Fangdd Network Group Ltd. Q1 FY2021 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to Fangdd Network Group Limited First Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the management’s prepared remarks, we will have a question-and-answer session. Please note that this event is being recorded. Now, I’d like to hand the conference over to your speaker host today, Ms. Linda Li, the company’s Director of Capital Markets. Thank you. Please go ahead, Linda.

Thank you, Operator. Hello, everyone, and thank you for joining us on today’s call. The company has announced its first quarter 2021 financial results today. Our earnings release is now available on the company’s IR website. Today, you will hear from our co-CEO, Mr. Zeng Xi, who will start the call with our overview of the current industry dynamics and details of our development strategies in the quarter. Afterwards, our CFO, Mr. Pan Jiaorong, will go over the financials before we open up the call for questions. Our management team will deliver their remarks in Chinese, and I will provide English translations. Before we continue, we would like to refer you to our Safe Harbor statement in our earnings release. Please apply this call as we will be making forward-looking statements. Please also note that we will discuss non-GAAP measures today, which are more thoroughly explained and reconciled to the most comparable measures reported under generally accepted accounting principles in our earnings release and filing with the SEC. With that, I will now turn the call over to our co-CEO, Mr. Zeng Xi. Please go ahead, sir.

Hello, everyone, and welcome to our first quarter 2021 earnings call. I would like to start off the call with a review of the real estate market in the quarter where we observed a series of changes and opportunities. First, the scale of the new construction properties is massive and has maintained its growth. Under the guidelines of the three red lines policy, real estate developers are increasingly focused on improving their turnover rates and utilizing various channels to reduce their inventories. According to the National Bureau of Statistics, the value of China’s commercial housing sales reached RMB17.4 trillion in 2020, up by 8.7% year-over-year. Meanwhile, the scale of the new construction property market continues to grow. Looking ahead, the top-line growth rates for average sales in 2021 are 11.85%, according to a group of 44 developers, which is still quite a high level. Under the guidelines of the three red lines policy, developers are focused more on enhancing their ability to navigate various market channels in order to reduce their inventories and further accelerate their turnover rates. Second, the regulations implemented along purchase restrictions and sales restrictions, as well as centralized land sales, have led to a rapid decline in developers’ profit margins. As of now, developers’ home demands include loaning their market expenses and reducing their reliance on distribution channels. According to data, the real estate industry’s overall net profit margin in 2020 was 9.85%, down by 1.9 percentage points compared to the prior-year period. Meanwhile, the industry’s net profit margins continued to decline in 2020 to reach their lowest level since 2015. In the first quarter, the Ministry of Natural Resources centralized land sales, and our land supply has continued to drive up land prices, according to recent data. The premium rate of land transactions jumped to over 25% in April 2021. Against the backdrop of declining net profit margins, increasing land costs, and rising rates in the sales channels for new construction properties, developers have an increasing need to improve their efficiencies while reducing their costs. Developers are actively transforming their business models from real estate development to real estate services. Now, accomplishing this, developers are focusing on enhancing their digital capabilities while reaching more synergies and the derivative within their digital services. The profit drivers of real estate companies are shifting from property investment and sales to asset operations and services. This transition requires real estate companies to transform their traditional development businesses into a more refined service-oriented model, and this is completely dependent on their company’s digitalization capabilities. Typical real estate companies, such as Country Garden, Longfor Properties, and others have set up digital development centers to build their own digital ecosystems. In the resale property markets of the first and second-tier cities, commission-based and city renovation businesses are starting to mature and generate consistent profits. As China’s real estate markets continue to mature, resale property transactions will become the main growth driver for real estate marketing in an increasing number of cities. For example, in the megacity in the Yangtze River Delta, Shanghai’s resale property transaction volume was RMB1.2 trillion in 2020, accounting for 16.5% of the country’s total resale property transaction volume. Shanghai’s resale properties separation rate was 2.7%, which was also much higher than the national average of 1.1%. In fact, Shanghai ranked first in the country in terms of market volume and transaction activities in 2020. Additionally, in the Yangtze River Delta region, Nanjing, Hangzhou, and Ningbo were among China’s top ten cities in terms of resale property transactions in 2020. With Shanghai as its lead, the Yangtze River Delta region’s resale property market has shown immense potential for the future growth of commission-based and city renovation businesses. In the first quarter of 2021, we remained committed to our growth strategy and continued to focus on our platform and the three core businesses. By leveraging our platform, we successfully upgraded our new construction property business to provide real estate developers with superior services. Meanwhile, by utilizing our technology-enabled franchising systems, we also accelerated the offline expansion of our resale property business. We remain focused on providing an open, independent, and technology-enabled platform to our partner agencies while offering them a complete, standardized SaaS solution to increase their stickiness. In the first quarter, we had 221,000 active agents on our platform, up by 1.2% from the first quarter of 2020 during the pandemic. For our new construction property’s SaaS-based business, we will continue to focus on utilizing our decentralized model to improve efficiencies and profitability. Currently, our competitors are boosting their cost bases due to transaction volume, then they’ll use advanced commission payments. However, we have chosen not to use our own funds for advanced commission payments. This has impacted the number of active agents on our platform, as well as our close relationships in property transaction volume, leading to a direct decline in our new construction property revenue growth. Nevertheless, we believe that our decision for growth based on advanced commission payments will allow us to avoid bad debts and low returns from them in the long term, which is most conducive to the healthy development of our company moving forward. This quarter, we actively researched the financial supply chain for a new path to address commission payments. Meanwhile, we strengthened the service and operational efficiency of our platform distribution, allocated our resources to key projects, and pursued effective growth of our gross profit. In the first quarter, the number of new construction property projects on our platform was 1,941, and distribution revenue was RMB270 million. Secondly, we introduced our property cloud SaaS solution to address developers’ increasing needs for digital marketing solutions. In the first quarter, we continued to refine and upgrade our SaaS solution at year-end launch pilot partnerships with thousands of developers. We expect this partnership to generate cash revenues in the second quarter of 2021. In the first quarter, we introduced a series of new features to enable developers and offline sales teams to quickly assess agent services. This feature includes smart agency recommendations, agency information, and agent online stores. Meanwhile, we’re still rolling out multiple new features on our property cloud app, including a private network marketing tool to help support developers in their generation of leads and short-form content for customer acquisition, as well as in their creation of online and real property billings. As a result, we continue to expand our cooperation with several key developers in pilot projects utilizing our property cloud solution. By the end of the first quarter, we had established partnerships through our public cloud solution with 24 of the top 100 real estate developers in China, including 22 of the top 30 domestic real estate companies such as Country Garden, China Vanke, Sunac China Holding, and Greenland Holding. Third, our resale property business initiatives have expanded rapidly. In the first quarter, our closed-loop resale property GMV reached RMB13.56 billion, representing an increase of 81.8% from the first quarter of 2020. Additionally, we pioneered an industry-leading technology-enabled franchise system while we established an innovative service model in the resale property transaction service space through our team housing projects. Both of these initiatives achieved rapid business expansions during the period. During the first quarter, revenue from our resale properties segment reached RMB18.8 million, an increase of 183.6% on a sequential basis. Looking ahead, we expect this segment to retain its rapid growth trend in the second quarter of 2021. In the first quarter, we expanded our Shanghai-centered network to cover 565 cooperative franchise agencies nationwide and added 5,086 agents. Meanwhile, there are 41 resale property transaction service centers that provide post-construction services for 1,441 partnered agencies. In the first quarter, our team housing projects began to gradually expand their survey scale, with single-month revenue exceeding RMB5 million for the first time ever, and its property premium rate reaching 15% to 20%. Meanwhile, our platform average turnover period of property listings was 22 days, while our property appreciation rate and transaction efficiency were also significantly higher than the industry average. As we continue to expand our businesses, we also recognize the importance of cost control governance. Now, please allow me to provide a few updates for everyone on this mission-critical front. During the first quarter, we fully optimized our management team, which was in line with our business development. In our resale property business, we appointed Mr. Liu Jiazhen to the position of Senior Vice President. As a young industry leader and Chairman of China’s Real Estate Agent Union, Mr. Liu will take charge of our resale property business, new business initiatives, and entry business. In this role, Mr. Liu will focus on integrating both internal and external resources to accelerate our business expansion. For our new construction property business, we have appointed six outstanding talents from various sectors to serve as general managers for our operations in different cities. This appointment will further enhance our ability to adapt to the rapid digital evolution of the new construction property market. Lastly, please allow me to share our update on our current outlook and expectations. For the second quarter of 2021, we will optimize our products and services to maintain stable investment in our new construction property business while we improve our operating efficiency and growth margins. Therefore, we expect our new construction property revenue to be between RMB314 million and RMB370 million in the second quarter. As we continue to expand, we seek more collaboration with real estate developers to our property cloud SaaS solutions. We expect to have 50 developers granting us broader capabilities, and to launch more offline partnerships with Centaline in 18 cities. Thus, we expect our SaaS solutions to start generating revenue in the second quarter of 2021. Our research shows our resale property business is entering a period of growth and development. We believe that this business is still scaling, and the closed GMV will achieve positive growth in the second quarter. Moreover, we expect our resale property business to generate revenues in the range of RMB40 million to RMB50 million in the second quarter. Based on these expectations, we are currently forecasting our total revenue to be between RMB380 million and RMB420 million in the second quarter of 2021. This is based on our current review of the marketing environment, which is subject to change.

Thank you. I will provide a closer look into our first quarter financial results. Before I begin, please note that all the numbers are in RMB terms unless otherwise stated. Revenue in the first quarter of 2021 increased by 6.9% to RMB291 million from RMB272.1 million in the same period of 2020. During the quarter, we continued to optimize our revenue mix and prioritize revenue generation from value-added services and new business initiatives, such as our SaaS solution for various platform participants. At the same time, in response to market complications, we are actively exploring digital supply chain financial products to meet the market demand for advanced commission payments. Cost of revenue for the first quarter of 2021 increased by 15.7% to RMB257.7 million from RMB272.2 million in the fiscal year of 2020. This increase was due to higher commission fees paid to agents for their services, stemming from increased commissions from transactions. Additionally, we recorded increased costs related to various SaaS solutions offered to market participants in the first quarter of 2021 to diversify our future revenue streams. Gross profit in the first quarter of 2021 decreased by 32.6% to RMB33.3 million from RMB49.4 million in the same period of 2020. The gross margin in the first quarter of 2021 decreased to 11.4% from 18.2% in the same period of 2020. Our sequential gross margin in the first quarter of 2021 increased by three percentage points. Going forward, we will continue to focus on developing SaaS solutions and improving our efficiencies to advance our growth margins. Operating expenses in the first quarter of 2021 decreased by 25.9% to RMB140.3 million, which included share-based compensation expenses of RMB11.9 million, compared to RMB189.4 million in the same period of 2020, which also included share-based compensation expenses of RMB26.4 million. Sales and marketing expenses in the first quarter of 2021 increased to RMB37.9 million from RMB1.4 million in the same period of 2020. This increase was primarily due to higher spending on brand promotion and marketing activities related to our new SaaS solution launched for our platform participants during the period. Product development expenses in the first quarter of 2021 were RMB37.3 million, compared to RMB95 million in the same period of 2020. This decrease was due to reductions in share-based compensation expenses and personnel-related expenses as we shifted our focus from expanding our product development team to optimizing our team’s operating efficiency and prioritizing our SaaS solutions development. General and other administrative expenses in the first quarter of 2021 were RMB65.2 million, compared to RMB293.1 million in the same period of 2020. This decrease was due to reductions in share-based compensation expenses and our implementation of cost control initiatives. Net loss in the first quarter of 2021 was RMB104.8 million, compared to RMB136.4 million in the same period of 2020. Non-GAAP net loss in the first quarter of 2021 was RMB93 million, compared to RMB110 million in the same period of 2020. Basic and diluted net loss per ADS in the first quarter of 2021 was both 1.27. In comparison, our basic and diluted net loss attributed to ordinary shares per ADS in the same period of 2020 were both 1.75. Each ADS represents 25 of our class A ordinary shares. As of March 31, 2021, we had cash and cash equivalents, restricted cash, and short-term investments of RMB872.3 million, short-term bank borrowings of RMB374.5 million, as well as unutilized banking facilities of RMB495.5 million. For the first quarter of 2021, net cash used in operating activities was RMB4.8 million. This concludes our prepared remarks for today. We are now ready to take questions.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Your first question comes from the line of Lisa Thompson from Zacks Investment. Please go ahead.

Hello. Congratulations on a good quarter.

Thank you, Lisa.

I’d like to ask about – you talked about getting supply chain financing, how far off would that be to put that in place and how much of an improvement do you think that would make to your current business?

Okay. Let us introduce your questions to our managers. Pan Jiaorong will provide the answers to your questions. Thank you, Lisa.

Last year, we worked with about seven banks for supply chain financing, totaling around RMB2 billion. And we will go – sorry?

Go ahead. No, go ahead.

Yes. That’s the answer from our CFO. Is that clear for you?

So, you have it in place now and you’re already using it with seven banks? Or is that something new?

Okay. We are also expanding our cooperative initiative through various forms of collaboration, including the ATS model. We continue to explore new ways to approach supply chain financing.

And how much do you think that will help the business? Will it have a big impact or not so much?

In the short term, the challenges faced by these large companies have led the market to increase public advanced commission payments and commission rates, resulting in a competitive price environment among agents and their agencies. For the long term, utilizing the company’s own funds for other advanced commission payments will enhance closed-loop transactions for new construction properties. However, given the impact of commission repayments and low return on investment from these payments, the company will concentrate on its supply chain financial product. This approach will facilitate risk management in developments and will be advantageous for reputable developers and high-quality projects that adopt this product. I believe it will positively influence our business, but effective risk management will be crucial.

Thank you. Regarding the second quarter, I expect to see increasing gross margins. However, will there also be spending, or will the net loss decrease from Q1?

In the second quarter, we will adjust a portion of the revenue from our business constructor. Similar to SaaS, we started generating revenue from the resale property and construction business, which has also seen significant growth. Additionally, we are seeking efficiencies in the new construction sector. As highlighted in the earnings report and in the script, we anticipate an increase in gross profit, which will enhance the company’s profitability.

Okay. That’s good to know. Given what you know now, what do you think the revenue level for the quarter would have to be, to be at breakeven? And what gross margin does that assume?

Hi, Lisa. Sorry, we didn’t fully understand your question. Could you ask that again, please? Thank you.

Okay. Given what you know now, what quarterly revenues would you need to breakeven, and what gross margin assumption is that?

It's difficult to give a precise answer without making a forecast right now. However, the profit margin for our SaaS solutions and the resale of construction properties is relatively high. Thus, we expect to allocate resources accordingly in the future. Our gross margin should improve, leading to increased revenue. We are also increasing our investment in staffing and focusing on high-margin opportunities within the construction resale market, which we see as a significant area for growth and digitalization. We believe that with additional investment, our business will grow rapidly, resulting in better earnings moving forward.

Do you believe the SaaS business will be successful, or is there still a risk that customers may not show interest?

We believe that the new construction market is facing intense competition and is approaching a bottleneck. Developers are establishing their own digital channels. However, we are committed to maintaining our gross profit, gross margin, and distribution efficiencies. We encourage them to utilize our SaaS solution, along with our investments in R&D and market-focused production. While the path to innovation is uncertain, we remain optimistic about the sector. In terms of our construction business, we have transitioned from a cultivation phase to a growth phase. Urban renovation and city revitalization are also experiencing both revenue and profit growth. Therefore, we believe this answers your questions.

Great. Thank you. That’s all my questions. Thank you so much.

Thank you, Lisa.

Thank you. As there are no further questions, we will conclude our conference for today. Thank you for participating. You may all disconnect.