Key Takeaways

The integration of AI and digital tools is expected to enhance customer satisfaction and operational efficiency, potentially boosting revenue and margins.
Expansion into home renovation and rentals promises diversified revenue growth, supported by increased store and agent networks enhancing market penetration.
KE Holdings faces growth risks from real estate market challenges, costly AI investments, and expanding services amid unstable conditions.

Catalysts

About KE Holdings

Through its subsidiaries, engages in operating an integrated online and offline platform for housing transactions and services in the People's Republic of China.What are the underlying business or industry changes driving this perspective?

The implementation of AI technologies across KE Holdings' operations is expected to significantly enhance customer experience and service quality, potentially increasing revenue through improved customer satisfaction and retention.
Expansion of the company's store and agent network, with an 18.3% increase in active stores and a 12.1% increase in agents, is likely to enhance market penetration and drive revenue growth through increased transaction volume.
The company's strategic focus on the integration of housing transaction services and home renovation businesses could boost revenue and net margins, as this integration leverages existing customer networks to expand service offerings.
KE Holdings' emphasis on digital tools and refined operational management is anticipated to improve operational efficiency, leading to potential margin expansion as costs are streamlined across the platform.
With a significant increase in revenue from new business segments like home renovation and rentals, which rose by 36% and 135% respectively, there is a promising outlook for diversified revenue streams to support overall earnings growth.

KE Holdings Earnings and Revenue Growth

KE Holdings Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

This narrative explores a more optimistic perspective on KE Holdings compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
The bullish analysts are assuming KE Holdings's revenue will grow by 17.8% annually over the next 3 years.
The bullish analysts assume that profit margins will increase from 4.3% today to 6.4% in 3 years time.
The bullish analysts expect earnings to reach CN¥9.7 billion (and earnings per share of CN¥12.79) by about May 2028, up from CN¥4.1 billion today. The analysts are largely in agreement about this estimate.
In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 38.6x on those 2028 earnings, down from 43.8x today. This future PE is greater than the current PE for the US Real Estate industry at 25.2x.
Analysts expect the number of shares outstanding to grow by 0.92% per year for the next 3 years.
To value all of this in today's terms, we will use a discount rate of 8.78%, as per the Simply Wall St company report.

KE Holdings Future Earnings Per Share Growth

Risks

What could happen that would invalidate this narrative?

The uncertainty and price stabilization challenges in China's real estate market pose risks to customer decision-making, which could impact KE Holdings' ability to grow revenues.
The rising cost of making wrong decisions in home-buying processes might slow down the transaction speed, potentially affecting net margins and revenue growth for the company.
The company's reliance on AI to address these challenges while promising could lead to high investment costs and uncertain returns, potentially impacting net earnings.
The increased demand for skilled agents amidst a shifting real estate landscape could strain resources, leading to higher operating expenses and affecting overall profitability.
The company's ambitious expansion in home renovation and rental services may face risks due to the current market conditions, which could threaten revenue stability and growth in the coming years.

Valuation

How have all the factors above been brought together to estimate a fair value?

The assumed bullish price target for KE Holdings is $32.67, which represents two standard deviations above the consensus price target of $25.85. This valuation is based on what can be assumed as the expectations of KE Holdings's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $33.05, and the most bearish reporting a price target of just $18.58.
In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be CN¥152.6 billion, earnings will come to CN¥9.7 billion, and it would be trading on a PE ratio of 38.6x, assuming you use a discount rate of 8.8%.
Given the current share price of $20.55, the bullish analyst price target of $32.67 is 37.1% higher.
We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.

AI And Digital Integration Will Upgrade Home Transactions And Renovations

AI And Digital Integration Will Upgrade Home Transactions And Renovations

AI And Digital Integration Will Upgrade Home Transactions And Renovations

AI And Digital Integration Will Upgrade Home Transactions And Renovations