Fangdd Network Group Ltd. (DUO) Q1 2021 Earnings Report, Transcript and Summary

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 all 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 a 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 call release – earnings press 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 the 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.

[Foreign language] Let me translate this part. Hello, everyone, and welcome to our first quarter 2021 earnings call. I would like to start off the call with a real – 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 increasing focus on improving their turnover rates and utilizing various channels to reduce their inventories. According to the National Bureau of Statistics, the feel of China’s commercial housing sales reached RMB17.4 trillion in 2020, up by 8.7% year-over-year. Meanwhile, scale of the new construction property market continues to grow. Looking ahead, the top line growth rates for average sales in 2021 is 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 – they are focused more on enhancing their ability to navigate various market channels in order to reduce their inventories and further accelerate – and accelerate their turnover rates. Second, the regulations implemented along restrictions – purchase restrictions and the sales restrictions, as well as centralized land sales, which have led to a rapid decline in developers’ profit margins. As of adopt, developers’ home demands now including loaning their market expenses and reducing their reliance on distribution channels. According to the win date, the real estate industry’s overall net profit margin in 2020 was 9.85%, down by 1.9 – a full 9 percentage points to the prior-year period. Meanwhile, in the industry’s net profit margins continued to decline in 2020 to reach its lowest level since 2015. Introduced in the first quarter, the Ministry of Natural Resources centralized land sale. Our land supplier has continued to drive up land’s price according to Kenny’s data. And to monitor safety, the premium rate of the land transaction jumped to over 25% in April 2021. Against the backdrop of declining net profit margins, increasing land costs, and the rising rates in the sales channels for new construction properties, developers’ increasing need to improve their efficiencies while reducing our their costs. Suddenly, developers are actively trying to transform their business models from real estate development to real estate services. Now, accomplished this. Developers are focused on experiencing their digitalization capabilities while help reaching more synergies and the derivative within their digital services. And the nature of the real estate industry’s interests around the property inventory. The profit drives of real estate companies are shifting from property investment and the sales to assets operations and services. This conviction – this transition requires real estate companies to transform their traditional development businesses into a more refined service-oriented model and does – this is completely dependent on their company’s digitalization capabilities. Typical real estate companies, such as Country Garden, Zi Zin, Holding and Longfor Properties have all set up digital development center to build their own digital ecosystem. Fourth, in the resale property markets of the first and the second-tier city. Commission-based and city renovation businesses are starting to mature and generate consistent profits. And China’s real estate markets continue to mature. Resale property transactions will become the main growth driver for real estate marketing in increasing number of cities. For example, in the old megacity in Yangtze River Delta. Shanghai’s real 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 separations 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 the market volume and transaction activities in 2020. Also, 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 the China renovation businesses. In the first quarter of 2021, we remained committed to our growth strategy and that’s continued to focus under the recommend of 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 process of standardization 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. First, for our new construction property’s SaaS-based business, we’ll remain so – we’ll remain the focus on utilizing our uncentralized model to improve efficiencies and the profitability. Currently, our competitors are boosting their based cost due to transaction volume, then they’ll use advanced commission payments. However, we have chosen not to use our own fund for advanced commission payments. If they feel their impact, 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. In turn, nevertheless, we believe that our decision for growth on advanced commission payments will allow us to avoid the bad debts and the low IRR from advanced commission payment in the long-term, which is the most conducive to the healthy development of our company going forward. In this quarter, we actively research 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 the effective growth of our gross profit. In the first quarter, number of new construction property projects on our platform was 1,941, and distribution revenue was RMB270 million. Second, without our property cloud SaaS solution to address developers’ increasing needs for digital marketing solutions. In the first quarter, we continue to refine, upgrade our SaaS solution at year-end launch pilot partnerships with 1,000s of teams developers. We expect this partnership with cash-generating revenues in the second quarter of 2021. In the first quarter, we introduced a series of new features to enable developers to offline sales teams to quickly assess agent services. This feature includes smart agency’s recommendations, agency information, and agent online stores. Meanwhile, we’re still rolling out multiple new features on our property cloud app, including private network marketing tool to help support developers in their generation of leading stream and short-form radio continent for customer acquisition, as well as their creation of online and a real property billings. As a result, we continue to expand our cooperation with several key developers in pilot projects billings. As a result – billions through our property cloud solution by the end of the first quarter, we have 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 the Country Garden, China Vanke, Sunac China Holding, and the Poly Real, China Poly Group, Greenland Holding and Ark Properties. Third, our resale property business initiatives had to be spent 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. In addition, Yangtze pioneered an industry-leading technology-enabled franchise system while we established an innovation service model in the resale property transaction service space through our team housing projects. Both of these initiatives achieved rapid business expansions in the period. During the first quarter, revenue from our resale properties segment reached RMB18.8 million and increased by 183.6% on the sequential basis. Looking ahead, we expand this segment to retain its rapid growth trend in the quarter – in the second quarter of 2021. In the first quarter, Yangtze expanded into Shanghai-centered network to cover 565 cooperative and the franchise agency national-wide and will add 5,086 agents. Meanwhile, there are 41 resale properties and transaction service centers, which provide post-construction service for 1,441 partnered agencies. In the first quarter, our team how to protect began to gradually expand his survey scale with its single month revenue exceeding RMB5 million [Technical Difficulty] time ever. And its property as of premium rate reaching 15% to 20%. Meanwhile, our platform average turnover period of the property listing was 22 days while our property appreciation rate and the transaction efficiency was also significantly higher than the industry at an average level. As we continue expanding our businesses, we also recognize the importance of cost straight 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 [ph] 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, our new business initiatives, and the entry business. In this role, Mr. Liu tries to focus on integrating both internal and external resources to accelerate our business expansion. For our new construction property business, we have appointed six outstanding talent from [indiscernible] to serve as general managers as our operations in different cities. This appointment will further enhance our ability to adopt to a rapid digital evolution of the new construction property market. Lastly, please allow me to share our update on our current outlook and expectation. For the second quarter of 2021, we will optimize our products and services to maintain stable investment of our new construction property business as we improve our operating section efficiency and growth margins. Therefore, we expect our new construction property business revenue to be between RMB314 million and RMB370 million in the second quarter. As we continue to expand this more collaboration with real estate developers to our property cloud SaaS solutions, we expect to have 50 developers further granting the broadest capabilities and the launch of a more offline partnership with Centaline in 18 cities. As such, we expect our SaaS solution to start generating revenues in the second quarter of 2021. And our research our resale property business is entering a period of growth and development. We believe that this biggest business is still scaling and the closest GMV will achieve positive growth in the second quarter. Meanwhile, we expect that our resale property business will 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 to RMB420 million in the second quarter of 2021. This is based on our current review of the marketing environment, which are subject to change. With that, I will turn the call over to our CFO, Ms. Pan Jiaorong to review this quarter’s financial results.

[Foreign language] 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 continue to optimize our revenue mix and prioritize that generation of revenue from value-added services and the 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 and products to fulfill the market demand for advanced conversion payments. Cost of revenue for the first quarter or 2021 increased by 15.7% to RMB 257.7 million from RMB272.2 million in the fiscal year of 2020. This increase was due to a highly commissioned fee payable to agents from the services they rendered, resulting from the increase in commissions from transactions. In addition, we also recorded an increased cost related to the various SaaS solutions that we offer to market participants in the first quarter or 2021 to further diversify our revenue – our future revenue streams. Gross profit in the fourth 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 basis 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 fourth quarter of 2021 decreased by 25.9% to RMB140.3 million, which includes – included share-based compensation expenses of RMB11.9 million from RMB189.4 million in the same period of 2020, which 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 1.4 million in the same period of 2020. This increase was merely due to our increased spending on brand promotion and marketing activities related to our new SaaS solution that we owe from our various 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 the decreases in share-based compensation expenses and the personnel-related expenses falling our decision to shift our focus from expanding our product development team to optimizing our product development team’s operating efficiency and prioritizing the development of our SaaS solutions. General and other mainstream expenses in the fourth quarter of 2021 were 65.2 million, compared to RMB293.1 million in the same period of 2020. This decrease was due to the decrease in the 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 attributable both to the ordinary share 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 have cash and cash equivalents, restricted cash, and short-term investment 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 activity was RMB4.8 million. This concludes our prepared remarks for today. Operator, we are now ready to take questions.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] 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 a little bit – I would 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. [Foreign language] Pan Jiaorong will give you the answer to your questions. Thank you, Lisa.

[Foreign language] Last year, cooperation with the banks of supply chain’s financial, we have cooperated with about seven banks and it’s about 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? [Foreign language]

[Foreign language] Okay. It is also expanding your cooperative initiative in the form of cooperation including the ATS form. So, we still try to find some new ways to do this of supply chain financial.

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

[Foreign language] Okay. In the short term, the anchors over these large companies who have forced the market to expand to the public advanced commission payments increased commission rates and stimulated a price war with the agents and their agencies. For the long-term use, the company’s own funds for other advanced commission payments will boost its closed-loop transactions of new transactions, a transaction – new construction properties. However, considering that damage from commission repayments and low AR of the payments, the company will focus on its supply chain financial product. This goes back a combined to its combination of the risk control at developments. This will all have high-quality brand developers, and the high-quality projects will use this product. I think it will give a better impact to our business. But we have to do a great job on the risk control.

Okay. Thank you. About the second quarter, I expect we should expect increasing gross margins. But are you also going to be spending, or will the net loss decrease from Q1? [Foreign language]

[Foreign language] In the second quarter, we will adapt a proportion of the revenue in our business constructor. Like SaaS, we began to generate revenue for the second – for the resale property and constructions business, we also grew rapidly. For the new construction business, we are also pursuing efficiencies. Like we mentioned in the ER and in the script, gross profit will be raised. The company’s profitability will go up.

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 get quite fully 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? [Foreign language]

[Foreign language] It’s not quite convenient to answer that as – that will take the forecast now. But proportion of the SaaS solutions and the second – resale property constructions of our business, their gross profit is relatively high. So we can allot that in the future. Our gross margin will be increased, and the revenue will go better. [Foreign language] Increasing investing in the staff and the high margin investment in the resale of construction business, I think this is a big market and that is a window of the digitalization. So, we’re seeing in the future after we’ve more investing this to rapidly increase business, we feel – we will enjoy a better earning in the future.

Okay. As far as the SaaS business, do you feel already that it’s going to be successful or if there’s still some risk that customers won’t be interested? [Foreign language]

[Foreign language] We believe that in the new construction business, the market has entered a fierce competition and the market scale will enter a bottleneck period, and developer built its own digitalization – digitalize the channel. But we will insist to our gross profit and gross margin, and distribution efficiencies. And we invite them all in the SaaS solution where we invest, the skills of R&D and market-oriented production. But innovation is still uncertain, but we still have confidence about the field. In the ratio of construction business, from the cultivation period to the growth has stayed from the cultivated period to growth period. The urban renovation and the city renovation has also into a state of both income and profit growth. So, we think that is the answer for your questions.

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

Thank you, Lisa.

Thank you. [Operator Instructions] All right. As there are no further questions, so with that, ladies and gentlemen, we will conclude our conference for today. Thank you participating. You may all disconnect.