Earnings Call Transcript - BEKE Q3 2023

Operator, Operator

Ladies and gentlemen, thank you for standing by for KE Holdings Inc.’s Third Quarter 2023 Earnings Conference Call. Please note that today’s call, including management’s prepared remarks and question-and-answer session, will all be in English. Simultaneous interpretation of Chinese is available on a separate line for the duration of the call. To access the call in Chinese, you will need to dial into the Chinese language line. At this time, all participants are in a listen-only mode. Today’s conference is being recorded. I would now like to hand the call over to your host, Ms. Siting Li, IR Director of the company. Please go ahead, Siting.

Siting Li, IR Director

Thank you, operator. Good evening, and good morning, everyone. Welcome to KE Holdings or Beike’s third quarter 2023 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 development, and Mr. Xu will provide additional details on the company’s financial results. Before we continue, I refer you to our safe harbor statements in our earnings press release, which apply 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. For today’s call, the management will use English as the main language. Please note that the Chinese translation is for convenience purposes only. In the case of any discrepancy, management statements in the original language will prevail. With that, I will now turn the call over to our Chairman and CEO, Mr. Stanley Peng. Please go ahead, Stanley.

Stanley Peng, CEO

Thank you, Siting. Hello, everyone. Thank you for joining Beike’s third quarter of 2023 earnings conference call. In the third quarter, the real estate market showed a notable rebound following the strong setting of the Politburo meeting and a series of supportive policies, including modification to first-time homebuyers’ qualifications in first-tier cities. The degree of support and the implementation of these favorable measures, as well as the real estate market’s performance, both went beyond our expectations. Our focus this year has been on contemplating the future over the long term and aligning our strategy with it. We are entering a new phase that we call crossing the next mountain. This phase begins as the market continues its shift from same-property purchases and investment in assets to prioritizing residential housing for the quality of living itself. In this transaction, we must also evolve from a transaction-centric operating model to one that is dedicated to ensuring better living experiences for our customers. This is a largely untapped market with vast opportunities. Real estate’s return to a focus on people’s better living signals a promising future ahead of us. With industry experience and insights that we have cultivated over the years, we are well-positioned to grow in a new phase encompassing many possibilities for better living. Beike has established the industry’s most powerful infrastructure, our ACN, throughout our existing home transaction business. This infrastructure, integrating our online databases and traffic networks with offline stores and engineering works, lays a solid base for us to explore new possibilities. Additionally, our management expertise for large groups as well as our digital capabilities and data-driven strategies collectively support our journey into this exciting future. This July, we took an important step toward our objectives by upgrading our corporate strategy to One Body, Three Wings. This is a key step in our roadmap to becoming the well-installed residential service platform for better living. As we navigate the dynamic landscape, we need a deeper, differentiated mindset, a knowledge base, as well as a set of mutual principles and guidelines to identify core value propositions to drive us forward in the right direction. To that end, there are a host of key questions we are asking ourselves. What value can technology bring to both customers and service providers? Our business segments are separated, but the customers are asking for a one-stop solution. In what ways can we unite our vertical business segments to create horizontal one-stop services that meet customers’ needs? How can we maximize customers’ living endurance and extend beyond merely delivering transactional value? What’s our value proposition to different stakeholders in our industry, including our partners and service providers? How do we focus on offering true value and humanistic care for our service providers rather than treating people as tools and channels? In addressing the broader residential industry, do we look for growth through physical expansion or through generating chemical reactions to drive industry-wide evolution? The next step to posing these questions is calling on everyone in our organization to think about them and work together to address these topics. While engaging in these crucial reflections to direct our strategy, we are also implementing organizational modifications and business initiatives of our One Body, Three Wings strategy, which will be reflected in our performance metrics. With the easing of COVID restrictions, pent-up demand drove the market’s recovery in the first quarter of this year. However, subsequent home transaction market activities deviated from historical seasonal trends. The new home market is still facing some challenges. In the third quarter, we recorded a GTV of RMB655.2 billion. There was a 2% and 27% year-over-year decrease in existing home transactions and new home transactions, respectively. Our overall performance has exceeded expectations. Our revenue for the quarter was RMB17.8 billion, up by 1.2% year-over-year. Year-to-date, GTV has grown by 23%, with existing home transactions up 28% and new home transactions up by 13%. In our efforts to manage risk and improve efficiency over the past two years, our One Body operations, which is our home transaction services, are more agile and efficient. It’s now time to broaden our collaboration with more industry partners and service providers as we advance together in offering one-stop residential services for better living. Here, we will further institute standardization for people, objects, and services to promote the industry advancement over the next decades. Starting in the third quarter, we accelerated our store network expansions. In September alone, we added around 1,300 newly connected stores nationwide, excluding Beijing and Shanghai. In the third quarter, contracted sales from our home renovation and furnishing business reached RMB3.26 billion, an increase of 66% year-over-year. Year-to-date, contracted sales reached RMB9.39 billion, up 19% year-over-year on our pro forma basis. Additionally, contracted rental units of our rental property management services grew from 50,000 in the third quarter of 2022 to 160,000 in the third quarter of this year. Many of the metrics that I mentioned are derived from our emerging businesses. More importantly, the long-term driver behind our business development is a consistently enhanced understanding of the industry landscape. Rapid growth and scalable operations have provided us with a deeper understanding of the industry and the capabilities to execute on small-scale testing approaches to make rapid business interaction across our service ecosystem. The build-up of SaaS systems systematic capabilities means knowing which metrics to use and how many parameters we should set in the business. Rather than how high the parameter is set, the deep dive and scale of our One Body business have accelerated our scientific management and competitiveness. It’s the equivalent of taking 50 steps forward. However, with our emerging business, we have only just taken our first step. It’s crucial to note that while growth and building scale are the best growth, they are not the sole objectives. We also deeply understand the importance of supporting the industry ecosystem. Platform-wise, while we have notably improved our efficiency and our operational capabilities over the last two years, we need to be careful about path dependence; building and maintaining synergistic relationships with all of our partners, whether they are brands, store owners, or developers, is of great importance to us. We will make adjustments to our operational strategy to better improve store owners’ endurance and engagement, refining our platform capabilities to empower them and establishing store owners committees that ensure collaborative developments and dominance. We started Lianjia and Beike driven wide by wheel to make the industry better, and today we need to adhere to underlying with understanding value auto tool becoming an interpreter in advanced productivity. It’s essential to bring unique value to the industry. We are not competing against existing service providers or business partners in the industry, but rather against low-quality supply that damages the industry reputation and diminishes customer ignorance. This is why we need to work hard to push for an overall improvement in the quality of the industry. Given our recent progress and the growing consumer demand for service and quality, we are seeing tremendous promise. We also believe that one day we will proudly advocate for this industry. Thank you. Next, I would like to turn the call over to our CFO, Xu Tao to review our third-quarter financials.

Tao Xu, CFO

Well thank you, Stanley. And thank you everyone for joining us. Before we dive into our performance, I would like to briefly touch upon some updates on recent housing markets. The third quarter saw the property market pick up from the bottom with month-over-month sequential recovery. Important policy directives were made during the Politburo meeting in late July addressing new clients in real estate supply and demand. Since the end of August, a wave of supportive policies has been rolled out with many cities taking steps to modify the criteria of first-time homebuyer qualifications, lower down payment ratios, cut market interest rates and relaxed purchase restrictions. Market sentiment notably improved with transactions substantially rebounding since September. This recovery was particularly pronounced for the existing housing market in first-tier cities and some strong secondary phases. To our expectations, policy relaxations and the demand for housing upgrades are the most substantial. The recovery of the new home market lagged slightly behind the existing home due to the varying demand across cities and volatilities on the developer supply side. Nevertheless, since August, there has been some improvement in the new home markets, but new home subscription data on the platform showed both year-over-year and a month-over-month recovery in September. We have been proactively advancing our ‘One Body, Three Wings’ growth strategy. In terms of our overall financial performance in Q3 we maintained vigilant and top line performance with total revenue growing 1.2% year-on-year, reaching RMB17.8 billion, exceeding our guidance along which surpassing especially the revenue for housing transactions and services. We also made remarkable breakthroughs for our home renovation and furnishing business, with gross revenue jumping 72.1% year-over-year to RMB3.2 billion. Notably, our enhanced operational capability coupled with our careful cost discipline developed in previous years generated a gross margin of 27.4% for Q3, ticking off by 0.4 percentage points from the same period last year. With overall revenue at a level relatively consistent with the same period last year, our GAAP net income saw a 63.4% year-over-year increase, reaching RMB1,170 million, while non-GAAP net income grew by 14.4% to RMB2,159 million. Non-GAAP net margin rose by 1.4 percentage points year-over-year to reach 12.1%, showcasing stronger profitability. Looking at our home transaction services, in Q3 on a national level, both existing and new home markets declined quarter-over-quarter and year-over-year due to notable quarterly disparity in market dynamics compared to previous years. However, benefitted from our enhanced operational efficiency, our GTV of existing homes only fell by 2.2% year-over-year, despite the higher base set by forecasts in the same period last year. Revenue from existing transaction services declined by 11.9% year-over-year to RMB6.3 billion. The bigger contraction of existing home revenue compared to that of GTV was primarily due to a lower contribution from the GTV served by Lianjia brands, which have a high material utilization rate. Lianjia GTV grew by 13% year-on-year on a higher base set by first-tier cities in the same period last year. While exiting home GTV served by connected agents increased by 8.1% year-over-year in Q3. Revenue of which is recorded on a net basis resolving the gap between the gross rate of our revenue and GTV. Meanwhile, on September 26, Beijing Lianjia adjusted commission rates, with suppliers and sellers each paying 1% of the property total transaction volume for about 12,000 ongoing transactions initiated before the adjustment took effect, while refunding the differences resulting from the rate adjustment. Adhering to our principle of putting customers first, the corresponding impact has already been reflected in our Q3 existing home revenues. We firmly believe that by sincerely serving our customers' best interest, we can earn long-term trust as they bring us lasting growth opportunities. The contribution margin for existing home transaction services was at 48.7%, reflecting a year-over-year increase of 2.6 percentage points and a quarter-over-quarter increase of 3.1 percentage points. This is indicative of how our core streamlined cost structure has enabled us to achieve stronger profitability instead of year-on-year decline in revenue. Let’s move to our new home business. The industry is undergoing a phase of reduced supply and continued risk mitigation evidenced by a more than 30% year-over-year decline in sales from the top 100 developers in Q3. We have adopted an active strategy of expanding channel collaboration with developers and continued to improve our business ecosystem while strictly adhering to our risk control bottom lines. As a result, our new home GTV decreased by 26.5% year-over-year, outperforming the overall market. The decline of 24.3% in new home revenue was smaller compared to GTV owing to a slight increase in our monetization rate. Our new home business contribution margin grew slightly year-over-year to 25.1% despite the decline in revenue, fully demonstrating our operational resilience. In Q3, the percentage of commission income from SOE developers remained at 46%. Projects with Commission in Advance model contributed 54% of total commissions collected, remaining at a high level. Regarding our emerging business, revenue from our business excluding home transaction services grew by 112% year-over-year, with its percentage to total revenues rising to over 30% in Q3, compared with 15% in the same period last year. Our home renovation and furniture business has remained on a fast track with a robust growth momentum that was not resilient on the trend of housing transaction services. Contracted sales reached RMB3.3 billion in Q3, a year-over-year increase of 65.6% with fast delivery and accelerated revenue recognition. Revenue grew at a higher rate of 72.1% year-over-year, reaching RMB3.2 billion, a quarter-over-quarter increase of 21%. In Q3, Shanghai reported two months with revenue exceeding RMB100 million, becoming the third city following Beijing and Hangzhou to achieve monthly revenue surpassing RMB100 million. Other cities are also growing rapidly. Cities including Wuhan, Chengdu, and Guangzhou achieved a quarter-over-quarter revenue growth of over 50% in Q3. Our customer acquisition capability continued to improve with both Beijing and Shanghai achieving business leads conversion rates in the middle to high single-digit percentage. The percentage of contract sales contributed by our home transaction services continued to increase to about 45% of total GTV. The sales of decoration home furniture increased by 93% to RMB920 million, with a proportion of 28%. The contribution margin for the home renovation and furnishing business in Q3 remains at 29.1%. A further solidified foundation in product design and SKU assembly is developing a positive cycle of our profitability across the leading cities. Ten cities including Beijing, Shanghai, and Hangzhou realized positive city-level profit in Q2 and Q3 consecutively. Among the top ten cities in terms of the contract sales, seven of them have positive operating profits. The breakthroughs we have made have given us greater confidence in our strategy. In October, we announced the proposed acquisition of Kongjian, and the deal is subject to the customary closing conditions. This will strive to bring higher quality offerings to the residential industry. In Q3, our net revenue from emerging and other services increased by 202.7% year-over-year to RMB2.4 billion, primarily proposed by the expansion of our rental property management services. Contribution margin remains stable at 25.3% year-over-year. The total of our store cost and other costs remain stable in Q3. Our gross profit grew by 2.6% year-over-year reaching RMB4.9 billion as a result of our increased operating leverage. Our gross margin ticked up to 27.4% compared with 27% in the same period last year. In terms of expense year-over-year, our GAAP operating expenses for Q3 totaled RMB4 billion, increasing 12% from the same period last year. Our non-GAAP operating expenses amounted to RMB3.1 billion, up 14% year-over-year, primarily due to the structural impact of the increased proportion from new business including home renovation and furniture. Looking at quarter-over-quarter performance, we have maintained effective cost control in our home construction services, notably with the RMB32 million better provisions written back during Q3, providing us with improved operational leverage. In terms of profitability, on the GAAP measures, our income from operations for Q3 was RMB911 million, compared with RMB1.2 billion in the same period last year. Our operating margin was 5.1%, compared with 6.9% in the same period last year. Our non-GAAP income from operations was RMB1,886 million compared with RMB2,108 million in the same period last year. Non-GAAP operating margin was 10.6% compared with 12% same period last year. The dip was mainly due to our investment in new business including home renovation and furniture, which was in the ramp-up period. Our GAAP net income for the quarter reached RMB1,170 million reflecting a significant growth of 63.4% year-over-year. Our non-GAAP net income increased by 14.4% year-over-year reaching RMB2,159 million. Non-GAAP net margin rose by 1.4 percentage points year-over-year to reach 12.1%. Now let me highlight our cash flow and the balance sheet metrics. Excluding customer deposit payable, we realized a net operating cash inflow of RMB2,658 million in Q3. The new home cash collection surpassed the new home revenue for the ninth consecutive quarter with a cash-to-income ratio rising to 1.21. New home DSO for the first three quarters was 52 days. In Q3, we spent approximately US$162 million in share repurchase and around US$200 million in special cash dividends. On top of that, our total cash liquidity, which includes customer deposit payable amounted to RMB79.8 billion, up RMB440 million from Q2. Over the recent period, supported by our solid cash reserves and prudent financial management, we will demonstrate our commitment to efficient capital allocation and delivering returns to our investors through the active share buybacks and the dividend repatriation. This September alone, our total stock repurchase amounted to over US$130 million. Since the initiation of our share repurchase program in September 2022, as of September this year, the total number of shares that we have cumulatively repurchased amounts to about 3.91% of the company's total shares prior to the launch of our program. Moreover, recently we have completed a special cash dividend distribution totaling around US$200 million. Looking at our guidance for the fourth quarter, we expect the total revenue to be between RMB18 billion and RMB18.5 billion, representing an increase of approximately 7.5% to 10.5% from the same period of 2022. This forecast includes the potential impact of the real estate-related policies and the macroeconomic status that constitutes the current and preliminary view of our business and the market conditions, which are subject to change. The property market transformation and upgrade towards living and the strengths of our organization structure have all bolstered our aspiration and momentum for continuous growth. Our focus remains on expanding connections with top-tier industry capabilities and fostering a cooperative ecosystem of the furnace and the win-win scenarios. We are simultaneously developing a high-quality service provider talent pool and formally dedicating resources to infrastructure development. As we thrive in the vast residential sector, we are positioned to expand into the significant opportunities that lie ahead. Our ability to effectively balance scale, efficiency, and financial stability has been force validated during the market fluctuations over the past few years. Under this volatility, we also achieved consistent improvement in business growth, profitability, and cash flow. Looking forward, we will maintain our disciplined approach to financial management, further enhance our capital allocation efficiency. We will prioritize our investment in business areas that can bring key outputs and values, investing in growth, investing in the future. We will also share the benefit of the developments with our shareholders. We believe this will enable us to achieve organic and substantial growth, creating long-term value for our shareholders. This concludes our prepared remarks. Now we are open for the questions. Operator, please go ahead.

Operator, Operator

Thank you. Your first question comes from Timothy Zhao with Goldman Sachs. Please go ahead.

Timothy Zhao, Analyst

Thank you, management, for addressing my question, and congratulations on the impressive results. I have one question: could you provide an overview of the housing transaction market in the past quarter and your outlook for the fourth quarter this year, especially after the mortgage easing policy announced in the third quarter? What observations have you made regarding the policy's impact on home transactions? Thank you.

Stanley Peng, CEO

Thank you, Timothy. Regarding your question, we notice that the investors pay close attention to the market change in the property market. I can share some of our perspectives. In terms of the policy, there has been relaxation or even removal of the restrictions on housing transactions in certain second-tier cities since the July Politburo Meeting. From the end of August to early September, first-tier cities have implemented policies to recognize households with mortgage records but no local property ownership as first-time home buyers. Additionally, Guangzhou, being the first among Tier 1 cities, has eased its home purchase restriction in September. Moreover, mortgage rates for both first and second-time homes in the top 100 cities decreased by 25 and 34 basis points respectively year-over-year. In the third quarter, the existing home market improved from its June performance, driven by the anticipation of supported policies to come and subsequent policy release. To elaborate this, the number of existing home transactions grew by single digits month-over-month in both July and August. This update shows that things are stabilizing and recovering due to the expectation for new policies. After the relaxed first-time homebuyer qualification policy was implemented in September, our platform saw an operates surge in existing home sales with a growth rate of 25% compared to the previous month and 32% compared to last year. In particular, for the first-tier cities, the recovery actually starts quite early and they also rebounded the most in September. After the Politburo Meeting at the end of July, these cities have already seen certain market recovery expectations. The number of home showings and listings increased by 5% to 10% from July to August, while transaction volume in September grew by over 30% month-over-month. Stronger second-tier cities like Nanjing, Hefei, Wuhan, and Hangzhou relaxed their home buying restrictions in September and led to a stronger recovery in transaction volume, which experienced 25% growth month-over-month. This also demonstrates the effectiveness of the policy measures. For home prices, according to data from Baker Research Institute, Beijing and Shanghai started to stabilize in July, and in September, they even increased by 1.6% and 1.9%, respectively compared to July. While many other cities across the country still saw a decrease in their home prices, the rate of decline has slowed down in September. The new home market in the third quarter of 2023 has also shown signs of rebound following the resurgence in the existing home market, although a notable disparity was seen on both the supply and demand side. Subscriptions for new homes experienced a modest double-digit month-over-month recovery in August. However, in September, the new home subscription volume on the Beike platform increased by more than 40% month-over-month and 15% year-over-year. This is a significant divergence from the historical month-over-month decline. In September, over the last three years, indicating that this September’s rebound was largely driven by policy support and improved market sentiment rather than seasonality. Transaction data typically lags behind subscription data by about three weeks. Accordingly, more positive change in transaction data is expected in October. A closer look indicates that the new home market displays a high degree of disparity. In September, the year-over-year growth rate for new home subscriptions was through the roof in first-tier cities by 49%, pretty solid in stronger second-tier cities at 20%, but negative 18% for other low-tier cities. The demand for home upgrades is higher in first-tier cities. The first-time homebuyer qualification policy helped pump more liquidity into this respective new home market and gave a big boost to those top-tier cities like Guangzhou, Nanjing, and Changsha that have stronger fundamentals. But when they eased up on purchase restrictions in these leading cities, it also caused a decrease in demand from neighboring low-tier cities. As the new home sales market is heavily influenced by the supply side, there have been at least two significant fluctuations in high-frequency data while the existing home market shows more consistency, making it a better indicator of overall market activities. Looking ahead, the policy effect of new policies will continue to unfold. The data of existing home transactions in October has been pretty consistent on a weekly basis with a gradual increase. Nevertheless, it is important to remember that it takes time for policies to kick in and for demands to turn into actual sales, usually spanning several months. The uncertainty in new home price trends will make potential buyers cautious and adopt a wait-and-see attitude. To keep up with and stimulate home buying and upgrading activities and attract more buyers to the market, we need further policy support, stable housing prices, and properties that match the changing needs of consumers for better living conditions. Additionally, easing the purchase restrictions in different cities along with the revised qualifications for first-time home buyers are expected to boost reasonable demand for first homes and further activate transactions in the market. Thank you.

Operator, Operator

Thank you. Your next question comes from John Lam with UBS. Please go ahead.

John Lam, Analyst

Thank you for taking my question and congratulations on the great results. My question is about the new home business. How do we view the sales strategies of property developers for the upcoming strong season in the fourth quarter? Additionally, what are their thoughts on collaboration with the channel in light of the recent relaxation of the price gap for both property and land prices? Does this indicate a positive outlook for your new home business? Also, given that Beike has been an industry leader in the new home sector, are there any areas for further improvement that you can share with investors? Thank you.

Tao Xu, CFO

Thank you, John. The current new home market is complex and consistently changing, which poses significant challenges for everyone involved in the industry. Although new homes generally offer better design and quality compared with existing ones, in cities, where there are risks associated with timely delivery, consumers tend to lean towards buying existing homes. In key cities, the percentage of consumers interested in purchasing new homes has dropped from 33% in 2021 to 70% in September. In one of our core central statuses, the proportion of transactions in these new homes has been rising from 25% in September 2021 to 70% this year. In cities like Chengdu, where timely delivery of appraisal holds are ensured more effectively, people still prefer buying new homes. However, a situation has emerged where prices of the new homes are significantly higher than those of existing homes. This creates a large price gap that hinders new home upgrades or reduces developers' motivation to increase inventory and offer promotions. There are also cities where demand for new homes has considerably improved this year, such as Shenzhen, where the weekly subscription volume of new homes reached a record high by end of September. However, a considerable proportion of this recently increased demand has already been met through the talent housing supply. In response to the market changes, most big national and local developers are expected to really step up their sales game by the end of the year with more promotions. Along with policy support, on the other hand, some smaller local developers are taking it easy. Starting in early September, with the current policies, some developers have taken the initiatives to start promoting their projects, but we don’t expect them to primarily rely on significant price reductions. In terms of the developers working with our brokerage services, the penetration rate for brokerage market to the new home market has been on the rise this year. For instance, in Q3, the penetration rate of brokerage services in Shenzhen increased by 6% compared to the same period of last year, while Chengdu witnessed a growth of 10% to 15% year-over-year. Although developer sentiment may fluctuate due to the market change, a relatively stable and balanced cooperative relationship has been established. From Beike’s perspective, our goal is to establish a mutually beneficial partnership with developers where we can cooperatively create additional value for customers. The low satisfaction level among customers regarding the new home product is one of the main reasons why the market lacks momentum. By gaining deeper insight into customer preference through interactive data analysis and extensive research, we can develop better products that cater to the new home housing upgrade needs, while also enhancing the overall experience. Recent projects like Chengdu One of the Riverside, Wuhan Tiandi, and Beijing One Sino Park demonstrate the high quality of new home products, which still generate significant demand in today’s market. This divergence indicates a clear direction for future development in the new home market. Additionally, if the 1.0 flow area to land area ratio restriction is removed for largely populated areas, it can help boost the development of high-quality, low-density residential properties in the future housing market. This will stimulate improvement in demand and enable residents to experience a leap forward in their future housing experience. Going forward, as we consolidate and deepen our fundamental work in core areas such as commissioning the bonds, cooperation with state-owned developers, and focused sales strategy, we will prioritize enhancing our new home market coverage and sell-through to withstand potential market downturn risks. Our strategy will primarily cover the following: Number one, building new partnerships with developers. As developers move from local autonomy to centralized management, we will work closely with them at every level to establish deep and meaningful collaborations. Number two, we will tailor our strategy and policies to individual cities. Number three, we will revamp operation management. We will build up our infrastructure starting with our housing dictionary, ecosystem, standardized processes and building the skills to make the products that the customer will love. Thank you.

Operator, Operator

Thank you. Your next question comes from Miranda Zhuang with Bank of America Securities. Please go ahead.

Miranda Zhuang, Analyst

Thank you. My question is about the historical use of mergers and acquisitions to grow companies, specifically regarding the home brokerage business. The company recently announced a proposal to acquire Kongjian Zhihui to further expand in the home furnishing sector. Can management share thoughts on the role of mergers and acquisitions compared to organic growth in your growth strategy, as well as insights on future investments and their pace? Thank you.

Stanley Peng, CEO

Okay. I’m Stanley. Thank you for the question. Generating sustainable internal innovation and organic growth is definitely a long-term goal for us. In the process of achieving the long-term goal, we have some phased strategic opportunities that we need to utilize to revolutionize the home innovation and the furnishing industry. We need to have ample scale and business density in a single city. This allows us to experiment, refine, and enhance our competencies promptly. Acquisitions are the most suitable route to achieve this short-term strategic opportunity. Hence, our emphasis on acquisitions isn’t merely for immediate revenue or financial growth but to obtain necessary scale and density as a fertile piece of land to foster the industry innovation. It’s very difficult to kickstart industry transformation results without a significant operational scale. Many capabilities can only grow out of certain operational scales. In the home renovation sector, such scale has been historically rare. Furthermore, the requirement for achieving RMB1 billion, RMB30 billion or RMB15 billion scale in rents differs across the real capabilities. We must remain agile and non-conformist to establish norms. For example, with a strong presence in the city or region, we can establish the entire scale, supply chain, and delivery process, which allows us to tap into economies of scale, addressing deeper-rooted industry challenges, and preparing a way for our transformative business methodology. Looking ahead, if acquisition can help us more effectively achieve our fast strategic objectives, then they are crucial and valuable. However, we see these as means to reach a grander vision, not the end goal where now acquisitions bring in necessary resources and like-minded individuals. I think these are important assets for transforming the industry. That’s my answer. Thank you.

Operator, Operator

Thank you. Your next question comes from Xiaodan Zhang with CICC. Please go ahead.

Xiaodan Zhang, Analyst

The company has made remarkable progress in standardizing and digitalizing its core business over the past few years. How should we approach this in relation to the emerging home renovation business? It would be great if you could share some of the milestones you have achieved. Thank you.

Tao Xu, CFO

Thank you, Sophie. To start with, the home renovation supply chain is long and complicated. Not all stages can or should be standardized. We can break it down into three categories: standardization, personalization, and the betweenness. Standardization entails pricing, customer practices, and the streamlined processes of rules. Personalization within this offering is emphasized by our tailored design solutions and the rich variety of products that are offered. The degree of the standardization or personalization for renovation maturity lies somewhere in between these two rings. Mature selections are based on stringent criteria while still providing our customers with ongoing diversity to make a personalized choice that meets their individual tastes. For areas that need standardization, we need to reshape the process and set standards. We will define distinct roles within our operation flow, establishing a set of mechanisms for collaboration, task allocation, and incentive structures. For example, in terms of role definition and fee settlement for renovation construction, it used to be common practice in the renovation industry for the project managers to bring their own teams of workers in control to the workshop, while the renovation company only dealt with payments to the project manager. This often resulted in the project manager starting off at a loss position when they took on a new project. This led to several issues. Their focus gets pulled into the actual charges and the tasks for more profits, and the manager accesses the labor schedules for other projects. Additionally, many renovation companies have limited expertise in managing workers leading to cost-related issues. On our platform, our project manager's role is to ensure a project runs smoothly and the customer is happy, and they’re not allowed to handle money. Their job is to manage project timelines, ensuring laborers are delivering quality craftsmanship, and so on. All of which improves customer satisfaction. Meanwhile, the platform is responsible for dispatching orders, setting up standards and certifying worker qualifications, implementing evaluations, and establishing a reward system, etc. Moreover, we are centralizing salary settlements based on a performance system centered around the cost structures. As such, we redefined roles, workflows, standards, and incentive mechanisms within the industry. Regarding the digitalization aspect, it is essential as a manifestation of in-depth industry understanding and serves as a means to facilitate the implementation of standardization. For example, let’s revisit the project manager and workers. This part of digitalization is now achieved through the home staff system. This module covers various sub-modules such as project schedule management, material dispatching, and construction quality control. It enables augmented task assignment, tracking of main material orders, acceptance inspections, certification processes, etc., providing a streamlined management approach. Additionally, it encompasses digital title management for both workers and project managers, including scoring systems, performance incentives, training, certification, and more. The home staff system will be upgraded to version 2.5 in November. This new version combines industry expertise from both Chengdu and Beike, making it more compatible and inclusive of various modules like construction delivery, customer acquisition, sales, centralized design control, supply chain delivery, employment tools, and data strategy. Moving forward, our focus will be on developing the designer and delivery middle office modules in order to standardize workflow processes and achieve a 'what you see is what you get' design approach. This will also save designers time in reputable workers and improve our interaction with client design solutions, which they care about increasingly these days. Lastly, we want to reiterate that the core goal of standardization and systemization is to establish a customer-centric digital infrastructure that supports the ongoing industrial development. This infrastructure should be capable of accommodating diverse industry players, allowing participants across the value chain to operate on streamlined and well-structured guidelines. As we gain deeper insights into the industry through experiments and provision in various cities, as well as coalition of our ideas following the merger and acquisition, we’ll continue to rapidly iterate the process of standardization and digitalization. Thank you.

Operator, Operator

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

Siting Li, IR Director

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 next quarter. Again, thank you and goodbye.