In this video we talk about Zhaopin, a rising online employment classifieds and recruitment services platform in China, and a key component of Seek Limited’s (ASX:SEK) international growth strategy.
As regular readers will be aware we believe Seek has an attractive business model and long term growth potential. We’ll provide a short overview of our thesis in broad terms to provide context for Zhaopin (ZPIN).
Zhaopin has strong momentum in China and we believe it’s a key source of long term upside for SEK.
Seek’s domestic business has outstanding economics due to its monopoly of online employment classifieds, which provides consistent and high margin revenues derived from ongoing market place activity. Its capital-light structure translates to strong free cash flows, which can be put to platform enhancements such as the recently launched Premium Talent Search product. These enhancements drive higher penetration into recruitment budgets and pricing power.
Over the last decade Seek’s domestic revenues compounded at over 30% as jobs advertising shifted online, and EBITDA margins expanded from 45% to close to 60% as SEK consolidated the market.
The international strategy targets large, early-stage markets where internet penetration is low and where there are opportunities for market consolidation as jobs advertising and recruitment services are digitised. The international businesses also provide opportunities for scaling new platform features and products like Premium Talent Search.
Seek’s share price is down this month after management provided lacklustre FY17 earnings guidance of $215m-$220m along with its announcement of increased stakes in Brasil Online (from 51% to 100%) and Seek Asia (from 80.8% to 86.2%). Excluding the earnings contribution of these investments, the guidance implies only low single digit earnings growth, which this is unacceptable for some investors given shares were trading at a multiple of 28 times earnings. It is important to note, however, that the subdued growth reflects the increased investment in technology and new and international expansion rather than any structural deterioration. Annual capex tripled from $17m to nearly $60m since 2012 which has dampened bottom line growth.
Now to Zhaopin. Based on consensus, Zhaopin contributes around $2.50 to SEK’s valuation. This is consistent with Zhaopin’s current 20% revenue growth slowing to low single digits within 10 years and its EBITDA margin staying around 20% – well below Seek’s domestic margin. This is interesting because ZPIN still has low penetration in China’s rapidly expanding market, and the relatively low margin is due to aggressive spending on sales and marketing.
In China it’s a two horse race for mass market dominance with ZPIN focused on the North and 51JOB in the South.
- 139 million online jobseekers, growing at 9% per annum
- ZPIN has 29% penetration with 40 million active registered users
- 3.4 million online employers vs 73 millions SME’s, growing at 15%
- ZPIN has 12% penetration with 0.42 million unique customers (over 12 month period)
- 50% – 60% vs 80% – 90% Australia
HR budget share
- ZPIN estimates HR cost for filling a job vacancy is about 1 month’s salary, and that 5 – 10% of the budget is spent on ZPIN’s services (mainly job postings and resume downloads)
Here we’ll go through a few notes on the Chinese market and how ZPIN and 51JOB are competing.
As you can see Chinese market is still fragmented, and should grow strongly over the next decade. There is also room for ZPIN to increase its share of HR budgets via platform enhancements and pricing power, with the latter depending Zhaopin achieving outright market leadership.
51JOB NYSE (RMB)
- MCap: $11.7bn
- Net cash: $4.1bn
- EBITDA: 0.77bn
- 3,500 sales force (2,900 in 2014)
- 104 cities
- 1 call centre (Wuhan in southern China)
- 25 sales offices
- MCap: $5.3bn
- Net cash: $1.1bn
- EBITDA: $0.3bn
- 3,220 sales force (2,002 in 2014)
- 220 cities
- 2 call centres (Beijing in the North, Suzhou in the South (launched late 2014)
- 33 sales offices
51JOB is about double the size of ZPIN in terms of market capitalisation and earnings, however the 51JOB’s online employment segment is about the same size as ZPIN, and ZPIN’s marketing arm has more breadth.
Importantly, ZPIN is leading on online engagement metrics with twice the number of daily unique visits and visits per user, which indicates a superior online experience. It is also leading on customer acquisition and revenue growth (20% vs 11%), however 51JOBS’s 35% EBITDA margin is much higher.
This chart shows Zhaopin is charging lower prices to acquire customers. Note average revenue per user growth recently reverted to an upward trend.
Here we can see ZPIN passed 51JOB on unique customers last year and is building a gap on its rival.
And finally ZPIN is spending more on sales and marketing on an absolute basis, and much more as a percentage of revenues (~50% vs ~35%).
Zhaopin represents a key pillar of Seek’s international growth strategy. As outlined above it has strong momentum in the large Chinese market. In our view there is potential for higher than expected revenue growth coupled with margin expansion, supporting our overall investment thesis for Seek.
Jonathan Wilson is an Equities Analyst at StocksInValue. Disclaimer: Clime Asset Management and Jonathan Wilson own shares in SEK.