DUO: Fangdd Valuation is Well Below Peers and Should Improve as Pandemic Related Woes Abate
NASDAQ:DUO
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Fangdd (NASDAQ:DUO) is the second largest real estate transaction platform in China. It is similar to a US company like Zillow where homebuyers can view properties, but in contrast, the platform earns a transaction fee like the Multiple Listing Service, which in the US can only be viewed by brokers. It provides discovery and transaction support to the 2019 ¥9.5 trillion market (US$1.4 trillion) of new and existing residential properties that are sold each year (that is expected to grow 9.3% to ¥17.4 trillion by 2024), as Chinese consumers add second homes and continue to invest in real estate as prices continue to appreciate. Fangdd targets small to medium independent agencies in China, of which 1.5million are registered on the platform.
As opposed to its main competitors, Fangdd is strictly an online platform with significantly lower fixed costs and an operating leverage advantage. Since it employs no brokers and has no agency storefronts, its model is easily scalable and as its volumes grow so should its operating margins.
The market in China is fragmented and the largest platform there, Beike, has only an estimated 12-13% market share in 2020. This leaves considerable opportunity to compete with differentiated pricing and services.
The majority of Fangdd’s revenue comes from commission sharing with agents from the sale of newly built homes. It gets a small portion of the commission paid by the developer to the agent. The agent gets a 2-3% commission and Fangdd may take 15 to 20% of that. Fangdd is working to diversify this revenue stream by adding value added services such as parking space sales and property management services. The number of the new construction property projects on its platform increased to 3,479, growing 11.3% year-over-year and 19.2% sequentially.
A big selling point for Chinese real estate agent in choosing a specific platform to use is the speed at which he can get his commission paid out. In contrast to the US market where agents get paid immediately at closing, commission payments from developers who are selling their new construction can take up to six months to collect. As a result, other competing platforms have financed this receivable themselves and pay agents immediately. This is part of “supply chain financing.” Fangdd recently added the ability to finance of these receivables via its bank partners thus allowing an immediate payout and making it more competitive without taking on loan risk from developer bankruptcies or non-payment.
Fangdd continues to grow and penetrate the real estate broker market. In Q3 it had 276,600 active users in the quarter up 22.0% from last year and 26,500 agents transacted on the platform in the quarter an increase of 28.0%. This led to revenues of ¥819 million down from ¥948 million a year ago or 13.6% decline. The value of the transactions completed on the platform was ¥55.9 billion versus ¥51.1 billion a year ago, up 9.4%, but clearly at lower commissions. The company’s revenue growth is suffering primarily from the impact of pandemic shut downs combined with an industry price war but should return to year over year revenue growth in Q1 2021. Despite declining sales this year, its registered and active user numbers continue to go up.
Although competition is stiff for real estate platforms in China, we believe an expanding market should float all boats and Fangdd, as an independent platform, should be an attractive option for micro, small, and medium sized independent agents.
At $6.87 per share Fangdd trades at an enterprise valuation of US$482 million or 1.3 times estimated 2020 sales and is a value play compared with its peers who trade at 9.7 times.
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