Chinese Market Leader Turns Down Chance to Democratize Control of Beike

After some speculation, Chinese mega-brokerage and portal company KE Holdings has elected to keep control of the company in the hands of an entity affiliated with the firm's late visionary founder Zuo Hui.

What is KE Holdings and why is it so important?

KE Holdings is a NYSE listed company that operates the country’s largest real estate marketplace Beike.com. Having started out as a bricks and mortar agency business under the name Lianjia in 2001 the company expanded from its Beijing base to the rest of China and launched its listings company Beike in 2018.

Touching most parts of transactions valued at a total $536 billion in 2020 alone, Beike as both a listings portal as well as a brokerage, is in many ways an archetypal model of the working end-to-end real estate company that many others around the world may privately be trying to mirror. Although there is stiff competition from Anjuke and Fang among others and some controversy within the market, KE Holdings is largely considered to be the market leader and posted 2020 revenues of over $11 billion.

What is the context of this latest news?

Following the unexpected death of the company's founder and Chairman in May, the fate of his 39% economic stake in the company and 81% of its voting rights had been up in the air. KE promoted CEO Peng Yongdong to replace Zuo as Chairman and has now answered questions about whether his shares would be converted to common ones to divide control of the firm more equitably among shareholders.

Dual share structures were banned in China for a long time which lead to many Chinese firms choosing to list in the US to retain control of their companies. This was the case for KE Holdings which decided to list on the NYSE in August 2020. Zuo's shares hold ten times the voting rights of ordinary shares and give those that own them what one reporter described as "feudal control" over the company.

Following his death, there had been speculation as to whether the dual shareholder structure was needed and whether the company might convert Zuo's shares to ordinary shares, give power to ordinary shareholders and in doing so become something of an example of corporate governance for other Chinese firms.

What does this mean for the company going forward?

In the event, the management at KE Holdings has effectively chosen to keep control of the company by passing the Zuo family Class B shares to an entity associated with the late Zuo Hui.

The upshot of an untimely death and the company's desire to retain outsized control has seen shares prices fall dramatically. On listing on the NYSE at $33 a year ago the company's share price more than doubled in the space of 3 months. Over the last month however, the price has fallen over 50% with shares now trading at $21 despite a recent acquisition which may well have been seen as a shrewd move to an adjacent market.