51Job: An Attractive Chinese Small-Cap Pick
As the global economy takes a route to recovery, a bullish momentum prevails in the markets worldwide. However, in China things are a little different as analysts fear that the authorities can no longer sustain the high growth rates. The Shanghai Composite Index fell by more than 2% in the past year. The security regulators in the Chinese economy have taken measures to keep up with the global trend as it gears the economy towards a wave of IPOs. This provides investors with an opportunity to take advantage of the low stock prices to add value to their investment portfolio.
The services sector of the economy has been one of the fastest growing fields; however, the growth has somewhat stagnated in the recent past. In May, there were signs of weak growth again raising concerns about sustainability. According to Shen Lan, an economist at Standard Chartered, the economy is facing a stimulus lag that will soon payoff in the coming quarter. The employment index improved to 50 prior to an index of 49.6. With more firms willing to expand especially in the green technology sector, the employment index is expected to improve sharply. 51Job Inc. (JOBS) is one of the companies that will benefit greatly from the recovery in the aforementioned index.
This article will discuss the upside potential in 51Job by analyzing in detail the internal as well as external factors that makes this small cap stock an attractive pick.
What Does 51Job DO?
51job is a leading provider of integrated human resource services in China aiming to capitalize on recruitment related services. Through online recruitment services at 51job.com and print advertisements in 51job Weekly, it enables enterprises to attract, identify and recruit employees and connects millions of job seekers with employment opportunities. 51job also provides a number of other value-added human resource services, catering to business process outsourcing, training, executive search and compensation and benefits analysis. 51job has a call center in Wuhan and a nationwide sales office network spanning 25 cities across China.
The company has collaborated with six material group entities namely 51net, Tech JV, Qian Cheng, AdCo and Adco Subsidiaries and WFOE. The joint venture provides advertising, consulting services and online recruitment and value-added telecommunication services.
Revenue Generation
The enterprise reports its earnings based on three core segments i.e. online recruitment services, print advertising and other human resources related revenues. The majority of the revenues are derived from recruitment and advertising services.
Online recruitment services share in the total revenue increased significantly in the last two years from 50% to 62.4%. Revenues through this segment are obtained by charging companies with advertisement and recruitment fees at the website. The website also provides companies with a facility to download resumes and management tools services. Print advertising share in revenues declined significantly in the past two years from 25% to a mere 7% as the management adjusts to the boom in the IT sector.
Again, employer companies are charged with a recruitment and advertising fee placed at 51Jobs Weekly across China. Contracts in this segment vary from single to multiple advertisements and are generally more short-term. The last segment, like the online recruitment services, experienced an increase in revenue share from 25% to 31%. The human resource related revenues as the name suggests generate revenues via catering to the employees of the company’s corporate clients.
Financials
The company reported an increase in its consolidated revenue of 11.3% in 2012 consistent with the average 3-year growth in revenue of 23.2%. However, the recent quarter revenue of 2013 amounted to $61.2 million, showing a decline of 0.1%. Analysts expect the decline to quickly reverse given the forward market expectation. Net income of the company also showed an increase of 21.4% in 2012 keeping up with the 3 year growth 61.1%. The company has managed to beat the industry trend as the industry ratios lingered in single digits. Given the competitive nature of the industry, 51Jobs upholds its competitive edge by relying on operational synergies to cut down costs. The EPS% for the 5 years touched 34% as per Reuters estimates.
The capital structure of the company is more geared towards financing from within. The company has not resorted to debt financing in its operations and has no plans to do so. Thus the company’s operations are well-cushioned against market risks. The liquid assets at the end of 2012 consisted of $408.6 million in cash and short-term investments. The recent quarter announcement marks an improvement in the liquidity position of the company. Thus 27% growth in asset base of the company is financed through growth from within.
Growth Strategy
Rick Yan, CEO of 51Job, announced that based on current market conditions and the declining share of print advertising revenues, the Company’s revenue target for the second quarter of 2013 is in the estimated range of $63.6 million to $66.0 million, an expected increase of roughly 6%. The stated increase in its revenues will be brought about by pursuing a multi-dimensional growth strategy.
Firstly, the management seeks to capitalize on the anticipated growth in the Chinese economy. As the employment index touch 50 and the expansive path undertaken by the firms, increase in revenues is inevitable. On the supply side, skilled and educated workers now comprise a major portion of the labor force. Secondly, the Chinese economy is still undergoing a development transition with more workers willing to accept new recruitment channels and human resource services. Growth in the IT sector will translate into an increase in customer base for the company.
According to CNNIC estimates, the number for internet users has showed an increase of 662% in the last 9 years making China the largest Internet user of the world. It is for this reason that the management has decided to increase its provision of online recruitment services. The claims can be authenticated by an increase in capital expenditure from $60 million to $138 million in the last year. It should be noticed that the free cash flows remained constant despite this increase. Lastly, mobile Internet website has been developed to increase access through mobile devices and utilize most functions available on the website. The construction of a call centre in Wuhan is anticipated to triple its catering capacity. Expenditure on sales and marketing also remained roughly constant for the recent quarter despite a decline in earnings. The company relies on the former to build a strong customer base and repute for itself. Thus, 51Jobs is all set to cater to the growing demand in the economy.
Competitive Advantage
As stated earlier, the enterprise operates in an extremely competitive environment facing competition from Adecco, Randstad ADR and Paychex Inc. It has been able to maintain its competitive edge by relying on operational synergies to maintain an operating margin of 32.5% as compared to an industry average of 2.5%. In the online recruitment service segment, a wide array of audience is catered to. The websites are updated on hourly basis which helps attain a high turnover. The idea to open up the websites to mobile users is expected to generate higher earnings in the near future. Also, the company is able to charge multiple prices based on the diverse customer base. The company mostly caters to large multinational corporations as well as local Chinese enterprises of all sizes. In the print advertising segment, publications are more city specific and short-term. Thus, the management is able to maintain relatively stable stream of revenues using the aforementioned techniques.
Risks
The risks associated with this small-cap stock are centered more towards economic factors. One of the potent risks that the company is exposed to is seasonality in its operations. The recent transition towards the provision of IT services makes the earnings of the company more volatile. Seasonal fluctuations in the demand for human resources add to the fluctuations in its operations. Inflation (although not currently) poses a threat to the earnings of the company. Inflation rates of 5.4%, 3.6% and 2.1% put an upward pressure on the costs of the company and if continued, can lead to a substantial decline in earnings. Lastly, the exchange rate risk associated with the stock cannot be ignored. Investment in derivative securities by the management does mitigate the associated risks nonetheless it cannot be disregarded.
Conclusion
The stock currently trades at $64.89 with the total market capitalization of $1.9 billion. The current P/E ratio for the stock is 25.8; however, the ratio is projected to decline to 17.7. The enterprise multiple ratio for the 12 months is expected to reach 31.41 while the current ratio stands at 33.72. The P/B and P/CF ratio equals 4.1 and 20.6, above the industry trend. The stock is up 39% year to date, and keeping in mind the growth potential, the upward trend is expected to continue.
After the careful evaluation of the company, I believe JOBS is an attractive investment and the stock will return handsomely over the short term as well as long term. The company is expected to benefit from the recovering economy offsetting the minor weaknesses. The management has been able to maintain its strategic position by adjusting to the changing market trends and is expected to do so in the future.