Kanzhun: Finally, "small and beautiful" can't withstand the "big hammer" of Beta anymore

After the Hong Kong stock market closed on August 28th Beijing time, Kanzhun.US released its financial report for the second quarter of 2024. As a leading player in the recruitment industry that has been holding up in a challenging environment for over a year, despite the alpha logic of grabbing market share, it has finally felt the beta chill.

Specifically:

1. Current performance is not far off from the revised company guidance: At the end of July, due to a rapid cooling of recruitment demand, the company came out to communicate the new performance guidance: slightly lowered Q2 cash flow and revenue, significantly lowered full-year cash flow and revenue, but profits have not been adjusted much, hoping to achieve the original profit target through cost control.

The Bloomberg consensus forecast excerpted by Dolphin Jun does not fully reflect the company's guidance adjustment at the end of July. In fact, Q2 performance and guidance are similar, but compared to the expectations of top investment banks, there has been compression in R&D expenses outside of SBC. Therefore, the final Non-GAAP operating profit and profit margin both exceeded the expectations of top investment banks.

2. Q3 guidance reflects growth pressure: The company's revenue guidance for the third quarter is in the range of 1.9 to 1.92 billion, with the median of 1.91 billion as a reference, implying a year-on-year growth rate slowing from 29% in the second quarter to 19%, and a slight decline on a quarter-on-quarter basis.

However, compared to long-term goals and industry penetration rates, Kanzhun is clearly not yet at the stage of a mature platform. The last time revenue declined on a quarter-on-quarter basis was in 2022, greatly affected by the epidemic, indicating weak environmental expectations.

It is recommended to pay attention to the company's guidance on Cash billings during the conference call again. This indicator is also more critical. Although the communication at the end of July has set the tone for the full-year target, after a month, does the management have new strategies to improve expectations? Dolphin Jun's rough estimate based on existing data implies a state of inline or slightly missing Q2 cash receipts, and after the surprise of "guidance beat" in previous quarters, it may not reappear in the short term.

In addition, another forward-looking indicator—deferred revenue also reflects the current marginal slowdown in demand: the net increase in deferred revenue in the second quarter (quarter-on-quarter growth rate) is weaker than the same period under normal operating conditions in previous years.

3. Supply-demand imbalance intensifies: Due to environmental factors, the labor relations on the Kanzhun platform have further deteriorated with supply exceeding demand. The net increase in monthly active end users in the second quarter was 8 million, second only to the first quarter of 2023, significantly outperforming peers according to third-party data. At the same time, the net increase in paid corporate accounts was only 200,000, the lowest in nearly a year.

Of course, considering the strategic direction of the management (with "user growth" as the main goal, proposing to increase 40 million users in 3 years by the end of 2022), as well as the return to growth in sales expenses in the second quarter, the record high MAU does not rule out the company's own active customer acquisition factors. However, looking at the not-so-high average customer acquisition cost, more growth is still driven by natural growth in the overall environment Labor supply is increasing rapidly, while the demand for recruitment from companies is not synchronized. Looking at this social microcosm from the perspective of Kanzhun, the imbalance in the labor supply-demand relationship is further exacerbated.

4. Increase in the proportion of large enterprises helps to alleviate short-term fluctuations: In the first half of the year, the income contribution ratio of Kanzhun's KA clients increased by 2 percentage points compared to the first half of last year. Due to business inertia, the recruitment demand of large enterprises is generally more stable compared to small and medium-sized enterprises. When facing short-term environmental changes, large enterprises are relatively countercyclical, so their contraction actions are also later than those of small and medium-sized enterprises.

Although the key words for Kanzhun are "small and medium-sized enterprises" and "blue-collar workers," large enterprises generally focus on campus recruitment or recruitment of high-end talents, so they are mainly targeted by Zhaopin and Liepin. Although the initial customer acquisition cost is relatively high, once converted, high-value large enterprise clients will further increase the platform's profit margin level. Therefore, in recent years, Kanzhun has also been actively penetrating large enterprise clients.

5. Share repurchase slowed in Q2, but increased in Q3: In Q2, the company repurchased 150,000 shares of ADS, consuming nearly 3 million US dollars, implying a single share price of 20 US dollars. Compared to Q1, the repurchase intensity may have slowed down due to the increase in market value.

However, from the end of July to early August, as the market value significantly declined, the company also accelerated its repurchase efforts. As of now, the company has repurchased a total of 42 million shares, consuming 8 million US dollars. Currently, the shareholder return is not high, but if the company plans to use up the announced 200 million US dollars by the end of this year (based on the repurchase intensity after July 25, it can be fully utilized by the end of the year), then the pre-market 8% drop corresponds to a market value of 5.7 billion US dollars, resulting in a 3.5% shareholder return for the year. Although the repurchase amount is not small, it does not belong to the top tier of Chinese concept stock repurchases.

Of course, there is a possibility of increasing the repurchase intensity in the future. Currently, Kanzhun has cash and short-term investments totaling 14.3 billion RMB (about 2 billion US dollars), and the cash flow is also very healthy, with an operating cash net inflow of 870 million RMB in the second quarter. However, because Kanzhun does not involve overseas business and cannot generate foreign exchange on its own, it mainly receives US dollar-denominated interest through overseas financial investments. Interest of 400 million US dollars was accrued in the first half of the year, theoretically supporting a slight increase in the repurchase amount.

6. Comparison of core performance indicators with market expectations

Dolphin's Viewpoint

For the second quarter, the biggest question in the market is why recruitment suddenly turned cold?

After all, when the first quarter report was released at the end of May, despite lingering macro pressures, the company's growth trend was stable, and the management was confident in short-term full-year guidance, especially mentioning that the recruitment demand from large enterprises was actively recovering. At that time, first-tier cities were taking turns to stimulate real estate, and at that point, whether it was the market or the company itself, the expectations for the overall environment were not very optimistic, but at least not further pessimistic. However, soon after, as the actual transaction volume of the 618 e-commerce promotion was lower than expected due to the low-priced preparations, and with the economic data such as social zero, PMI, etc. showing weakness again in the same month, coupled with more fresh graduates entering the job market this year (a 2% year-on-year increase in the number of college graduates), it exacerbated the imbalance in supply and demand. Finally, the high-frequency data of BOSS recruitment online, which had been flowing steadily, also sent out a signal of weakening. Subsequently, the management lowered the full-year revenue guidance by the end of July.

Macroeconomic pressures are not new risk factors, and for Kanzhun, which is strongly tied to them, it has always been a looming sword. It's just that since the beginning of the year, the market has pinned hopes on Kanzhun to seize market share and achieve growth across the cycle.

From the indicators of the second quarter, the fundamental logic of Kanzhun seizing the market has not changed, but unfortunately, the macro impact is too great. Following the wave of killing high-growth valuations since the end of July, the key questions for the future are actually:

1) Will the environment significantly deteriorate: It has been a month since the last preview, how does the management judge the macro situation for the second half of this year and even next year?

2) How to increase penetration among large enterprises: When the environment worsens, changes in small and medium-sized enterprises will be greater, how can Kanzhun, which has a relatively high proportion of small and medium-sized enterprises, mitigate the impact? How to accelerate penetration among large enterprises?

These questions will have to be heard again from the management's answers on the conference call, and for now, Dolphin will remain cautious. Apart from the impact factors of environmental beta, we believe that Kanzhun's competitive advantage has not been affected, which will help the company to continue stabilizing its profit targets even as revenue slows down by controlling expenses (reducing customer acquisition costs, operating at scale, improving long-term efficiency through large models, etc.).

Detailed interpretation below

1. C-end user numbers: End of quarter hits a new high, showing the labor supply and demand relationship is still severe

Although the second quarter is not traditionally the peak season for recruitment (the end of the Golden Three and Silver Four), the severity of the job market and more graduates have led to a continued increase in platform activity for job seekers - the platform's monthly active users increased by 8 million in the second quarter, reaching 54.6 million.

According to Questmobile's data, Kanzhun's performance in the second quarter was better than its peers, not only being the only one with an increase in monthly active users, but also an increase in user engagement, indicating that these are not zombie users brought in by money, but users who fit the target demand and were successfully retained through product features, further demonstrating the high stickiness advantage of Kanzhun under "direct chat + recommendation"

2. Guidance shows growth pressure

In the second quarter, total revenue was 1.92 billion, a year-on-year increase of 29%, close to the lower end of the company's guidance. Among them, ToB-end online recruitment service revenue was 1.89 billion, a year-on-year increase of 28.7%. Management's guidance for total revenue in the next quarter is in the range of 1.9 to 1.92 billion, with a year-on-year growth rate of 18% to 20%, which is inline or slightly missing compared to the latest expectations. Although the growth itself is not low, the trend of slowing growth is enough to show the pressure brought by the overall environment.

(1) Kanzhun: Rapid slowdown in recruitment demand for SMEs

The implied average payment amount per enterprise in the second quarter increased by 3% month-on-month. In addition to reflecting a wave of price increases for some prosperous industries at the end of last year, Dolphin believes that this is mainly due to changes in the revenue structure contributed by different enterprises.

When the environment deteriorates, more flexible small and medium-sized enterprises will shrink their recruitment demand faster and more, while large enterprise clients, on the one hand, have stronger counter-cyclicality than small and medium-sized enterprises, and on the other hand, have business operational inertia, which will reflect slower, so short-term recruitment demand will be relatively stable.

Changes in the number of paid corporate accounts can also be seen. In the second quarter, the number of paid corporate accounts only increased by 200,000 compared to the first quarter, the lowest quarterly increase since the easing of the epidemic.

(2) Industry situation: Unemployment rate rises in June, sparse recruitment season for graduates

With the arrival of the graduation season in the second quarter, the unemployment expectations in June rose, and the urban unemployment rate from the end of the quarter to July also began to rebound. Looking at the overall recruitment performance of platforms excluding Kanzhun, it has been relatively flat after June compared to previous years. Year-on-year, it is almost on par with the poor performance in 2023. Month-on-month, it also did not reflect the recruitment heat of the graduation season (the number of job postings, recruitment index did not increase month-on-month as in previous years), indicating that starting from June, corporate recruitment demand quickly turned cold

3. Profit still has room for optimization

In the second quarter, the operating profit of Kanzhun's core business (revenue - costs - sales expenses - R&D expenses - administrative expenses) was 350 million, with a profit margin of 18.3%, an improvement of 6 percentage points year-on-year, mainly driven by revenue scale expansion. In fact, all three expenses increased in the second quarter, including marketing expenses that decreased in the previous quarter. Here, we can look at the management's explanation. Dolphin believes that it may mainly be adjustments made to follow the pace of peer placements, increasing customer acquisition before graduation season.

Ultimately, Non-GAAP operating profit, excluding stock incentives, also remained at 34%, outperforming the latest investment bank expectations adjusted by 2 percentage points.

However, in the long run, Kanzhun has entered a good ecological stage of complementing B and C-end traffic, and abnormal placements will naturally decrease gradually. Overall, it shows a seasonal trend of concentrated placements in peak seasons and more restrained placements in off-peak seasons.

Profit growth is also reflected in the improvement of gross profit margin. The Q2 gross profit margin increased by 1.5 percentage points year-on-year. Although the company added server investments at the beginning of 2023, the company relied on faster revenue growth (especially the increase in offline payments by large enterprises signing contracts and the additional channel commissions to be borne by small and medium-sized enterprises for online payments, such as the 30% Apple tax), covering the incremental server investments and the additional channel commissions.

The company maintains its long-term Non-GAAP operating profit margin target at 40%, but short-term macro pressures have slowed down the pace of achieving the profit margin target. In addition to revenue expansion, the increase in profit margin also comes from the optimization of SBC expenses. Currently, SBC accounts for 17 percentage points of revenue, and the company expects the ratio to steadily decline over the next two years, with the absolute value of SBC expected to decrease after 2025.