Kanzhun

Boss Zhipin's second-quarter revenue increased 14% year on year to CNY 2.4 billion, while operating margin improved by 500 basis points to 36%. Administration and general costs continue to fall.

Why it matters: Boss Zhipin reduced administration costs again as the company continues to invest in artificial intelligence-assisted chats and AI interviews as part of its cost-cutting initiative. While it guided to 11%-16% year-on-year growth next quarter, this is still below previous 20% expectations. Sales and marketing costs, however, increased by 38% year on year, which likely explains the jump in users and paying enterprises. The increase in marketing costs was also due to the World Cup, which could revert next quarter, and could also suggest the same for user growth. User growth in Tier-1 and Tier-2 cities is mostly mature, the company said. To increase monetization, it is raising prices on paying enterprises looking for employees. It is also looking to expand its blue collar job postings, which account for 40% of revenue, to attract more enterprises.

The bottom line: We maintain our fair value estimate for no-moat Boss Zhipin at USD 17 (HKD 68) as user growth this quarter was encouraging, but does not alleviate long-term concerns. We would like to see user growth trend up without a jump in sales and marketing costs before having a more positive outlook. We think the firm operates in a fragmented industry with no switching cost. With only 71.5 million active users and 7 million hiring enterprises out a workforce of 800 million, it is vulnerable to larger platforms with an existing networking effect that could create a job site such as Weixin. We still have concerns as to user growth slowdown lingering, given that the platform saw lackluster growth last quarter to 61 million, reflecting only a 6% year-on-year increase. Management indicated that the domestic job market is weak and other industries are struggling outside of manufacturing.

Our fair value estimate for Kanzhun is USD 17 (HKD 68).

Given that 99% of revenue is derived from enterprises, we expect valuation to be driven by the number of enterprises that eventually join the platform. Monthly active user numbers will factor indirectly into revenue growth, given that enterprises are more incentivized to join the platform if they have access to a diverse pool of candidates. There are now 4 million enterprises on the platform and 40 million MAU. Management expects the platform can attract 100 million users in three years, driving paying enterprises to join as well.

While we can positively correlate between MAU and the number of paying enterprises that join Boss Zhipin, users do not directly drive enterprise customers to join the platform. However, looking at the total addressable market, the nonagricultural business population in China is about 600 million potential job seekers. When accounting for those involved in some state-owned enterprises, public institutions, and government units, that number falls to around 450 million, but still suggests that there is a large runway for more users, which should lead to further increases in paying enterprises in the long term.

However, there is no guarantee that the company can reach its 100 million target, given the competitiveness of the industry nor is there certainty that this can translate into greater monetization. While we assume a greater number of users and enterprises on the platform can translate into meaningful revenue, there are estimates risks as to whether the platform can monetize more customers. There are about 4 million paying enterprise customers on Boss Zhipin and we assume that the platform can see modest growth in both users and enterprises in our estimates. We also assume that Boss Zhipin will eventually increase its monetization per enterprise on the platform. At the moment only about 50% of enterprise customers pay a fee on the platform, and we increase the average fee per customer by about 15% per year over the next five years. Similarly, our estimates would be at risk if Boss Zhipin struggles to convert the subsidized enterprises on its platform into paying users.

We estimate operating margins to increase to 18% from 3% over the next 10 years based on the historical operating margin of peers such 51job and Liepin. Management’s long-term forecast for operating margin should be about mid-30%, similar to that of peer competitors at their peaks. However, we believe it could fall short of management’s expectations, given recent operating margins in the industry have declined to 10%-15%. While the company indicates that it is differentiated through its proprietary AI algorithm and human resources services that provide value to the SMEs, we would like to see further evidence of MAU and enterprise growth outpacing its competitors as signs of differentiation before raising our margin estimates.

We assign a no-moat rating to Kanzhun despite having 40 million MAU, the most among its peers in the online recruitment industry. Despite its leading number of users, we believe the company’s business model has a low barrier to entry where its differentiation may be fleeting. The company is able to provide value to SMEs, whose time and resources may be limited, through its algorithm-based screening and hiring services, but we do not believe its recruiting platform, Boss Zhipin, has gatekeeping power through its innovative business model. Kanzhun’s competitors can also develop their own proprietary techniques and shift their monetization models to provide the same filtering and hiring services. While Boss Zhipin may provide value to enterprises through its current algorithm, we don’t believe the company is differentiated enough, nor that it would be difficult to replicate its business model.

The main differentiation in Boss Zhipin’s monetization model is that the platform decides whether to charge companies for job postings based on their demographic composition. In short, enterprises only pay if the number of job seekers outweighs the number of jobs in a specific region, and charges are dependent on the level of users and a factor of supply and demand. Boss Zhipin focuses more on small and medium-size enterprises than peer platforms, and provides convenience to the enterprises by screening applicants who outnumber job supply, saving the enterprises time and resources in their hiring process—similar to LinkedIn’s model. However, unlike its Western counterpart, it doesn’t appear that its innovative model has yet translated into a network effect, as the platform only has 40 million users out of its self-proclaimed 450-million-user total addressable market in China. While the filtering process is unique, given its algorithm and its provision of services to enterprises, we believe the company still faces a challenging path toward gaining acceptance among the client base that it targets. Recently, it has announced that is looking to expand overseas, and we believe its strategy is part of its challenges of scaling its domestic clients.

In addition, the company is still in an early-stage phase compared with its peers, who have been established in the market for nearly 20 years, where user growth has remained relatively low. User growth has only been modest for its incumbent competitors, which suggests that there could be challenges for Boss Zhipin given its goal of 100 million users in the next three years (more than double the current MAU). Its trajectory could stall, as the closest peer only has 21 million MAU on its platform despite a longer-established history of operations. The Chinese recruiting landscape remains competitive and we believe there are no switching costs that make Boss Zhipin the preferred platform in the long term. With its three-year MAU target at more than double that of its current users, we would like to see demonstrable growth first.

Kanzhun remains relatively cautious of the fees it charges users, as it charges only about half of the enterprises on the platform a fee. This reflects the lack of network effect, where enterprises may not see the benefits of joining the platform, as well as the competitiveness in the industry. As for branding, the company is still building out the platform through sizable marketing attempts such as its proprietary Spring recruitment festival and mass advertising, but we do not think there are meaningful intangible assets, given that the number of its users isn’t significantly greater than that of its peers either. While the company acknowledges the industry’s challenges and aims to help unfulfilled college graduates through its Spring recruitment festival by pivoting toward SME job openings, there are still other mediums outside of the platform that can act as substitutes.

Kanzhun believes its potential long-term operating margin is about mid-30%, similar to that of its peers at their peaks. However, it appears that competitors have exerted pressure on industry operating margins, as these have declined to the high single digits to midteens. While we still expect Boss Zhipin’s operating margin to increase from its current 9% operating loss, we believe it is unlikely that it can reach 30%, given our view that it doesn’t have any moat sources that significantly propel it past the industry average. Since we still expect operating margins to improve from current losses, we expect ROIC will still increase from current levels. However, given our views on the lack of differentiation and uncertainty over both margin and user estimate growth, we do not believe increasing ROIC outweighs our concerns, and the company doesn’t warrant a narrow moat. Given that it has lowered its growth projections despite having relatively few paying customers, we have less confidence that it can warrant a moat in the future.

Record-high unemployment in China could accelerate the monetization process as there are more job seekers than jobs at enterprises.

Expectations of a larger middle class in the future could mean more demand for white-collar jobs in urban areas.

A differentiated targeting model for blue-collar workers could result in disruption of the hiring industry in China.

China’s recovery slowdown could mean that SMEs are less willing to hire more workers.

High unemployment in China’s urban areas could mean migration toward rural areas, where the platform is less effective.

The job recruiting industry may be too undifferentiated and despite advertising campaigns, the platform may eventually be commoditized.