DUO: Fangdd Cuts Costs to Ride Out the Real Estate Downturn

By Lisa Thompson



Fangdd (NASDAQ:DUO) is a residential real estate transaction platform company operating in China. It was founded by experienced real estate brokers to serve the needs of small and medium agencies with superior tools to run their businesses. It is one of the top SaaS platforms in China and was greatly affected by pandemic shutdowns and the current Chinese real estate crisis. It has US$98 million in cash and trades at a negative US$5 million enterprise value. We believe the company’s scalable business model provide and cash reserves may give it the ability to survive the real estate downturn.

Fangdd has suffered first from the pandemic, followed by industry commission price wars and now by the tightening of lending and sales restrictions in the real estate industry causing a real estate crisis. Particularly hard hit was new construction, Fangdd’s bread and butter. The company has had a huge decline in sales and has responded by cutting staff and operations and taking huge write offs of accounts receivable from its developer customers. It has also taken impairment charges for operations. It has missed all guidance it has given during the past year and as a result, take it Q4 guidance of revenue to be between RMB130 million and RMB150 million with a grain of salt. This is down 17% sequentially from RMB169 million in Q3 as it moves into the slow winter season for the industry and compares with revenues of RMB622 in Q4 of 2020.

The big and only question for the company is whether it survives until the real estate crisis ends and the market returns to normal times. While we may use US standards for predicting outcomes, there is always the caveat that there could be government intervention in China to change results either for Fangdd or for its debtors. We have already seen reports of China encouraging banks to lend to developers. According to the National Bureau of Statistics, the total volume of real estate transactions in China decreased by 14.1% year over year to RMB4.2 trillion in the third quarter of 2021.

As of September 30, 2021, Fangdd had a combination of cash, restricted cash and marketable securities of RMB633 million (US$98 million.) This was actually a net cash increase of RMB28 million (US$4.6 million.) Although we do not know how this was done, as the company does not release quarterly cash flow statements, it says net cash used in operating activities decreased to RMB12.8 million (US$2.0 million) from RMB53.0 million (US$8.3 million) in the second quarter of 2021. We believe this was achieved mostly through collecting accounts receivable.

In Q2 and Q3, Fangdd took one-time write offs as well as increased allowances for bad debt. In Q2 the number was RMB79.1 million. In Q3 it had its write offs and right sizing expenses of RMB 201.9 million (US$31.3 million) which included a provision for impairment of certain assets, such as accounts receivable due from developers and other accounts receivable of project deposits as well as an increase in severance as it streamlined its operation to weather the downturn. Although the company does not, we took out these write offs in our estimates of non-GAAP numbers to get a more accurate view of ongoing operations.

If we look at operations taking out these provisions, for the first nine months of 2021, the company had revenues of RMB862 million compared to RMB1.83 billion, down 53%. Operating losses would have been RMB279 million versus RMB150 million, an 87% increase.

Most importantly the company has reduced its cash breakeven point. We do not know what revenue level the company would breakeven going forward as a number of measures were only put in place in July. Given all the unknowns both with current operations at the company and the industry in general it is hard to predict anything let alone the 2022 year. We are predicting things improve, but slowly.

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