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February 27, 2006

8:30 a.m. EST

Executives

Linda Chien - Manager, IR

Rick Yan - CEO

Kathleen Chien - CFO

Analysts

Safa Rashtchy - Piper Jaffray

Jason Brueschke - Citigroup

Rick Tesser - Morgan Stanley

Kit Low - Goldman Sachs

Albert Lee - Maxim Group

Presentation

Operator

Good day, ladies and gentlemen. Welcome to today's 51job Incorporated fourth quarter and fiscal year 2005 conference call. Now I would like the turn the conference over to your host Ms. Linda Chien, investor relations manager of 51job. Please go ahead, ma'am.

Linda Chien

Thank you, Robert. Thank you all for attending this teleconference with 51job management. With me today are CEO Rick Yan and CFO Kathleen Chien. Management will discuss unaudited financial results for the fourth quarter and the full year ended December 31, 2005. A press release containing fourth quarter and 2005 results was issued earlier today and a copy can be obtained through our website at ir.51job.com.

Before we begin, I would like to remind you that during this call, statements regarding targets for the first quarter of 2006, future business and operating results constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended, and Section 21E of the Securities Exchange Act of 1934 as amended, and as defined in the Private Securities Litigation Reform Act of 1995. These statements are based upon management's current expectations, and actual results could differ materially.

Among the factors that could cause actual results to differ are: the number of recruitment advertisements placed; sales orders received and customer contracts executed during the remaining weeks of the first quarter of 2006; any accounting adjustments that may occur during the quarterly close; fluctuations in the value of the RMB against the U.S. dollar and other currencies; behavioral and operational changes of customers in meeting their human resource needs as they respond to evolving social, economic and political changes in China; introduction by competitors of new or enhanced products or services; price competition in the market for the various human resource services that the Company provides in China; and fluctuations in general economic conditions.

For additional information on these and other factors that may affect the Company's financial results, please refer to the risk factors section of the Company's filings with the Securities and Exchange Commission. 51job undertakes no obligation to update targets prior to announcing final results for the first quarter, or as a result of new information, future events or otherwise.

Now, I will turn the call over to Rick Yan, Chief Executive Officer.

Rick Yan

Thank you, Linda. Thank you, everyone for joining us on this call. I will begin today's call with highlights for the fourth quarter and the full year 2005. Then Kathleen will go through our financial results in greater detail. Following her comments, I will discuss current operating conditions and provide our outlook for the first quarter of 2006. Finally, we will open the call to your questions.

Total revenues for the fourth quarter were RMB145 million, or approximately $18 million. Although this was near the midpoint of our guidance range of RMB140 million to RMB150 million, fourth quarter profitability exceeded our expectations. Diluted earnings per share was RMB0.34 over 10% higher than the upper end of our forecast range of RMB0.20 to RMB0.30.

In the fourth quarter, we continued to focus on optimizing the scale benefits and operating efficiencies of our operations. Despite the fact that quarter four revenues were 10% lower than quarter three because of seasonality, quarter four gross margin of 54.4% was comparable to the record level achieved in quarter three, and was more than 5 points higher than quarter four 2004.

For the full year 2005, gross margin improved to 52.1% compared with 50.8% in 2004. We believe that this margin improvement is important to note, particularly in light of the relative moderation in market demand we observed throughout 2005 and the four new cities we added last year.

Our business is subject to seasonal fluctuations, and we believe that a trend has emerged with quarter four revenues sequentially declining from quarter three levels. Business activity in quarter four 2005 exhibited a pattern similar to quarter four 2004, which has been the first time in our operating history that revenues sequentially decreased.

From our conversations with some customers and analysis of their spending patterns, we attribute this fourth quarter trend to changing customer behavior and preferences. We observe that HR managers are allocating their budget expenditures earlier in the calendar year and are taking holidays in December.

A highlight of the fourth quarter was the continued solid growth of our online recruitment services business. Online service grew almost 50% year-over-year in the fourth quarter and increased 43% for the full year 2005 over 2004. We continue to be highly encouraged by the growing number of HR customers using our platform. Unique employers using our online services reached over 56,000 in 2005, which was over 40% higher than the number in 2004.

Another bright spot in quarter four was the continued growth of the other HR-related services business. Excluding revenues from the stationary business we exited in late 2004, for more relevant comparisons, quarter four revenues for the other HR services segment increased 80% over quarter four 2004. For the full year, revenues were 70% higher than 2004.

As the sophistication level of our corporate customers increases and human capital becomes more important to them, we believe services such as corporate training and business process outsourcing will achieve greater acceptance and increase our wallet share of HR budgets.

The solid performance of our online business and other HR services business offset the slower growth we saw in our print advertising business in quarter four. Unlike our online business, in which customers would typically purchase monthly or annual subscriptions, our print ads are more affected by seasonal demands and are usually sold on a per placement basis. As a result, the changes in customer behavior we observed underlying the fourth quarter declining trend, most impacted this part of our business. We expect our print business to resume a high growth trajectory in the first quarter as demand for print ads is traditionally more robust during the post-Chinese New Year period.

For 2006, our objectives remain to drive revenue growth, improve margins and increase profitability. We continue to be the premier brand in HR in China and look forward to a successful 2006. I will now turn the call over to Kathleen for a more detailed review of the financial results.

Kathleen Chien

Thank you, Rick. Fourth quarter total revenues were RMB145 million, a 20% increase over Q4 of 2004. Excluding the stationary business, total revenues grew 23% year-over-year. Our print advertising revenues rose 7% year-over-year, primarily due to higher ad volumes. The estimated number of print advertising pages was about 2,500 compared with 2,300 pages in Q4 of 2004. Average revenue per page was similar year-over-year.

Online recruitment services revenues grew 50% to RMB44 million in Q4. The increase was primarily due to a higher number of employers using our online services. Unique employers using online recruitment services were over 34,000 in the fourth quarter compared with 23,000 in Q4 of 2004.

Gross margin, as noted, was 54.4% compared with 48.8% for Q4 2004, driven primarily by improved efficiency and economies of scale.

Sales and marketing expenses for the quarter were RMB27 million. The increase over Q4 2004 was primarily due to an expansion in our sales force, and we ended 2005 with over 1,200 sales and account management staff.

G&A expenses for the fourth quarter were RMB23 million, an increase over Q4 2004, primarily as a result of higher professional services fees, additional costs related to operating more offices, and also personnel additions.

Operating income was RMB21 million, an increase from RMB19 million for the Q4 2004. Other income in the fourth quarter of this year included a financial subsidy of approximately RMB4.6 million. Net income for the fourth quarter was RMB19 million, 60% higher than the RMB12 million in Q4 of 2004. Fully diluted earnings were RMB0.34 per common share, which is equivalent to $0.08 per ADS.

For the year 2005, total revenues were RMB596 million, an increase of 24% over 2004. Gross profit grew 26% year-over-year to RMB293 million, and gross margin improved to 52.1% compared with 50.8% in 2004. Operating income was RMB77 million, compared with RMB90 million for 2004. 2005 net income was RMB61 million and similar to 2004 profit levels. Fully diluted earnings per common share for 2005 was RMB1.07 equivalent to earnings per ADS of $0.27.

Please note that our share count for 2005 was approximately 55% higher than in 2004, and the increase was due to new common shares issued in our IPO and the conversion of preferred shares, which was partially offset by the Company's repurchase of its ADS in the market during the latter part of 2005.

Also, in July 2005 the Chinese government changed its foreign exchange policy to permit the RMB to fluctuate within a band against a basket of certain foreign currency. This resulted in an appreciation in the value of the RMB against the U.S. dollar. As the RMB is our functional currency, we recognized a foreign currency translation loss of RMB11 million in 2005. Please note that this foreign currency translation loss does not impact our cash earnings.

Excluding the foreign currency exchange translation loss, non-GAAP adjusted net income for 2005 was RMB72.6 million, and adjusted fully diluted earnings per common share was RMB1.27. Expressed in U.S. dollars and reflecting the common share to ADS ratio, adjusted fully diluted earnings per ADS were $0.31. Our cash balance at December 31st was RMB831 million, decreased from RMB874 million at the end of Q3.

During the fourth quarter, we made installment payments toward the purchase of a new office complex that we'll begin occupying later this year in 2006. Last October we signed a letter of intent to purchase a new office complex in Jianguo High Technology Park for approximately RMB114 million. We expect to incur additional expenses with renovations, relocation and other related items.

Also, our use of cash in the fourth quarter includes a repurchase of approximately 455,000 ADS in the open market. Since the inception of our share buyback program last May, we have purchased approximately 686,000 ADS in 2005 for an aggregate consideration of $9.4 million. Now I will turn the call back over to Rick for his comments on current market conditions.

Rick Yan

Thank you. We enter 2006 with a market-leading position and remain the largest integrated HR service provider in China. Because we faced different competitors in our various businesses, it's important that we are not only the largest combined HR company, but also a leader in each of the print and online segments.

In print, we now have 24 different local additions of 51job Weekly being published across China. Our coverage is unmatched and the print competition remains largely fragmented and localized.

In the online space, whether looking at revenues, the number of job postings, or page views, we are the industry leader under each of these measures. Although Internet penetration remains relatively low in China, the number of users is growing rapidly. There are now more than 110 million Internet users, second only to the United States. As acceptance of the online platform continues to grow among HR managers, we believe that our brand, service, reputation and large job seeker user base positions us well to capture this significant opportunity.

Based on current market and operating conditions, our total revenue target for the first quarter of 2006 is in the range of RMB165 million to RMB175 million. Our fully diluted EPS target for the first quarter of 2006 is between RMB0.28 and RMB0.38. Please note that this EPS range relates to our business operations. It does not reflect the impact of any translation losses that may arise from future RMB revaluations.

Similar to past years, our growth strategy for 2006 has three main components:

  1. Geographical expansion.
  2. Increased penetration in existing cities.
  3. Product development and innovation.

With our presence now in 25 cities across mainland China, we intend to moderate our city expansion from the prior pace of three to five per year. We will continue to evaluate opportunities for geographical expansion, but we will no longer aim to enter three to five new markets this year.

We plan to focus more resources on new customer acquisition and growing market share in existing cities. Our internal analysis shows that even in the cities that we have operated the longest -- such as Shanghai and Beijing -- our penetration of the target customer universe is still in the single-digit percentages.

Another strategic priority for us is to build upon our online growth momentum. We expect more intense competition in the online segment this year. We are dedicating greater time and resources on online development efforts in 2006 to ensure that we continue to strengthen our competitive position in the online space.

We believe that we have built a powerful and effective business model. It has not only differentiated us from the competition in the eyes of the customers, but also has been proven to generate returns for our shareholders.

2005 marked our fourth consecutive year of profitability. However, we do not believe that we have achieved our full potential. We will continue to strengthen our market position, grow our revenues, improve our margins and deliver better returns to our shareholders. That concludes our presentation. We will be happy to take your questions at this time. Operator.

Question-and-Answer Session

Operator

Thank you, Mr. Yan. (Operator instructions) First we will hear from Safa Rashtchy of Piper Jaffray.

Safa Rashtchy - Piper Jaffray

Good evening, Rick and Kathleen. Good quarter. A couple of questions. Could you discuss, given the seasonality that you noted similar to last year which you said accounted for the weakness in the print, what caused the online to be so strong? It seemed like the online and your print businesses were going in different directions. I would assume that if there were some broader industry trends it would impact both of them. I have a quick follow-up. Thanks.

Kathleen Chien

Safa, actually in the call we just mentioned that what we did see was that typically, as you note, that print and online were moving more in tandem than otherwise. I think what we noticed was that as we are able to get our online users to buy longer and longer subscriptions, I think the quarter-to-quarter fluctuation for online will decrease over time. What you will see is that for Q4 we saw the online revenues held at pretty much Q3 levels, and there was not real sequential decline if you will. I think the print business, given that it is more of a per placement basis, we were much more affected. I think that's really the difference between a more of a longer term subscription model versus a per placement model. That's what we noted in Q4.

Safa Rashtchy - Piper Jaffray

It seemed like pricing in both online and print stayed relatively strong, despite the seasonality. What are your observations on that? How should we look at pricing trends going forward? Thanks.

Kathleen Chien

I think for us, at the end of the day we've always said that we did not necessarily feel that our customers are always that price sensitive. I think if you need to place an ad and you need to recruit somebody, you are willing to pay the right price to get to the right candidates. You can see that actually the pricing hasn't really changed that much quarter on quarter. We are looking at optimizing some of our pricing structures in some cities. We hope that we are able to stabilize our prices on the print a little bit more than we were doing in the prior quarters of 2005.

If you look at what the prices were for last quarter, it is pretty much back to the level that we were at for the end of 2004, so I think we're looking at optimizing our pricing a little bit on the print side. The online, I don't think that has really materially changed too much in the last few quarters and I don't see that that would change very much coming up.

Safa Rashtchy - Piper Jaffray

Thank you.

Operator

Next we will here from Jason Brueschke of Citigroup.

Jason Brueschke - Citigroup

Thank you. Allow me to add my congratulations on the quarter, Rick, Kathleen and Linda. I will just maybe follow up a little bit to what Safa asked and focus on online. You indicated that you expect online competition to increase, as well as indicating you're going to devote more resources. Could you give us a little bit more color on each one of those? Exactly how do you expect the competition to increase? Could you give us some color on where and how you expect to devote more resources online? Is it in sales and marketing? Is it in brand building or what have you to match this competition?

Kathleen Chien

Well, I think I will probably start answering and maybe Rick will just add to that. I think for us the players or the overall landscape hasn't really changed in the past, but when I was looking at our performance versus our competitors, one of the things we've always said is that since the Monster investment into China HR one of the things I notice about their team really is more of a focus, if you will, on the online. I think China HR was dabbling a lot more in some of the other related businesses or adjacencies. I feel that in the last year they have really tried to shift their focus on the online space. That's something that we've noticed through the last couple of quarters.

What we've always said and I think what we've always felt is our positioning hasn't changed in terms of our market share and a number of other things, but I think we want to make sure that we're prepared to match any sort of marketing or other sales campaigns as they are ready to launch.

What we heard on the call for Monster is probably what you guys have also heard. Their plan is to probably have a big marketing blitz and probably spend a lot of money on that front. We're not saying that we are necessarily planning to match that. All we're saying is we're ready and prepared to do the right thing to make sure that we are able to maintain and certainly even increase our position in the market.

I think we will be looking at a lot of our technology platforms to make sure that in term of access, user friendliness, interfaces, a number of other things -- it is pretty much the same thing in that overall we just want to make sure that we don't lose focus. We will be prepared to match and do the right things for the online space.

Jason Brueschke - Citigroup

Thank you. Just one additional follow up. The slight change in strategy to kind of de-emphasize the geographic expansion and focus more on existing cities -- is the strategy to focus more on the top tier cities where you may have greater penetration, but take that even deeper? Or, is it going to be more focused on some of your second and third tier cities where your entry into the cities may be newer, and focus there?

Rick Yan

I think we are going to try to do both. I think one important factor is the fact that if you look at the online segment, there is more online penetration in the more developed and mature cities. So actually, we are going to focus a lot of our effort in the major cities like Beijing, Shanghai , Guangjo because there is more online penetration and we expect more competition from our competitors.

We want to focus our resources this year on the existing cities -- both the big cities, probably more on the big cities than on the secondary cities. Certainly, we'll also look at secondary cities and look at our competitive position and look for opportunities to improve our position further.

Jason Brueschke - Citigroup

Great. Thank you, all.

Rick Yan

Thanks.

Operator

Next we will hear from Richard Ji of Morgan Stanley.

Rick Tesser - Morgan Stanley

Hi, Rick Tesser.

Linda Chien

Hi, Rick Tesser.

Rick Tesser - Morgan Stanley

Hi. I have a couple of questions. The first one is, I noticed there's a sequential decline in advertising pages. Can you just shed some light on that and why you scaled that back?

Kathleen Chien

Well, I think overall we did expect a sequential decline because if you look at the revenues, it matches really what the pages are reflecting. I think if you look at last year also, there was a sequential decline from Q3 to Q4. I think the pattern for this year was very similar to what we saw last year as well.

Rick Tesser - Morgan Stanley

Okay. My second question is about the breakdown in terms of total sales between the top tier cities and your non-top tier cities.

Kathleen Chien

We don't have a clear definition what top and non-top is, Richard.

Rick Tesser - Morgan Stanley

Beijing, Shanghai.

Kathleen Chien

I think we've tried not to break that out in any degree in the past, and I don't think that we'll be changing our position on that for now.

Rick Tesser - Morgan Stanley

My last question is regarding the financial subsidy. Can you also give us some color on that?

Kathleen Chien

Yes. Essentially it is a finance subsidy that we received from one of the entities in Shanghai. It is something that I think many of the other companies probably have enjoyed in the past. We are, as one of the leading enterprises in the area, they try to actually support us by looking for ways to help us grow. That's really the subsidy that we received at the end of the year.

Rick Tesser - Morgan Stanley

Okay. Thank you.

Kathleen Chien

Thank you.

Operator

Next we will hear from Kit Low of Goldman Sachs.

Kit Low - Goldman Sachs

Hi. Thanks for taking the question. Following up to what Richard was alluding to in terms of the print, I understand that from a seasonal perspective that is a weaker quarter, fourth quarter versus third quarter. Even if I look on a year-on-year perspective, there is a 7% growth, which is substantially lower than the mid-teen growth that you have been able to achieve. Could you elaborate a little bit more about it from a seasonal perspective, just comparing what you see in this fourth quarter versus fourth quarter of 2005?

Rick Yan

If you look at the year-on-year growth, if you look at 2004 where we have public data, you will see that quarter four growth on a year-over-year basis was almost 30 to 40 percentage points lower than previous quarters. Fourth quarter growth on a year-on-year basis has always been lower than quarter one, quarter two or quarter three. On an absolute basis, growth in 2005 was slower than 2004. If you compare the growth between quarters, I think we have seen a similar pattern in 2005.

Kit Low - Goldman Sachs

Does that mean a deceleration from 2005 to 2006, in terms of your print growth, is going to be from the high teens to the mid to perhaps low teens in 2006? You achieved 19% in '05.

Kathleen Chien

Kit, we already gave guidance for our top line expectation for Q1 of this year. I don't necessarily think that is the case, because we've always said that Q1 tends to be a strong quarter for print. If you look at the split between print and online, typically Q4 is one where actually -- I would say Q2, Q3, Q4 tends to be where online will outperform print, if you think about it in terms of relative growth rates. Q1 is actually a different story.

I think there is some seasonality going on in there as well that's mixed in. We're giving guidance for the bucket of services, if you will, and we haven't broken that out. We are not necessarily saying that Q4 is an approximation for what Q1 growth rates are for a segment.

Kit Low - Goldman Sachs

I am just going to push this one more time and if we can't get any further I will take it offline. The question here is, if you look at the first quarter for print, it is the highest growth quarter, as you alluded to. The second and third quarters are flat, and fourth quarter seasonally turning out to be historically a down quarter. Is that the sort of trend we should be expecting in 2006? That is what I am trying to get to.

Kathleen Chien

That is what we saw in 2004 and 2005. I guess for lack of more information, that's something that will have to come. Again, we'll be updating everyone on our view throughout the quarters and if something changes or new information comes to light, we'll share that with you all.

Kit Low - Goldman Sachs

Okay. Great. Thank you.

Kathleen Chien

Thank you.

Operator

(Operator instructions) Next we will hear from Albert Lee of Maxim Group.

Albert Lee - Maxim Group

Hi, guys.

Kathleen Chien

Hi.

Albert Lee - Maxim Group

In light of the anticipated online competition for 2006, can you talk little bit about -- more about your sales and marketing plan for '06? What or where do you anticipate throwing those dollars into, considering your brand has clearly started to become synonymous with the job search business? Where do you plan to spend that sales and marketing money?

Kathleen Chien

We're actually going to keep the exact locations and plans a little bit under the wraps, but as I said, we're very sensitive to what's going on in the market. We keep a very, very close eye on our competitors. We're ready and committed to pick the right battles to win the war. It will be something we'll keep a little bit under wraps for now, if you don't mind.

Albert Lee - Maxim Group

Not a problem. In terms of your low single-digit penetration into existing tier 1 cities, do you have some kind of a target penetration rate in mind or a benchmark that you see or use that you believe could be achievable over 'X' period of time? What kind of penetration rates do more mature operators have in their respective cities and other more developed countries? I am just curious to see where you see that penetration rate going, from where it is at right now?

Rick Yan

I think normally if we see a higher penetration in let's say Beijing or Shanghai where we have operated the longest, we have been operating in Beijing and Shanghai since 1999. It has been seven years. I think the challenge we have is, even in Beijing and Shanghai where we have been operating for seven years, the penetration is still in the single-digit percentages. So it feels like we have a long way to go before we can tell when we might hit saturation.

I don't know how long it takes, but if and when we feel that we're hitting saturation in Beijing and Shanghai, then we might be able to tell how that penetration curve would evolve over time. At this stage, even Beijing and Shanghai, we feel that we're under-penetrated. That's why I think it is hard for to us predict what level of saturation it will reach and how long it takes to get there.

Albert Lee - Maxim Group

Okay. Thank you.

Operator

We have no further questions at this time. Mr. Yan, I will turn the call back over to you for any additional or closing remarks.

Rick Yan

Thank you. We appreciate you joining us today, and we look forward to updating you on our achievements next quarter. Again, thank you for your interest and continued supported of 51job.

Operator

That does conclude today's teleconference. We thank you all for your participation. Have a great day.

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