US Stock IPO Preview | GongWuYuan: Slowing Revenue Growth, How to Navigate the Flexible Employment Blue Ocean?

Driven by the strong momentum of the new era economic trends such as the sharing economy and platform economy, the flexible employment model is reshaping the relationship between enterprises and workers profoundly. According to relevant agencies, it is predicted that by 2036, the number of "gig economy" workers in the country will reach 400 million. Behind this number is the continuous penetration of digital technology and the vigorous development of new formats, jointly driving the rapid expansion of the flexible employment market.

The race in the flexible employment sector is heating up, and Gongwu Yuan is a participant in this race. Public information shows that Gongwu Yuan plans to list on Nasdaq with the stock code BIYA. The company is a blue-collar labor resource sharing platform. The company plans to issue 3 million common shares at a price of 4-6 US dollars, with a maximum fundraising of 18 million US dollars.

Sharp Drop in Revenue with Losses Hard to Conceal

The prospectus shows that Gongwu Yuan is based in Shenzhen, Guangdong. As an internet company engaged in building a blue-collar labor resource sharing platform, it has independently built a human resource sharing platform focusing on blue-collar labor, namely the Gongwu Yuan platform. Through an innovative guarantee transaction model, the company solves the needs and problems of enterprises, human resource companies, and blue-collar job seekers. Currently, there are 6,456 registered enterprise clients on the Gongwu Yuan platform, and it has established cooperation plans with over 230 vocational and technical colleges. The company has established more than 20 subsidiaries/branches in China and operates over 10,000 online human resource communities.

During the reporting periods of 2021, 2022, and the first half of 2023, the company's revenues were 20.825 million yuan (in US dollars, the same below), 13.162 million yuan, and 4.696 million yuan, with corresponding net profits of 240,000 yuan, -1.264 million yuan, and -177,000 yuan respectively.

In terms of business segments, Gongwu Yuan can be divided into job matching services, entrusted recruitment services, project outsourcing services, labor dispatch services, etc., with entrusted recruitment services and project outsourcing services being the main sources of revenue for the company. During the period, the revenues from entrusted recruitment services were 9.588 million yuan and 2.749 million yuan, accounting for 46.1% and 20.89% of total revenue respectively; project outsourcing services revenues were 9.876 million yuan and 9.874 million yuan, accounting for approximately 47.4% and 74.79% of total revenue respectively; job matching services and labor dispatch services had a relatively small revenue share, even less than 1%. In fact, the job matching services business did not generate revenue in 2022.

Overall, the company's revenue has almost halved, mainly due to the comprehensive decline in major businesses, especially a 71.3% decline in revenue from entrusted recruitment services.

Income has plummeted on a large scale, and the gross profit of Gongwu Garden has also shown a declining trend. In the first half of 2021 to the first half of 2023, the company's gross profit was approximately 267.6 thousand yuan, 152.6 thousand yuan, and 30.2 thousand yuan respectively, with year-on-year decreases of 42.96% and 40.6%. In addition, the net profit turned from profit to loss.

The slowdown in performance growth has led to the deterioration of other key financial indicators of the company. During the period, the company's cash was approximately 240 thousand yuan, 240 thousand yuan, and 10 thousand yuan respectively; as of June 30, 2023, the company's operating cash flow was -87 thousand yuan, and the liquidity risk is worth noting. The company stated that so far, it has mainly provided funds for operations through operating cash, loans, and shareholder contributions. As of the six months ended June 30, 2023, cash provided by financing activities was 200,000 US dollars, including 1.3 million US dollars in loan proceeds and 1.1 million US dollars in loan repayments.

The flexible labor market remains a blue ocean, and Gongwu Garden urgently needs to expand its business scale

Since 2017, the company has been providing job matching services in a traditional way, and later launched the "Gongwu Garden" platform, expanding its services to entrusted recruitment, project outsourcing, labor dispatch, etc., achieving rapid growth in customer base and revenue. By continuously deepening the flexible employment market, Gongwu Garden may enjoy the growth dividend of this track.

As China's industries continue to upgrade, the investment in digitalization by enterprises is increasing. According to the "Industrial Digital Talent Research and Development Report" jointly released by Renrui Talent and Deloitte, China's digital economy is expected to reach 16 trillion US dollars by 2035, with a projected shortage of digital talents ranging from 25 to 30 million.

A report by Minsheng Securities also points out that global human resources giants are mainly concentrated in Europe, Japan, and the United States. Looking at the top 100 companies in terms of global market value, the largest number of companies engaged in flexible employment are in the field of flexible employment; in terms of revenue volume, among the 6 companies with revenue exceeding one trillion yuan, 4 are engaged in flexible employment. The current macro environment in China meets the conditions for the rapid growth of flexible employment, and the domestic market is expected to experience rapid development in the future.

According to a report by iResearch, the compound annual growth rate of the flexible employment market from 2017 to 2021 was 41%, and the market size of the flexible employment market reached 814.5 billion yuan in 2021. It is estimated that the compound annual growth rate of the flexible employment market from 2022 to 2024 will increase by 26.2%, and the market size in 2024 is expected to reach 1.6834 trillion yuan.

Compared to other countries, the penetration rates of flexible employment in the United States, Japan, and the European Union were 10%, 4%, and 3% respectively in 2018, while China's penetration rate of flexible employment (excluding labor dispatch) was only 1%, showing a significant gap from developed countries. Considering the large scale of the labor market in China and the continuous improvement of industry policies, the flexible employment market has great growth potential in the future.

In terms of competitive landscape, ManpowerGroup, Kelly Services, and Randstad are the top three flexible employment service providers. Kelly Services (CR3) holds an 8.0% market share, indicating that competition among flexible employment service providers is still in the early stages. Therefore, Gongwu Yuan urgently needs to expand its business scale to gain growth dividends in the rapidly developing industry. However, facing intense competition, Gongwu Yuan may experience reduced profits, market share, and clients, leading to a decrease in the usage of its services by employer companies and human resource service providers.

During the period, Gongwu Yuan actively innovated its technology. Its "Cloud Single Guarantee" system provides corresponding guarantees for both parties in transactions, and the "Smart Management" function empowers enterprises through the platform, facilitating cooperation between supply and demand while providing subsequent derivative services, ensuring stable revenue. Currently, Gongwu Yuan has developed multiple products including the institutional end APP (Gongwu Yuan Institutional Edition), personal version APP (Gongwu Yuan Personal Edition), and personal job search mini-program, among others. Undoubtedly, these changes solidify the company's technological foundation for business development, but the decline in business and weakening fundamentals are already a reality.

Furthermore, Gongwu Yuan's business heavily relies on cooperation with third-party companies, such as collaborating with human resource companies to provide job matching services, recruitment services, and project outsourcing services, as well as partnering with third-party companies to provide various ongoing technical support for our platform.

As of June 30, 2023, the company had three main clients, namely Nanchang Jiesite Cleaning Environmental Protection Co., Ltd., China Post Group Co., Ltd., and Guangdong Yingwang Industrial Investment Co., Ltd. In the six months ending on June 30, 2023, the total revenue contributed by the above three clients was 2.31 million yuan, 0.945 million yuan, and 0.504 million yuan respectively, accounting for 49%, 20%, and 11% of its total revenue. The top three clients contributed over 70% of the revenue, highlighting Gongwu Yuan's deep dependence on them.

In the future, reducing the business stickiness to a single industry's labor demand, achieving diversity in customer structure distribution, and enhancing business resilience will also be a major growth challenge for Gongwu Yuan