the cost control in the fourth quarter of 2022, the fixed cost of our one body business fell by 36% year-over-year and its variable cost as a percentage of revenue dropped by 5.6 percentage points year-over-year. In terms of expenses, the total amount of non-GAAP operating expenses declined by 70% year-over-year to the same level in the year of 2019. The expense reduction will be more significant if we exclude the impact from the consolidation of Shengdu. Commissioning [indiscernible] account for 44% of total new home commission in fourth quarter, up from 20% in the first quarter. This ensures the collection of the new home receivables, mitigating the negative impact of the new home better provisions of the expenses. In 2023, our platforms agent productivity will see even greater improvement, and we will implement incentive to develop and retain on our employees. We also hope to offset the cost of such initiatives through the continuous cost control of the nonpersonnel expenses. In addition, we hope to improve agents' productivity by technology investments to reduce their time spend on the low productivity matters and low engine to get workers earlier spend more time with their families and contributing to further industry optimization as well as potential profitability improvements. All in all, our financial strategy for our one body business will remain focused on efficiency with optimized cost and the expense level in 2022, we will support the quality growth cost effectively. Meanwhile, we will continue to strictly control the risk and strike a balance between the efficiency, receivable collection speed and the skill expansion. With ensured security of the accounts receivable, we will enhance our cooperation with partners in upstream and downstream. For 2 wings business, regarding our home renovation and furnishing business, in addition to making sure total loss ratio will not further expand where we will capture opportunities to reinforce our fundamental capabilities, including the products, supply chain and service deliverability and invest in high-quality service providers. On the whole, we will reflect some of our redundant investment we made during the last round of market growth. And while continuing to promote our business growth, strictly control cost and expense to balance the growth and the profitability.

Sorry, can I ask one more question? So you also mentioned about the 2 wings. So what is your plan regarding on skill expansion and also efficiency improvement for 2 wings? In terms of the strategy for expansion and also the scale of investment, could I say that for the full surface home renovation and furnishing model, do you achieve the [indiscernible] in 2022? Is 2023 a critical year to go from 1 to 10 [indiscernible] with us with key focuses and goes in 2023.

Okay. I will answer your question. 2022 was a year our 2 wings were born and took a route. We have taken a solid step for in both our home renovation and furnishing business and our rental business. It will still barely stay in more cities on the home renovation and furnishing side, our total contract sales backed a trend and increased by more than 30% year-over-year. With total revenue exceeding RMB 6 billion in both Beijing and Hangzhou, we reached the first milestone of over RMB 1 billion in annual contracted sales. And for rental services, we enter certain cities in 2022 and the total number of rental units under management in the city, 120,000. In 2023, we will establish benchmark cities achieved breakthrough and make commitment investment to build long-term capabilities. In 2023, our 2 wings business will build on the current momentum in the cities we enter, we will not be pursuing comprehensive and rapid skill expansion. First, instead of focusing on short-term and rapid skill expansion, we will continue to decisively invest in our long-term capabilities, including the ability to stand out services and provide better online [indiscernible] as well as our online operations of the supply chain digitalization capabilities, product specification for Chinese consumers and professionalism of service providers. Second, based on these capabilities, we hope to achieve comprehensive scientific management, business need conversion and operating efficiency improvement for both renovation and refurnishing. We also expect to reduce the vacancy period for our rental units, improve consumer satisfaction and enhance the efficiency of our service providers and our business. Our 2023 goal is to penetrate several key cities deeply [indiscernible] as benchmarkers enabling our 2 wings to truly complete the breakthrough. In 2024, we will replicate and promote this benchmark to more cities. Yes, it's my answers.

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.

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. We conclude today's call. And we look forward to speaking with you again next quarter. Thank you, and goodbye.

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.