BZ - Kanzhun: A Play On China's Recovery But Risks Remain

Summary

• 2023 should be a good year for Kanzhun, considering expectations of accelerated topline and bottom line growth.
• But there are risks for Kanzhun like potential regulatory headwinds and the possibility of a valuation de-rating.
• The risk-reward for BZ is balanced, which warrants a Hold rating for the stock.

Elevator Pitch

My investment rating for Kanzhun Limited's ( BZ ) (2076:HK) shares is a Hold. BZ doesn't deserve either a Buy or Sell rating. Kanzhun isn't a Buy, taking into account its rich valuations and potential regulatory risks. But BZ isn't a Sell as well, as its 2023 outlook is good, and the stock is a play on a recovery for the Chinese economy. As such, I take the view that a Hold rating for Kanzhun is the right call.

Company Overview

Kanzhun Limited refers to itself as a company which runs the "online recruitment platform BOSS Zhipin in China" in its media releases . The company was first established in December 2013, and it is currently listed on both Nasdaq and the Hong Kong Stock Exchange.

BZ is the leading player in the Chinese online recruitment space, boasting a 6.1% market share based on its topline for the first half of the prior year. Gold-collar and white-collar workers accounted for more than half or 55% of Kanzhun Limited's platform users in 1H 2022, while college students and blue-collar workers made up the remaining 16% and 29% of BZ's platform user numbers in the same time frame.

BZ Is A Beneficiary Of China's Reopening And Economic Recovery

Analysts are rushing to lift their respective 2023 economic growth forecasts for China, as the country pivots away from its COVID-zero policy.

A December 14, 2022 CNBC news article mentioned that Morgan Stanley's ( MS ) economic research team increased its GDP projection for China by +40 basis points from 5.0% earlier to 5.4% now. Reuters also reported on December 15, 2022 that JPMorgan's ( JPM ) 2023 China GDP estimate was revised upwards by +0.3 percentage points from 4.0% previously to the current 4.3%.

It is reasonable to assume that recruitment activity in China will be positively correlated with the country's economic growth. Therefore, a faster pace of economic growth for China will definitely be a tailwind for Kanzhun, China's largest online recruitment company.

Also, the relaxation of pandemic restrictions in China should have a direct, positive impact on Kanzhun's business operations. BZ highlighted at its third quarter earnings call in end-November 2022 that the company saw an increase in its "active enterprise customers" in the July-August 2022 period when COVID-19 restrictions weren't "that stringent."

As such, China's reopening should benefit Kanzhun, as employers are in a better position to plan for future manpower needs as uncertainty over the country's COVID-19 policy has eased. Moreover, Kanzhun's platform users are typically small-to-medium sized enterprises which usually take a relatively short period of time to ramp up hiring, as a result of less bureaucracy and more pressing manpower needs. Roughly 85% of the corporates that are BZ's users are small outfits with under 100 people on their respective payrolls.

Kanzhun's positive outlook for this year is reflected in the sell-side analysts' consensus 2023 revenue estimates for the company. As per S&P Capital IQ data, the market predicts that BZ's topline growth in local currency (Chinese yuan) terms will accelerate from +5.8% in fiscal 2022 to +42.5% for FY 2023.

Positive Operating Leverage And Cost Optimization Are Key Earnings Growth Drivers

In the previous section, I touched on the market's consensus revenue growth expectations for Kanzhun this year. In fact, the sell-side sees BZ's earnings growing at an even faster rate than its topline in 2023.

Consensus numbers obtained from S&P Capital IQ point to Kanzhun's normalized earnings per share or EPS surging by +98.5% from RMB1.77 in FY 2022 to RMB3.52 for FY 2023. As a comparison, BZ's expected fiscal 2022 bottom line growth is much more modest at +10.7%.

In my opinion, BZ benefits from two key bottom line growth drivers.

A key earnings growth driver is positive operating leverage. As an operator of an online recruitment platform, Kanzhun runs a high fixed cost business where variable costs do not increase significantly with every dollar of incremental revenue. As such, it is natural that BZ's bottom line will expand at a faster rate than its topline thanks to fixed cost leverage.

Another key earnings growth driver is expense optimization. According to historical financial data taken from S&P Capital IQ , Kanzhun's selling, general, and administrative or SG&A expenses have been declining on a quarter-on-quarter basis in 2022. Specifically, the SG&A cost-to-revenue metric for BZ decreased from 59.6% in Q1 2022 to 50.3% for Q2 2022 before declining further to 46.9% in Q3 2022. In absolute terms, Kanzhun witnessed a -5% YoY contraction in its selling and marketing costs to RMB397 million in the third quarter of the prior year.

At its Q3 2022 earnings briefing, BZ credited "marketing efficiencies" for its expense reduction, and it also guided that "our marketing efficiency for the digital market will not decrease" in 2023.

Regulatory Risks Shouldn't Be Ignored

In its IPO prospectus filed in June 2021, Kanzhun cautioned potential investors that "we could become a target for regulatory or public scrutiny in the future." Unfortunately, that risk materialized very shortly. Seeking Alpha News reported on July 5, 2021 that Kanzhun was "ordered to stop adding users" as part of "China's cyber probe."

The Chinese regulators finally allowed BZ to accept new users again in the middle of last year, according to a June 30, 2022 Reuters article . While it is impossible to know the exact reasons why Kanzhun was targeted by regulators, it is widely speculated that China was concerned about the potential leakage of critical Chinese data (e.g., recruitment and employment data, etc.) to foreign parties. Although Kanzhun's shares are now also listed in Hong Kong , the company has retained its US listing. This suggests that Chinese policymakers' concerns about the security of Kanzhun's data are unlikely to have eased completely.

Separately, it is also worth noting that China is pursuing a policy of " common prosperity ", which implicitly means that public interest is given priority over the profitability of private enterprises. It is reasonable to assume that ensuring that the majority of the people in China are gainfully employed is a key component of "common prosperity". Therefore, it is very probable that regulators in China will continue to keep a close watch on major players in the Chinese recruitment space such as Kanzhun. One potential risk is that policymakers might place a cap on fees that Kanzhun and its peers charge in the future, as a means of boosting recruitment activity and employment numbers.

Valuations Are Demanding

The market currently values Kanzhun at a consensus forward next twelve months' normalized P/E multiple of 49.0 times as per S&P Capital IQ data.

BZ trades at a much higher valuation metric as compared to its Asia-Pacific peers. As a reference, SEEK Limited ( SKLTF ) ( SKLTY ) (SEK:AU) and Recruit Holdings ( RCRRF ) ( RCRUY ) (6098:JP) are currently trading at relatively lower consensus forward P/E multiples of 28.9 times and 23.1 times, respectively.

It is possible that the market might de-rate Kanzhun's valuations to be closer to that of peers in time to come, and this is another key risk factor for the stock.

Closing Thoughts

I rate Kanzhun's shares as a Hold. Kanzhun is a proxy for China's reopening, but its valuations are very demanding and there are specific regulatory risks relating to the company.

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