BOSS Zhipin: Niche, small and beautiful, easily crossing cycles

After the Hong Kong stock market closed on May 21st Beijing time, Kanzhun.US released its first quarter financial report for 2024. Overall, the Q1 performance was decent, but the revenue guidance inline, not exceeding expectations, may disappoint the market slightly.

Specifically,

1. Slightly Exceeded Expectations for the Current Period: Q1 revenue and cash receipts both slightly exceeded expectations, showing strong growth. In terms of profitability, due to more restrained marketing expenses than expected by the market, the Non-GAAP net profit (excluding SBC expenses) significantly outperformed market expectations, with a profit margin increase of 12% year-on-year.

2. Guidance Without Surprises: However, it is slightly regrettable that the company's revenue guidance for the second quarter did not exceed expectations like last time. The guidance range is 19.1 to 19.6 billion, with the median corresponding to a year-on-year growth rate of around 30%.

It is recommended to pay attention to the company's guidance on Cash billings during the conference call, as this indicator is more crucial. Based on existing data, Dolphin estimates that Q2 cash receipts are also basically inline. Being accustomed to beating guidance in previous years, this may bring some slight disappointment to the market. (Specific data still needs to be confirmed during the conference call).

3. Significant Increase in Paying Customers: Although the monthly active users of end users at 46.6 million were weaker than expected, Dolphin believes that this is mainly due to unreasonable market expectations. Dolphin's prediction based on third-party platform data is basically the same as the company's disclosure. Considering that BOSS Zhipin has an absolute advantage in the C-end, even if the current user growth is average, Dolphin is not too worried about the short-term growth of MAU, which accounts for over 90% of job seekers.

Instead, Dolphin is more concerned about the number of enterprise paying customers, which reached 5.7 million in the first quarter, exceeding our original expectation of 5.4 million. However, the average payment amount per individual enterprise still saw a slight year-on-year decline, possibly reflecting an increase in small and medium-sized customers, a decrease in recruitment demand per individual enterprise, or some discount offers by BOSS Zhipin in Q1, among other reasons. Specific explanations can be obtained during the conference call from the management.

The market may be concerned about the enterprise payments brought by promotions, does it imply a decline in competitiveness at the margin? Dolphin believes that under the ToB business logic (higher cost of channel migration, easier to maintain a higher retention rate under the condition of not lagging behind in product experience), accelerating the penetration of customers during the growth period is more crucial, and the average enterprise payment amount can gradually increase with the enrichment of subsequent services.

4. No New Actions on Repurchase and Dividends: The company announced a new repurchase plan for the first time last quarter, which also boosted short-term stock prices sentiment. In Q1, the company has not announced any new actions yet. However, BOSS Zhipin's cash flow is very healthy, with a net operating cash inflow of 910 million RMB in the first quarter, continuing to contribute to net cash increment As of the end of the year, the company's cash and short-term investments totaled 11.9 billion, which is sufficient to sustain normal operations, investments, and share repurchases.

5. Comparison of Core Performance Indicators with Market Consensus Expectations

Dolphin's Viewpoint

BOSS Zhipin has delivered good results for several consecutive quarters. Although the management "humbly" attributed the last quarter's success to the marginal recovery in the recruitment market, especially the rebound in demand from large enterprises. However, comparing the Q1 financial report with actual macro data and the recent performance of peers increasingly proves that the change in beta is not the most crucial factor supporting BOSS Zhipin's accelerated growth, but rather the alpha-driven increase in market share.

In addition to a high-quality product experience and a perfect closed-loop ecosystem that aligns with the business model, Dolphin also believes that the more macro pressures there are, the more it is a period of dividend for BOSS Zhipin to increase market share:

(1) In the first quarter, offline service consumption took the lead in weak economic data, with the highest increase in recruitment positions and salaries. Most of the offline service recruitment demand is for blue-collar positions, where BOSS Zhipin has always had a relative advantage.

(2) Lian, a high-end recruitment platform mainly serving large enterprise clients, did not effectively recover its revenue in 4Q23 on a low base, with a sharp 30% decrease in headcount for the whole year and pressure on Q1 receipts. Therefore, the so-called recovery in recruitment for medium and large enterprises mentioned by BOSS Zhipin may be due to an increase in demand for mid-to-low positions within large enterprises, or companies shifting part of their budget to more flexible platforms like BOSS Zhipin in search of cost-effective recruitment channels.

Overall, the first-quarter financial report still reflects BOSS Zhipin's logic of continuing to gain market share, so there is no problem with its performance. However, judging from the implied valuation of the current stock price, the market also has high expectations. The current market capitalization of 10 billion USD implies a forward valuation of 25-27x EV/Non-GAAP np for one year, which is neutral in valuation. However, with recent intensive real estate policies, attention can be paid to their impact on the macroeconomy. In addition, regarding the high proportion of SBC, we believe there is considerable room for optimization (the company previously expected an absolute decrease in 25 years). On the other hand, relying on the competitive advantage of traffic loops, there is also a trend of continued adjustment in sales expenses. Therefore, even if revenue growth slows down in the future, the release of operating leverage is expected to continue to support the valuation.

As a leading player in the niche sector with an excellent business model, BOSS Zhipin's management's operational capabilities are relatively reliable. While continuously gaining market share, it also possesses high competitive barriers. Therefore, BOSS Zhipin is a high-quality company that Dolphin will track in the long term. During the macroeconomic bottoming period, market expectations will also bring short-term fluctuations in stock prices. From the perspective of risk-return ratio, it is recommended to actively pay attention to potential pullback opportunities.

Detailed Analysis Below

1. C-end User Numbers: Quarter-end hits a new high, showing the labor supply-demand relationship remains challenging

In the first quarter, crossing the quiet period before the Spring Festival and the peak recruitment season of "Golden March" after the Spring Festival, job seekers have a significant difference in their willingness to be active during these two periods. As mentioned in Dolphin's commentary in March, January and February continued the low consumption expectations from the end of last year, leading to a decrease in the number of job positions released by companies at the beginning of the year. Additionally, due to the Spring Festival holiday, the job-seeking willingness of C-end users was also somewhat affected, resulting in an increase in the "lying flat" mentality.

However, after the Spring Festival holiday as companies gradually resumed work, C-end users also regained their job-seeking mentality. Overall, the monthly active users in Q1 showed a trend of starting low and ending high. This ultimately drove a 5.4 million increase in monthly active users for BOSS Zhipin in the first quarter, reaching 46.6 million users.

According to Questmobile's data, the user changes in the entire industry were basically consistent (starting low and ending high). Taking BOSS Zhipin as an example, the monthly active users in January may have been only around 35-40 million, but by March, it rapidly climbed to nearly 50 million. Compared with peers, BOSS Zhipin continues to maintain a leading advantage in terms of user scale and total user time share.

2. Guidance is healthy, but not significantly above expectations

The total revenue in the first quarter was 1.7 billion, a year-on-year increase of 33%, with ToB-end network recruitment service revenue at 1.68 billion, a year-on-year increase of 34%, slightly exceeding market expectations. The management's guidance for the next quarter is in the range of 1.91-1.96 billion, with a year-on-year growth rate of 28%-32%, which is basically in line with expectations. Although the growth itself is not bad, funds that were expected to beat expectations may experience some minor disappointment.

During a period of relatively flat traffic, the advantages of BOSS Zhipin may become more significant. Compared to the issue of long-term non-updated resumes in the resume databases of peers, the user ecosystem of BOSS Zhipin is more active, which is why it can attract more new cooperation or renewals from medium to large enterprises.

(1) BOSS Zhipin's Customer Payments: Volume Increase, Price Decrease After the customary price increase in the fourth quarter of last year, the implied average enterprise payment amount in the first quarter showed a slight decrease of 2% compared to the previous quarter. However, the number of paying enterprise accounts increased by a net of 500,000, reaching 5.7 million, with a significant growth.

When looking at the combination of "increased quantity and decreased price", it may reflect several reasons such as an increase in small and medium-sized customers, a decrease in individual enterprise recruitment demand year-on-year, or perhaps some discount offers given by BOSS Zhipin in Q1. For more specific details, it is recommended to pay attention to the management's explanation during the conference call.

Perhaps the market may be concerned about the enterprise payments brought about by promotions, indicating a decline in competitiveness. Dolphin believes that in the ToB business logic (where the cost of migrating channels is high and with a good product experience, it is easier to maintain a high retention rate), accelerating the penetration of customers during the growth period is more critical, and the average enterprise payment amount can gradually increase with the enrichment of subsequent services.

(2) Industry payment situation: Marginal recovery, strong service consumption demand

Although the first quarter started off pessimistically, there was no significant further deterioration overall. The unemployment rate decreased year-on-year, urban employment continued to grow on a high base, and the wage growth rate in first and second-tier cities turned positive. Among them, the wage growth in the service sector was the highest, while the semiconductor, TMT, and financial industries had slower wage growth. This presents a mixed picture for BOSS Zhipin - on one hand, it can further leverage its advantage in blue-collar recruitment, but on the other hand, the short-term slowdown in recruitment in the TMT industry, which has a high customer proportion, may also pose challenges.

3. There is still room for profit optimization

In the first quarter, the operating profit of BOSS Zhipin's core business (revenue - costs - sales expenses - R&D expenses - administrative expenses) was 91 million, with a profit margin of 5.34%, a 13 percentage point improvement year-on-year. This was mainly due to the decrease in sales expenses, while R&D expenses remained within the expansion cycle of the previous round. Ultimately, the Non-GAAP operating profit, excluding stock incentives, also remained at 22%, exceeding market expectations by 2 percentage points.

High marketing expenses have always been the biggest flaw in the excellent business model of online recruitment platforms, but BOSS Zhipin has entered a good ecological stage of B and C-end traffic complementarity, and abnormal placements will naturally decrease gradually. Overall, it shows a trend of concentrated placements in the peak season and more restraint in the off-season.

Looking at Q1, despite the customary placements during the Spring Festival, there was still an 11% decrease compared to last year. The first quarter is generally the low point of the year in terms of profit margin, which will gradually increase in the following quarters.

Profit growth is also reflected in the improvement of gross profit margin. The Q1 gross profit margin increased by 2 percentage points year-on-year, with a higher improvement than the previous quarter. Although the company added server investments at the beginning of 2023, it covered the incremental server investments and the additional channel sharing costs (such as Apple's 30% tax) incurred by the increase in online payments by small and medium-sized enterprises, relying on faster revenue growth (especially the increase in offline payments by large enterprises signing contracts offline).

The company maintains its long-term Non-GAAP operating profit margin target at 40%, with room for further improvement compared to the current level. In addition to efficient expansion through revenue growth, this is also due to the optimization of SBC expenses. Currently, SBC accounts for 17 percentage points of revenue, and the company expects the ratio to steadily decline in the next two years, with the absolute value of SBC decreasing after 2025.

In the internet industry, there are not many tracks where the long-term operating profit margin target can reach 40%, so the recruitment track may attract some players eager to try. However, the main competitive risks for BOSS Zhipin do not lie with the current peers (as evidenced by significant differences in products, business models, and operational capabilities), but more likely come from other platforms with traffic advantages crossing over to online recruitment, such as Kuaishou and Douyin. However, overall, the impact on the fundamental position of BOSS Zhipin is not significant. Live streaming platforms cater to recruitment needs that are more focused on large-scale traditional blue-collar recruitment, such as frontline factory workers, which are not directly competitive with BOSS Zhipin at the moment. It is recommended to continue monitoring the situation

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