KE Holdings: the 'Zillow of China'

One of the most interesting areas in the market is "real estate tech". Just like so many industries have been disrupted by technology, the same is happening with real estate. Of course, the process is slower since there are so many different parts of the homebuying process such as listings, agents, mortgages, titles, etc. Additionally, regulations differ in states and countries.

Yet, given the size and importance of this market, it's inevitable that companies emerge who will bring increased liquidity, transparency, and speed to the buying and selling process. While, there are many companies in the U.S. targeting this market such as Zillow (Nasdaq: Z), Redfin (Nasdaq: RDFN), and OpenDoor (Nasdaq: OPEN), there is also a Chinese company that is hoping to do the same in China - KE Holdings (Nasdaq: BEKE).

KE Holdings

Like the U.S., property prices in China are at a record high having increased 6% in 2020 with analysts expecting 5% compound growth over the next five years. Real estate accounts for 20% of China's GDP. Similar to the U.S., the real estate market is controlled by local brokers and agents who are protective and not eager to give up control which would happen if it becomes disrupted by technology.

However, KE Holdings is attempting to slowly modernize the industry by providing public data about listings and previous transactions to bring more transparency to the market. Real estate services in China is estimated to be an $800 billion market. In addition to listing information, KE offers an online platform for transactions, brokers that it employs, and a lead-generation business.

The company has also been operating for more than a decade so, it's also been able to establish relationships with many forward-looking agents and brokers. Currently, lead-generation for agents is its primary source of revenue. Another growth area is connecting homeowners with other real estate-based service providers for home renovations, interior design, financing, etc.

Stock Outlook

The stock is up 180% since its IPO in September 2020. It's 35% lower since its mid-February peak largely due to the selloff in many growth stocks. However, the company's outlook remains bullish especially due to its large market opportunity, the potential for growth in adjacent markets, and the inevitability of technology disrupting real estate. Since its IPO in September 2020, BEKE is up 83%. Despite this strong debut, investors should remain bullish on the stock due to its huge market opportunity, earnings growth, and increasing market share.

In fact, it could be argued that there is more potential for KE Holdings compared to the U.S.-based companies since the company is in a leading position with few competitors. Also, the Chinese real estate market is very opaque with no equivalent to the multiple listing service (MLS).

Since KE is a relatively mature company, it's profitable and able to internally fund growth. Last year, it earned $8 billion in revenue and $110 million in earnings. Analysts expect double-digit annual earnings growth over the next decade. Stocks with these characteristics have a strong track record of outperformance.