US Stock IPO Preview | Latch Service: Financial data cannot hide customer dependency dilemma. Is profit growth all dependent on its internal accounting staff?

Due to the "immigration wave", various industries in Hong Kong are facing a "talent shortage".

Statistics show that in the past 5 years, the labor force in Hong Kong has decreased by about 219,000 people, while the number of job vacancies in companies has increased from about 39,000 in March 2021 to about 78,000 in March 2023, with a vacancy rate of 2.8%, reaching a new high in 9 years. The most in-demand industries include technology, healthcare, education, banking and insurance, aviation, construction, and hotel services.

In addition, according to a publicly available report on manpower demand, the Hong Kong Special Administrative Region government estimates that by 2027, there will be a supply-demand gap in overall human resources in Hong Kong, with an overall shortage of up to 169,700 people.

Recently, Click Holdings Limited (hereinafter referred to as "Click Services"), the holding company of Hong Kong human resources company Lik Services Limited, officially submitted a prospectus to the U.S. Securities and Exchange Commission (SEC) to apply for listing on the Nasdaq with the stock code: CLIK. The prospectus shows that Click Services plans to issue 1.5 million shares at a price of $4 per share, raising $6 million. At the proposed price, Click's market value will reach $60 million.

Through its prospectus, we may be able to gain insights into the fundamentals of Click Services and the operation of the Hong Kong human resources market.

Net Profit Growth Rate Far Lower Than Revenue Growth Rate

Established in 2017 and headquartered in Hong Kong, Click Services is a comprehensive human resources service provider that focuses on providing comprehensive human resources solutions in three main areas: professional solution services, care solution services, logistics, and other solution services, including services such as care, postpartum care, home cleaning, and packaging.

During the reporting period from 2022 to 2023, the company's revenue was approximately $415.6 thousand and $565.7 thousand respectively, with a year-on-year growth of 36%; gross profit was $79.8 thousand and $170.0 thousand respectively, with a year-on-year growth of 113%; net profit was $18.3 thousand and $80.3 thousand respectively, with a year-on-year growth of 338.8%. The net profit growth rate far exceeds the revenue growth rate.

According to the Zhitong Finance app, behind Click Services' net profit growth rate far exceeding the revenue growth rate, on the one hand, is the significant increase in gross profit; on the other hand, the decrease in expenses, with the company's marketing and sales expenses decreasing by 31.2% year-on-year during the period.

Looking at the business segments, during the reporting period, the revenue from professional solution services was approximately $94.2 thousand and $200.3 thousand respectively, with a year-on-year growth of 112%, accounting for approximately 22.7% and 35.4% of total revenue respectively; The revenue of the nursing solution services was approximately 1.934 million RMB and 1.770 million RMB respectively, with a year-on-year decrease of 8.5%, accounting for 46.5% and 31.2% of the total revenue respectively; while the logistics and other solution services were approximately 1.280 million RMB and 1.884 million RMB respectively, with a year-on-year growth of 47.2%, accounting for approximately 30.8% and 33.4% of the total revenue.

It can be seen that professional solution services have become the main revenue growth driver for the company, even rising to become the company's largest business. With the growth of this business, its gross profit margin has also increased from 35.9% to 59.9%. Professional solution services have a higher profit margin because these services are provided by internal company employees, whose salaries are a core part of the revenue cost but relatively stable. In addition, the scale of logistics and other solution services has further expanded mainly due to business expansion. However, the gross profit margin of this business has declined by 4.1 percentage points to 11.9% year-on-year as it expanded.

Hong Kong's Labor Industry Still Lacks Leading Services - Where Does the Service Gap Lie?

Over the past decade, Hong Kong's labor market has been constrained, with low unemployment rates and high job vacancy rates evident. According to the "Manpower Projection to 2027" report released by the Hong Kong Labour Department in December 2019, the supply of labor in Hong Kong is expected to increase slightly, with an average annual growth rate of 0.2% from 2017 to 2022, followed by an expected average annual decline of 0.6% from 2022 to 2027, resulting in an average annual decline of 0.2% from 2017 to 2027.

At the same time, Hong Kong's total labor demand (excluding foreign domestic helpers) is expected to increase by 127,000 people, from 3.61 million in 2017 to 3.74 million in 2027, with an average annual growth rate of 0.3%. According to the latest labor statistics released by the Census and Statistics Department of Hong Kong (www.censtatd.gov.hk/en/), the seasonally adjusted unemployment rate remained stable at a low level of 2.9% from November 2023 to January 2024, the same as the unemployment rate recorded from October to December 2023.

Therefore, the widening gap between labor supply and demand in Hong Kong is expected to increase the demand for human resources services to match labor with local vacancies.

However, in a market with such high demand for human resources, there is a lack of leading companies. According to information from the Zhitong Caijing app, Hong Kong's labor industry is highly fragmented, lacking a leading enterprise with a significant market share. Staffing companies typically act as intermediaries, helping employers accurately describe job vacancies and screen suitable candidates With the leading position waiting to be filled, can Liji Services establish a solid foothold in the human resources market by continuously capturing market share?

Looking at the human resource prospects in the business sectors covered by Liji Services, in the subsectors of accounting, auditing, and bookkeeping services, the demand for manpower is expected to increase at an average rate of 0.7% per year, from 30,700 people in 2017 to 32,800 people in 2027; the demand for manpower in the nursing sector is expected to grow at an average annual rate of 0.9%, from 732,200 people in 2017 to 799,700 people in 2027; most clients in the logistics industry are driven by e-commerce, with the Hong Kong e-commerce market expected to reach USD 20.32 billion by 2023, with a 9.4% annual growth rate and a user penetration rate of approximately 80.9%.

In summary, the business prospects of Liji Services are relatively promising, with significant growth potential in various major business markets.

However, the company currently suffers from severe customer dependency. During the reporting period, the revenue from the top five customers accounted for 51.6% and 48.4% of the group's total revenue. Over-reliance on customers has led to high accounts receivable, amounting to 850,000 RMB and 803,000 RMB in 2022 and 2023, respectively. In order to obtain working capital, the company continues to rely on bank loans to fund its operations. As of December 31, 2023, and 2022, the total amount of loans for the company was approximately 500,000 RMB and 600,000 RMB, respectively. In addition, the financial costs of Liji Services were 25,018 USD and 5,487 USD, accounting for 2.8% and 3.0% of the pre-tax profits as of December 31, 2023, and December 31, 2022, respectively. The sharp increase in financial costs not only dilutes the profits of Liji Services but also tightens its cash flow.

In conclusion, the significant growth in revenue and net profit of Liji Services mainly stems from the substantial growth in the scale of its professional solution services business. In the long run, there is still room for growth in the human resources covered by the company's business, and the company will also benefit from industry growth dividends. However, the aftermath of deteriorating financial indicators caused by customer dependency is still a matter of concern.