Significant Perceptual Difference? Kanzhun.US "Stamps Approval" on Recruitment Rebound

After the Hong Kong stock market closed on March 12th Beijing time, Kanzhun.US released its 2023 fourth-quarter earnings. Overall, the performance is not bad, although there was a slight miss in GAAP profit and user numbers compared to expectations, it's not a big issue.

Specifically:

1. Revenue exceeds expectations, providing good guidance

In the fourth quarter, Kanzhun's direct recruitment revenue increased by 46% year-on-year to 1.58 billion, once again exceeding the upper limit of guidance (management guidance has always been relatively conservative), slightly surpassing market expectations. Management's revenue guidance for Q1 is in the range of 16.4-16.7 billion, with a year-on-year growth rate of 28-31%, slightly better than market expectations.

Some operational indicators also show a positive trend, with a significant 61% increase in current cash flow and a net increase of 300,000 paying enterprises in the off-season, reflecting a real recovery in overall corporate recruitment demand. At the same time, the year-on-year growth of annualized payment amount for enterprises is 3%, indicating that in the structure of paying enterprises, the recruitment demand of larger enterprises with higher payment levels is also recovering.

Looking back at the whole year, due to its relatively significant competitive advantage in the industry, Kanzhun's direct recruitment, as a "theoretical" strong Beta stock, has actually been delivering fundamental performance like an Alpha stock, and the performance in the fourth quarter further strengthens the marginal recovery trend in the recruitment industry.

2. R&D expenses slightly exceed expectations, restrained marketing in the off-season

The profit performance is slightly weaker than expected, mainly due to higher R&D expenses, including increased personnel costs and server investments, while the expected high sales expenses did not materialize, which may have slightly affected customer acquisition. However, compared to industry peers, the user numbers in Q4 did not give Kanzhun a competitive advantage.

Overall gross profit margin and Non-GAAP profit indicators excluding SBC exceeded expectations, with the operating profit margin not showing a significant decline on a QoQ basis in the off-season, and a significant improvement on a YoY basis. It is precisely because the company has sufficient competitive advantages in the industry that it can relatively calmly maintain its operational efficiency in a complex environment.

3. User scale declined in the off-season, but rapidly rebounded after the Spring Festival

In the fourth quarter, Kanzhun's direct recruitment monthly active users were 41.2 million, lower than the market's expectation of 4.4 billion. Dolphin Research believes that the discrepancy in MAU expectations may be more related to statistical errors consistent with Bloomberg's expectations.

On one hand, the user trend in third-party data is clear, and the current stock price has basically priced in this information. On the other hand, the decline in MAU in the off-season is basically an industry norm, unless there is a counter-season marketing customer acquisition action like in the fourth quarter of 2022 due to the World Cup, so the market's initial expectations were clearly too high.And according to third-party data, user daily activity has rapidly rebounded after the Spring Festival.

4. Generously rewarding shareholders, repurchasing shares after the last dividend

During the third quarter report, the company announced its first dividend (0.18 USD/ADS). This time, the company also announced a 12-month, 200 million USD share repurchase plan starting from March 20th, as a way to reward shareholders after stabilizing profits.

The management of Kanzhun Zhipin has always been relatively reliable, so they have done quite well in terms of rewarding shareholders within the Chinese concept stock sector. In fact, from an operational perspective, Kanzhun Zhipin only started to turn a profit in the second quarter of last year, but due to its sound business model, its cash flow status is better than its financial accounting status.

In the fourth quarter, the net cash inflow from operations was 930 million RMB, with a total outflow of less than 900 million from current investments + financing cash. This resulted in a net cash increase for the period. By the end of the year, the company had 12.9 billion RMB in cash + short-term investments, enough to sustain normal operations, investments, and share repurchases.

5. Comparison of core performance indicators with market expectations

Dolphin Research's Viewpoint

Looking back over the past two years, despite the changing macro environment and relatively consistent pressure, Kanzhun Zhipin's overall performance has been quite impressive, mostly exceeding expectations. As the fourth-quarter financial report draws to a close, any flaws do not overshadow its strengths, further confirming the company's solid competitive strength and the industry's warming trend.

As we mentioned in the previous quarter's review, large enterprises are the main force in the recruitment industry. The recovery of recruitment by large enterprises reflects the industry hitting bottom. With the tail end of cost reduction and efficiency improvement by large enterprises (especially in Internet IT, where job demand accounts for 30% on Kanzhun Zhipin) and the new talent cycle brought by AI technology, recruitment demand is gradually stabilizing. Therefore, it is highly probable that Kanzhun Zhipin's performance will improve QoQ.

In addition, we would like to emphasize Kanzhun Zhipin's strong Alpha attribute this time: after more than a year of repeated verification, Kanzhun Zhipin has continuously proven to have a certain moat advantage. In simple terms, having a flexible and user-friendly product is essential, enabling B and C-end traffic complementarity, thereby forming a perfect closed-loop ecosystem.

(1) For C-end job seekers, Kanzhun Zhipin is the largest job-seeking platform in China (with many companies and active HR personnel), with high brand awareness, especially for young job seekers born in the Internet era. Despite occasional heavy spending by competitors to acquire customers, in terms of MAU comparison under normal circumstances, the gap between followers and Kanzhun Zhipin is widening.

(2) For B-end recruiters, Kanzhun Zhipin, with its traffic advantage, can provide lower job seeker outreach costs. Moreover, through the "pre-interview" online communication stage, recruiters can conduct an initial screening to improve recruitment efficiency.The ability to support high-frequency interactive scenarios like online communication relies on large-scale traffic and user stickiness, which brings us back to the strengths of Kanzhun.

According to market expectations, the current one-year forward valuation of Kanzhun's direct recruitment is 7.2x PS (revenue +25%), with a long-term steady-state after-tax operating profit of 20%, implying a 24-year PE of 36x. Looking at the profit growth in the next three years and the premium of leading companies, the valuation is neutral, and the current stock price adequately reflects the company's quality. However, there is a short-term improvement trend, and there may be further rebound momentum.

Due to reliable management, the company's business model in the industry is relatively excellent, and it has high competitive barriers. Therefore, Dolphin Research suggests long-term attention to Kanzhun's direct recruitment and to look for suitable opportunities.

Here is a detailed analysis:

1. Off-peak traffic naturally declines, but rebounds to new highs after the Spring Festival

The fourth quarter is the off-peak season for recruitment, with Kanzhun's direct recruitment monthly active users decreasing by 340,000 compared to the previous month, reaching 41.2 million. Last year, the economic expectations started high but ended low. Small and micro-enterprises that actively expanded at the beginning of the year during the relaxed epidemic situation have also lowered their expectations for the coming year in the subdued market environment at the year-end.

The reduction in positions has also affected the job-seeking willingness of users, with more adopting a laid-back attitude. The company did not have any significant increase in customer acquisition through expanded advertising during the period, and the corresponding sales expenses were relatively restrained.

However, after the end of the Spring Festival holiday, the monthly active scale of platforms like Kanzhun's direct recruitment has rapidly returned to last year's peak. From this perspective, the labor market supply remains sufficient. But at the same time, we believe that enterprise demand is not continuing to shrink.

On one hand, the recruitment demand of large enterprises that started to recover in the second half of last year is expected to continue to gradually warm up. For example, industries such as urban blue-collar services, cross-border e-commerce, and new energy require manpower. The hard cost reduction cycle in the internet industry is nearing its end, but the AI new generation technology cycle will bring about a medium to long-term talent gap that needs to be filled.

On the other hand, the optional consumption during the Spring Festival exceeded expectations, which may repair the outlook for small and medium-sized enterprises, mainly in cultural tourism and local social services industries.

1. Good guidance, benefiting from industry beta recovery and strong self Alpha

Total revenue in the fourth quarter was 1.58 billion, a year-on-year increase of 46%. Among them, the revenue from ToB end network recruitment services was 1.57 billion, a year-on-year increase of 46.5%, slightly exceeding market expectations. The management's guidance for the next quarter is in the range of 1.64-1.67 billion, with a year-on-year growth rate of 28.4% to 30.7%, which is better than what the market expected.During a period of relatively flat traffic, the advantages of Kanzhun Zhipin may become more significant. Compared to the issue of long-term non-updated resumes in the industry's resume database, Kanzhun Zhipin's user ecosystem is more active, thus attracting more new cooperation or renewals from medium and large enterprises.

From a financial and operational perspective, how can we see that the growth in revenue is being driven by the recovery of recruitment demand from large enterprises?

(1) Increase in enterprise payment volume and price

As usual, Kanzhun Zhipin tends to renew contracts with customers at the end of the year and adjust prices for different industries. Therefore, in Q4, the average payment per customer tends to increase, while the number of paying users decreases compared to the previous quarter.

However, in the fourth quarter of last year, the number of paying enterprise users increased by 300,000 quarter-on-quarter, showing growth against the trend. At the same time, the annualized payment amount per enterprise also increased by 3% compared to the previous quarter.

The increase in both volume and price led to an abnormal expansion of cash flow in the fourth quarter. If the company did not have strong promotional or limited-time price increase policies, then the performance in the fourth quarter precisely confirms that the recruitment demand from the enterprise side, especially from large enterprise clients with higher payment capabilities, is steadily recovering.

(2) Deferred revenue increased by 7% compared to previous years, with the proportion of current recruitment tool consumption lower than last year

Despite the increase in cash flow, the proportion of current recruitment tool consumption by enterprises in Q4 decreased significantly compared to Q3, leading to a higher quarter-on-quarter growth in deferred revenue in Q4.

Generally, in a flexible payment model for small and medium enterprises, the proportion of current consumption is relatively high (i.e., pay-as-you-go). Only in the annual contract model of medium and large enterprises will it show that with an increase in current revenue, the consumption ratio is relatively low. Therefore, from this perspective, it can also be seen that the demand from large enterprises is steadily recovering.

(3) Judging the development trend of enterprise clients' industries

During the last quarter's conference call, the management mentioned that the significant change in the current period mainly came from large and medium enterprises, rather than from small and medium enterprises as in the first and second quarters. This is actually a crucial sign of confidence turnaround. In economic fluctuations, small and medium enterprises have higher expansion motivation after the epidemic due to lower costs of starting or stopping operations. Conversely, large enterprises, with a more pessimistic/conservative economic outlook, tend to act slower and more hesitantly.In the third quarter, large enterprises have significantly accelerated their recruitment efforts, indicating signs of a bottoming out in their expectations. In addition to the bottoming out of their own cost optimization cycle, there are also new demands and industry growth momentum brought by new technologies such as blue-collar workers and AI. Large enterprises consider at least a one-year operational outlook when formulating recruitment plans, so the recovery in large enterprise recruitment can at least support the short-term performance stability of recruitment platforms.

Of course, for sustainability beyond one year, the overall direction still needs to see the extent of continued recovery in the macro environment, especially with more policies being implemented.

During the peak season, acquire customers, and during the off-season, calmly improve efficiency.

In the fourth quarter, Kanzhun Zhipin's core business operating profit (revenue - costs - sales expenses - R&D expenses - administrative expenses) was 217 million, with a profit margin of 13.7%. Compared to the previous quarter's 15.4%, it did not drop as rapidly as before, showing better performance than market expectations.

The Non-GAAP operating profit, excluding equity incentives, also remained at 32.6%, showing more stability compared to the previous quarter. In other words, apart from personnel expenses, overall operating expenses are maintaining a stable trend in proportion to revenue changes. However, looking into details, marketing expenses are more restrained, while R&D expenses have significantly expanded compared to the previous year. It is worth paying attention to the management's explanation during the conference call, whether it is for purchasing servers or for investing in product-related activities by expanding the workforce.

Due to significant traffic stickiness advantages, Kanzhun Zhipin can more confidently restrain marketing spending during the off-season of employment imbalance (job demand >> recruitment demand) compared to its peers, to improve operational efficiency. High marketing expenses have always been the biggest flaw in the excellent business model of online recruitment platforms. However, as mentioned earlier, Kanzhun Zhipin has entered a good ecological stage of complementing B and C-end traffic, and abnormal spending will naturally decrease gradually.

At the same time, the gross profit margin increased by 1.3 percentage points year-on-year, mainly due to the low base in the adverse environment of the same period last year. However, in early 2023, the company added server investments.In other words, the company relies on faster-growing revenue (especially the increase in fees from large enterprises that sign contracts and use offline payments), covering the incremental server investment and the additional channel commissions (such as Apple's 30% tax) incurred by the increase in online payments from small and medium-sized enterprises.

Although the gross profit margin has not yet returned to previous levels, considering the more flexible payments from some small and medium-sized enterprise customers, issues related to Apple's channel commissions arise when purchasing scattered props online, thus affecting the gross profit margin. In addition, due to the increase in traffic, the company has added some servers for support in the past year, so it may be challenging for the gross profit margin to return to previous peak levels, but there is still room for further improvement.

During the last quarter's conference call, the company maintained its long-term Non-GAAP operating profit margin target at 40%. With a fourth-quarter margin of 32.6%, there is still significant room for optimization to reach the long-term target. The adjusted SBC is expected to account for 16-18 percentage points of revenue currently. Even if the SBC ratio remains unchanged (there is actually room for adjustment), the long-term GAAP operating profit margin could reach 22-24%, calculated with a 15% tax rate, resulting in an after-tax profit margin of 18.7%-20.4%, demonstrating the superiority of the business model.

On the other hand, being in a good track also means attracting more new players. Therefore, the competitive risk for Kanzhun Zhipin does not necessarily come from existing competitors, but more likely from other platforms with traffic advantages venturing into online recruitment. Of course, this is not something that can be achieved overnight, so for investors, it is important to keep a close watch.

Dolphin Research on "Kanzhun Zhipin" Historical Research:

Financial Report Season

November 15, 2023 Conference Call " Blue-collar service industry recovers the fastest (Kanzhun Zhipin 3Q23 conference call summary)"

November 15, 2023 Financial Report Review " Kanzhun Zhipin: The coldest period of recruitment winter is over"

• Telephone conference on August 30, 2023: "Blue-collar Rapid Infiltration, Slowdown in Large Enterprise Layoffs (Kanzhun Zhipin 2Q23 Telephone Conference Summary)"

• Financial report review on August 29, 2023: "Kanzhun Zhipin: Stable Performance, Focus on Policy Expectations"

• Financial report review on May 24, 2023: "Kanzhun Zhipin: 'Industry Kanzhun' Position Still Strong, Waiting for Opportunities"

• Telephone conference on March 21, 2023: "Platform Data Reaches New Highs, Confident in Exceeding Expectations (Kanzhun Zhipin 4Q22 Telephone Conference Summary)"

• Financial report review on March 20, 2023: "Kanzhun Zhipin: Recovery Confirmed, but Pace is Sluggish"

• Financial report review on November 30, 2022: "Kanzhun Zhipin: Short-term Impact of Epidemic, Turning Point Comes After Emerging from Economic Downturn"

• Telephone conference on August 25, 2022: "Kanzhun Zhipin: Rational Spending and Efficiency First While Business Operations Recover (2Q22 Telephone Conference Summary)"

• Financial report review on August 24, 2022: "After Double Pressure, Kanzhun Zhipin Returns to Growth Countdown"

• Telephone conference on June 25, 2022: "Highest Rebound in Service Industry Demand After the End of the Epidemic, No Immediate Threat Seen in Competition (Kanzhun Zhipin Telephone Conference)"

• Financial report review on June 25, 2022: "Kanzhun Zhipin: Resisting the Headwinds, Awaits the 'Unsealing'"

• Telephone conference on March 24, 2022: "Continuing refined operation of existing stock before lifting the ban (Kanzhun Zhipin telephone conference summary)"

• Financial report review on March 24, 2022: "Kanzhun Zhipin: Accumulate grain now, build high walls in the future"

• Financial report review on November 25, 2021: "Kanzhun Zhipin: Pressured by regulation and macroeconomics, making money first to survive the winter (including key points from the telephone conference summary)"

• In-depth analysis:

  • December 6, 2022: "Kanzhun Zhipin: Crazy World Cup boosts stock price, smooth road ahead after the mud?"

  • December 13, 2021: "Kanzhun Zhipin: The recruitment version of Pinduoduo, is it worth the price?"

  • November 4, 2021: "Kanzhun Zhipin: The ultimate 'Kanzhun' in the recruitment industry?"

Risk disclosure and statement for this article: Dolphin Research disclaimer and general disclosure