On August 28, multiple State Council level authorities jointly refined the country’s housing sales and mortgage framework, marking a major shift in the property sales and financing model. Key measures include:

1) higher presale thresholds and a push toward completed-home sales, with presale projects generally required to have their main structures topped out and new projects are encouraged to adopt completed-home sales. As such, future development funding will rely more on developers’ own capital and project-level loans, effectively cracking down the high-leverage, high-turnover model.

2) lower delivery risk for homebuyers, proceeds from pre-sold units will be deposited into segregated accounts and monitored by relevant authorities.  This should reduce the risk of improper use of sales proceeds and restore market confidence for buying new developments.  In addition, the local authorities will speed up their process in issuing Property Certificate (the local equivalent of title deeds).

3) extend maximum mortgage tenor to 40 years for eligible new and existing-home transactions. By extending the tenor by 10 years, for instance, a RMB5mn home with a 15% down payment at 3% interest rate and equal monthly payments, monthly repayments would decline from around RMB17.9k to RMB15.2k, representing roughly RMB2.7k or a 15% reduction, although total interest would rise by around RMB0.85mn. The policy will reduce monthly payment pressure rather than total ownership costs.

In short, the reform should lower purchasing risks and improve transaction volume. As KE Holdings (KE) covers both existing- and new-home transactions, stronger housing turnover should directly support its Gross transaction Value (GTV) and service revenue, with the existing-home business likely to benefit most.

Existing-home transactions have started to recover: As the number of secondary home sales improved in core cities, KE’s 2Q26 existing-home GTV rose 8% YoY to RMB629.9bn, broadly in line with expectations and accounting for 71% of housing transaction GTV. Secondary transaction volume increased 24.8% YoY, much faster than transaction value. Beilian (貝聯) network continued to outperform the self-operated Lianjia (鏈家) network, with average secondary-home transactions per active Beilian shop up 26% YoY, while Lianjia-led GTV declined by around 3%. Beilian growth was mainly driven by higher shop productivity rather than network expansion. However, the more asset-light platform model and cost optimization lifted contribution margin by 6.1ppts YoY to 46.1%, indicating better earnings quality despite softer reported revenue growth. Looking ahead, the Mgt will continue to focus on shop productivity and platform efficiency. And the new policy may also stimulate “sell-old-buy-new” replacement demand, providing further upside to existing-home transactions and earnings leverage.

The new-home business has started to stabilize and continues to outperform the market. Despite continued weakness in the new-home market, KE’s 2Q26 new-home GTV returned to growth, rising 1.2% YoY to RMB258.4bn, slightly above expectations, while sales of the top 100 developers declined by 9% YoY. The outperformance mainly reflected greater coverage of high-quality and newly launched projects, together with better customer matching and conversion. Despite a roughly 2.4bps QoQ decline to 3.46% in the take rate, new-home revenue still increased 3.8% YoY to RMB8.9bn, above market expectations, while contribution margin improved 4.4ppts YoY to 28.8%. New-home accounts receivable turnover days also improved to 39 days from 51 days a year earlier as the company strengthened collection and credit-risk management.

The new policy also raises project standards. This aligns with KE’s strategy shift in new homes from channel distribution toward project services. KE will advise developers with its proprietary database in formulating the most suitable product positioning, pricing and marketing plan to enhance sell-through.

Other businesses are being streamlined to boost profitability: Home renovation revenue fell 30% YoY to RMB3.19bn as KE exited lower-efficiency markets and channels, while contribution margin improved to 39.6%. Rental revenue declined 15% YoY to RMB4.83bn due to a shift toward a more asset-light model, although managed rental units still grew 34% YoY to over 790k and contribution margin rose to 15.3%. As low-efficiency operations were streamlined and costs optimized, GPM rose to 28.6% (+6.7ppts YoY/+4.5ppts QoQ), while OPEX declined 14.1% YoY, lifting OPM to 12.3% (+8.2ppts YoY/+5.6ppts QoQ). Adjusted net profit reached RMB3.18bn (+74.9% YoY/+98% QoQ), way above market expectations of RMB2.4bn, indicating that the earnings beat was driven mainly by internal efficiency gains rather than a broad property-market recovery.

Cash flow improved sharply, with OCF rebounding from an outflow of RMB1.5bn in 1Q26 to an inflow of RMB6.6bn in 2Q26, bringing 1H26 OCF to an inflow of RMB5.14bn versus an outflow of RMB3.14bn a year earlier, supported by higher profits and working-capital improvements. Net cash stood at RMB46.7bn (US$6.95bn) at end-June. During 1H26, KE spent about US$450mn on buybacks, of which about US$250mn was used in 2Q26.  Cumulative repurchases since 2022 reached US$2.99bn (14.8% of the initial share count), with around US$2bn of authorized and unused value remaining through August 2028.

Our Views. We view KE as an important barometer of China’s residential property market, given its exposure to both existing- and new-home transactions. Earlier policy easing on core cities and the latest reforms should improve buyers’ confidence. Secondary homes accounted for over half of nationwide housing transactions for the first time in 1H26, while KE’s greater exposure to existing homes positions it to benefit more directly from improving turnover and replacement demand.

The overall property market is not yet out of the wood, and KE is shifting from scale expansion toward cost and efficiency discipline. Meanwhile, it continues to gain market share with strong shop productivity and new-home GTV.  Furthermore, the rising contribution from Beilian and other platform businesses will alleviate reliance on the Lianjia direct-operation model, improving cost flexibility and operating leverage.

It is believed that China’s property market will shift towards product quality instead of purely pricing.  KE’s early move into upstream project services will likely lead to additional market share gain.  The counter is trading at 20x FY26E P/E. (Research Department)