Breakingviews - China's Zillow builds hope for hard-up developers

A man wearing a face mask walks past apartments with a Chinese flag, following new cases of the coronavirus disease (COVID-19) in the country, in Beijing, China January 11, 2021.

HONG KONG (Reuters Breakingviews) - Ke’s success selling homes is building the wrong kind of attention. The $77 billion Chinese real estate broker’s adjusted net profit more than tripled last year, despite Beijing’s hawkish tone on frothy prices. Its shares are trading more than 200% above the price set in its August initial public offering in New York and value the company at more than U.S. peer Zillow and Australia’s REA combined. But hard-up property developers inspired to muscle in on the action might be disappointed.

The Tencent- and SoftBank-backed company offers sales, rentals, renovations and loans to customers on- and offline. With a system similar to the Multiple Listing Service database built in the United States which relies on the cooperation of real estate brokers, Ke boasts half a million agents from nearly 300 brokerages. Purchases of new homes through Ke made up around 10% of China’s total sales last year, Breakingviews calculates.

Big developers are trying to replicate the model. They are desperate to diversify and build new income streams as official curbs on leverage ratios crimp their core business. Evergrande is partnering with 21 million brokers across China to transform its online home-selling app into one that markets third-party properties alongside its own and will even flog new and used cars, according to Chinese publication Yicai. Its strong brand will give it an edge in a market where fake listings are a big problem.

The prize is superior profitability and valuation multiples. Ke’s 8.1% adjusted net profit margin in 2020 compares to the less than 6% Evergrande generated in the six months to June, for example. The broker’s enterprise trades on 49 times its forecast EBITDA for the next 12-months, per Refinitiv’s Eikon. That’s slightly lower than Zillow but much higher than Evergrande’s 6 times.

Yet Ke’s success in a highly fragmented market may be hard to replicate. The broker’s extensive network of its own exclusive agents gives it a big lead. Developers trying to build out their existing in-house brokerage service also need to convince competitors to surrender data. In short, Ke’s achievements are hard to reconstruct.


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