KE HOLDINGS(BEKE.N)COMMENTARY：DUAL-PRIMARY LISTING BY INTRODUCTION TO MAXIMIZE SHAREHOLDER PROTECTION

KE Holdings (aka Beike) disclosed its proposed dual-primary listing on the Stock Exchange of Hong Kong Limited (SEHK) by way of introduction. The completion of the listing would mean that Beike’s delisting in one bourse will not affect its listing status in the other. This will effectively resolve the uncertainty faced by Beike and protect shareholders’ interests. In addition, there is no new share issue involved in the listing, which minimizes dilution and could expedite the process. It will also facilitate Beike’s admission to the Stock Connect program, attract more investors, and improve stock liquidity.
Uncertainty over listing status caused a significant correction in share price.
In the past 12 months, Beike's market capitalization plummeted by 71.5%.
While the correction was certainly due to fundamentals such as the declining gross transaction value (GTV) in China's real estate market and the time needed for the experiment of new businesses, the most important reason lies in the uncertainty over Beike's listing status as a China Concepts Stock (CCS) under the Holding Foreign Companies Accountable Act. Beike’s shortfall was part of the significant correction in CCSs, which corroborates that the core reason behind the fluctuations in its market cap is all but the fundamentals.
The proposed dual-primary listing on the SEHK can protect shareholders’ interests and we expect it to clear up the uncertainty over listing status.
Beike did not opt for a secondary listing, which is more common, but a dual-primary listing instead. We believe completing the latter means that Beike’s delisting in one bourse will not affect its listing status in the other, thereby protecting shareholders’ interests. Moreover, in the dual-primary listing option, Beike will likely enter the Hang Seng Index and be eligible for trading in the Stock Connect program (which sets eligibility criteria such as trading volume and market cap) sooner.
The listing does not involve a new share issue and has a shorter timeline, which maximizes protection of existing shareholders’ interests.
Unlike other dual-primary listings, Beike opted for a listing by way of introduction. This approach means that Beike will not seek equity financing from the listing to minimize dilution of shareholders' equity while its market cap is at a low level, and that it can complete the listing process more quickly (as there is no share issue). A listing by way of introduction is usually only feasible for companies with strong cash flows, which have no equity financing needs in the short term and primarily seek to protect investors. Beike’s latest financial statements showed a cash balance of Rmb56.1bn and no plan for major capital expenditure in the short term, a very suitable position for a listing by way of introduction. We strongly believe that Beike’s dual listing will provide investors with greater choice over which exchange to trade in and help bring in more domestic and overseas investors to improve stock liquidity.
Real estate sales remain muted under the impact of Covid-19 but policymakers will likely make efforts to turn the tides.
According to our statistics, in Apr 2022, the online signing of new house transactions in key cities fell by 50.7% YoY and that of pre-owned house transactions dropped by 37.7% YoY. We are convinced that Beike's GTV will outperform the sector due to the advantage from its Agent Cooperation Network (ACN), increased market share in the sales channels of new houses, and the trouble faced by other sales agencies of new houses. However, while outperforming, Beike can in no way transcend the sector, and with its new businesses including house decoration in the early stage, we expect it to still face challenges in terms of fundamentals in 1H22. Meanwhile, we noticed that policymakers attach great importance to meeting the inelastic “rigid demand” for houses and the demand for better quality housing as seen in the decline in mortgage rates and increase in mortgage distribution. We expect that the sector may see quarterly GTV growth in 2H22 as more policies take effects.
With the improvement in GTV, Beike's quarterly earnings will also increase.
Potential risks:
Dual-primary listing still in progress; short-term quarterly losses due to fixed costs under decreased GTV.
Investment recommendation: We are convinced that Beike has chosen the most favorable option for its shareholders among many others, which fully reflects its good governance and deep pocket. We believe that after its listing on the SEHK, Beike will gain more recognition from investors. Existing shareholders can also avoid the potential risks in the US market as they may switch the exchange for trading.
We reiterate our 2022E/23E/24E non-GAAP net profit forecasts of Rmb2.51bn/6.11bn/8.60bn. Considering that the valuation of Beike’s peers stands at 30-40x 2023E PE and its significant advantages in the property services industry, we assign 40x 2023E PE to derive a target price of US$32.0/ADS and reiterate the “BUY” rating.
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   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。