Beike: Lower 2024 Q1 Forecast Given Lackluster Housing Sales, but ADRs Underpriced

We cut our first-quarter 2024 assumptions for narrow-moat KE Holdings, or Beike, after reviewing the growth outlook of services for new homes, existing homes, and home renovation. Sluggish housing sales for year-to-February 2024, coupled with management’s cautious tone, have reaffirmed our view of worse-than-expected top-line growth. Hence, we lower our commission income forecasts for new homes and existing ones by a respective 22% and 10% for the first quarter. We also model a more conservative home renovation revenue for the same period due to low project delivery. These revisions translate to a 22% decline in our non-GAAP net profit estimate for the first quarter, but we foresee gradual home demand recovery in the second half of 2024 to uphold full-year earnings. Hence, we keep our fair value estimate for Beike at USD 17.00 per ADR (HKD 44.20 per share), and view its ADRs as slightly undervalued.