Fangdd Network Group Ltd. (DUO) Q2 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to FangDD Network Group Limited Second Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. After management's prepared remarks, we will have a question-and-answer session. Please note 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 sir.

Thank you, operator. Hello everyone, and thank you all for joining us on today's call. The company has announced its second-quarter 2020 results today and earnings release is now available on the company's IR website. And today, you will hear from our co-CEO, Mr. Zeng Xi, who will start the call with a review of our progress and the current industry dynamics and the details of our development strategies in this quarter. 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 the 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 measurements -- 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 filings with the SEC. With that, I will now turn the call over to our co-CEO, Mr. Zeng Xi. Please go ahead, sir.

[Foreign language]

Hello, everyone. This is Zeng Xi, and welcome to our earnings call for the second quarter of 2020.

[Foreign language]

And following the outbreak of COVID-19 in the first quarter, the pandemic in China has been effectively brought under control in the second quarter. And since May, Chinese economy has started to recover.

[Foreign language]

Specifically, the real estate market also started to recover across the board in the second quarter. The recovery has unleashed a backlog of the pent-up market demand in April which has driven the growth of real estate transaction services market as well as the penetration rate of agent services. According to the Frost & Sullivan report, the total realized transaction value facilitated through agents in China is expected to grow at a CAGR of 14.8% till 2023, while the total property transaction value in China is only projected to grow at a CAGR of 9.3%. The increase in penetration of agent services will also expand the real estate transaction service market. The total commission revenue from the residential property transaction in China is expected to grow at a CAGR a 22.6%, while the scale of a real estate transaction is expected to reach RMB13.5 trillion.

[Foreign language]

With the increasing penetration of agent services, the real estate industry now has more operational platforms and capital funding than before. Meanwhile, the best agents in China are now polarized into two different categories, the leading large-scale agencies and small and medium-sized agencies. Based on our observation, over 40% of agencies in first and second-tier cities that we cover are small and medium-sized agencies. In comparison, independent, small and medium-sized agencies account for more than 85% of the real estate agency market in the U.S. Based on the comparison, we expect there is a significant headroom for small and medium-sized agencies to grow in China in terms of quantity and quality. In fact, since the pandemic, smaller agencies have been flourishing into the platform, thanks to their distinct competitive advantages including the flexibility of their business operations, their ability to organize as one cohesive unit and operate aggressively and the lower cost of running a leaner operation. At the same time, they also have obvious weaknesses such as their inability to digitize their operations with SaaS solutions, lack of a brand endorsement to retain customers and limited resources, making them susceptible to market volatility. In light of these characteristics, we continue to enhancing our value proposition to small and medium-sized agencies to sharpen their competitive edges, while addressing their weaknesses. As a result, we recorded an inflow of the small and medium-sized agencies to our platform in the second quarter which resulted in the significant growth in the number of active agency, agents on our platform. During the quarter, small and medium-sized agency accounted for 85% of our closed-loop transactions, while we continue to serve larger-scale agencies. Such achievement has fortified our position as the largest transaction platform for small and medium-sized agencies in China.

[Foreign Language]

We remain to our commitment to improving agency's stickiness to our platform through our SaaS offerings. During this quarter, we continue to make our total property sale solution free for agencies, while introducing updates to address the needs of small and medium-sized agencies.

[Foreign Language]

First, we updated our total property sales SaaS solution to help small and medium-sized agency owners, effectively managed their agents online and improved their efficiency in daily operations and customer acquisitions. The services that our solution offers include customer acquisition ranking of agency's private network as well as data analysis of media promotions, automatic call follow-ups and online training. This service is providing agency owners with real-time insights into the operation status of their own agents.

[Foreign Language]

Second, we continue to strengthen our total property sales SaaS solution's capability in utilizing agent's private connections and friends' network for marketing. This effort allowed us to effectively distribute our marketing information and material and integrate WeChat and other social media platform resources to enhance agents' ability to engage and convert their customers. During the second quarter, our online shop generated 1.2 million sales lease per month on average.

[Foreign Language]

Certainly, we also upgraded our SaaS solutions and technology to enable agencies to conduct online resale property business, where the upgrade of our solution is providing online data analysis for business management, cash flow and agent management for agency owners. In addition, we also rolled out an online transaction module, Duoduo transaction, to digitize the full process of resale property transaction service.

[Foreign language]

The optimization of our total property sales SaaS solution helped us to further increase our agency stickiness and loyalty which, in return, magnified our network effect. In addition, by utilizing our SaaS solutions to empower small and medium-sized agencies, we improved their operational efficiencies. The number of registrations on our platform as of 30 June, 2020 was 1.42 million, representing an increase of 32% from 1.07 million as of June 30, 2019. Moreover, the number of active agencies on our platform reached 64,000 in the second quarter. The number of active agents on our platform in the second quarter of 2020 was 265,000, representing an increase of 26.9% from 209,500 in the same period of 2019. Notably, the number of agencies on our preferred agent alliance network further increased to 27,900.

[Foreign language]

Additionally, according to the National Bureau of Statistics, the total volume of real estate transactions in China in 2019 was RMB120 trillion. Based on the data from Frost & Sullivan, the penetration rate of agent services in the new construction property market in 2018 was 15.3%. Meanwhile, the latest research data from Freedom Research Institute show that the key 20 cities in China including all our Tier 1, all four Tier 1 cities had agent service penetration rate of more than 40% in 2019. These statistics show that as the penetration rate of agent services increased in new construction property transactions, this market will become a central point of contention for players in the industry. As one of the first agent service platform with new construction property business in China, we have established a competitive edge on our agency base and developed partnerships. In 2020, due to the impact of the pandemic, agencies are in need of commission fee payment in advance of developers' payment. In light of this demand, we have integrated supply chain financing products, co-developed with banks into our SaaS platform. And the integration has started to gain a competitive edge. Also, they are not included in our second-quarter results yet.

[Foreign language]

We remained focused on the real growth engines of agencies and the listings in the new construction properties. In line with this strategic focus, we continue to attract small and medium-sized agencies, while increasing the transaction matchmaking efficiency for agencies on the platform with a better increase in the number of small and medium-sized agencies. We further deepened its collaboration with property developers. And this is illustrated by a strategic partnership with the presence of top-tier developers. Our multidimensional product sales strategy adjust their pain points of property sales for the property developers and increases our coverage for residential properties. In the second quarter of 2020, the number of new construction property projects, that is the new properties, increased by 24.9% year over year and 22.76% quarter over quarter to 2,918.

[Foreign language]

Facing with this marketing demand for SaaS commission payment service from agencies on our platform, Fangduoduo launched Sohinbao, a line of credit product, based on its 9 years of cumulative transaction data and experience in online management of the closed-loop transactions. This product aims to solve the pain point of constrained credit distributions from banks to small and medium-sized agencies, due to they cannot, the banks cannot control their risk on their potential borrowers. Our platform enable banks to assess and evaluate historical transactional data, helping agency receive funding sources through supply chain financing products of banks. That's fulfilling agency's needs for fast commission payment in advance of the developer payment. As of June 30, 2020, we have collaborated with several commercial, major several commercial banks to grant credit to our agencies with a total credit line of RMB2 billion. For the first time ever, we help small and medium-sized agency receive bank credit.

[Foreign language]

At the same time, Fangduoduo leverage its transaction service capability to keep developing innovative, value-added services, helping agencies on the platform diversify their business operations, while generating new monetization channels for our marketplace. For example, to assist the property developer in monetizing their parking space assets with low turnovers, we continue to refine our parking space transaction service to tap into the RMB800 billion parking space market in China. In the second quarter, Fangduoduo expanded its parking space service to eight additional cities including Wuxi, Changzhou, Fuzhou and Ningbo. The number of listed parking spaces on our platform increased by 37.8% sequentially to over 13,500, and revenue generated from commission fees on parking space transaction increased by 53% quarter over quarter to RMB54.62 million.

[Foreign language]

Furthermore to ensure that small and medium-sized agency have access to standardized resale property transaction service, we integrated financial participants into transaction service centers, either established or authorized by us. This asset streamlines the transaction service or agencies, while enabling monetization for post transaction services. In the second quarter, Fangduoduo's authorized transaction service center network has covered 11 cities with 31 service centers from 14 transaction center brands. And this facility provides systematic online administration of the transactional orders for small and medium-sized agencies by monitoring and recording this off-line transaction stream, enable the integration of financial products in the property transactions thus building monetization channel in serving the post transaction market.

[Foreign language]

During the 13th National People's Congress in May 2020, the government online facility upgrading the old urban properties, as the key focus on the business industry. Following this national government policy, we launched renovation and transaction services designed for old urban property by utilizing and analyzing our massive agency database by upgrading old urban properties with a professional renovation services. The initiatives accelerated the transaction turnover and boosted the transaction value of old urban properties. And currently, we have extended this project to eight core commercial areas in Shanghai in collaboration with thousands of agencies on nearly 1000 old urban property listings.

[Foreign language]

We have made reference to the open door business of -- open door and effective business office though and we foresee that this business -- this new business will become a strong growth point of our business in the period and quarters to come.

[Foreign language]

As a result of the pandemic, market demand was suspended during the first quarter, while the backlog of the pent-up market demand was unleashed in April. The real estate industry began its actual recovery in late May and started to return to its normal transaction level in June. At the same time, we recorded a all-time high in the number of active agencies on our platform, demonstrating our platform's attractiveness to small and medium-sized agencies.

[Foreign language]

Now we turn to an overview of the third quarter with the COVID-19 generally being brought under control in the second quarter of 2020 in China. Agencies have maintained their preferences to conduct their business online. We will capitalize on this trend and expand our agency base with our comprehensive SaaS product offerings, while serving larger-scale agencies. We will also focus on upgrading our product that can address the pain points of small and medium-sized agencies. Through financial products from commercial banks, we aim to optimize the service experience for our new construction product agencies in commission payments and empower resale property transaction with more financing liquidity in, all in an effort to enhance the overall transaction volume on our platform.

[Foreign language]

We will also continue to solidify our foothold in the new construction residential property space. Through in-depth collaboration with the developers, we will be able to generate more property listing for agencies which will, in turn, boost the number of property listing on our platform for more cities that have access to our services.

[Foreign language]

Meanwhile, we will keep optimizing our innovative products such as Surveycon, that is a parking space transaction service and [Foreign Language] a property renovation and resale service, in addition to exploring the commercial opportunity in products and services for properties that we, are already available on our platform.

[Foreign Language]

Given the competitive nature of agencies and limited resources, off-line, self-operated agencies would always have a conflict of interest with the platforms that have their own agents. This is why we have totally independent market business model to serve the property agencies on the platform. We collaborate with the larger-scale agencies in the robust industries, while attracting numerous small and medium-sized agencies. Based on our broad and diverse client base, we have established a leading service capability, empowering our agent, client agency users with SaaS solutions.

[Foreign Language]

Based on this expectation observation, we are currently forecasting our active agency and agent number will continue to grow in the coming quarter, and we're currently forecasting our revenue to be between RMB1.05 billion and RMB1.15 billion in the third quarter of 2020. And this forecast is based on our current view of the market environment which are subject to change.

[Foreign Language]

This concludes my remarks. I will hand the call to our CFO, Ms. Pan, to review our financial performance in this quarter.

[Foreign Language]

Okay. The CFO, Ms. Pan will provide a closer look into our second-quarter financial results. The revenue in the second quarter of 2020 decreased by -- decreased to RMB737.7 million. The decrease was due to the outbreak of COVID-19 in China and the resulting constraints imposed on our real estate agents activity which negatively impacted the ability of agents to facilitate business in the period. Although we have seen a gradual resumption of real estate agency business activities since April. The COVID-19 and its impact on the real estate market caused both the number of the transactions and GMV facilitated through our marketplace to decrease, both of which significantly impacted our revenue generation capability in the period. Nevertheless, as the outbreak has been gradually brought under control in China, real estate agents business activity has started to recover in turn. In fact, our revenue in June, single month, increased by 30.5 -- 35.9% year over year to RMB390 million.

[Foreign language]

Cost of revenue in the second quarter of 2020 decreased by 15.1% to RMB616.7 million from RMB726 million in the same period of 2019. This decrease was mainly attributable to a decrease in the commission fee payable to agents for the services they rendered, and which is -- which resulted from both the decreased commission from transaction -- the commission income from transactions and the decreased costs relating to -- and decreased costs of relating to various initiatives being offered to the agent during the period to overcome the negative impact of the COVID-19 pandemic.

[Foreign language]

Gross profit in the second quarter of 2020 decreased to RMB121 million, and the gross margin in the second quarter of 2020 was 16.4%.

[Foreign language]

Sales and marketing expense in the second quarter of 2020 decreased by 86.4% to RMB2.9 million from RMB21.3 million in the same period of 2019 primarily due to the reduction in spending on brand promotion and marketing activity to attract proper listings from activity to attract proper listings from real estate sellers to our marketplace.

[Foreign language]

Product development expenses in the second quarter of 2020 were RMB70.5 million, compared to RMB79.1 million in the same period of 2019. The decrease in product development expenses was mainly attributable to the company's shifting from expanding the team size to optimizing the operating efficiency of its product development team in response to the outbreak of COVID-19 which led to a decrease in personnel-related expenses in this period.

[Foreign language]

General and administrative expenses in the second quarter of 2020 were RMB80.5 million, compared to RMB55.3 million in the same period of 2019. The increase in our general and administrative expenses in this period included an increase of RMB9.6 million in share-based compensation expenses. The increase was also attributable to our increased headcount and various expenditures to both improve our corporate governance and ensure compliance with U.S. SEC rules as a U.S.-listed company as well as an increase to our account of provisions for doubtful debtors.

[Foreign language]

Net loss in the second quarter of 2020 was RMB14 million and excluding the share-based payment expenses, the non-GAAP net income in the second quarter of 2020 was RMB11.9 million.

[Foreign language]

The basic and diluted net loss per ADS in the second quarter of 2020 were both RMB0.18 and as of June 30, 2020, we had cash and cash equivalents, restricted cash and short-term investments of RMB950.2 million, short-term bank borrowings of RMB361.9 million, as well as unutilized banking facility of RMB297 million. For the second quarter of 2020, net cash used in operating activities was RMB62.2 million.

[Foreign Language]

We have also adopted a conservative business strategy during the pandemic. While we continue to expand our business, we reduced our working capital to only a third of the prior-year level. Meanwhile, we have fully utilized our competitive advantage in digitizing real estate transaction to build supply chain financing partnership with larger financial institutions during the first and second quarter of 2020. This partnership enabled us to leverage our partnered banks risk management capabilities to reduce our own risk exposure to credit risks and funding costs. In addition, this partnership also allowed us to enable the continuity of working capital supply on the platform, while helped us further strengthen our platform's value proposition to agencies. And also increase their loyalty and improve their sense of the security, while they operate on the platform.

[Foreign Language]

And this concludes our prepared remarks for today. And operator, we are now ready to take questions.

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator instructions] Our first question comes from the line of Wei Xiong from UBS. Please ask your question.

[Foreign Language] My question is that based on recent business development that we have observed in July and August, could management share your view on the second half market outlook, especially your thoughts on any change in the competitive landscape? For example, have you seen the competition from other players getting more intensified? And if there are, what's your strategy to deal with it? Thank you.

[Foreign language] Okay. Let me translate into English. As we have mentioned before, we have reported a non-GAAP net income for the second quarter. We believe, we are now -- have turnaround for the second quarter, where we will have more revenue generated in the -- we expect to generate more revenue in the third quarter. And in the second quarter, we mainly focus on providing financing product to make payment to the agencies in advance of the development payments, so that we cooperate with various banks and financial institutions to resolve this. And we -- in view of competition dynamics, we have seen -- our observation is all the competitors has their own advantage. For example, the banker mainly rely on its managerial capability on the offline shops and its own balance sheet to pay commission to the connected agents in advance of developers' payments, so that they see a significant growth in their revenue generation. However, we will persist on our own independent platform and development driver. We do not open our offline shop. We do not employ a single real estate agent. We focus on the new construction property market and serve various tech-enabled small and medium-sized agencies in China. And on the other side, on the developer side, we also see a significant growth in our new construction property listings in the second quarter. So we believe the key drivers for the growth of our platform. The first, the connection with various real estate transactions, service agencies and agents. And the second is the property listings and the third is introduction of financing products to provide the financing opportunity and financing business to the real estate transaction agents, so that we improve their loyalty and sense of security. And therefore, we believe, also, there is a pressure from competition, but the market size is really enormous. We will continue to persist on our own way in developing an independent platform and stick to our core value and competitive edge. So we believe the, our vision and our expectation for the third quarter and the second half of 2020 will achieve. [Foreign language]

Okay. Let me translate this. The CEO, co-CEO, Mr. Duan Yi has further remarks to include to the answer. And it's our observation that, based on our observation on the banker's prospectus and all the SEC filings, it is proven that the new property market, market size is really enormous. And it is proven that our judgment of the new property market and the penetration of real estate agent to the new property market will be very huge. And therefore, we also, we also proved to have a significant room to grow. And upon the listing of a banker, we and banker will together educate the developer to use a channel like us to sell their property. And because of the current strengthened real estate government policy, we believe if the developer would like to reduce their marketing expenses, then use the sales channel like us, will be the best choice for them. And also, we also, therefore, see an increase in the take rate to the property sold by us. And from the developer side, the developer also want to have another, an additional choice in addition to banker for their sales of properties by the real estate agents. And as we are different from bankers, the logic of a banker's operation is to control and manage the real estate agencies and agents like their own operations, their own employee real estate agents, while we focus on empower and enable the medium- and small-sized agencies. So we see in the second quarter, there is a significant growth in the active agencies on our platform. So we, therefore, have strong confidence in the third quarter and the fourth quarter expected growth in our revenue and profit. And that is, that concludes our reply. Thanks. Operator, that concludes our reply.

[Operator instructions] There's no more question at this time. I'd now like to hand the conference back to today's presenters. Please continue.

If there is no further question then we will conclude our earnings call today. Thanks everyone.

Ladies and gentlemen, this conclude today's conference call. Thank you for participating. You may now disconnect.