BZ - Kanzhun Q2 Preview: Results Might Miss Expectations

2023-08-11 04:50:35 ET

Summary

• I expect Kanzhun's Q2 2023 revenue and bottom line to miss expectations, following my review of economic data and the management's comments.
• BZ's shares are unlikely to drop significantly in the case of an earnings miss, as it has a new share buyback plan which could provide support for its stock price.
• I retain my Hold rating for Kanzhun, considering both a potential Q2 results miss and BZ's cash-rich balance sheet.

Elevator Pitch

I continue to rate Kanzhun Limited (BZ) [2076:HK] stock as a Hold.

In my January 3, 2023, initiation article for BZ, I evaluated the factors which could potentially affect Kanzhun's share price performance such as the company's 2023 business outlook, the stock's valuations, and regulatory issues.

With this current update, I perform a preview of Kanzhun's financial results for the second quarter of this year. My prediction is that BZ could potentially report below-expectations revenue and earnings in Q2 2023, but Kanzhun's shares price should be supported by its robust balance sheet and its share repurchase plan to some extent. In that case, I choose to leave my Hold rating for BZ unchanged.

Analysts Expect BZ To Deliver Strong Revenue And Earnings Growth In Q2

BZ is expected to disclose the company's Q2 2023 financial performance on Wednesday, August 23, 2023 . The analysts have a bullish view of Kanzhun's second quarter results judging by the current market's consensus financial estimates for the company.

As per S&P Capital IQ's consensus data, Kanzhun's revenue is forecasted to expand by +31% YoY from RMB1,112 million in the second quarter of 2022 to RMB1,452 million for the second quarter of the current year. This implies that the sell-side expects BZ to achieve significant top line growth acceleration for Q2 2023, as the company's Q1 2023 sales increase was a relatively more modest +12.3% YoY.

The market also sees BZ's non-GAAP adjusted diluted earnings per share or EPS increasing by +74% QoQ and +68% YoY to RMB0.94 (source: S&P Capital IQ ) in Q2 2023. This assumes that Kanzhun's normalized net margin improves from 19.2% in Q1 2023 and 23.1% in Q2 2022 to 25.4% for the second quarter of this year.

In the subsequent section, I assess whether the sell-side's optimism regarding Kanzhun's second quarter performance is justified.

My Bet Is On Kanzhun's Second Quarter Results Disappointing The Market

I am of the opinion that the sell-side analysts have been too optimistic about BZ's Q2 2023 results. Based on a review of management commentary and economic data, I think that there is a good chance of Kanzhun's actual second quarter performance falling short of the market's expectations.

Chinese brokerage China Renaissance Securities issued a research report (not publicly available) titled "Group NDR (Non Deal Roadshow) Call Takeaways" on June 5, 2023, detailing notes from Kanzhun's "investor call" on June 2. As per China Renaissance Securities' report, BZ highlighted that the second quarter is typically "a historical low season", and noted that the "2023 Chinese New Year ("CNY") was earlier than usual allowing the online recruitment industry to capture most of the post-CNY demand in 1Q23." In other words, Kanzhun's actual top line and bottom line growth might be weaker than expected in Q2 2023 due to seasonality factors.

Separately, China's urban unemployment rate was "5.2% for both May and June" 2023, and this "is the lowest it (urban unemployment rate) had been in the past 16 months", according to a July 17, 2023, article published by consulting firm MS Advisory . Also, a survey conducted by ManpowerGroup ( MAN ) in March this year found that more than half of Mainland Chinese companies "plan to keep workforce levels steady" or "expect a staffing decrease" in the second quarter of the current year. As such, it is reasonable to assume that actual hiring activity in Mainland China for Q2 2023 could be below expectations, which would have hurt BZ's financial performance.

Kanzhun did indicate at its Q1 2023 earnings briefing in May this year that "our platform has continued to see solid growth trends in our user base and user engagement both on the jobseekers side and enterprise side" in April and May. Therefore, I still expect BZ to register positive top line and bottom line expansion in Q2 2023. However, Kanzhun's actual second quarter revenue and earnings growth rates should have been lower than what the market anticipated, taking into account seasonality and weak hiring activity as mentioned above.

BZ Is Cash Rich With A Buyback Program

Assuming that BZ's actual Q2 2023 results release in late August fail to meet the market's expectations, investors could potentially react negatively to Kanzhun's second quarter results miss. But downside for Kanzhun's shares should be limited by BZ's strong financial position and its share repurchase plan.

As of March 31, 2023, Kanzhun had cash and investments amounting to RMB13,456 million or $1.87 billion on the company's balance sheet. This means that BZ's cash balance is roughly equivalent to about a quarter of its market capitalization.

Earlier on March 20 this year, BZ also announced a new one-year $150 million share buyback program. Kanzhun will have the ability to utilize share repurchase to support the company's share price in the event of a potential earnings miss.

Concluding Thoughts

In my view, the market might be disappointed by Kanzhun's actual second quarter financial performance as a result of seasonality and below-expectations hiring activity in China. On the flip side, BZ's new share repurchase plan initiated in March 2023 might limit the downside for the company's stock price in the case of a potential earnings miss. This explains my decision to stick with a Hold rating for Kanzhun.

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