BZ - Kanzhun: Consider Mixed Signals And Potential Surprises

2023-10-19 08:31:48 ET

Summary

• The outlook for China's recruitment industry is murky based on my opinion, following an assessment of different indicators.
• There is the possibility of Kanzhun achieving higher-than-expected profit margins and better-than-expected shareholder capital returns in the future.
• I keep my Hold rating for BZ stock intact, after taking into account mixed signals for the Chinese recruitment market and potential surprises for Kanzhun.

Elevator Pitch

Kanzhun Limited ( BZ ) [2076:HK] shares still warrant a Hold investment rating. Earlier, I previewed BZ's Q2 2023 financial performance and highlighted the company's share repurchase program in my prior write-up published on August 11, 2023.

There is no certainty that China's recruitment sector will perform well in the foreseeable future based on various indicators. On the other hand, there are potential surprises for Kanzhun relating to shareholder capital return and profit margins which may or may not be realized. Considering these factors, I still assign a Hold rating to Kanzhun.

Mixed Signals Regarding The Chinese Recruitment Industry's Outlook

There are both positive and negative signs relating to the prospects of China's recruitment market.

On the positive side of things, the urban unemployment rate in China has been on the decline, and Kanzhun's management disclosed that it has witnessed favorable trends at an investor event last month.

The unemployment rate in China's urban areas decreased from 5.3% in July 2023 to 5.2% for August this year, before declining further to 5.0% in the prior month. China's urban unemployment rate for September 2023 was the lowest it has been in the past 12 months, and this is also better than the country's full-year urban unemployment rate goal of 5.5% .

Kanzhun communicated with institutional investors at an investor call on September 6, 2023 organized by China Renaissance Securities . According to a research report (not publicly available) published by China Renaissance Securities titled "Prudence Despite Encouraging Trends" on September 7, BZ has observed "an encouraging recovery trend" that "is widespread across major customer segments and verticals" considering "metrics, such as the number of active enterprise users and job posts."

On the negative side of things, there are other indicators like the performance of domestic recruitment agencies, compensation expectations for job hoppers, and the non-disclosure of certain data, which suggests that not all is well when it comes to China's recruitment market.

A recent October 15, 2023 commentary piece published by South China Morning Post cited comments from "a CEO from a top recruitment agency based in Shanghai" that "the shrinking talent market has also affected the performance of recruitment agencies, with revenues down by 30 to 40 per cent for the last two years." This CEO interviewed by South China Morning Post also revealed that "over half his clients would 'calmly' accept an (new job) offer at the same salary, or even lower" now. It is reasonable to assume that any improvement in the Chinese recruitment market in recent times would have been limited, with job hoppers having modest expectations of wage increases and recruitment agencies recording weaker top line.

To make things worse, China didn't continue with the disclosure of the youth unemployment rate metric in the country two months ago as mentioned in an August 15, 2023 Seeking Alpha News article . This naturally raise questions about whether there are specific segments (e.g. youths) of the Chinese job seeker's market that are still doing poorly, even though the overall urban employment rate has shown signs of improvement in recent months.

In a nutshell, it will be fair to refer to the outlook for China's recruitment sector as mixed at best. It is noteworthy that the consensus FY 2024 revenue estimate for Kanzhun was revised downwards by -10% from RMB8,433 million (source: S&P Capital IQ ) three months ago to RMB7,551 million now. This shows that the sell-side analysts are becoming conservative when it comes to expectations for BZ's top line for the following year.

Watch Out For Surprises In Areas Like Profitability And Shareholder Value Creation

I take the view that there is meaningful uncertainty about Kanzhun's top line performance in the near term as detailed in the previous section. On the flip side, there are opportunities for BZ to surprise the market in a positive manner with regards to profit margins and shareholder value enhancement.

With respect to profitability, Kanzhun emphasized at the company's most recent Q2 2023 earnings briefing that "we think that our operating margin will maintain at healthy level and with upside potential" from "a mid- to long-term" perspective.

At the September 6, 2023 investor call hosted by China Renaissance Securities referred to in the preceding section, BZ guided for "branding marketing expenses to remain low for the rest of 2023 amid no planned major marketing events", and revealed that "unit CAC (Customer Acquisition Cost) has come down notably" in recent quarters. The current market consensus as per S&P Capital IQ data points to a +50 basis points expansion in Kanzhun's pre-tax profit margin from 31.9% for FY 2023 to 32.4% in FY 2024. BZ is in a good position to surpass the sell-side's expectations relating to margins, assuming the company can deliver on below-expectations marketing costs and CAC as outlined at the investor call last month.

Separately, BZ disclosed at its second quarter results call that it "is doing some research and trying to find appropriate ways to increase shareholders' value" and "improve shareholders' return."

Kanzhun had cash and investments amounting to RMB12.8 billion or $1.8 billion on the company's balance sheet as of end-1H 2023. BZ doesn't pay a dividend, and it has a modest $150 million share repurchase plan that expires at the end of March next year. It will be easy for Kanzhun to consider boosting shareholder value by expanding the size of its current buyback program and initiating dividend payments.

Closing Thoughts

I maintain my Hold rating for Kanzhun. Taking into account mixed signals associated with the prospects for China's recruitment market and potential surprises pertaining to profitability and capital return, my view of BZ is Neutral.

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