Maybank Securities analyst Eric Ong has kept his “buy” call on HRnetGroup CHZ at an unchanged target price of $1.04, in anticipation of the reopening of China contributing to returning business volumes and the recovery of the labour market. Ong’s target price is based on 15x of the group’s FY2023 P/E.
In his April 6 report, Ong says that China’s reopening in early January shows “encouraging signs of recovery” in sectors primarily in domestic travel and hospitality and logistics.
Although China currently makes up less than 20% of the group’s overall gross profit, Ong believes that China will be the key growth driver for HRnetGroup's operations in North Asia.
“Despite global economic uncertainties, we believe the North Asia market will help to offset some of the weakness elsewhere for HRnetGroup as [around] 80% of its turnover in China is contributed by the higher-margin professional recruitment segment,” he says.
Ong explains that multinational corporations (MNCs) and local companies in China make up about 62% and 38% of HRnet’s clientele in FY2022 ended in December 2022, but the recruitment demands are split equally.
This is particularly apparent in enterprises involved in digital transformation, advanced manufacturing, AI and big data, total wellness, and other medical-related companies, says the analyst.
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HRnet has three brands under professional recruitment in China, HRnetOne, REFORCE, and PeopleSearch. It also has one brand under Flexible staffing, RecruitFirst, with more than 200 recruiters operating in six mainland cities.
“Management said China is a huge market with enormous potential,” Ong says. “As a result, the group intends to do much more, especially in deepening its market penetration in cities that it is already in, and keeping a lookout for cities like Xi’an that offer high growth potential for certain strategic industries like semicon.”
According to the analyst, the group will go beyond chasing organic growth through its co-ownership model, by pursuing inorganic expansion and embarking on the “combo” route through joining hands with new business leaders to start-up joint ventures, and set up more business units in China.
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HRnetGroup’s value proposition is that it has a balanced business model with professional recruitment and flexible staffing segments that are complementary through economic cycles and help customer retention.
Its geographically-diversified and has a multi-disciplinary focus, with over 3,000 clients, including several Fortune 500 companies operating in the region.
“The group has achieved continued growth through its co-ownership operating model with 36 business leaders holding stakes in the business units they operate,” says Ong.
It is the largest recruitment player in Singapore in terms of the number of licensed consultants and revenue, according to Frost & Sullivan.
Ong sees that HRnetGroup has two complementary businesses that provide margin resilience in economic and recruitment cycles, as seen by relatively stable margins over past the three and a half years.
It also commands a decent return-on-equity (ROE) of 14%-15% despite its significantly ungeared balance sheet, and a low capex intensity with strong free cash flow generation, and does not require high working capital commitments.
As at 11.22am, shares in HRnetGroup are trading flat at 80.5 cents.
