BZ is a ticker that we wrote extensively about in our deep dive article published slightly more than a year ago. This article is a follow-up piece aiming to offer updates in light of the BZ's recent selloff and plummeting of its stock price.
Stock price decline on the back of weaker growth outlook for 2H24 due to worsening near-term macro headwinds
Stock price was performing consistently well...: BZ's stock performed notably well for much of the 1H24, showing a gradual and consistent upward trend. The company's strong 1Q24 earnings (which we summarised here under the BZ section) also definitely helped with this positive momentum.
...Until concerns of macro weakness resurfaced: However, the stock price started to see massive decline since May at the back of investor concerns on weakening recruitment demand stemming from macro weakness.
- 2Q24: Management noted that after a strong 1Q, the demand for hiring significantly declined following the May 1 holiday. Consequently, BZ now anticipates a 20% y/y cash billing growth in Q2, down from the previous guidance of 28-32%. Q2 revenue is now projected to be at the lower end of the forecasted range of RMB 1.91-1.96b.
- 2H24: Looking ahead to the remainder of the year, management has adopted a more cautious stance. They have revised the FY24 cash billing growth guidance down to 20% y/y from the previous range of 25-30%. Additionally, the full-year 2024 revenue growth guidance has been adjusted to 25%, though the earnings outlook for FY24 remains unchanged.
- Also note that 3Q margins might be impacted from marketing spend on the Olympics.
Macro weakness likely to hold true, unless major stimulus from the CCP: This trend is likely to hold true unless there are major policy announcements from the CCP. Given that the recent 3rd Plenum (a major meeting held roughly once every five years to map out the general direction of the country's long-term social and economic policies) turned out to be largely a non-event, such a catalyst is not very likely to materialize.
Long-term investment theses remain intact. We believe it's an opportune time to buy the dip.
Despite near-term macro softening, which will likely negatively impact earnings for the FY, we think that our original investment theses remain intact. Therefore, this could be an opportune time to buy the dip, especially if you have patient capital and not looking to divest in the next 1-2 years. It would be extremely ideal if don't currently already have holdings in BZ, since investor concerns over short-term macro would already be priced into the stock.
I will summarize our theses here:
Thesis #1: Leader in an underpenetrated vertical within Chinese internet, which is rare as Chinese internet tend to be quite mature.
- Huge headroom: Online recruitment is only at ~35% penetration vs other verticals like online payment (89%), e-commerce (82%), live streaming (71%). More mature markets like Japan/US have ~70% penetration for online recruitment.
- Growth headroom can be realised due to democratization of recruitment services: In the past, companies recruiting for blue collar jobs or SME white collar jobs may not use recruitment services as the cost is too high relative to the salary they are paying for the workers. Online recruitment services like BZ’s cost 1/5 of offline recruitment, which will prompt them to start using such services.
Thesis #2: Concerns over Chinese macros have consistently overshadowed the less appreciated positive impact it has on BZ's business fundamentals
- Since its IPO in June 2021, the share price has been on a downward trend, primarily due to investor concerns over weak Chinese macros (the triple D - demographic, debt, and deflation). The recent selloff can also be attributed to these same concerns. The rationale is that a poor economic outlook leads to companies reducing hiring or downsizing, which negatively impacts recruitment firms like BZ.
- What the market hasn't fully appreciated is that a poor economy makes people more anxious about their jobs, leading to increased usage of job platforms. This results in reduced customer acquisition costs and a clearer path to profitability. With BZ already having an EBITDA margin of around 14%, the reduction in sales and marketing expenses, typically the largest cost driver for growth companies, is particularly beneficial.
Thesis #3: Highly defensible core driven by (i) product-market fit, (ii) strong execution and (iii) network effect
- Product-market fit: Despite being a latecomer (2014), they have overtaken 51job (1998) and Liepin (2011) by 3Q 2020 in revenue; indicating strong product-market fit due to its innovative product features.
- Execution: CEO Peng Zhao was CEO at Zhaopin (first and longest running online job portal in China) and spent many years in HR prior. Left Zhaopin to start BZ.
- Network effect: BZ operates with a flywheel effect similar to most tech platforms: more employers attract more job seekers, generating more data, which enhances the platform and, in turn, attracts even more employers. Unlike platforms like Grab or Shopee, which rely on heavy discounts to build their moat, BZ's network effect significantly improves the product's value. This makes users appreciate the platform for its quality rather than just its price competitveness.
Thesis #4: Prudent capital structure means buffer to weather storms or capital to pursue growth
- No debt
- Huge cash war chest from IPO still unutilized and receiving high interest income(almost US$1.8b)
- OCF positive, profitable (14% EBITDA)
