Headquartered in Beijing, China, KE Holdings Inc. (BEKE) is an integrated online and offline platform for housing transactions and services in China. It operates through Existing Home Transaction Services, New Home Transaction Services, and Emerging and Other Services segments. BEKE’s focus on delivering unmatched service to its customers and improving the scalability on its platform, along with tailwinds from China’s robust economic growth after its recovery from the pandemic, bode well for the stock.

However, the housing broker was warned last month by the State Administration for Market Regulation (SAMR) for suspected anti-competitive practices. BEKE’s shares have retreated 23.1% over the past three months and 19.5% so far this year. 

Also, the recent death of its billionaire founder Zuo Hui, who built the company into China’s largest platform for housing services, has made investors nervous regarding the stock’s prospects. While BEKE’s strong business model and success in enhancing its online content for new home projects have helped it achieve strong topline growth, given the regulatory pressure now on the company, its near-term prospects look uncertain.

Here is what we think could influence BEKE’s performance in the coming months:

Impact of Regulatory Scrutiny

Last month, an antitrust probe was launched into BEKE—which is backed by Tencent Holdings Limited ADR (TCEHY)—by China’s market regulator SAMR. The regulator opened an investigation to ascertain  whether the housing broker forces real estate developers to list housing information only on its platforms and exploits its customers. As regulators continue to widen a clampdown on  the country’s tech sector, BEKE has become the latest target. Since the investigation has not yet been announced publicly, there is uncertainty in the market regarding what it could entail for the company. If the regulatory scrutiny intensifies in the coming days, it could drive  BEKE’s stock to further declines.

 Favorable Analyst Estimates

Analysts expect BEKE’s revenues to increase 39.1% next quarter (ending September 2021), 28.3% in 2021, and 22.3% next year. The company’s EPS is expected to rise 71.9% year-over-year to $0.98 in the current year, and 40.8% from its  year-ago value to $1.38 in 2022. The Street expects BEKE’s EPS to increase at a 4.8% annualized rate over the next five years. BEKE surpassed  consensus EPS estimates in three of the trailing four quarters.

Mixed Financials

BEKE’s revenue increased 190.7% year-over-year to RMB20.7 billion ($3.2 billion) in the first quarter, ended March 31, 2021. This was attributable primarily to 224.2% GTV growth to RMB1,069.6 billion ($163.3 billion) over this period. Its net income came in at RMB1,059 million ($162 million), compared to a RMB1,231 million ($189.93 million) net loss in the first quarter of 2020. However, the company’s total operating expenses rose 80.9% year-over-year to RMB3.8 billion ($0.6 billion).

Its 25.2% trailing-12-month gross profit margin  is 61.3% lower than the 65.1% industry average. BEKE’s net income margin and EBITDA margin of 6% and 8.2%, respectively, are 11% and 54.8% lower than their industry averages. Furthermore,  its 6.8% levered free cash flow margin is 79.7% lower than the 33.5% industry average. However, its 1% and 12.8% respective  asset turnover ratio and ROE compare favorably with the 0.1% and 2.8% industry averages.

Consensus Price Target Indicates Potential Upside

Currently trading at $49.53, analysts expect the stock to hit $67.81 in the near term, indicating a 36.9% potential upside. Their price targets range from a low of $21.53 to a high of $96.29.

POWR Ratings Reflect Uncertainty

BEKE has an overall C rating, which translates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with the weighting of each optimized to improve overall performance.

Our proprietary rating system also evaluates each stock based on eight different categories. BEKE has a C grade for Quality. The stock’s mixed profitability is in sync with this grade.

The  company has a C Momentum grade, reflective of its price returns year-to-date.

In terms of Sentiment Grade, BEKE has a B. This is in sync with analysts’ expectations regarding  its earnings and revenue growth.

In addition to the grades we’ve highlighted, one can check out additional BEKE ratings for Stability, Growth, and Value here. BEKE is ranked #24 of 44 stocks in the D-rated Real Estate Services industry.

Click here to view the top-rated stocks in the Real Estate Services industry.

Bottom Line

A robust property market in China has bolstered BEKE’s home transactions, thereby increasing the revenue it derives from its platform services. However, the recent death of the company’s founder and news of the antitrust investigation into the company have added uncertainties to the company’s prospects. So, we think investors should wait for the situation to stabilize before investing in the stock.

BEKE shares rose $0.67 (+1.35%) in premarket trading Wednesday. Year-to-date, BEKE has declined -18.43%, versus a 14.01% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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