Embracing the profit release cycle

Embracing the profit release cycle TargetPriceUS$23.00Up/Downside22.9%Current PriceUS$18.72 Ke Holdings’ (Beike)1Q26revenue declined19.0% YoY to RMB18.9bn, inlinewith Bloomberg consensus and our forecast,butnon-GAAP net profit reachedRMB1.6bn,up 15.7% YoY,largely beating Bloomberg and our forecast ofRMB1.0-1.2bn.Non-GAAP NP margin reached 8.5%,a 7-quarter high,validating the company's efficiency-driven transformation.Looking forward,management guided forstrong 2Q26Erevenuewith non-GAAP OPM of ~12%and NPM of ~9-10%. Together with 7-8% non-GAAP net margin guidance in3Q/4Q26E, FY26E non-GAAP is likelyto reach 7.9-8.7% per our estimate.Weraise our SOTP-based TP to US$24.0(up 4% fromUS$23.0) to reflect stronger-than-expected profitability trajectory.NewTPtranslatesinto25.6x 2026E PE(non-GAAP).Maintain BUY. China Internet Saiyi HE, CFA(852) 3916 1739hesaiyi@cmbi.com.hk Ye TAO, CFA(852) 3850 5226franktao@cmbi.com.hk 1Q26 earnings beat driven by structural cost optimization.Beike's 1Q26revenue declined 19.0% YoY to RMB18.9bn due to high base effects, withEHT/NHTGTV down 7.9%/37.2%YoY.Despite the revenue decline,contribution margins(CM)improved across all business segments, drivenbyLianjia headcount optimization (per-agent transaction volume +26%YoY), refined channel management for new home biz, and procurement-ledcost savings in Home renovation biz. Operating expenses declined 22.3%YoY to RMB3.29bn, hitting a 3-year low, thanks to AI-enabled precisemarketing allocation and staff streamlining in main biz, higher designerefficiencyand lower compensation due to scale contraction in homerenovation biz. This liftednon-GAAP NP margin by 2.5ppts YoY to 8.5%,a7-quarter high. Miao ZHANG(852) 3761 8910zhangmiao@cmbi.com.hk WentaoLU, CFAluwentao@cmbi.com.hk Shuyin GUOguoshuyin@cmbi.com.hk Stock Data Strong 2Q26 guidance signalsupward revision ofFY26forecast.Mgmt.guidedfor2Q26 revenue at ~RMB24bn with non-GAAP OPM of ~12% andNPM of ~9-10%, implying non-GAAP NP of ~RMB2.2-2.4bn. Keydriversinclude: EHT transaction volume growth of 25%+ YoY with GTV achievingsingle-digit growth; NHT GTV flattening YoY; and gross margin improving to25%+. For 3Q/4Q26E,mgmt.indicated non-GAAP NPM of 7-8%,andweestimatethisimplies FY26 non-GAAP NPof ~RMB7.0-7.7bnwith a marginof 7.9-8.7%,suggestingmeaningful upward revisionfrom 7.0%. New businesses on track for profit contribution.As ofend-1Q26, homerentalbizhad~750k units (+50% YoY)under management, with43.6% ofrevenue changedaccounting method(vs. ~20% a year ago),drivingCMto14.8% (+8.1ppts YoY),withthepercentageexpected to exceed 50% in2Q26Eper mgmt.guidance.Home renovation CM reached 36.2%(+3.6ppts YoY) despite a 20.6% revenue decline from proactive channelrestructuring, with management confirmingto reach breakeven inFY26.Bothnew businesses are becoming increasingly meaningful profitcontributors. Source: FactSet Results comparisonand changes in forecast Disclosures& Disclaimers Analyst CertificationThe research analyst who is primary responsible for the contentof this research report, in whole or in part, certifies that with respect to the securities or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about the subject securities or issuer; and (2)no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific views expressed by that analyst in this report.Besides, the analyst confirms that neither the analyst nor his/her associates (as defined inthe code of conduct issued by The Hong Kong Securities and Futures Commission) (1) have dealt in or traded in the stock(s) covered in this research report within 30 calendar days prior to thedate of issue of this report; (2) willdeal in or trade in thestock(s) covered in this research report 3 business days after the date of issue of this report; (3) serve as an officer of any of the HongKong listed companies covered in this report; and (4) have any financial interests in the Hong Kong listed companiescovered in this report. CMBIGM RatingsBUY : Stock with potential return of over 15% over next 12 monthsHOLD: Stock with potential return of +15% to-10% over next 12 monthsSELL: Stock with potential loss of over 10% over next 12 monthsNOT RATED: Stock is not rated byCMBIGM :Industry expected to outperform the relevant broad market benchmark over next 12 months:Industry expected to perform in-line with the relevant broadmarket benchmark over next 12 months:Industry expected to underperform the relevant broad market benchmark over next 12 months CMB InternationalGlobal MarketsLimited Address: 45/F, Champion Tower, 3 Garden Road, HongKong, Tel: (852) 3900 0888 Fax: (852) 3900 0800CMB InternationalGlobal MarketsLimited (“CMBIGM”) is a wholly owned subsidiary of CMB International Capital Corporation Limited (a wholly ownedsubsidiary of China Merchants Bank) Important DisclosuresThere are risks involved in transacting in any se