Executive Summary / Key Takeaways

• Strategic Inflection from Scale to AI-Driven Efficiency: KE Holdings is executing a fundamental shift away from pure network expansion toward leveraging artificial intelligence to extract higher productivity from its existing 8.6 million customer base and 660,000+ rental units, directly addressing the industry's core challenge of operational efficiency that has historically constrained profitability.

• "Three Wings" Reach Profitability Tipping Point: The home rental and renovation businesses achieved city-level profitability in Q3 2025 for the first time, with rental contribution margins expanding 4.3 percentage points year-over-year to 8.7% and renovation margins holding steady at 32%, validating the diversification strategy and creating new earnings drivers beyond the cyclical core brokerage business.

• Core Brokerage Resilience Amid Market Volatility: Despite a 36% decline in GAAP net income in Q3 2025, BEKE's existing home transaction GTV grew 5.8% year-over-year while the broader market contracted, and the new home business outperformed with 54% of revenue from stable SOE developers, demonstrating durable market share gains and pricing power in a distressed sector.

• Aggressive Capital Returns Signal Management Conviction: Having repurchased $2.3 billion in shares since 2022 and expanded the program to $5 billion through 2028, management is returning a significant portion of capital, exceeding 2024 net income, a bold move that implies either exceptional confidence in cash generation or a recognition that growth investments face diminishing returns in the current environment.

• Execution Risk at Center of Investment Case: The thesis hinges on whether AI can truly offset margin pressure from agent welfare investments and fixed cost inflation in the core business, while macro headwinds from China property market volatility and trade frictions continue to suppress buyer sentiment and transaction volumes.

Setting the Scene: China's Real Estate Operating System

Founded in 2001 and headquartered in Beijing, KE Holdings began as Lianjia, a traditional real estate brokerage that solved China's endemic problem of fake listings and transaction fraud by building an Agent Cooperation Network (ACN) that enforced authenticity and service standards. This foundation—integrating online innovation with offline execution—created a moat that today processes RMB 3.35 trillion in annual gross transaction value across 8.6 million customers. The company isn't merely a brokerage; it's the operating system for China's residential real estate market, capturing value through transaction fees, platform services, and increasingly, through ancillary services that monetize its unique data and customer relationships.

The industry structure has fundamentally shifted. After three decades of one-way price appreciation, China's housing market has matured rapidly, with buyers now prioritizing risk minimization and "living well" over speculative gains. This behavioral change transforms the value proposition from transaction speed to service quality and risk mitigation. BEKE's response is its "One Body, Three Wings" strategy: the core brokerage business (the body) provides cash flow and customer acquisition, while home renovation, rental services, and emerging businesses (the wings) capture lifetime value. The diversification of revenue away from cyclical transaction commissions—non-housing services already account for 41% of total revenue in Q2 2025—creates a more resilient earnings profile that can withstand property market downturns.

Competitively, BEKE dominates fragmented rivals. Anjuke (58 Group) offers listings but lacks transaction depth. Centaline Property maintains dense offline networks without BEKE's technological integration. 5i5j and Leju operate at a fraction of BEKE's scale, with Leju posting negative margins and minimal revenue. BEKE's advantage lies in its ACN network effects: each additional agent increases the value of the platform for all participants, creating a self-reinforcing cycle that has driven brokerage channel penetration in new homes from 30% to over 50% in recent years. This moat translates into measurable outperformance—BEKE's existing home transactions rose 26% in H1 2025 versus 19% market growth, while new home orders increased 19% against a 6% market decline.

Technology, Products, and Strategic Differentiation: AI as the New Production Factor

BEKE's AI deployment is not experimental; it's becoming the core production factor across all business lines. The company has launched "Pudding," an AI-powered home-seeking assistant accessible to 40% of homepage traffic, and "Qianji," an agent assistant used by over 200,000 agents that increased lead-to-mandate conversion by 30% and mandate-to-transaction conversion by 10%. In home rental services, AI handles 80% of standardized work, enabling property managers to oversee 200+ units each—nearly double the historical average. For renovation, AI generates up to 90,000 design scenarios per minute for optimal staffing and can process contract reviews in 20 seconds, a 60-fold efficiency gain.

This directly addresses the industry's efficiency paradox. Real estate services have historically suffered from diseconomies of scale: beyond a certain point, complexity rises sharply while thin margins cannot absorb operational inefficiencies. AI reverses this dynamic by standardizing non-standard processes. In the rental business, AI-powered inventory management accelerated lease-out of 350,000 units across 11 cities in Q3 2025, generating over RMB 100 million in cost savings. In existing home transactions, AI-identified high-quality opportunities represent a single-digit percentage of leads but contribute over 50% of transaction volume. This implies that BEKE is not just cutting costs but fundamentally improving the yield on its human capital and data assets.

The strategic differentiation extends to product innovation. BEKE's seller and buyer agent specialization mechanism, piloted in Shanghai, redefines commission structures to increase the selling agent's share from 40% to over 50%, potentially boosting earnings 25% for seller-focused agents. This alignment of incentives with market needs—sellers now require sophisticated marketing capabilities in a buyer's market—creates a more defensible agent value proposition that can retain top talent despite margin pressure. The AI-powered listing score system, which captures know-how across six key areas, has driven high-score listings to account for over 75% of Shanghai transactions in September, directly linking technology investment to revenue outcomes.

Financial Performance & Segment Dynamics: Margin Pressure Meets Diversification

BEKE's Q3 2025 results reveal the tension between strategic transformation and near-term profitability. Total revenue grew 2.1% year-over-year to RMB 23.1 billion while GAAP net income fell 36.1% to RMB 747 million, with gross margin declining 1.3 percentage points to 21.4%. This divergence signals that AI investments and agent welfare improvements are front-loaded costs with back-loaded benefits. The company spent $281 million on share repurchases in the quarter—its highest in two years—while R&D expenses rose 13.2% to RMB 648 million, driven by a doubling of AI-related R&D personnel.

The existing home transaction segment, representing the core "body," shows mixed signals. Q3 GTV grew 5.8% year-over-year to RMB 505.6 billion, but revenue declined 3.6% to RMB 6 billion as a higher proportion of transactions came from connected agents (recorded on a net basis). The contribution margin compressed 2 percentage points to 39% due to fixed labor costs remaining stable amid revenue decline. This implies that BEKE is sacrificing near-term profitability to maintain network scale and agent satisfaction—a strategic choice that only makes sense if AI-driven productivity gains materialize to offset these costs. The 20% reduction in fixed labor costs from Q4 2024 peaks suggests management is already rationalizing, but the pace of margin recovery remains uncertain.

New home transaction services face market headwinds but demonstrate resilience. Q3 GTV fell 13.7% year-over-year to RMB 196.3 billion, yet the segment maintained a 24.1% contribution margin and generated 54% of revenue from SOE developers —up 4 percentage points year-over-year. This concentration of revenue from SOE developers represents lower credit risk and more stable commission payments, explaining why BEKE's DSO remained healthy at 54 days despite market volatility. Management's B+ product strategy , expanding to over 30 cities by year-end, targets lighter-touch offerings that can capture market share with lower operational intensity, directly addressing the efficiency imperative.

The "Three Wings" provide the most compelling evidence of strategic progress. Home renovation and furnishing generated RMB 14.8 billion in 2024 revenue (+36% year-over-year) and achieved city-level profitability in Q3 2025. Centralized procurement expanded from 4 to 13 categories, reducing unit purchase prices over 20% for some products. Home rental services surged to RMB 14.3 billion in 2024 revenue (+135%) and also reached city-level profitability, with contribution margin jumping 4.3 percentage points to 8.7% in Q3 2025. The Carefree Rent business, representing 25% of managed units under net revenue accounting, contributed RMB 470 million in revenue and lifted margins by 3 percentage points. This demonstrates BEKE's ability to build profitable, scalable businesses adjacent to its core, diversifying earnings and reducing cyclicality.

Capital allocation reflects management's confidence and strategic clarity. The $5 billion share repurchase program through August 2028, combined with a $0.4 billion dividend in 2024, represents total shareholder returns that significantly exceed net income. CFO Tao Xu's statement that "we support and reward our shareholders through consistently active share repurchase to improve the efficiency of capital operations" during "short-term business challenges" implies management views the stock as undervalued relative to long-term prospects. With RMB 70 billion in cash liquidity and net operating cash inflow of RMB 851 million in Q3 2025, the balance sheet can support both AI investments and capital returns without financial strain.

Outlook, Management Guidance, and Execution Risk

Management's guidance for 2025 centers on a cautiously optimistic neutral scenario: existing home market moderate recovery, new home market decline narrowing, and potential policy support in the second half. This guidance frames expectations for margin recovery and GTV growth. The company anticipates Lianjia agent and store counts remaining stable while modestly expanding non-Lianjia networks in key regions, signaling a shift from quantity to quality. The target of 20% efficiency improvement for connected agents within three years, driven by AI and larger store formats, directly supports the margin recovery thesis.

The home rental business outlook is particularly bullish. Management sees "significant room to continuously improve contribution margin" through scale growth (660,000+ units), operational efficiency (doubling units per manager to 200+), and value-added services. Q3 2025's RMB 500 million contribution profit, up 186% year-over-year, suggests this isn't aspirational but achievable. For renovation, the conservative approach—focusing on Beijing and Shanghai until product and delivery capabilities meet "high standards"—implies disciplined expansion that prioritizes profitability over growth, a marked departure from the scale-at-all-costs mentality.

Execution risks are material and multifaceted. The agent specialization mechanism in Shanghai, while innovative, requires retraining and cultural change across a network of over 200,000 agents. If productivity gains don't materialize, fixed labor costs will continue pressuring margins. The AI transformation demands sustained R&D investment—already up 13.2% in Q3—while competitors may develop comparable tools, eroding BEKE's technological edge. Most critically, the entire efficiency pivot assumes the property market stabilizes. As CEO Stanley Peng noted, "the industry's most significant challenge remains efficiency," but efficiency gains can't offset a prolonged market downturn if transaction volumes collapse.

Risks and Asymmetries: What Can Break the Thesis

The primary risk is macroeconomic deterioration. Trade frictions have already impacted buyer sentiment, with high trade-dependency cities showing weaker performance since April 2025 tariff escalations. If U.S.-China tensions resume, the Beike Sentiment Index —already showing hesitation—could drive transaction volumes below management's neutral scenario. BEKE's fixed cost base (store leases, agent retainers) creates operating leverage that works viciously on the downside. A 10% GTV decline could drive a 20-30% profit drop if cost cuts lag.

Competitive dynamics pose a subtler threat. While BEKE currently outperforms, Anjuke's listing-heavy model could pivot to transaction services, and proptech startups might replicate AI tools without BEKE's legacy cost structure. The brokerage channel penetration in new homes has reached 50%, approaching saturation. If developers build direct sales capabilities or SOE developers consolidate market share further, BEKE's pricing power could erode. Management's observation that new-standard products initially carry lower commission rates, while currently only 10% of units, signals potential margin compression as the product mix shifts.

Financial risks center on capital allocation sustainability. The 88% payout ratio and buybacks exceeding net income are manageable with RMB 70 billion in cash, but if AI investments require more capital than anticipated or if the Beihaojia business requires additional funding beyond the RMB 1 billion cap, management may need to choose between shareholder returns and strategic investment. The two proprietary development projects in Chengdu and Shanghai, while described as "testing grounds," still represent capital at risk in a distressed property market.

The asymmetry lies in AI's potential to create value beyond current guidance. If the AI-native operation model for Carefree Rent can truly handle 80% of standardized work, property manager productivity could exceed 200 units per person, driving contribution margins toward 15-20%—levels comparable to mature property management companies. If agent specialization boosts conversion rates by 30% as pilot data suggests, the core brokerage business could see margin expansion even without market recovery. These upside scenarios aren't priced into the current valuation but depend on flawless execution.

Valuation Context: Pricing in Transformation

At $17.23 per share, BEKE trades at a market capitalization of $20.24 billion with an enterprise value of $16.30 billion. These figures price BEKE as a growth stock while the business is pivoting toward profitability and capital returns. The 2.09% dividend yield and aggressive buyback program suggest management is steering toward a value-return orientation, creating potential multiple compression if growth stalls.

Comparative valuation is challenging. Leju Holdings (LEJU), the only public peer with data, trades at negative earnings with a 0.80 EV/EBITDA and minimal revenue, making it an irrelevant benchmark. BEKE's 21.86% gross margin and 3.36% profit margin reflect the high-cost, people-intensive nature of real estate services, yet its 1.61 current ratio and 0.31 debt-to-equity indicate a fortress balance sheet that peers lack. The 5.02% return on equity, while modest, is achieved while investing heavily in AI and maintaining excess cash, suggesting underlying profitability is stronger than reported metrics indicate.

The valuation's key driver is whether the "Three Wings" can grow fast enough to offset core brokerage margin pressure. With rental and renovation combined generating RMB 29.1 billion in 2024 revenue (31% of total) and growing at 78-135% rates, they could represent 50% of revenue by 2026. If these segments achieve 10-15% contribution margins at scale, they would add RMB 4-6 billion in annual profit—enough to justify current multiples even if core brokerage margins remain compressed. The market appears to be pricing in a 50/50 probability of this scenario, creating upside if execution exceeds expectations.

Conclusion: Efficiency as the New Growth Engine

BEKE's investment thesis hinges on a single question: Can artificial intelligence transform a historically inefficient, people-intensive real estate services industry into a scalable, high-margin platform? The Q3 2025 results provide early but compelling evidence that the answer is yes. Home rental and renovation businesses have achieved city-level profitability while growing at triple-digit rates. AI tools are driving measurable productivity gains across 200,000+ agents and 660,000 rental units. The core brokerage business, while margin-challenged, continues gaining market share and maintains pricing power with SOE developers.

The strategic pivot from scale to efficiency, announced in 2025, aligns BEKE's investments—AI, agent specialization, centralized procurement—with fundamental market demands. The $5 billion share repurchase program signals conviction that these investments will generate returns exceeding the cost of capital, even as near-term margins compress.

The critical variables to monitor are AI-driven productivity metrics: units managed per property manager, agent conversion rate improvements, and contribution margin expansion in the "Three Wings." If these metrics continue trending positively through 2026, BEKE will have built a defensible, profitable growth model that justifies its premium valuation. If they stall, the company risks being a well-capitalized but low-margin brokerage in a structurally declining market. The risk/reward is asymmetric: downside limited by RMB 70 billion in cash and market leadership, upside driven by AI transformation that could redefine real estate services economics. For investors willing to underwrite execution risk, BEKE offers a unique combination of scale, technology, and capital discipline in the world's largest property market.