51job: Q1 Growth, Operating Profitability Outstrip Estimates

Excerpts from Gilford Securities analyst Ashish R. Thadhani's update to clients on 51job, Inc. (JOBS) following its recently released earnings report:

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JOBS: 1Q08 Growth, Operating Profitability Outstrip Estimates

Investment Conclusion. Based on continued (currency-aided) revenue growth and improved margins – offset by allowances for currency translation and an earthquake-related disruption – we are fine- tuning our estimates as follows: 2008 GAAP EPADS remains at $0.55 on net revenue of $134 million (26% YoY growth and up from our prior $131 million projection); while 2009 GAAP EPADS stays unchanged at $0.75 on net revenue of $167 million (25% YoY growth and up from $163 million previously). We are also raising our target price from $20.50 to $24. In 12-months, this would correspond to a $513 million enterprise value and 30x forward GAAP EPADS – a premium to 20% compound EPS growth in 2007-09E. We note that the $360-405 million valuation placed on ChinaHR.com by Monster (MNST-Hold) represents a validation for 51job ($370 million), which remains much larger and more profitable than its nearest competitor.

1Q08 Results. GAAP EPADS of $0.11 vs. $0.15 a year ago on net revenue of $32.0 million (30% YoY growth) beat our $0.10 estimate on net revenue of $29.9 million. The YoY drop in EPS is attributed to aggressive marketing, sales force expansion and online product development initiatives (S&M jumped to 24.3% of net revenue vs. 17.3% a year ago), as well as a $1.5 million currency translation loss (5.2 cent impact). 51job posted a $2.1 million positive variance in net revenue – with strength across all business lines – that was partially offset by non-operating forex/tax items ($1.8 million). Revenue from online recruitment services advanced 40% YoY to 33% of the total. Operating income rose only 2% YoY to $5.5 million (17.2% margin) but exceeded our $3.5 million estimate (11.7% margin) by 57%. Metrics showed somewhat slower growth in print advertising page-count (+16% YoY) with higher average revenue per page (+3% YoY in dollar terms despite city-mix); and steady growth in the number of employers using online services (+26% YoY) along with higher revenue per employer (+11% YoY). Net cash climbed to $145.8 million (or $5.10 per ADS) from $138.0 million on December 31...

Investment Thesis. According to recent surveys, a shortage of qualified staff and high turnover ranks as the biggest business concern in China. 51job is enviably placed to capitalize on the rapidly evolving market for HR services in China – by applying a proven business model across its vast labor force (5x U.S.). Compared with traditional job search channels such as referrals and fairs, pioneers like 51job offer significant reach and speed advantages. Favorable demographic drivers include GDP growth (~10% in recent years), Internet usage (ranked #1 worldwide), an aging workforce and increasing private, urban and service sector employment. iResearch forecasts that the total recruitment market in China will increase from $568 million to $1.39 billion in 2005-10, implying 20% compound annual growth. During this period, the online recruitment segment is expected to advance from $99 million (17% of the total) to $631 million (45%), or 45% compound annual growth. Superior positioning includes a premium brand/pricing; comprehensive online/offline offering; wide geographic presence (25+ cities); large direct sales force (over 1,600 representatives); and unmatched job seeker database (access to more than 16 million resumes for professional, clerical, industrial and hourly jobs). EPS growth stands to benefit from ramp-up of online subscriptions (from single-digit penetration of client budgets at present) and a scalable model offering 30%-plus operating margin (excluding share-based compensation).

JOBS is suitable for aggressive investors. In our opinion, principal risks include the following:

• Deterioration of economic conditions in China, slowing of hiring activity or a “hard landing” scenario.
• Competition from ChinaHR.com and Internet portals could pressure future profitability by way of higher marketing expenses and/or lower pricing.
• Rapid online migration could result in cannibalization of offline revenue.
• 51job has an inconsistent execution record.
• Uncertainties in the PRC regulatory and legal system, particularly laws governing foreign ownership and licensing/operation of HR and Internet business entities. Note that 51job is incorporated as a holding company in the Cayman Islands.
• Disruptions such as spread of the H5N1 virus or a recurrence of SARS, political unrest, breakdown in relationship with a major publishing/distribution contractor, etc.
• Influence of Recruit Co. and current management over all matters requiring a shareholder vote.
• Correction in the U.S. markets.

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ANALYST CERTIFICATION

I, Ashish Thadhani, certify that all the views expressed in this research report accurately reflect my personal views of the subject companies. I certify that I have not and will not receive compensation with respect to the issuance of this report.

Comments

[weng ho teng:]

No doubt this is a great long term investment.

A strong pick for 2008 in China is MYST.OB as well.

Earnings on 5/15/08

2008 May 14 06:08 PM