2021-04-05 16:00PART I Item 3. Key Information This section provides selected historical financial data, showcasing significant revenue growth, a shift to net income in 2020, and details non-GAAP metrics and comprehensive risk factors A. Selected Financial Data Total net revenues significantly increased from RMB 28.6 billion in 2018 to RMB 70.5 billion in 2020, with the company achieving a net income of RMB 2.8 billion in 2020 after prior losses Selected Consolidated Statements of Operations (2018-2020) | Indicator | 2018 (RMB, thousands) | 2019 (RMB, thousands) | 2020 (RMB, thousands) | | :--- | :--- | :--- | :--- | | Total net revenues | 28,646,499 | 46,014,906 | 70,480,978 | | Existing home transaction services | 20,154,642 | 24,568,508 | 30,564,584 | | New home transaction services | 7,471,924 | 20,273,860 | 37,937,886 | | Gross profit | 6,869,976 | 11,268,044 | 16,859,857 | | Net income (loss) | (427,681) | (2,180,127) | 2,778,323 | Contribution Margin by Business Line (2018-2020) | Business Line | 2018 (%) | 2019 (%) | 2020 (%) | | :--- | :--- | :--- | :--- | | Existing home transaction services | 38.4% | 38.9% | 40.9% | | New home transaction services | 40.5% | 24.3% | 21.5% | | Emerging and other services | 71.2% | 80.4% | 83.9% | Reconciliation of Net Income (Loss) to Adjusted Net Income and Adjusted EBITDA (2018-2020) | Metric | 2018 (RMB, thousands) | 2019 (RMB, thousands) | 2020 (RMB, thousands) | | :--- | :--- | :--- | :--- | | Net income (loss) | (427,681) | (2,180,127) | 2,778,323 | | Adjusted net income | 130,802 | 1,656,003 | 5,719,704 | | Adjusted EBITDA | 606,852 | 2,917,227 | 7,737,665 | D. Risk Factors The company faces diverse risks including real estate market fluctuations, government regulations, VIE structure challenges, uncertainties in China's legal system, and potential delisting under the HFCAA - The business is highly susceptible to fluctuations in China's residential real estate market and is subject to extensive government regulations, including policies aimed at stabilizing the market, which can adversely affect transaction volumes and prices383940 - The company operates parts of its business through a Variable Interest Entity (VIE) structure to comply with PRC foreign ownership restrictions, and this structure relies on contractual arrangements which may be deemed non-compliant by PRC authorities, potentially leading to severe penalties151153154 - The company's ADSs may be delisted from U.S. exchanges under the Holding Foreign Companies Accountable Act (HFCAA) if the PCAOB is unable to inspect its China-based auditor for three consecutive years, which could materially harm the value of the investment206207208 - A dual-class voting structure gives the founder, Mr. ZUO Hui, 81.1% of the aggregate voting power as of February 28, 2021, limiting the ability of other shareholders to influence corporate matters224226 Item 4. Information on the Company This section outlines the company's history, business model, and organizational structure, detailing the evolution to the Beike platform, its core components, and the use of VIEs to comply with PRC regulations A. History and Development of the Company Founded as Beijing Lianjia in 2001, the company launched the Beike platform in 2018, completed its NYSE IPO in August 2020 raising US$2.36 billion, and uses a VIE structure for PRC operations - The company was founded as Beijing Lianjia in 2001 and launched its integrated platform, Beike, in 2018265266 - KE Holdings Inc. completed its IPO on the NYSE on August 13, 2020, raising net proceeds of approximately US$2.36 billion, with a follow-on offering in November 2020 raising an additional US$2.32 billion268 - Due to PRC restrictions on foreign ownership in value-added telecommunication and finance services, the company uses a VIE structure, controlling entities like Beijing Lianjia and Yiju Taihe through contractual arrangements269 B. Business Overview Beike, China's leading integrated housing transaction platform, achieved a GTV of RMB 3.5 trillion in 2020, leveraging its Agent Cooperation Network (ACN) and proprietary technologies to generate revenue across various services - Beike is the leading integrated online and offline platform for housing transactions and services in China, generating a GTV of RMB 3,499.1 billion (US$536.3 billion) in 2020271 - The platform's foundation is the Agent Cooperation Network (ACN), an operating system that fosters collaboration among agents and standardizes property listings, with over 493,000 agents and 47,000 stores as of December 31, 2020275300 - The company's proprietary "Housing Dictionary" is a comprehensive property database covering approximately 240 million properties across 332 cities in China as of December 31, 2020312 - The company has invested heavily in technology, including its RealSee Virtual Reality (VR) platform, which hosted approximately 1.29 billion views of property showings in 2020320 C. Organizational Structure KE Holdings Inc., a Cayman Islands holding company, operates in China via PRC subsidiaries and VIEs, controlled through contractual arrangements to comply with foreign ownership restrictions and consolidate financial results - The company uses a VIE structure to operate in PRC sectors with foreign ownership restrictions, such as value-added telecommunication and financial services429 - Control over the VIEs is established through a series of contractual arrangements, including Power of Attorney, Equity Pledge Agreements, and Exclusive Business Cooperation Agreements, which enable the consolidation of the VIEs' financial results431432434 - The company's PRC legal counsel is of the opinion that the ownership structure and contractual arrangements are valid and do not violate current PRC laws, but notes that substantial uncertainties remain regarding the interpretation and application of these laws436437 D. Property, Plant and Equipment The company leases its Beijing headquarters and 8,000 facilities for brokerage stores across 29 cities, while owning a 55,210 square meter training center in Kunshan - The company leases its headquarters in Beijing and approximately 8,000 facilities for its Lianjia brokerage stores across China438 - The company owns a 55,210 square meter training center in Kunshan, Jiangsu Province438 Item 5. Operating and Financial Review and Prospects This section analyzes the company's financial performance, highlighting 53.2% revenue growth to RMB 70.5 billion and a shift to RMB 2.8 billion net income in 2020, driven by platform expansion and covering liquidity and accounting policies A. Operating Results Operating results demonstrate strong growth, with total revenues increasing 53.2% to RMB 70.5 billion in 2020, achieving a net income of RMB 2.8 billion after a prior net loss, and detailing critical accounting policies Year-over-Year Revenue Growth (2019 vs 2020) | Revenue Stream | 2019 (RMB, billions) | 2020 (RMB, billions) | YoY Growth | | :--- | :--- | :--- | :--- | | Existing home transaction services | 24.6 | 30.6 | 24.4% | | New home transaction services | 20.3 | 37.9 | 87.1% | | Emerging and other services | 1.2 | 2.0 | 68.7% | | Total net revenues | 46.0 | 70.5 | 53.2% | - The company achieved net income of RMB 2,778 million in 2020, compared to a net loss of RMB 2,180 million in 2019, with adjusted net income growing from RMB 1,656 million in 2019 to RMB 5,720 million in 2020509510 - General and administrative expenses decreased by 9.4% in 2020, primarily due to a RMB 1.8 billion decrease in share-based compensation expenses compared to a large one-time recognition in 2019504 - The company identified a material weakness in internal control over financial reporting related to a lack of sufficient competent financial reporting and accounting personnel149 B. Liquidity and Capital Resources Liquidity significantly improved, with cash, cash equivalents, and restricted cash reaching RMB 49.5 billion by December 31, 2020, driven by RMB 9.4 billion from operating activities and RMB 25.4 billion from financing activities, including IPO proceeds Summary of Cash Flows (2019 vs 2020) | Cash Flow Activity | 2019 (RMB, millions) | 2020 (RMB, millions) | | :--- | :--- | :--- | | Net cash provided by operating activities | 113 | 9,362 | | Net cash used in investing activities | (3,874) | (14,978) | | Net cash provided by financing activities | 23,026 | 25,406 | - As of December 31, 2020, the company held RMB 49.5 billion (US$7.6 billion) in cash, cash equivalents, and restricted cash589 - Financing activities in 2020 were primarily driven by net proceeds of RMB 16.3 billion from the IPO and RMB 15.3 billion from the follow-on public offering602 Item 6. Directors, Senior Management and Employees This section details the company's leadership, compensation, and employee base, highlighting the Baihui Partnership, 119,658 employees as of 2020, and the founder's 81.1% voting control via a dual-class share structure - The company has established an executive partnership, the Baihui Partnership, which has the right to appoint Executive Directors and nominate the CEO, ensuring management's long-term influence on corporate governance616622 - As of December 31, 2020, the company had 119,658 employees, with the largest group (91,210) being agents and supporting staff669670 Share Ownership of Key Individuals and Entities (as of Feb 28, 2021) | Shareholder | % of Beneficial Ownership | % of Aggregate Voting Power | | :--- | :--- | :--- | | ZUO Hui (Founder & Chairman) | 38.8% | 81.1% | | Entities affiliated with Tencent | 11.6% | 3.6% | | SVF II Holdings Subco (DE) LLC. | 7.1% | 2.2% | | Entities affiliated with Hillhouse | 5.0% | 1.5% | Item 7. Major Shareholders and Related Party Transactions This section identifies major shareholders and details significant related party transactions, primarily with entities controlled by founder Mr. ZUO Hui and principal shareholder Tencent, involving various services and loans - The company engages in significant related party transactions with entities controlled by its founder, Mr. ZUO Hui, including Ziroom Inc. and Yuanjing Mingde Management Consulting Co., Ltd, involving agency services, online marketing, and loans683685 - In 2020, the company incurred expenses of RMB 39 million for services from Tencent, a principal shareholder, related to advertising and cloud technology690 - The company has granted registration rights (demand, piggyback, and Form F-3) to certain shareholders, allowing them to have their shares registered for public sale under specific conditions693694695 Item 8. Financial Information This section confirms consolidated financial statements, discloses an ongoing legal proceeding with claims of approximately RMB 150 million, and states the company's policy to retain all earnings for business growth - The company is involved in a civil lawsuit with a real estate developer, where a court of first instance ruled for the company to pay damages of ~RMB 12.7 million and for the plaintiff to pay the company service fees of ~RMB 12.9 million, with the case currently under appeal699 - The company does not have a present plan to pay any cash dividends and intends to retain earnings to operate and expand its business701 Item 10. Additional Information This section details corporate governance, including a dual-class share structure granting the founder significant control, and outlines PRC exchange controls and tax implications, including Passive Foreign Investment Company (PFIC) risk - The company has a dual-class share structure where Class A ordinary shares have one vote per share, while Class B ordinary shares have ten votes per share, and Class B shares can be converted to Class A, but not vice-versa706709 - The company is an exempted company incorporated under the laws of the Cayman Islands, which provides certain corporate flexibilities compared to U.S. corporations, such as not being required to hold an annual general meeting725 - The company does not believe it was a Passive Foreign Investment Company (PFIC) for the 2020 taxable year but notes that the determination is a factual one made annually and is subject to changes in income, assets, and market capitalization765 Item 11. Quantitative and Qualitative Disclosures about Market Risk The company's primary market risks include foreign exchange risk due to RMB/USD fluctuations, interest rate risk from floating-rate borrowings, and potential inflation impacts - The company's primary market risk is foreign exchange risk, as its business is conducted in RMB while its ADSs are traded in USD, making the investment's value affected by RMB-USD exchange rate fluctuations782783 - Interest rate risk exposure comes mainly from floating-rate long-term borrowings785 PART II Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds This section details the use of proceeds from the US$2.36 billion IPO and US$2.32 billion follow-on offering in 2020, with US$311.0 million of IPO proceeds utilized by year-end - The company raised net proceeds of approximately US$2.36 billion from its August 2020 IPO and US$2.32 billion from its November 2020 follow-on offering794797 - As of December 31, 2020, US$311.0 million of the IPO proceeds had been used for R&D, expansion of new home transaction services, and general corporate purposes795 Item 15. Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of December 31, 2020, due to a material weakness in internal control over financial reporting, with remediation efforts underway - Management concluded that disclosure controls and procedures were not effective as of December 31, 2020, due to an identified material weakness799 - The material weakness relates to a lack of sufficient competent financial reporting and accounting personnel with appropriate knowledge of U.S. GAAP and SEC reporting requirements802 - Remediation efforts include hiring qualified personnel, establishing an internal audit team, implementing new financial reporting policies, and providing ongoing training804 PART III Item 18. Financial Statements This section presents the audited consolidated financial statements for 2018-2020, highlighting critical audit matters in revenue recognition and credit loss estimation, and providing detailed accounting policy explanations Report of Independent Registered Public Accounting Firm PricewaterhouseCoopers Zhong Tian LLP issued an unqualified opinion on the consolidated financial statements, identifying critical audit matters related to revenue recognition for new home services and allowance for credit losses - The auditor, PricewaterhouseCoopers Zhong Tian LLP, issued an unqualified opinion on the consolidated financial statements828 - A critical audit matter was identified related to revenue recognition for new home transaction services, focusing on the management judgment required to determine if commission collection is probable833834 - A second critical audit matter was the allowance for credit loss on accounts receivable, which involved significant management judgment and a high degree of auditor subjectivity in evaluating the estimates836837 Notes to Consolidated Financial Statements The notes provide detailed explanations of the company's reorganization, VIE structure, significant accounting policies, balance sheet item breakdowns, preferred share terms, segment information, and related party transactions - The company's reorganization in 2018, establishing the current holding structure, was accounted for as a common control transaction, with assets and liabilities stated at historical carrying amounts870872 - Revenue from new home transaction services is recognized when commission terms are met and collection is probable, with the company acting as the principal agent and recording commissions on a gross basis966967 - The company granted a significant number of share options under its 2018 Share Option Plan, with total share-based compensation expense at RMB 2.3 billion in 2020, up from RMB 382 million in 2018 but down from RMB 3.0 billion in 201911051110 - Prior to the IPO, the company had multiple series of convertible redeemable preferred shares (Series B, C, D, D+), which were classified as mezzanine equity and accreted to their redemption value, and all preferred shares were automatically converted to Class A Ordinary Shares upon the IPO in August 202011351159