Fangdd Network Group Ltd

NASDAQ:DUO

Earnings Call Transcript 2021-Q3

[Operator]

Ladies and gentlemen, thank you for standing by. And welcome to Fangdd Network Group Limited's Third 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.

I'd now like to turn the conference over to your host speaker today, Ms. Linda Li, the company's Director of Capital Markets. Please go ahead, Linda.

[Linda Li, Director of Capital Markets Department]

Thank you, operator. Hello everyone. And thank you all for joining us on today's call. The company has announced its third quarter 2021 financial results today. And earnings release is now available on our 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 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. And we will be making -- looking forward statements. Please also note that we will discuss non-GAAP measures today, which are more to 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 call co-CEO, Mr. Xi Zeng. Please go ahead, sir.

[Xi Zeng, Co-Founder, Co-CEO & Director]

Hello, everyone. And welcome to our third quarter 2021 earnings call. I would like to start the call with reviewing some of the changes and opportunities we reserved in the real estate market during the quarter.

First the real estate market is rapidly could off and expected to continue its downward trend in the short term. During the third quarter impact by the macroeconomic regulation and the tightening of the small gauge loans. The real estate market is rapidly crude off.

According to the National Bureau of Statistics, the total volume of the real estate transactions in China decreased by 14.1% year-over-year to RMB4.2 trading in the third quarter of 2021. According to data released by the Real Estate Industry Digitization Research Institution, total transaction volume for resell property in the Tier 1 cities decreased by 32% year-over-year in the third quarter of 2021.

The most notable year-over-year decrease occurred in Shenzhen, which saw a 81% decline in total transaction volume for resale property during the third quarter of 2021. Market sentiment has become more bearish and the developer credit risk has been reviewed to the market.

In the short term, the also ties have emphasized. Principle of keeping the real estate market stable and protecting the legitimate rights and interest of housing consumers, accelerating the launch of the pilot property tax reform schemes.

This suggests that the control and the regulation measures won't be relaxed significantly. And we believe that the near term focus of the government remains on stabilization, real estate market expectations. As a result, we believe the real estate market will continue its downward trajectory in addition as real estate developers are entering peak season for repayment of oversee debts. Their credit risk will further intensify.

Second, real estate developers increased investment in digital transformation despite the downward trend and the competitive landscape continues to evolve. With the arrow of a rational expansion driven by high leverage coming to the end. Differentiation among the developers continues to increase. And the industry faced declining margins and increasing competitions with high inventory levels.

Most real estate developers have realized that refined operations and management through digitalization is a long-term solution. According to the data released by the TMT post, more than 90% of the real estate developers participating in the serving increased investment in digital transformation in 2021. 26% of these developers increased their investment in digital transformation by more than 38% year-over-year. This data indicates the digital transformation remains an important area of investment for developers.

However, digital transformation of the real estate industry is still at an early stage of development and the competitive landscape is far for stable. Limited by the multiple factors such as transformation model options, the fundamental characteristics of the management and the liability of the talent.

Third, under the current context of the housing is for in not for speculation. Computation in the new property distribution market has intensified driven by excessive supply. Meanwhile, we are seeing a new market opportunities emerge from the real estate asset management service sector. And due to the General Office of the State Council issued the opinion accelerating the development of affordable rental housing. It is stated that idle and efficient commercial offices, factories, warehousing and the other non-residential buildings are allowed to be converted into affordable residential housing.

It also encourages Special Life's large-scale residential leasing enterprise to operate and manage affordable residential housing. According to the Wind [ph] data, ROE of Asia-listed companies in China was 11.25% in 2020, marking a historical low since the financial crisis in 2018. As a result, real estate developer has an organic need for asset realization for retire fund and stabilization of their ROE.

In addition, buyers are becoming more demanding in terms of service qualities and transaction transparency. As a result, under the current context that housing is for living in notable speculation, more innovation service will emerge as a result of the evolving needs of the government, developers and consumers, which will drive product innovation and development of diversified service for the real estate assets, professional operations with added services and more.

In a rapidly changing market environment, we continue to closely follow the evolving regulatory policies and client requirements to proactively adopt to change in the real estate market and agent service sector, implementing a number of initiatives, property adjustment, our strategic direction. Our initiatives include proactively reducing the distribution of new properties, enhancing risk control efforts, focusing on our SaaS business on key accounts and establishing a benchmark and quickly exploring the real estate as service business, while maintaining the efficiency of our operations.

We have adjusted our business skills, layout and the strategic direction to improve the robustness and clients of our business operations. At the same time, we have continued exploring growth opportunities for the future.

First, we adhere to maintaining client operations and focus on cost control. New response government regulations on data security and privacy. We migrated all our data to Huawei Cloud in the third quarter. We also conducted comprehensive reflection on our current product based on the regulatory requirements. And achieve book line in our management of users and agency information.

For agent service on our platform, we improved operational capabilities for agents to serve the need of focused market and customers through a couple of measures. On one hand, we conducted a comprehensive evaluation and optimization of our organizational and team structure. On the other hand, we enhanced cooperation and improved resources integration between different regions and areas. However, during the downward impact of the overall real estate industry, the total number of closed loop agents on our platform was 10,600 in the third quarter.

Second, in terms of new property distribution business, we proactively reduced of the scale of the new property distribution and enhanced our risk control. We focus on the business development in the Young River Delta, Guangdong, Fujian Guiyang, [Indiscernible] Hefei and other key provincial capital cities. At the same time, we trimmed down our service team in noncore cities.

For cooperation with developers, we also take initiatives to access credit risk, and focus on the reliable developers were ruling out higher-risk developers. During our corporation, related developers credit worthiness and market corresponding provision for bad debt in order to control credit risk.

Following the conclusion of our cooperation, we implement our pre-established internal procedures to manage developers with high credit risk with the aim of the mitigating the risk of default. We have developed a project evaluation index system based on the multiple criteria, including developer strengths, project gross margin, receivable, circle, commission split and so on.

Based on the evaluation results, we selected premium projects with productivity and profitability and allocate additional resources towards human resources, capital and technology for key projects. Due to the impact of the market downturn and our business model adjustments, cost loop GMV of new property with RMB9.3 billion and the number of new property projects served was 1,815 in the third quarter of 2021.

In terms of upgrading our business model for new properties, we established business capabilities for asset management service. We gradually explore possibilities for serving multiple categories in real estate assets. We have also continued to improve the capabilities for our personnel in business development capital debt and risk control to promote an implementation of high quality projects.

Third, for our Property SaaS Solution business, we focused on key accounts and establishing a benchmark. During the third quarter, we further developed our cooperation with [Indiscernible] and integrate [Indiscernible] internal sales management system with our C and B apps. Following this system integration, we launched our Fangdd office flagship stores in our TC app. This store aggregate real time information to Fangdd promotes -- for new for sales and CMIC [ph] with its internal system, allowing us to provide procedures, precision online marketing service, leveraging our platform, big data and analytics.

At the same time, Fangdd is able to manage customers through its self-operated system. Thus reducing the transition cost of cooperating with us by means of our SaaS solution. And as of the end of the third quarter, Fangdd had launched 30 property projects using our SaaS solution digital marketing service.

In addition, we added instant messaging and telephone consultation features to our SaaS system during the third quarter, enabling seamless connection between the home buyers, agents and property sales galleries. In the third quarter, our revenue from SaaS solution business increased by 38.8%, sequentially, to RMB3.2 million.

Fourth, we are quickly reacting to the rapid drive down of the property resale market in the 2 -- in 2 ways. On one hand, we implemented loss control measures to substantially reducing the scales of Yuancui business. On the other hand, we continue to execute our innovative asset service model in the resale property transaction service space through our working Tinghaozhu product. We have sustained the healthy development in this segment through accelerating property sales and optimizing our risk control model.

Under the impact of the marketing environment our closed loop resale property transaction was GMV was RMB5.9 billion in the third quarter.

Lastly, please allow me to share an update on our current outlook and expectations. In the fourth quarter, our overall business development will continue to be based on our platform for agents. In terms of our SaaS solutions business, we will continue to deepen our cooperation with key accounts to unleash our value in digital marketing after the system integration.

In terms of new property asset service. We will continue to execute our strict risk control measures to manage developer credit risk for our new property distribution business. At the same time, we will continue to develop our asset service for real estate categories. We will continue to revitalize our assets increase the scale of the project we serve, and drive improvement in our financial performances.

In terms of the resell property, we will maintain a reasonable pace of business development under the current marketing environment and ensure a sufficient supplier of the second of the resell housing as we refine our business model to achieve steadier development. Due to the downward trend of the industry environment, we face great uncertainty in the fourth quarter performances.

As a result, we expect our revenue in the first quarter to between RMB138 million and RMB150 million. This forecast only reflects our current preliminary view on the market and operational conditions, which are subject to change.

With that, I will turn the call over to our CFO, Mr. Jiaorong Pan to review this quarter's financial results.

[Jiaorong Pan]

Thank you, Xi. Now. I will provide a closer look at our third quarter financial results in 2021. Before I begin, please note that all numbers are in RMB terms unless otherwise noted.

Revenue in the third quarter of 2021 decreased by 57.8% to RMB169.2 million from RMB401.4 million in the second quarter of 2021. The sequential decrease was mainly due to several factors. First, the real estate market continued downturn led to a 48.5% sequential decrease in total closed loop GMV facilitated on our platform.

And second, our strategic adjustments to our business scale to manage the downturn in the real estate transaction market. For the new property transaction service business, with strategically reduced our business scale to avoid vicious competition for the resale property transaction service business. We subsequently reduced our NC business to avoid further losses in the third quarter.

Despite the current challenges, we continue to optimize revenue mix and prioritize the generation of revenue from value-added services and new business initiatives, including our SaaS solution for various platform participants. Revenue from SaaS solution increased by 38.8% to RMB3.2 million in the third quarter of 2021 from RMB2.3 million in the second quarter of 2021. The increase was primarily attributable to an increase in the number of new property projects, which will provide solutions for developers.

Total revenue in the third quarter of 2021 decreased by RMB51.8 million to RMB163.2 million from RMB338.9 million in the second quarter of 2021. The decrease was primarily due to the significant drop in revenue for both new property and resale property transaction services, which resulted in a decrease in the commission fees payable to agents from their service rendered.

Gross profit in the third quarter of 2021 decreased by 90.4% to RMB6 million from the RMB52.5 million in the second quarter of 2021. Gross margin in the third quarter of 2021 decreased to 3.5% from 15.6% in the second quarter of 2021. The decline was mainly due to our strategic reduction of our Yuancui business to cut -- losses and our strategic adjustments to reduce our business scale in resale property transaction and new property transactions.

Operating expenses in the third quarter of 2021, which included RMB11.7 million in share-based compensation expenses, increasing by 54.3% to RMB316.4 million from RMB205.1 million in the second quarter of 2021 which included RMB11.1 million in share-based compensation expenses.

Let's take a look at the breakdown of operating expenses for the third quarter of 2021. Sales and marketing expenses in the third quarter of 2021 decreased to RMB8.6 million from RMB13.1 million in the second quarter of 2021. The decrease was primarily due to optimization of compensation for the sales department by reducing spending on marketing activities related to new property transaction services, our reduction of the Yuancui business of our increased focus on new SaaS solutions and other value-added services offered to various platform participants in the third quarter of 2021.

Product development expenses in the third quarter of 2021 was RMB 40.3 million compared to RMB 64.5 million in the second quarter of 2021. This decrease was attributable to a decrease in personnel-related expenses following our decision to hold further investment in research and development for Yuancui and heightened focus on the research and development for our value-added services and SaaS solutions.

General and administrative expenses in the third quarter of 2021 was RMB267.5 million compared to RMB127.5 million in the second quarter of 2021. This increase was mainly due to 2 reasons. First, was the increase in provision of impairment on assets such as accounts receivable, billed from developers and other accounts receivable from project deposits to RMB201.9 million in the third quarter of 2021 from RMB79.1 million in the second quarter of 2021.

Second, based on our judgment regarding the continued downturn in the real estate transaction market. We reduced the redundant staff to improve our operating efficiency and optimize our composition of our staff structure, which increased the current quarter's severance expenses for the purpose of long-term expense savings.

Net loss was RMB355 million in the third quarter of 2021, which included the impairment of accounts receivable due from developers because of the tightened financial conditions as well as the impairment of goodwill intangible assets and accounts receivable due from the individual and the result of the company's substantial reductions of Yuancui business under the situation of continuous downturn of the resale property transaction market. This is compared to the net loss of RMB139 million in the second quarter of 2021.

Non-GAAP net loss was RMB 343.4 million in the third quarter of 2021, compared to a non-GAAP net loss of RMB127.9 million in the second quarter of 2021.

Basic and diluted net loss per American depository share in the quarter of 2021 was both RMB4.13. In comparison, our basic and diluted net loss contributable to ordinary shareholders per ADS in the second quarter of 2021 was both RMB1.64. Each ADS represents 25 of our Class A ordinary shares.

As the September 30, 2021, we had cash and cash equivalents, restricted cash and short term investment of RMB632.9 million. Short term bank borrowing of RMB 220.2 million and unutilized bank facilities of RMB180 million. We contributed to keep our cash flow at such level by increasing the cash inflow and reducing the cash outflows to improve our abilities of going concern.

On the third quarter of 2021, net cash used in operating activities decreased to be RMB12.8 million from RMB53 million in the second quarter of 2021, highly decreased about RMB40.2 million.

This concludes our prepared remarks for today. Operator, we are ready to take questions.

[Operator]

We have no further questions at this moment. Ladies and gentlemen, that concludes our conference call for today. Thank you all for your participation. You may disconnect your lines now.