51job Q2 2014 Preview: A Slow Grind For Now

| About: 51job, Inc. (JOBS)


JOBS to report after market on Monday with cons. expects $0.67 EPS on $74m in revenue.

Volume will be a focus given the limited pricing upside. Investment will weigh in on margins in the near-term.

M&A is in play with CB offering. ST focus on SME but LT focus should be on the SNS and high-end segment.

51job (NASDAQ:JOBS) will report 2Q14 results on Monday after market closes. Consensus expects $0.67 EPS (-3% y/y) on $74m in revenue (+10% y/y), compared with the management guidance of $71-73m in revenue and $0.69-0.76 EPS. I recently initiated on Zhaopin (NYSE:ZPIN) with a negative bias citing micro risk of market fragmentation and competition from JOBS as two of key rationales behind my view (Please see: Zhaopin: You Are Fired; Initiating With Sell And $12 Target, Based On 16x FY15 PER). For JOBS, I expect the company to balance both volume and pricing to drive revenue growth. While investment in sales and marketing will likely weigh in on earnings in the near-term, I expect margins to rebound early next year after investments in customer acquisition begin to bear fruit. But for now, investors should expect a slow grind until year-end as the company focuses on near-term investments.

Quantity over price

Given the fragmented online HR market in China and the lack of tangible difference among the products offered, JOBS needs to leverage its nationwide network (77m registered user base) and its relationship with 260k companies to drive volume growth in the near-term. In order to do so, JOBS is sometimes required to discount its product and services below the price that the incumbents charge to attract customers in the new market. Pricing upside is limited in my view given that the incumbents have significant advantage over JOBS in the local market when it comes to relationships with corporate and market intelligence. That said, JOBS's have little pricing power and its only choice is to undercut the incumbents on price to attract the customers onto its platform, hoping to eventually upsell other value-added offerings to drive pricing growth.

Value proposition to drive pricing upside

JOBS' key advantages lie in its nationwide coverage, solid track execution record and superior brand equity. Despite the low barrier to entry in the online HR business, I believe that these factors could eventually drive higher ASP after three years of flat pricing given that JOBS's scale allows it to better serve its HR customers by providing a holistic view of the job market, salary information and candidate database. While I acknowledge that a pure price increase will be difficult due to minimal differences amongst the product/service offering, creating a tiered product/service offering and encouraging customers to shift to the high-end product is more justifiable given the better service and product quality.

Expect to see M&As ahead

JOBS recently issued $150m in convertible senior notes, which the company said will be used for working capital and potential acquisition. JOBS's standalone business is free cash positive and I suspect the issuance is more for M&A purpose than working capital. JOBS's near-term focus will be on targeting local SMEs to drive volume and enlarge its customer base, and I agree with this strategy given the larger pool of clients (~40m across China). However, I believe that the longer-term strategy should be focusing on the high-end (ie. C-level) and professional SNS to drive the next leg of growth. This will allow JOBS to have better pricing power and a stronger network effect, which are likely to attract advertisers in the future. While I believe that LinkedIn (NYSE:LNKD) poses a threat to China's online HR solution providers given its global scale, investors need to know that LNKD only appeals to the global minded Chinese professionals and HR personnel, which still account for a small percentage of the overall market. Acquiring a local professional SNS and high-end HR solution provider is a good start to solidify JOBS's product offering and industry standing, in my view.

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