Tao Value recently released its Q3 2020 Investor Letter, a copy of which you can download here. The fund posted a return of 7.08% for the quarter, underperforming its benchmark, the MSCI All Country World Index (ACWI) which returned 8.41% in the same quarter. You should check out Tao Value’s top 5 stock picks for investors to buy right now, which could be the biggest winners of this year.
In the said letter, Tao Value highlighted a few stocks and KE Holdings Inc. (NYSE:BEKE) is one of them. KE Holdings Inc. (NYSE:BEKE) is a China-based real estate services provider. KE Holdings Inc. (NYSE:BEKE) stock gained 19.2% in the last one month and on October 28th it had a closing price of $73.05. Here is what Tao Value said:
“KE Holding (Beike), a leading real estate transaction and services platform in China, recently IPO’d with a valuation of $23 billion. Despite the market sentiment upbeat, I see Beike could worth much higher than its current valuation and built a position at cost below $40 per share. As laid out below, my thesis is heavily around the founder CEO Zuo Hui & the culture of the company.
Tao: Beike is a combination of two distinct businesses – firstly an 18 years old household name off-line brokage business Lianjia, and the two years old online platform Beike Zhaofang. The history of Lianjia is a tale about how it single-handedly reshaped the real estate brokerage industry in China. In early years, real estate brokers/agents in China were more of less like “con artists”, who would try to rip off both buyers & sellers. Over the years, Lianjia adopted a strategy which charges higher but transparent commission rate (3%) and provides superiors services. It gradually pushed the industry to a modern & dignified position and ultimately captured almost 20% of the existing home sales market. It is a manifestation of its mantra of “to do the difficult but right thing”.
As strong as Lianjia, offline brokerage is not the best business from investors perspective. Beike Zhaofang, on the other hand, is a new attempt to solve the next difficult question of the industry – how to make different brokers/agents to work together to bring more value to customers? Building on Lianjia’s deep root in traditional brokerage business and wide geographical footprint, Beike launched an Agent Cooperation Network (ACN), consolidating information & processes from various stages of real estate transactions. It created fair allocation of credits for each step, attracting collaboration from different brokers/agents. I believe this MLS-like platform would be one of the best businesses in the world (huge TAM, low penetration, high scalability & strong network effect), and Beike with its hard earned market position, industry expertise & reputation is poised to capture majority of such value in China.
Meteorology: Real estate transaction market is a RMB 22 trillion market in China, with near 0 “MLS” penetration. Given the attractiveness of a platform business, there have been numerous attempts by other players (e.g. Fang Holdings expanded to offline circa 2016, FandDD’s platform for linking developers to consumers) but no home run yet. Why Beike can do differently this time? I think Beike’s deep understanding of the industry and its motivation to solve the right, but difficult problem are the key factors. From day one, Beike aimed to empower & incentivize brokers/agents to collaborate, which I think is the right way to evolve itself to a SaaS model. All the failed attempts didn’t have this deep understanding, ultimately evolved into ads (taking the easy way out) or commission (being brokers/agents) monetization models. Another recent attempt by Alibaba along with Yiju– “Tmall Haofang” is interesting, but I think Beike still has the up hand for its early start and on field know-how.
Topography: Beike is a market leader in offline brokerage business with wide margin, and the first mover in digital transformation. I believe the Agent Cooperation Network (ACN) is a game changer. In other countries, MLS (multiple listing service) created great value for agents, buyers & sellers. It tends to be a winner takes the most model with strong network effect yet is owned mostly by association or public. I think Beike ACN could have the potential to be the dominant network creating similar and more value for all stakeholders in real estate value chain. A clear extension (since China has less legacy) is to further digitalize mortgage & titling, each being large TAM vertical on its own.
Commander: founder CEO Zuo Hui is the key reason in my investment decision. I think Zuo is a hard-tocome-by mindful entrepreneur. Based on his two fundamental beliefs: 1) one should be honest & 2) business should be profitable, he made a hard decision to adopt a high but transparent commission rate in Lianjia’s early days. This decision appeared irrational at the time as Lianjia would not be able to compete with other lower (yet deceptive) commission competitors. Yet it is later proven to be an industry-shaking decision. Zuo wrote a thoughtful shareholder letter in its prospectus, articulating his vision and philosophy. The one key principle is “Do the right thing even if it’s difficult”. I believe an organization, who validated such principle in building and growing Lianjia, will have ripple effect on value creation in years to come.
Valuation: In the current market condition, I would admit the current valuation is silly to say the least. Even Beike is profitable, the profit mainly comes from the traditional brokerage business. But I think Beike Zhaofang alone could very likely be a $10 billion run rate business one day. I also believe there will be more innovation from Beike in the future creating significant value for all stakeholders.”
Copyright: vikalipa / 123RF Stock Photo
Our calculations showed that KE Holdings Inc. (NYSE:BEKE) isn’t ranked among the 30 most popular stocks among hedge funds.
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Disclosure: None. This article is originally published at Insider Monkey.