Fangdd Network Group Ltd. Q2 FY2021 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to Fangdd Network Group Limited Second Quarter 2021 Earnings Conference 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. I'd now like to hand the conference over to your speaker host today, Ms. Linda Li, the company's Director of Capital Markets. 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. An earnings release is now available on the company's IR website. Today, you will hear from our Co-CEO, Mr. Xi Zeng, who will start the call with an overview of the current industry dynamics and the details of our development strategies in the quarter. Afterwards, our CFO, Mr. Jiaorong Pan, will go over our financials before we open up the call for questions. Our management team will deliver your remarks in Chinese, and I will provide an English translation. Before we continue, I would like to refer you to our safe harbor statement in our earnings press release, which applies to 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 the generally accepted accounting principles in our earnings release and the filings with the SEC. With that, I will now turn the call over to our Co-CEO, Mr. Xi Zeng. Please go ahead, sir.

Hello everyone, and welcome to our second quarter 2021 earnings call. I would like to start by reviewing some of the changes and opportunities we observed in the real estate market during the quarter. First, low sales and tightened financing have forced real estate companies to shorten the cash conversion cycle. According to the National Bureau of Statistics, the total volume of real estate transactions in China increased by 17.2% year-over-year to RMB5.4 trillion in the second quarter of 2021. Major cities in China have implemented regulatory measures to control the property market and tighten loans. As a result, the growth rate of the real estate market in the second quarter slowed, dropping by 70 percentage points sequentially. New regulations for managing the concentration of real estate loans were introduced. Banks continue to tighten lending standards in response to price drops for weak sales, lack of financing access, and maturing outstanding debts. There is an urgent need for real estate companies to accelerate sales and shorten the cash conversion cycle to maintain sustainable cash flow. Second, real estate companies are in a long-term process of digitalization with a focus on digital marketing. Due to declining margins, they have begun to emphasize the digitalization of their businesses, which involves many business areas and use cases that require large-scale and long-term transformation. Companies need to prioritize their efforts to maximize results in the short term. Given that digital marketing directly contributes to sales performance, it has become the primary focus for many real estate companies. According to CRIC's data, all the top 50 real estate companies began using their own digital marketing platforms by 2020, up from just 12 companies using this platform in 2018. Third, the era of reckless competition on real estate transaction platforms is gradually ending as efficiency becomes the next developmental trend. The strategy of increasing commissions and lowering gross profits is becoming less effective due to regulatory changes. As the market stabilizes, platform technological capabilities and our provisional businesses will become key competitive factors. We are committed to the principle that housing is for living, not for speculation, and we believe that relevant policies will promote the healthy and stable development of the real estate market over time. In light of policy shifts in the real estate industry and the trend toward digitalization, we have renewed our mission to enhance real estate transaction efficiency and funding experiences. Our renewed mission aims to serve thousands of properties, millions of real estate agencies, and millions of families while facilitating trillions of transactions and becoming the trusted platform for our customers. During the quarter, we remained focused on our growth strategies and continued developing our platform through three core businesses. We worked on improving our business fundamentals and gross margins, and we maintained competitiveness through subsidies. The total closed-loop GMV facilitated on our platform was RMB29.6 billion in the second quarter of 2021. Our revenues increased by 37.9% to RMB401.4 million, and our gross margin improved by 36 percentage points to 15.6% quarter-over-quarter. We continue to advance our platform to provide agencies with an open, independent, and technology-enabled environment. With our door-to-door property sales APG and Cone, we are focused on developing new video content and data collaborations with midstream media platforms to enhance agent operational management and marketing tools, improve agent efficiency, and strengthen platform loyalty. In the second quarter, the number of active agents on our platform reached 250,000, representing a 13% increase quarter-over-quarter. Next, I would like to discuss our three primary business lines. For new property sales, we increased the number of property listings on our platform and improved overall profitability. During the quarter, we enhanced the quality of our listed properties while growing our scale, utilizing our parking space plus product, which improves listing quality and other real estate transaction solutions. We expanded collaborations with property developers and improved our gross margins while building cooperation with key agents and partnering with banks to optimize algorithms and efficiency. In the second quarter, our closed-loop new property transaction GMV rose by 15.7% to RMB18.9 billion from RMB16.4 billion in the first quarter of 2021. The number of new property projects on our platform reached 1,930, with distribution revenues increasing by 32.1% to RMB358.8 million quarter-over-quarter. For our property cloud SaaS solutions, we are seeing early successes from pilot projects with key developers as we refine and upgrade our systems. During the quarter, we established various tools for agencies, marketing campaigns, and digital media channels to help developers improve their project launches. With the launch of agents' own functions, developers can realize real-time dynamics of their stocks and connect with key contacts to enhance efficiency for new business launches and agency assignments. Additionally, we expanded the management display board's scope and launched an automated smart Q&A function, thereby enhancing developer efficiency and user experience. In terms of pilot projects, we selected benchmark projects and improved efficiencies through digital marketing channels. For instance, our collaboration with China Railway Real Estate Group Corporation Limited completed 54 transactions in June, while our work with CMB Real Estate Corporation Limited finalized 78 transactions during its opening sale. Consequently, revenues from our SaaS solutions in the second quarter reached RMB2.3 million. Our resale property business maintained steady development during the quarter. Despite macro uncertainty, we have leveraged our innovative business model to sustain revenue and gross profit growth. In the second quarter, our core new resale property transaction GMV reached RMB10.6 billion, with revenues from resale property transactions increasing by 114.4% sequentially to RMB40.3 million. Lastly, I’d like to provide an update on our outlook and expectations. Moving forward, we will continue to utilize our platform to facilitate transactions without sacrificing margins by improving our competitive stance on subsidies. We'll deepen collaborations with real estate developers and agencies, expand our geographic reach, and develop benchmark projects through our property cloud SaaS solutions. As we enter a phase of steady development, we will keep pushing for innovation, technology-enabled franchising, and the Tinghaozhu service business model. Due to the impact of COVID-19 on certain key markets and the resulting uncertainty regarding our business performance in the near term, we expect our revenue to be between RMB250 million and RMB300 million in the third quarter of 2021. This forecast reflects our current preliminary views on market and operational conditions, which could change. Now, I will turn the call over to our CFO, Mr. Jiaorong Pan, to go over this quarter's financial results.

Thank you, Zeng. Now I will provide a closer look at our financial results for the second quarter of 2021. Please note that all numbers are in RMB terms and all comparisons are made sequentially, unless otherwise noted. Revenue in the second quarter of 2021 increased by 37.9% to RMB401.4 million from RMB291 million in the first quarter of 2021. During this quarter, we continued to optimize the revenue mix and focused on generating new revenue from value-added services and new business initiatives. This includes our SaaS solutions for various platform participants as we work to diversify our future revenue streams. Now, let’s review our revenue breakdown for the second quarter of 2021. Net revenue from new property transaction services rose by 32.1% to RMB358.8 million in the second quarter from RMB271.6 million in the first quarter, primarily due to a 15.7% increase in GMV from new property transactions to RMB18.9 billion in the second quarter from RMB16.4 billion in the first quarter. Net revenue from resale property transaction services surged by 114.4% to RMB40.3 million from RMB18.8 million, mainly due to contributions from our comprehensive real estate service platform and the home renovation service platform, Tinghaozhu. This growth occurred despite a 21.7% decrease in GMV for resale property transactions to RMB10.6 billion from RMB13.6 billion, primarily due to changes in fee structures for listings. Revenues from SaaS solutions increased significantly by 268.4% to RMB2.3 million from RMB0.6 million. This rise was largely due to an increase in the number of projects. Cost of revenue in the second quarter increased by 31.5% to RMB338.9 million from RMB257.7 million, driven by high commission fees to agents and rising costs related to value-added services and SaaS solutions offered during the quarter. Gross profit jumped by 87.5% to RMB62.5 million from RMB33.3 million. Gross margin improved to 15.6% from 11.4%. Operating expenses grew by 46.2% to RMB205.1 million from RMB140.3 million, which included share-based compensation expenses of RMB11.1 million and RMB11.9 million in the second and first quarters, respectively. Sales and marketing expenses decreased to RMB13.1 million from RMB37.9 million, mainly due to personnel adjustments in our sales department, allowing us to reduce spending related to new property transaction services and focus more on our SaaS solutions. Product development expenses rose to RMB64.5 million from RMB37.3 million as we prioritized research and development for our value-added services and SaaS solutions. General and administrative expenses increased to RMB127.5 million from RMB65.2 million, largely due to a rise in provision for doubtful accounts on receivables from some developers to RMB79.1 million from RMB20 million, as certain developers faced tighter financial conditions. Net loss was RMB139 million in the second quarter, compared to RMB104.8 million in the first quarter. However, the net loss narrowed to RMB59.9 million from RMB84.8 million when excluding the provision for doubtful accounts. Non-GAAP net loss was RMB127.9 million compared to RMB93 million in the first quarter, narrowing to RMB48.8 million from RMB72.9 million when excluding the provision. Basic and diluted net loss per ADS were both RMB1.64 in the second quarter, compared to RMB1.27 in the first quarter. Each ADS represents 25 of the company's Class A ordinary shares. As of June 30, 2021, the company had cash, cash equivalents, restricted cash, and short-term investments totaling RMB749.4 million, with short-term bank borrowing at RMB290.7 million and unutilized bank facilities of RMB379.5 million. For the second quarter, net cash used in operating activities was RMB53 million. This concludes our prepared remarks for today. We are now ready to take questions.

We have a question from Lisa Thompson at Zacks Investment. Please go ahead.

Good evening, okay.

Hi, Lisa.

It's going to be hard with just one question now. So I think probably my biggest question would be you took a very large bad debt reserve this quarter. And so far this year, you're already almost double what you took last year. Could you go into more detail as to what the problem is? Did you have a couple of developers go bankrupt? Is there any chance of collecting any of that money? Just describe the situation. And then what you expect in the next couple of quarters? Are you going to keep taking higher reserves?

Okay. Let me translate the question to our CEO.

It's true that some developers may go bankrupt now. The decline in income scale is due to our strategy change. We have shifted from providing subsidies to focusing more on gross profit. This is part of our broader strategy adjustments and has also been influenced by recent market conditions, including the impact of COVID-19. Active trading has been affected by regulations, which may impact our revenues. We believe this issue is not market-related and is unrelated to the developers' bankruptcies.

So is there any hope of collecting any of that?

Lisa, could you repeat your question? I didn't hear you clearly.

Is there any hope that you can collect some of that bad debt allowance back again, if they're not bankrupt?

Okay. I will translate the question to the managers.

Recycling of accounts receivable is currently standard practice. There are no concerns regarding the quality of creditors for us to collect our accounts receivable, as each developer's sales are fundamental to their operations. Right now, commission payments exceed expectations. However, if any risks arise or if developers encounter financial difficulties, we will monitor the situation closely and compile all relevant information. Consequently, we will limit our collaboration with such real estate developers.

Okay. Thank you. Can I ask another question or am I restricted to one?

Actually, we prefer to have one question from each participant. But Lisa, if you have more questions, maybe we can arrange a backup call later.

That’ll be great. Thank you.

Okay. Thank you, Lisa.

We do not have any further questions at this moment. I would like to hand the conference back to our host for any ending remarks. Thank you. Ladies and gentlemen, that concludes our conference call for today. Thank you all for your participation; you may disconnect now.