(ASX : SEK) – Hide & SEEK

To begin, SEEK (ASX: SEK) is an almost mind-splitting company to think about, the group is truly global and has several large investments as well as early stage ventures.

The SEEK group is extensive and complex! And due to my limited time & resources, any analysis I do wont add too much value.

So… I did a quick synopsis on two of the entities within the Seek Investments. These are OES / Online Education Services & Zhaopin Limited.

As a background, Seek (Australia & New Zealand) is a company that most Australians are familiar with, it’s a market leader in the Online Employment Marketplace with 35% market share and c35m monthly visits. It is a cash machine! with c185,000 month paid jobs that generate $400m revenue which is made up of cash with job posting paid upfront.

The Seek group structure is as follows:

  1. Seek Australia & New Zealand, Seek Asia, Seek Americas, OCC (Mexico), the previous are fully owned online employment marketplace services.
  2. Seek Investments, which includes Early Start Ventures. These include – Zhaopin Limited (60%), Online Education Services (80%), and a number of early ventures such as JobAdder, Jora, and Sidekick.

Headline figures:

  • Market Cap: $6.3B
  • Npat: (excludes one – off items): $229.5m
  • Ebitda: $432.9m
  • P/E: 28x
  • Net debt: $573m

OES / On-line Education Services (80%).

OES provides online educations courses, a joint venture set up via 50/50 partnership with Swinburne University that in turn created Swinburne Online. OES now has over 10,000 p.a. students enrolled. The company provides LMS Hosting, Course Design, Marketing & recruitment and Assessment Management.

SEEK, opportunistically in 2017 increased their stake of OES to 80% and sought new partners such as Western Sydney University in 2017. Aswell as a recent win from Queensland University of Technology.

The total investment into the business was initially $10m and now totals $124m.

The SEEK H1 2018 results highlighted a fair value of $412m based on a consensus analyst estimate. A conservative estimate and doesn’t factor the new partnership with Queensland University with online courses to be rolled out in 2019.

OES recently contributed $119m in revenue and $37.5m in EBITDA for FY18 based on +10,000 students per annum.

The future for OES is positive, and there is a clear runway for growth. OES has capacity scale up its current platforms, and source new partners with from Australian Universities and International Universities with the recent appointment of UK Managing Director.

Dont get your hopes too high, the current government funding around postgraduate and further study might be a potential headwind for OES.

Zhaopin Limited – 61% owned by Seek

Zhaopin Limited, a China based career and talent acquisition platform. It’s one of China’s largest online recruitment sites with ~140 million job seekers on its platform.

According to IResearch, the company is the 95th most visited site by Unique Visitor. Its competitor and rival 51job.com is 111th. More on 51job.com later…

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An interesting point about Zhaopin Limited and its value add is that due to the massive volume of applicants, human vetting is impossible therefore the company relies on machine learning / AI to rank candidates as it collects more than 100 data points from its users.

Meek Beginnings

In 2016 / 17, the company was valued at c$1b in a take private transaction by Hillhouse Capital, FountainVest Partners & Seek. Subsequently, Zhaopin was delisted from the NASDAQ in October 2017.

And to be fair to existing shareholders, at the time of the takeover,  the transaction was viewed undervaluing the business. The purchase of c$1b seemed standard for earnings of $62m (FY16), a price-to-earnings multiple of 18x.

However, this doesn’t discount the price of the net cash held totaling $300m which makes for an adjusted price-to-earning of c11x.

A cheap multiple or a lowball valuation for a high growth, low cap ex online business with strong cash flows (hirers pay in advance!)

Zhaopin last reported revenue of $329m (FY16) at the time of the takeover compared to $461.5 (FY18) today. However, at the 2018 company presentation, SEEK valued the their ownership at $550m (total value .9b) in line with buyout.

Notably, the company’s ebitda from 2016, 2017, 2018 has been flat at $79m, $80m, $84m. Whilst revenue has increased $329m, $372m, $461m with the sites unique customers / hirer relationships increasing as follows 510,000 , 613,000, 775,000.

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Story of scale

When it comes to Zhaopin shareholders, they will need to be patient. The future earnings of Zhaopin will look much different compared to today.

The focus of Zhaopin is scale which is to the detriments to its profits and capital.  Its customers (hirers) are seeking the largest candidate base for their jobs postings. This is dependent on the amount site visitors which requires marketing & sales.

Sales and marketing expenses made up 54% of net revenue in FY17. Its competitor, 51job.com reported sales & marketing expense of 32% of revenue. The 20% difference in margin translates to c$100m which should flow through to ebitda.

The approach to scale is underpinned by the new platform strategy under a “Freemium Model”. A Free to Post for basic job adds with a monetization process via the refreshing of adds and value add services such as CV Search, guaranteed adds and prominence adds.

The company in 2017 had reported a penetration rate of 11% for online employers in China which will further increase under the new “freebie model”

The company is also set grow its other HR related channels online i.e. junior to high-end recruitment, campus assessment and education and training as well as offline recruitment in traditional HR.

Zhaopin’s, main competitor is 51Jobs.com (see 51jobs.com annual report) has been admirable and profitable in applying both online & offline revenue channels.

51Job.com also offers an online recruitment services comparable to Zhaopin.com with 65% revenues generated from online services and the remainder from HR services.

51job is unique compared Zhaopin in that it has multiple online channels under different brands i.e. tech talent, college, experience workers under different websites aswell as profitable offline channels.

A worthwhile note – 51jobs as of 30th June 18 was valued at almost $7b and is today valued at 3.6b. Meanwhile Zhaopin was last valued at $1b.

  51Job.com (2017) Zhaopin Ltd (2017) Zhaopin Ltd (2018)
Revenue $442,000 $372,000 $462m
Unique Customers 519,000 613,000 775,000
Registered users 130m 140m 158m
Resumes / CV 121m 95m 107m

Another point on Zhaopin is MaiMai (LinkedIn’s rival in China).

Zhaopin in November 2017 led a series C funding of $75m. The speculation is the company is primed for 2019 IPO worth $10b. Seek Investments recently reported a $35m fair value gain in 2018 with a 6% interest.

 

 

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