By Lisa Thompson
NASDAQ:DUO
READ THE FULL DUO RESEARCH REPORT
Fangdd (NASDAQ:DUO) is working its way back to profitability from a pandemic-ravaged 2020 by cutting costs and introducing new higher margin services. Rather than matching subsidies for short-term low margin revenues the company plans to maintain it bases business at current levels and grow through its new SaaS offering.
Competitors are throwing out huge subsidies to attract transactions and taking huge losses to gain market share. Fangdd has chosen not to compete on price and is instead trying to make its platform more efficient with improved features and functions. In Q4 it introduced a new SaaS product targeted at real estate developers. These developers have been experiencing a profit margin squeeze and are looking for solutions that reduce their operating costs and improve their ability to generate sales faster. Fangdd’s new product is sold at a flat monthly fee to developers making their costs more predictable. It allows them to communicate with real estate brokers directly through an app and it can also allow the developer to set the agent’s commission rate. An agent that closes its deal on Fangdd’s platform then pays Fangdd 5% of whatever commission it has earned from that developer. The company is already had discussions with the top 100 developers in China and is optimistic about its prospects. We expect this product should yield the typical 60-80% margins a SaaS product provides and will increase the company’s overall gross margin.
Fangdd 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 1.5 million are registered on the platform.
At $5.52 per share Fangdd trades at an enterprise valuation of US$387 million or 0.8 times estimated 2021 sales and is a value play compared with its peers who trade at 7.9 times.
2020 Earnings Results
For 2020 revenues declined 31.9% from 2019 to ¥2.5 billion from ¥3.6 billion. Revenues improved sequentially from a low in Q1 through to Q3, but dropped again in Q4. Gross margin dollars decreased 45.3% and margins declined to 16.9% from 21.0%. The company cut expenses, mostly by reducing stock-based compensation expense. Operating costs for 2020 were ¥640 million of which ¥103 million was from stock-based compensation. This compares with ¥1.3 billion in expenses in 2019 of which ¥746 million was stock-based compensation. The decline in spending offset the decline in revenues and the operating loss decreased to ¥226 million from ¥537 million on a GAAP basis. Taking out stock-based compensation, that loss would have been ¥123 million in 2020 compared to a profit of ¥209 million in 2019.
Last year operating margins were 3.0%, while this year the margin sunk to -14.9%. On a GAAP basis the net loss to ordinary shareholders in 2020 was ¥221 million compared to a loss of ¥1.3 billion last year. The non-GAAP net loss was reduced to ¥117 million in 2020 versus a loss of ¥523 in 2019.
The loss per ADS was ¥2.76 in 2020 versus a loss of ¥29.16 in 2019 using average ADS outstanding. Non-GAAP loss per ADS was ¥1.49 this year compared to non-GAAP income per ADS of ¥5.50 in 2019.
Balance Sheet
The company ended the December quarter with ¥945 million in cash and short-term investments or ¥0.025 per ADS. This was a decrease of ¥129 million in the quarter. Working capital was a positive ¥917 million and the current ratio remained a healthy 1.4xs. Total debt was ¥443 million or 11.0% of total assets. The company had cash usage of ¥225 million for the full year. For the fourth quarter of 2020, the net cash used in operating activities was ¥225.9 million (US$34.6 million).
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