Ladies and gentlemen, thank you for standing by, and welcome to Fangdd Network Group Limited's Third Quarter 2020 Earnings Call. [Operator Instructions] Please note, this event is being recorded. And I would now like to hand the conference over to your speaker host today, Mr. Warren Wen, Financial Controller of the company. Please go ahead, sir. .

Yes. Thank you, operator. Hello, everyone, and thank you all for joining us on today's call. The company has announced its third quarter 2020 results today, and earnings release is now available on the company's IR website. And today, you will hear from our co-CEO, Mr.

Zeng Xi, who will start the call with a review of our progress and the current industry dynamics and the details of our development strategy in this quarter. Afterwards, our CFO, Mr. Pan Jiaorong, will go over our financials before we open up the call for questions.

Our management team will deliver their remarks in Chinese and I will provide the English translations.

And before we continue, I would like to refer you to our safe harbor statement in our earnings press release, which applies to this call as well, as we will be making forward-looking statements, and please also note that we would discuss non-GAAP measurements today, which are more thoroughly explained and reconciled to the most comparable measures reported under the generally accepted accounting principle in our earnings release and filings with the SEC.

And with that, I will now turn the call over to our co-CEO, Mr. Zeng Xi, and please go ahead. .

[Foreign Language].

Hello, everyone, and welcome to our third quarter 2020 earnings call..

[Foreign Language].

Before I start reviewing our business highlights, I would like to share an update on the current state of the real estate market in China..

[Foreign Language].

The first, the market size of the new construction property transactions, resale property transactions and the transaction service have maintained their growth trajectories.

According to Frost & Sullivan, the total property transaction value in China are projected to grow at a CAGR of 9.3%, reaching RMB 27.6 trillion in 2023, while the total real estate transaction value facilitated through agents in China is expected to grow at a CAGR of 49.4%, reaching RMB 13.6 trillion in 2023.

In particular, the transaction service market has been growing steadily as the total value of the property transaction service is expected to reach 343.6 billion by 2023 at a CAGR of 22.6%. The total value of resale property transaction services is expected to reach RMB 229.8 billion by year 2023, growing at a CAGR of 20.6%..

[Foreign Language].

And the second, real estate regulators announced the establishment of the third red lines -- three red lines policy for domestic real estate developers in August 2020. This policy has effectively introduced ceilings for the debt-to-cash, debt-to-assets and the debt-to-equity ratios for real estate developers.

As a result of the new policy, the real estate developers are now being forced to place greater emphasis in accelerating their sales, collecting their accounts receivables and reducing the debt.

This shift has encouraged developers to rely on real estate agents to greater portion of their sales and start utilizing other channels to reduce their inventory. Based on the data from National Bureau of Statistics and our own analysis, the total value of the developers' parking space inventory has reached RMB 1.5 trillion.

And the total value of the community-centric business property has reached RMB 13.2 trillion as of March 31, 2020. The ability to quickly reduce inventory has become an essential component of the developer strategy to better manage their business and their cash flows..

[Foreign Language].

Consequently, the third observation is the value agents are able to provide in facilitating real estate transaction has continued to grow and has thus further boosted the attractiveness of those agents who are capable of providing outstanding transaction services.

While the penetration rate of agent service has maintained stable in terms of resale property transactions, the penetration rate of agent services for new construction property transaction has grown rapidly.

Meanwhile, within the agencies, we have observed that the [minority] of highly capable agents continue to deliver the lion's share of quality's results. Therefore, we believe that aggregating capable agents will be the key to unlock our future growth potential..

[Foreign Language].

And the fourth is as the market expands, the subsidy competition between real estate transaction platforms has become fierce as the platforms are leveraging their capital funding to offer higher commissions or subsidies to quickly gain market share.

Take Guangzhou, for example, we have seen platform providing advances of commissions in several projects in full with additional incentives for transaction ranging from RMB 1,000 to RMB 2,000 for each closed deals. And in other cities, including Shanghai and Chengdu are also following up this trend.

However, these subsidies and commission advances have been pushing up the developers' commission costs while forcing real estate agencies to rely on sheer quantity of agents to achieve their results..

[Foreign Language].

Despite the intensifying market competition, we have still found that the demand for SaaS technology in the real estate services industry remains strong as technology continues to become essential for agents to conduct their business and provide their services.

Our online solutions cover 5 key elements of the transaction progress -- process, including property listings, customer online reactions and real estate agent online services and transaction management online services and the transaction service fee payment online.

As a result, our solution has significantly improved both transaction efficiency and user experience..

[Foreign Language].

Based on our accumulation of the valuable experience in the past 9 years, we have implemented 3 major strategic optimizations in the third quarter. The first strategic optimization we made was our decision not to offer any subsidies, customer advances or advances for food commissions.

Instead, we plan to leverage our SaaS offerings and the technology to empower more small- and medium-sized agencies, which also improved our ability to facilitate closed-loop transactions.

From our perspective, the vicious subsidy competition is not a long-term solution for the industry, nor does it help to improve the market overall efficiency as such short-term performance in the market is unsustainable. Real estate transactions have a relatively low frequency and the average annual turnover rate of agents is typically more than 70%.

A healthy and sustainable relationship between the platform and its agents cannot be built on subsidies. We believe that the future of real estate industry lies in leveraging technology to improve one's operating efficiency, standardizing their services and implementing appropriate guidelines..

[Foreign Language].

Okay. In line with our first strategic optimization, we have remained committed to utilizing our SaaS solution to empower our agent partners, which we believe is at the core of our long-term economic moat.

As such, we continued to upgrade our DUODUO property sales SaaS solution in the third quarter to help agencies to better market their solution through their agents' private network.

By leveraging official accounts and mini program on WeChat, our SaaS solution enables agencies to attract customers through the release of introductory videos for high-quality property listings.

Meanwhile, we have also developed new features to help agents refine their operations without a different stage of -- throughout the different stages of their careers.

For example, during this quarter, we introduced a series of marketing incentives, including new user acquisition awards and a property viewing price [wheels] to stimulate agent activity.

We also introduced platform coupons as a complement to these marketing incentives as well as an agent development system, which has helped agents to close transaction more effectively while augmenting the efficiency of both agency transactions and agency user acquisition efforts.

At the same time, we developed innovative features to help agents refine their operations throughout the different stage of their careers.

To help enhance the quality of agents' work, for example, we leveraged our ability to analyze the operating data of agents at the individual level to gain an in-depth understanding of agent needs in relation to workflow procedures, customer management and other areas at different levels of development.

Through this analysis, we have helped agencies to improve their management capabilities in a number of ways such as enabling agencies to assign tasks to their agents online and set the reminders for agents' key responsibilities throughout the agents' work process.

These initiatives have helped new agencies, in particular, empowering those organizations to acquire customers and organize property viewing faster. We have also adjusted the needs of most small- and medium-sized agencies for agent training, increased the usage of our products and higher engagement on our platform.

As a result, our technology capabilities has enabled us to continue optimizing our SaaS solutions and service offerings and thus attract more agents to our platform. In the third quarter of 2020, the number of active agents on our platform exceeded 276,000, representing an increase of 21.98% year-over-year from the same period of 2019.

More importantly, in September, the number of active agents on our platform increased by 12.9% year-over-year, while the number of active agents on our platform reached a monthly record high of 185,000..

[Foreign Language].

The goal of the second strategic optimization is to maximize the number of agents that complete real estate transaction deals exclusively on our platform. For this purpose, we will focus on utilizing our SaaS solution and [offline] operation services to empower those agents in our preferred agent alliance network.

This initiatives will enable us to achieve mutual growth with our agents and enabled our transaction service capabilities over the long run..

[Foreign Language].

During the third quarter, we established a strategic cooperation with the Centaline Group. Through this partnership, we plan to develop a leading first-grade technology-enabled franchising system in the fourth quarter.

We are confident that our ability to empower our agent will enable -- will help us to secure the exclusivity of our Asian partnership over the long run. And we have announced this overall cooperation with Centaline Group yesterday..

[Foreign Language].

In the last 9 years, our platform has accumulated over 1 million agents as a result of our technology leadership. Centaline Group is based in Hong Kong and has been active in Mainland China's real estate market since the 1990s.

The combination of its extensive experience in off-line operations and sophisticated management system has made Centaline Group one of the best real estate agent service providers in this country.

As part of our partnership, we have jointly invested Shanghai Yuancui Information Technology Co., Ltd., and this joint venture will focus on creating a new technology and service-oriented real estate service model to further empower those agents in our preferred agent alliance network via an innovative and technology-enabled franchising system. Mr.

Liu Tianyang, Director of Centaline Group, Vice President of the Centaline China Property Agency Limited and the Chairman of China's real estate agent union will serve as the President of this joint venture, which currently manages over 400 real estate agent shops, off-line agent shops in China..

[Foreign Language].

The [third] strategic optimization focused on strengthening our off-line resale property service capabilities and expanding the service offerings of our transaction service centers, off-line centers. By utilizing our Duoduo transaction CRM, our transaction service centers are able to fully digitize the management process of the transactions.

During the third quarter, we built an additional 10 self-owned transaction service centers and established 41 online stores, while -- 41 off-line stores, while expanding our coverage to 11 cities in the Shanghai area through joint operations. In addition, we have provided online solutions on the transaction of commission payments.

To date, we have already established partnerships with ICBC and the Bank of Communications and interfaced our system with both banks to enhance the efficiency of the mortgage process..

[Foreign Language].

Okay. As property listings are essential for agent to conduct their business, we continued to expand our property listing library in the third quarter to better serve agencies on our platform. We consider this is the core supply of production materials for the agents.

We further enhanced our products and services to real estate developers to expand our developer collaborations and our library for new construction property listings. By the end of the third quarter, we have forged strategic partnerships with 25 top-tier developers in China.

These partnerships have enabled us to expand our coverage of the new property construction projects as well as to grow the number of new projects on our platform with a focus on those projects in key cities.

As a result, during this period, the number of the new construction property projects on our platform increased to 3,479, representing an increase of 11.26% year-over-year and 19.23% quarter-over-quarter.

In terms of our real estate related asset management business, we continued to expand our parking space pass business during this quarter, executing 12 new projects in 7 new cities such as Changsha, Jinan, Chongqing, Luzhou, and Jimo. Since our addition of 9,358 parking spaces in this quarter.

The total number of listed parking spaces on our platform reached 23,000 for a total value in excess of RMB 1.8 billion. We also continued to expand our property renovation services through our exclusive access to resale properties.

As such, we leverage our foothold in the resale property renovation space to forge partnership with the leading providers of renovation services and indoor environmental health enterprises.

This partnership enabled us to actively promote technology and health during our home renovation process to help make our customers home better, smarter and safer than before..

[Foreign Language].

Since our establishment 9 years ago, our goal has always been to empower real estate agencies by providing agency with the quality SaaS solution, digitizing agencies, off-line operations and becoming a long-term and reliable ally for our real estate agents.

We will continue our conservative approach, manage our risk diligently and execute those growth strategies that can generate long-term value going forward. And lastly, let me share an update on our current outlook for the fourth quarter.

We expect our strategic decision not to offer any subsidies, or agents will have a short-term impact on our closed-loop transaction for new construction properties. However, we remain confident in our ability to continuously expand our agent base and the properly listing library.

We also plan to invest more in empowering those agents in our preferred agent alliance network through the cooperation with Centaline and the establishment of a joint venture, Centaline-Yuancui, which we believe will enable us to establish more long-term and exclusive partnerships with those same agents.

As a result, we expect our off-line costs to increase in the next quarter. In addition, we will remain our commitment to upgrading our SaaS offerings, including our platform stickiness for agents, strengthening our real estate developer partnerships and expanding our property listing library in the fourth quarter of 2020.

Based on those expectations and assumptions, we are currently forecasting our revenue to be between RMB 600 million and RMB 700 million in the fourth quarter of 2020. This forecast is based on our current views of the market environment, which are subject to change..

[Foreign Language].

With that, I will turn the call over to our CFO, Mr. Pan Jiaorong, to review this quarter's financial results..

[Foreign Language].

Thank you, Mr. Zeng. I will now provide a closer look into the third quarter financial results. Before I begin, please note that all numbers are in RMB terms unless otherwise stated.

Revenue in the third quarter of 2020 was RMB 819.1 million, which represented a decrease of 13.6% from RMB 948 million in the same period of 2019 and an increase of 11% from RMB 737.7 million in the second quarter of 2020.

And the cost of the revenue in the third quarter of 2020 was RMB 626.8 million, which represented a decrease of 16.3% from RMB 749.1 million in the same period of 2019 and an increase of 1.6% from RMB 616.7 million in the second quarter of 2020.

The year-over-year decrease was mainly attributable to a decrease in commission fees payable to agents for the services they rendered, which resulted from the decrease in commissions revenue from our transactions..

[Foreign Language].

Gross profit in the third quarter of 2020 was RMB 192.3 million, which represented a decrease of 3.3% from RMB 198.8 million in the same period of 2019, an increase of 58.9% from RMB 121 million in the second quarter of 2020. Gross margin in the third quarter of 2020 further expanded to 23.5% from 21% in the same period of 2019..

[Foreign Language].

Operating expenses in the third quarter of 2020, including share-based compensation expenses of RMB 26.1 million were RMB 168.8 million, which represented an increase of 38.4% from RMB 122 million in the same period of 2019, an increase of 9.7% from RMB 153.9 million in the second quarter of 2020..

[Foreign Language].

Sales and marketing expenses in the third quarter of 2020 were RMB 1.5 million, which represented a decrease of 60.5% from RMB 3.8 million in the same period of 2019 and a decrease of 48.3% from RMB 2.9 million in the second quarter.

The decreases were primarily due to our reduction in expanding our brand promotion and marketing activity to attract property listing from real estate sellers to our marketplace and platform..

[Foreign Language].

Okay. Product development expenses in the third quarter of 2020 were RMB 65 million as compared to RMB 73.4 million in the same period of 2019 and RMB 70.5 million in the second quarter of 2020.

The decrease on a year-over-year basis was primarily attributable to our commitment to the continued optimization of our product development teams' operating efficiency. And therefore, lead to the decrease in the personnel-related expenses in the period. .

[Foreign Language].

General and administrative expenses in the third quarter of 2020 were RMB 102.3 million as compared to RMB 44.8 million in the same period of 2019 and RMB 80.5 million in the second quarter of 2020. The year-over-year increase in general and administrative expenses in the period, included share-based compensation expenses, were RMB 90 million.

And the remaining increase of RMB 48.5 million was primarily attributable to the first, an increased headcount and various expenditures to both improve our corporate governance and ensure compliance in relation to our status as a U.S.-listed company. And the second, an increase in provision for doubtful debtors..

[Foreign Language].

Net income in the third quarter of 2020 was RMB 21.9 million as compared to RMB 18.3 million in the same period of 2019 and a net loss of RMB 14 million in the second quarter of 2020.

Net -- non-GAAP net income in the third quarter of 2020 was RMB 48 million as compared to RMB 80.3 million in the same period of 2019 and RMB 11.9 million in the second quarter of 2020..

[Foreign Language].

Okay. Basic and diluted net income for ADS in the third quarter of 2020 were RMB 0.28 and RMB 0.26, respectively.

In comparison, our basic and diluted net loss per ADS in the second quarter of 2020 were both RMB 0.18 while our basic and diluted net income attributable to ordinary [shareholders] per ADS in the third quarter of 2020 were $2 and $1, respectively..

[Foreign Language].

As of September 30, 2020, we had cash and cash equivalents, restricted cash and short-term investment of RMB 1,073.7 million, short-term bank borrowing of $447.9 million and unutilized banking facilities of RMB 386 million. For the third quarter of 2020, net cash provided by operating activities was RMB 11.6 million..

[Foreign Language].

And this concludes our prepared remarks for today. And operator, we are now ready to take questions. .

[Operator Instructions] We have the first question from the line of Wei Xiong from UBS..

[Foreign Language] So as management mentioned just now that we expect the primary distribution business that the size of the business would be impacted in the short term, and we will plan to invest more in off-line in the fourth quarter as well.

So my question is, how long would we expect to see the impact on the primary distribution business? And also, what kind of off-line investments are we expecting to see in the fourth quarter? And how will that impact our margins?.

[Foreign Language].

Okay. We believe through our continued strengthening on our SaaS solution offerings, we will continue to improve our active -- the size of our active agents. For example, we have reached a record high of our active users in the September. And we're also upgrading our new property listings.

By the third quarter, we have reached a record high on -- of our new property listing, number of new property listings. And so that we are working -- we endeavor to improve both on the activeness of our agencies and agents and also our new property listings.

However, because of the vicious competition on the subsidy, and we still consider there will be a negative impact on the rate of closed-loop transaction. That is the agent and agencies who close their deals on the platform. We have observed that some of the agencies have obtained the information on the new property listings on the platform.

However, they close their deals on other platform. However, we believe this is not going to be long because all the competition is based on a property level of the gross profit. And therefore, we forecasted the competition on the subsidy will last like 1 or 2 quarters.

And we believe that this, and our competitors and the competition landscape will become more reasonable and stable after that. And in respect of the investment on our off-line presence with the cooperation with the Centaline Group, in particular, the Yuancui Information Technology Company.

We continue focused on empowering our outstanding agency on our platform. And we empower them with our online traffic. We kept that working capital in off-line operation management.

And we have -- we focused on forming an exclusive cooperation with these agents and so that we can build up a wall against -- buildup a protection against vicious competition like subsidizing without limits, and therefore, we believe this is our key strategy going forward for the few quarters to come to respond to the competition from the market..

[Foreign Language].

Right. We have seen an increase in our gross margin by this quarter whilst we have seen there is a decrease in the gross margin in our competitors. And that is the result of we have insisted not to offer too much subsidy in terms of the competition.

And in terms of our off-line presence and our investment on our off-line agency shops, we forecast -- we expect there will not be a significant increase in the off-line presence and its related revenue. So we expect the gross profit will not be positively improved in the short term..

We don't have any further questions on the line. I'll now hand the conference back to the presenters for closing remarks..

Do we have any further questions, operator?.

There are no further questions at this time. I'll now hand the conference back to today's presenters for closing remarks. Thank you..

Okay. Thank you, everybody, and thank you for joining this earnings call. And this does conclude the earnings call now. And thank you again..

Ladies and gentlemen, that does conclude our conference for today. Thank you all for participating. You may now disconnect..