Earnings Call Transcript - DUO Q4 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to FangDD's Network Group Limited Fourth Quarter and Full Year 2020 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, Mr. Warren Wen, Financial Controller of the Company. Please go ahead, Warren.

Warren Wen, Financial Controller

Thank you, operator, and hello, everyone, and thank you all for joining us on today's call. The Company has announced its fourth quarter and full year 2020 results today, and the 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 a review of our progress, the current industry dynamics, and details of our development strategies in 2020. Afterwards, our CFO, Mr. Pan Jiaorong, will go over our financials before we open up the call for questions. Our management team will deliver their remarks in Chinese, and I will provide 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 our filings with the SEC. And with that, I will now turn the call over to our Co-CEO, Mr. Zeng Xi. Please go ahead, sir.

Zeng Xi, Co-CEO

Please refer to our Safe Harbor statement in our earnings press release, which applies to this call as we will be making forward-looking statements. Additionally, we will discuss non-GAAP measures today, which are explained in detail and reconciled to the most comparable measures reported under generally accepted accounting principles in our earnings release and our filings with the SEC. Now, I will turn the call over to our Co-CEO, Mr. Zeng Xi. Please proceed.

Warren Wen, Financial Controller

Hello, everyone, and welcome to our fourth quarter 2020 earnings call. Mr. Zeng would like to start off the call with a review of the real estate market in 2020. During 2020, real estate developers began to adopt digital marketing in their operations. However, they faced increasing cost pressures as they relied more on sales channels to achieve higher turnover rates while sales channel commissions continued to rise rapidly. The COVID-19 pandemic in 2020 further accelerated the digitalization of various industries as more consumers moved online. Overall, the growing reliance on online sales channels from homebuyers has resulted in the rapid development of digital real estate transaction services. However, with the real estate industry focusing on reducing inventory and the government's implementation of serious initiatives in 2020, such as property price caps and the three red lines policy, developers faced additional pressure on their profit margins. Consequently, reducing costs and improving turnover efficiency have become core issues for developers. According to data from our Real Estate Digital Research Institute, the commission rate for ordinary residential property sales surpassed 3% in 2020. A report from CSC Financial indicates that the average commission rate for resale properties has remained below 2% for the past two years. Thus, we believe the rising trend in commission rates for new construction properties is neither long-term nor sustainable. Developers are usually at the forefront of the value chain in the real estate agent service sector, and the adoption of digital marketing solutions may reshape the role platforms play as their sales channels going forward. We have also noticed a series of structural changes in the real estate agent service sector. The advancement of platforms has significantly changed the allocation of agents and led to a decline in the number of large-scale agencies. However, as competition intensifies, small- and medium-sized agencies, or SMAs, have remained stable, with the quality of agents improving to stay competitive. In Shanghai, SMAs accounted for over 60% of all agencies in 2020. According to our Real Estate Digital Research Institute, we believe the allocation of capable agents is increasingly polarized, with some drawn to leading platforms and others to SMAs as they embark on start-up ventures. Additionally, we have witnessed unprecedented competition in the sector this year. Platforms in new construction properties have offered unreasonably high subsidies and full advances of commissions to rapidly increase their transaction volumes, believing that higher subsidies will lead to greater market share. Players from other industries have also been drawn to the agent service sector, intensifying the competition for subsidies. We believe the infrequent nature of real estate transactions and the profit-driven nature of real estate agents suggest that subsidies will only lead to higher sales performance in the short term and are not sustainable as a competitive strategy. Instead, we believe long-term growth will be driven by innovative service offerings that improve agent service efficiencies. Mr. Zeng will now provide an overview of the strategic business plans we developed in 2020. With our SaaS solution at our core, we position ourselves as a pioneer in the digitalization of the Chinese real estate service industry. We have established a development roadmap centering around our platform and our three key business segments. First, as a platform, we are dedicated to empowering more agencies through our SaaS offering, thus expanding our agency base. As an independent third-party platform, we provide agencies with a comprehensive set of standardized digital and mobile tools, making us the go-to service provider for SMAs. Consequently, the number of agents on our platform grew for the ninth consecutive year in 2020. In the fourth quarter, the number of active agents exceeded 283,000, marking a 19% increase from the same period in 2019. More importantly, the number of active agents using our SaaS solution surged by 30.2% year-over-year to 557,000, with 85% of these active agents being from SMAs. Across our business segments, we focus on enhancing our SaaS product to facilitate transactions without engaging in subsidy battles. For agency services, we upgraded our SaaS offering while strengthening our offline operating capabilities. We launched version 5.0 of our Duoduo property sales app, optimizing how agents establish and maintain relationships with property buyers. In the fourth quarter, we expedited our agent development system, introducing various tools like online property promotion, virtual property viewings, and online chat rooms to facilitate agents' connections with property buyers and manage their client base more effectively. As a result, in the fourth quarter, our agent development system achieved a retention rate of 88.64%. Simultaneously, as we refined our SaaS service, we expanded our offline service team to cover 124 cities in the fourth quarter. We also established China’s first digital registry for agencies, now encompassing more than 1 million agents from 288,000 agencies supported by 19,000 independent companies. In terms of property listings, we’ve improved our collaboration with developers. For instance, in the fourth quarter, we expanded partnerships with key developers and projects while emphasizing the quality of their real estate offerings through our SaaS solutions and feedback mechanisms for agencies and developers. We further streamlined our property lease management processes, leading to a rise in new construction property projects listed on our platform to 3,479, reflecting an 11.26% year-over-year increase and a 19.23% sequential increase. For the full year of 2020, we serviced 5,825 new construction property projects, up 24.15% year-over-year. The number of cities covered by our new construction projects increased by 22% year-over-year to 204 cities nationwide, with our property listings and agency base—the key drivers of our new construction property sales business—continuing their strong growth. However, affected by short-term impacts, the GMV of closed-loop transactions for our new construction properties reached RMB30.9 billion in the fourth quarter, down 6.25% sequentially and RMB107.9 billion for the full year of 2020, down 23.6% year-over-year. Although our decision to refrain from offering subsidies may temporarily impact our closed-loop transaction volume, we remain optimistic about our long-term growth prospects. Secondly, we have noticed growing market opportunities for developer-side SaaS solutions. In response, we launched our property Cloud SaaS solutions. Data from CRIC reveals that 60% of the top 50 real estate developers in China increased their investment in digitalization during 2020, with an average annual investment reaching RMB100 million. These developers primarily focused on online marketing solutions to improve their operations. However, because of limited technological capabilities and high upfront costs associated with building their own systems, most real estate developers often depend on third-party SaaS solutions for digitalizing their operations. Based on Frost Sullivan estimates, the market size for real estate products in China is projected to grow at a CAGR of 49.3% to RMB15.9 billion by 2024. During the fourth quarter, addressing the demand from developers, we utilized our agency resources, data, and product expertise accumulated over the last nine years to develop and launch our property sales SaaS solution for real estate developers. This solution facilitates interactions between developers and the platform's most suitable agents, improving transaction efficiency through the digitalization of their sales cycle. It leverages property project management and customer profile analysis to digitalize the transaction process, offers coupons for sales events, and enables agents to share property details across their networks to enhance customer acquisition. It also categorizes agencies and manages individual agent performance to digitalize sales channel management and features for analyzing viewership, budget, and campaign conversion rates, helping developers select their commission rates while managing costs effectively. Under this new business model, we typically set service fees for our SaaS solutions on an annual or monthly basis. With our total property sales app, developers can access agents in their cities with just one tap. Our new developer direct sales feature has been well received by our platform agencies. By providing high-quality online property listings and enabling direct services from agencies to developers, this feature aids agents in improving customer conversion rates. Since launching the app, we have established pilot programs for our property sales SaaS solution with over 30 top developers. According to data from our Real Estate Digital Research Institute, there are currently more than 45,000 property projects for sale in China, highlighting significant market potential for our property sales SaaS solution, which operates on a monthly retainer and value-added service fee model. For our resale property business, we continue to invest in developing new growth initiatives. In the fourth quarter, we formed a strategic partnership with Centaline Property Agency, which enhanced our closed-loop resale property transaction capabilities. Consequently, our closed-loop resale property transaction GMV rose by 15.4% sequentially, while in 2020 it increased by 15.26% year-over-year, reaching RMB73.1 billion. We also launched a new platform, Yuancui, through our collaboration with Centaline. On Yuancui, we will utilize our technology capabilities, effective management processes, and brand influence to establish a cutting-edge technology-enabled franchising system. With Yuancui’s top SaaS offerings, we can provide operational and service support to our franchise stores by integrating our extensive resources into the platform. As of the end of the fourth quarter, Yuancui expanded into 28 cities covering 3,940 agents across 455 agencies. Furthermore, we developed our offline transaction service infrastructure by building a network for offline transactions, which currently includes 11 managed transaction service centers in Shanghai dedicated to offering high-quality transaction services to SMAs on our platform. Additionally, our network connects with several banks and financial institutions, including major banks in China, to integrate services such as secure loans and mortgage options. During the fourth quarter, closed-loop transactions completed through our network increased by 35.9% sequentially, with GMV also rising by 45.9% sequentially. Regarding our asset inventory business, we continue to provide effective operational support services. We utilize our operational and sales support services to help developers monetize underperforming parking spaces. Thus, we have effectively reduced parking space inventory for developers. Lastly, I would like to share our outlook for the fourth quarter. Looking into 2021, we will concentrate on upgrading our total property sales SaaS solution for agencies on our platform. This will accelerate the digitalization of agency operations, enhancing their capacities to close deals on our platform and driving revenue and profit growth in our new construction property transaction business. Moreover, we intend to increase our investment in developing our service system centered around our property sales SaaS solution to meet developers' needs for digital marketing solutions aimed at lowering costs and improving turnover efficiency. Such initiatives will help us bring more property listings to our platform and accelerate revenue growth in our SaaS and other value-added services. Finally, we plan to invest more in our resale property segment, leveraging our online sales solutions and offline coverage to establish a leading retail property transaction service model that enables this segment to grow its revenue and achieve breakeven. Based on these expectations, we forecast our revenue to be between RMB270 million and RMB290 million in the first quarter of 2021, based on our current views of the market environment, which are subject to change. I will now turn the call over to our CFO, Mr. Pan Jiaorong, to review the quarter's financial results.

Pan Jiaorong, CFO

We are forecasting our revenue to be between RMB270 million and RMB290 million in the first quarter of 2021. This estimate reflects our current views of the market environment, which may change. Now, I will hand the call over to our CFO, Mr. Pan Jiaorong, to discuss the quarter's financial results.

Warren Wen, Financial Controller

Okay. Thank you, and the CFO will now provide a closer look into the fourth quarter financial results. Before beginning, please note that all the numbers are in RMB terms unless otherwise indicated. Revenue in the fourth quarter of 2020 decreased to RMB622.4 million. The decrease was attributable to the Company's plan to reallocate resources among the revenue from commission, which had lower profit margins due to the intensified market competition, and revenue from value-added services and new business initiatives. Revenue in the fourth quarter of 2020 decreased to RMB570.6 million, and this decrease is attributable to the decrease in the commission payable to the agents. At the same time, due to the Company’s plan to diversify the future income stream, the Company provided various SaaS solutions which resulted in relevant cost increases. The gross profit in the fourth quarter of 2020 decreased to RMB51.8 million. Gross margin in the fourth quarter of 2020 decreased to 8.3%. Operating expenses in the fourth quarter of 2020, which included share-based compensation expenses of RMB24.3 million, decreased by 85.7% to RMB128.3 million from RMB199.7 million in the same period of 2019. Sales and marketing expenses in the fourth quarter of 2020 increased to RMB32.2 million from RMB17.1 million in the same period of 2019. The increase was primarily due to the Company's increased spending on brand recognition and promoting activities related to its new SaaS solution offering to various platform participants in the fourth quarter of 2020. Product development expenses in the fourth quarter of 2020 were RMB17.9 million compared to RMB506.8 million in the same period of 2019. This decrease was primarily attributable to the decrease of share-based compensation expenses in the fourth quarter of 2020 to RMB15.6 million from RMB435.1 million in the same period of 2019. This decrease was also due to the Company's decision to shift its focus to expanding the size of a product development team to optimize operating efficiency as well as refine its product development structure with a focus on the Company's SaaS solution, resulting in decreased personnel-related expenses during the period. General and administrative expenses in the fourth quarter of 2020 were RMB25.2 million compared to RMB375.9 million in the same period of 2019. This decrease was mainly due to the decrease in share-based compensation expenses in the fourth quarter of 2020 to RMB8.7 million from RMB310.8 million in the same period of 2019. To a lesser extent, the decrease also resulted from the Company's efforts to implement cost control initiatives in response to the impact of COVID-19. Net loss in the fourth quarter of 2020 was RMB92.8 million compared to a net loss of RMB691 million in the same period of 2019. The non-GAAP net loss in the fourth quarter of 2020 was RMB68.5 million. Basic and diluted net loss per American depository share (ADS) in the fourth quarter of 2020 were both 1.15. In comparison, the Company's basic and diluted net loss attributable to the ordinary share per ADS in the same period of 2019 were both RMB22, each ADS represents A ordinary shares of the Company. Now, I will also briefly review our full-year results. Revenue in 2020 is RMB2,451.3 million. Cost of revenue in 2020 is RMB2,036.8 million. Gross profit in 2020 is RMB414.5 million. Gross margin in 2020 is 16.9%. Operating expenses in 2020, including share-based compensation expenses of RMB102.8 million, decreased by 50.5% to RMB640.5 million from RMB1,293.8 million in 2019. Sales and marketing expenses in 2020 were RMB38 million compared to RMB48.4 million in 2019. Product development expenses in 2020 were RMB301.4 million compared to RMB725 million in 2019. General and administrative expenses in 2020 were RMB301.1 million compared to RMB520.4 million in 2019. Net loss in 2020 was RMB221.4 million compared to RMB510.4 million in 2019. The non-GAAP net loss in 2020 was RMB118.6 million. Basic and diluted net loss per ADS in 2019 were both RMB2.76. As of December 31, 2020, we had cash and cash equivalents, restricted cash, and short investments of RMB945 million, short-term bank borrowings of RMB443.4 million, and utilized banking facilities of RMB460.5 million. For the fourth quarter of 2020, net cash used in operating activity was RMB225.9 million. That concludes our prepared remarks for today. Operator, we are now ready to take questions.

Operator, Operator

Ladies and gentlemen, we will now begin the question-and-answer session. Please state your question in Chinese first, followed by the English version for everyone's convenience. We have a question from Lisa Thompson from Zacks Investment. Please go ahead.

Lisa Thompson, Analyst

Good morning. Sorry, I can't ask my question in Chinese, sir. I would like to know, given your change in strategy for this year, what do you expect gross margins to be going forward? And also, what are your plans for spending on operating expenses?

Warren Wen, Financial Controller

Let me translate your question first. Pardon me, are you asking about the operating expenses in the coming year, medium-term, or long-term?

Lisa Thompson, Analyst

This year.

Warren Wen, Financial Controller

This year, you mean 2021?

Lisa Thompson, Analyst

Yes.

Pan Jiaorong, CFO

Let me translate your question first. Pardon me, are you asking about operating expenses for this year?

Warren Wen, Financial Controller

To answer your first question, we will have two models coexist for the year 2021. The first one is the new property sales commission revenue. Properties will remain at a gross profit margin similar to 2020 at 15% to 20%. At the same time, we have newly launched a SaaS solution offering to our developer base, which is a SaaS model with monthly or annual subscription fee income with gross profit margins of 60% to 80% in the years to come.

Pan Jiaorong, CFO

To answer your first question, we will have two models coexist for the year 2021. The first one is the new property sales commission revenue. Properties will maintain a gross profit margin similar to 2020 at 15% to 20%. Additionally, we have recently launched a SaaS solution for our developer base, which operates on a SaaS model with monthly or annual subscription fee income and gross profit margins of 60% to 80% in the years ahead.

Warren Wen, Financial Controller

Regarding the product development expenses, we believe that because our product development team is now quite mature, the increase in percentage compared to 2020 will probably be within 10% to 20%. Regarding the sales and marketing expenses, we have established a strong presence in offline services to our agent base and developers, which are quite mature. We believe that the percentage increase in sales and marketing expenses will remain stable, with only a minimal increase.

Lisa Thompson, Analyst

Does that add up to around the same amount as you spent in 2020 to be RMB640 million?

Warren Wen, Financial Controller

RMB640 million, what do you mean by that?

Lisa Thompson, Analyst

Total operating expenses.

Warren Wen, Financial Controller

Co-CEO anticipated there will be a minimum increase of overall operating expenses by about 10%.

Lisa Thompson, Analyst

Okay. And as far as gross margins expected to increase from this 8% going forward?

Warren Wen, Financial Controller

The Co-CEO anticipated there will be a minimum increase of this overall operating expenses by like 10% within 10%.

Pan Jiaorong, CFO

Co-CEO anticipated there will be a minimum increase of this overall operating expenses by like 10% within 10%.

Warren Wen, Financial Controller

The answer is really yes because we have launched the SaaS solution offering to our developer base with a much higher gross profit margin, as mentioned before. As the penetration rate and the percentage of this type of revenue increases in the years to come, we believe the overall gross profit margin will increase in the following quarters and years.

Pan Jiaorong, CFO

Warren Wen, Financial Controller

Lisa Thompson, Analyst

Okay, great. One last question. Just for us U.S. folks, could you describe the state of the Chinese real estate market now? Is it 100% back to normal, or are you still recovering from shutdowns?

Warren Wen, Financial Controller

Also, concerning our traditional commission-based revenue, we believe that with continued investment in service for our developer and agent base, we also expect the gross profit margin, as a percentage, will continue to increase in the years to come. One last question. Just for us U.S. folks, could you describe the state of the Chinese real estate market now? Is it 100% back to normal, or are you still recovering from shutdowns?

Pan Jiaorong, CFO

Our traditional commission-based revenue is expected to increase as we continue to invest in service for our developer and agent base, leading to an increase in gross profit margin as a percentage in the years ahead. Lisa Thompson, Analyst, asked about the current state of the Chinese real estate market, inquiring whether it has fully returned to normal or if recovery from shutdowns is still underway. Warren Wen, Financial Controller, responded in a foreign language.

Warren Wen, Financial Controller

I’m happy to say that the Chinese real estate market has essentially returned to normal. We expect that over the next few years, the transaction volume for the entire country will likely remain very high, estimated at around RMB15 trillion for new construction property and RMB6 trillion for second-hand property. Additionally, we have observed that the Chinese government is regulating the selling prices of both new construction and resale properties, which is significantly reducing developers' profit margins. Developers are working hard to establish their own sales teams to cut down on selling costs. This situation creates opportunities for our future growth, especially in the digitalization of our sales channels. Are there any other questions?

Operator, Operator

Sir, we do not have any questions at this moment. Back to you. We do not have any further questions at this moment. Back to you, sir.

Warren Wen, Financial Controller

Okay. That will conclude today's earnings release conference call. Thank you, operator.

Operator, Operator

Thank you. Ladies and gentlemen, that concludes our conference call for today. Thank you all for your participation. You may disconnect now.

Warren Wen, Financial Controller

Thank you.