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51JOB, INC. : Safety With A Capital S

|About: 51job, Inc. (JOBS)

Summary

51job is a leading integrated human resources service provider in China.

51job is likely the largest online recruitment services provider in China with the company reporting 84 million accounts and 75 million resumes posted on the website as of December 31,

Growth has been more difficult to come by recently as the Chinese economy has slowed.

by Jeffrey Alton, CFA

51job (NASDAQ:JOBS) is a leading integrated human resources service provider in China. Traditionally, its largest business is online recruitment services with job postings that cover a wide variety of employment classifications from professionals to hourly workers. Because of its internet presence, listings are slanted to the Internet-using population which is comprised generally of white-collar professionals ages 20 - 35. 51job is likely the largest online recruitment services provider in China with the company reporting 84 million accounts and 75 million resumes posted on the website as of December 31, 2014. Revenue is derived from advertising on the site and a recruitment platform used by company clients.

51job current outstanding convertible HOCS score is 72 overall/ 63 growth/ 88 safety. (A quick refresher. HOCS, or Hillside Overall Convertible Score, measures the attractiveness of a bond, taking into account both upside potential and downside protection. HOCS is not a theoretical model but a rating system that assigns points to a number of different characteristics of each convertible. HOCS can theoretically lie anywhere from 0 to 100. In practice the average score for a broad group of convertibles is typically around 50. 60 is a good score, 70 is excellent, and 80 is exceptional.)

The high safety score results from the company's large cash balance relative to its outstanding debt, which is comprised only of the company's US$ 172.5 million 3.25% 4/2019 convertible bonds. One caveat regarding the safety of the convertible bonds is the company's VIE structure. Hillside has covered the risks regarding the VIE structure used by many Chinese convertible bond issuers, so give us a call if you would like to have a more in-depth discussion, but suffice it to say that bondholders may have limited recourse to the company's assets in the event of a default on the bond.

51job was an early entrant in the Chinese recruitment market, beginning operations in 1988 primarily as a print recruitment advertiser. Over time, the company has moved its products online while participating successfully in the rapid expansion of the Chinese economy, growing revenues from US$58 million in 2004 to $305 in 2014 - a compound annual increase just shy of 20%.

Growth has been more difficult to come by recently as the Chinese economy has slowed. Yet with a track record of investing prudently, management that sticks to the business that it knows, a sizeable cash balance to cushion any unexpected events and a yield above 3%, it is a bond worth considering.

Business Summary

51job is a leading integrated human resources service provider in China. Its largest, and traditional business, is online recruitment services with job postings that cover a wide variety of employment classifications from professionals to hourly workers. Because of its internet presence however, listings are slanted to the Internet-using population which is comprised generally of white-collar professionals ages 20 - 35. 51job is likely the largest online recruitment services provider in China with the company reporting 84 million accounts and 75 million resumes posted on the website as of December 31, 2014. Revenue is derived from advertising on the site and a recruitment platform used by company clients.

51job is winding down its print advertisement recruiting operations, which appeared as inserts included in local papers. The print editions are being eliminated as Chinese society moves online and newspapers lose their advertising efficiency. In 2014, the company sold print advertising in only one Chinese city, down from seven cities in 2012. The company is also developing additional human resource related products including benefits processing, training, campus recruitment and executive search. A revenue comparison by segment of year-end 2010, year-end 2014 and the most recent quarter highlights the shift in revenue away from print toward online recruitment and other human resource services.

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The company has shifted its marketing efforts toward small and medium sized Chinese companies as the large-company market is already highly penetrated. However, with the current softness in the Chinese economy, 51job is more focused on cross-selling its human resources products to existing clients versus obtaining new customers.

In the second quarter of 2015, 51job completed the acquisition of Yingjesheng, a leading recruitment website targeting college graduates and students. The company also recently invested in Zhiding Youyuan, which provides talent assessment tests and tools for corporations.

Leverage

51job's financial position is strong as recognized by the HOCS 88 safety score. While 51job, along with most Chinese companies, does not provide quarterly cash flow statements, the company cranked out US $121.8 million in cash flow from operations in 2014.

As of June 30, 2015, the cash balance stood at $745 million. The company's only debt is the $172.5 million 3.25% convertible note due April 2019.

Conclusions

The 51job 3.25% 2019 convertible bond offers purchasers the opportunity to invest in a growing business at a reasonable yield. One other feature of the bond is the April 2017 put which allows investors a chance to sell the bonds back to the company at 100% of face value. Given the current cash balance of the company, we see little risk of default over the next 18 months, and the put is priced for investors to exit at a small profit even if the Chinese economy experiences a hard landing near-term.

Over the longer term, 51job should grow along with the overall Chinese economy, and is focused on a market with long-term potential - human resources management. Human resource policies and work place regulation are still in the nascent stages in China and offer plenty of potential over the longer term.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: Originally published 10/19/15 in Hybrid Vigor, The Convertible Advisory Letter.