The long-awaited Q3 report of "Kanzhun" $Kanzhun(BZ.US) has finally been released. As the company's official preview was communicated earlier this month, the pressure on cash flow revenue in the Q3 report has already been fully digested by the market.

Therefore, the performance of the Q3 report itself has little impact on short-term valuation, with more emphasis placed on the management's outlook, clear quantitative guidance, or qualitative tone changes. In addition, stepping outside of macroeconomic factors, I will focus on the company's internal operations, examining BOSS Zhipin's ability to create alpha from a medium to long-term perspective.

Specifically:

1. Expected growth pressure: The Q3 performance is basically predictable, including the pressure on cash flow and maintaining profit margins through cost optimization. The company's guidance for Q4 cash flow remains cautious, with year-on-year growth further sliding to low single digits, and revenue growth guidance also slowing down.

However, the company has a revenue growth expectation of over 10% for next year, 2025, which seems to indicate a bottoming recovery compared to the situation in the second half of this year. This may imply a small expectation that, since the 924 policy, the economic cycle is likely to accelerate towards a turning point under policy stimulus.

However, the company remains more confident in improving profitability, expecting a growth of over 30% to reach 3 billion. This is, of course, due to BOSS Zhipin's relatively excellent business model and stable competitive advantages, which provide significant room for optimizing operational leverage.

2. New traffic highs, slight recovery in CB structure post-policy: Q3 monthly active users reached a new high of 58 million, but most of the new active users are likely job seekers.

The job seeker/recruiter (CB ratio) in Q3 still faces pressure, with the number of job seekers far exceeding that of recruiters among new users. However, management also revealed in the preview that the CB ratio improved in late November. Currently, this marginal change has not yet translated into corporate paid conversions, but with the continuous rollout of economic policies, we can continue to monitor and anticipate a recovery in corporate payments.

At the end of 2022, the company set a target of a net increase of 40 million monthly active users over the next three years. Currently, the progress over two years has reached 68%, steadily advancing as planned. The economic downturn has worsened the labor supply-demand relationship, although it has brought in a natural flow of job seekers, BOSS Zhipin has also exercised more restraint in marketing expenditures.

When compared horizontally with peers, BOSS Zhipin's brand awareness is more evident—whether in monthly active users or usage duration, BOSS Zhipin's lead continues to expand.

3. The proportion of large enterprises continues to rise: In Q3, corporate recruitment revenue grew by 20%, mainly driven by the increase in paid corporate users, which grew by 22% from 4.9 million to 6 million. Meanwhile, I calculated that the average payment from enterprises over the past 12 months has also increased quarter-on-quarter, indicating that in the challenging Q3, the recruitment demand from small and medium-sized enterprises has faded faster, while the proportion of large enterprises with high ARPPU continues to rise

This will alleviate some of the fluctuations during the adversity period for BOSS Zhipin. Due to business operational inertia, the recruitment demand of large enterprises is generally more stable compared to small and medium-sized enterprises. When facing short-term environmental changes, large enterprises are relatively counter-cyclical.

4. Repurchase accelerated, new repurchase plan has been executed: The $200 million repurchase plan announced by the company in March for 12 months has been fully utilized by early December. In August, the company announced another 12-month repurchase plan of $150 million, which has already begun execution as of December based on the cumulative repurchase amount.

Generally speaking, the repurchase by BOSS Zhipin's management will vary based on market value fluctuations. After the 924 policy, the market value has increased compared to September, leading to a decrease in the daily repurchase amount, but the frequency of repurchases has increased. Since the resumption of repurchases after the disclosure of the second quarter report at the end of August, the overall repurchase has been accelerating (repurchased $120 million from September to November, and a cumulative repurchase of $90 million from March to August).

Although the new repurchase amount of $150 million is less than the initial plan at the beginning of the year, Dolphin believes that the management places relatively high importance on shareholder returns in their communication with the market, and the second quarter earnings call also revealed that they are considering a dividend plan. Therefore, it cannot be ruled out that subsequent repurchases will continue to increase, launching the third and fourth phases, etc.

If we are optimistic, based on the accelerated repurchase pace from September to November, Dolphin estimates the annualized return on shareholder returns (annual total of $120 million * 4 = $480 million) to be 7.5%. However, if we consider a conservative expectation of a $150 million repurchase within the year, the return rate would only be 2.4%.

Dolphin tends to believe that the latter scenario has a lower probability of occurring. Currently, BOSS Zhipin has cash and short-term investments (with no debt) amounting to 14.6 billion RMB, approximately $2 billion. The platform's light asset + contract prepayment business model ensures healthy cash flow, with a net operating cash inflow of 810 million RMB in the third quarter, indicating a relatively abundant cash flow to support increased shareholder returns.

6. Comparison of core performance indicators with market consensus expectations

Dolphin's Viewpoint

In the preview communication at the beginning of the month, the company's management was still cautious about the outlook for Q4, expecting a revenue growth rate of over 10% in 2025, while also indicating that they will no longer provide guidance on cash billings.

Due to the considerable operational flexibility from cash contract signing to final revenue recognition, the revenue and cash flow data may not necessarily synchronize completely during seasonal fluctuations. However, considering that cash flow indicators are more forward-looking for business development, the market generally focuses on cash flow indicators when trading BOSS Zhipin, rarely paying attention to revenue. Therefore, the management's cautious guidance on Q4 cash flow data and the cancellation of guidance for next year will, to some extent, increase market concerns

Of course, from the current standpoint, the aforementioned negative factors have basically been digested. In the short term, the biggest factor affecting the valuation of BOSS Zhipin is policy changes. Currently, policy tools are still being introduced, but the market is largely focused on short-term speculation, and changes in expectations will continue to disrupt market capitalization.

Generally, December is the period when most clients discuss and sign contracts for the following year, so we can pay attention to whether the management provides any updates on the outlook for next year based on the current performance in December during the conference call.

Stepping away from external factors, what can be further confirmed from the third-quarter report is that, from a mid-term perspective, BOSS Zhipin not only continues to leverage its competitive advantages to gain market share but also has highlights in "internal strengthening":

On one hand, there is the release of operational leverage. BOSS Zhipin has already established brand recognition among users, and during the current industry downturn (where job supply far exceeds recruitment demand), the natural traffic for recruitment platforms is increasing. While peers are adopting a conservative approach to advertising, BOSS Zhipin can further optimize its customer acquisition costs.

In addition, the release of operational leverage can also be reflected in the compression of equity incentives. According to previous guidance from management, Dolphin Jun expects that this could increase profit margins by 10 percentage points in the future, so we should pay attention to whether management has a more aggressive contraction pace.

On the other hand, there is shareholder return. Under a light asset business model, BOSS Zhipin's cash flow is relatively healthy, allowing for a more robust shareholder return plan. Since the beginning of the year, BOSS Zhipin has repurchased 14.5 million ADS, using up $200 million, and has significantly accelerated the repurchase pace since August. Although the repurchase amount from the initial plan has been exhausted and the new plan's amount has been reduced, we expect that the repurchase actions should not stop. Meanwhile, during the last quarter's conference call, management revealed that they are studying a dividend plan.

Of course, from a longer-term perspective, this is the overseas strategy that BOSS Zhipin is currently pursuing. However, although Dolphin Jun recognizes the operational capabilities of BOSS Zhipin's management team, it is not recommended to set expectations before taking effective steps.

According to the company's performance guidance for 2025 and market expectations, the current market capitalization of $6.4 billion corresponds to a P/E (Non-GAAP net profit) valuation of about 15x based on a 7.3 exchange rate for the 2025 performance. Considering BOSS Zhipin's leading position and the significant potential for profit improvement due to its business model advantages, and that the pace of improvement largely depends on the company itself, the previous valuation premium compared to other domestic platform economies has clearly diminished. From the perspective of profit growth, the current valuation is at a neutral (around 18x) slightly low position, which to some extent reflects the market's high concerns about macro pressures. Additionally, a potential risk that may need to be considered is the depreciation of the RMB, and we assume that the company's repurchase can hedge against this impact.

Of course, if we take a more optimistic view, the implementation of more consumer-oriented policies in the future and the acceleration of the cycle's turning point could lead to a quicker recovery in recruitment demand for small and medium-sized enterprises, which are under heavier short-term pressure on BOSS Zhipin due to their operational flexibility, and this could also usher in a Davis double hit

The following is a detailed interpretation

1. C-end traffic is not a concern: Job seekers continue to flood in

The third quarter is the peak season for autumn recruitment. In the severe macro environment, recruitment platforms like BOSS Zhipin, in addition to routinely sponsoring large events, do not need to spend extra money on promotion (Q3 sales expenses increased by 14.2% year-on-year, but decreased quarter-on-quarter. After excluding the one-time Olympic investment of 100 million yuan in the second and third quarters, sales expenses remained basically flat), a large number of job seekers are active—monthly active users on the platform increased by 3.4 million quarter-on-quarter to 58 million, continuing to hit new highs.

At the end of 2022, the company set a target of a net increase of 40 million monthly active users over the next three years, and currently, 68% of the progress has been completed in two years, steadily advancing as planned. The economic downturn has worsened the labor supply-demand relationship, although it has brought a lot of natural traffic from job seekers, BOSS Zhipin itself has also exercised more restraint in marketing investments.

During the same peak season for customer acquisition, although it has the largest scale, which means the highest user penetration rate, BOSS Zhipin's customer acquisition effectiveness (MAU changes) and user stickiness (user duration) are still higher than its peers.

2. B-end payment: Recruiters tighten their wallets

Total revenue in the third quarter was 1.912 billion yuan, a year-on-year increase of 19%, in line with guidance. Among them, revenue from ToB online recruitment services was 1.89 billion yuan, a year-on-year increase of 18.7%. Management's guidance for total revenue in the next quarter is in the range of 1.795 to 1.81 billion yuan, with a year-on-year growth rate of 13.6% to 14.6%, continuing to slow down compared to the previous quarter.

(1) BOSS Zhipin: Small and medium-sized enterprises withdraw faster, job seekers are willing to "spend money to find jobs"

The implied average payment amount from enterprises in the third quarter increased by 2.7% quarter-on-quarter, which not only reflects a price increase for some booming industries at the end of last year but also indicates a change in the income contribution structure from different enterprises, according to Dolphin Jun.

When the marginal environment deteriorates, small and medium-sized enterprises, which are more flexible, will reduce their recruitment demand faster and more, while large enterprise clients are relatively more resistant to economic cycles and have business operation inertia, so their recruitment demand will be relatively stable in the short term The change in the number of paid enterprise accounts also shows that in the third quarter, the number of paid enterprise accounts increased by only 100,000 compared to the first quarter, marking a new low in quarterly growth since the pandemic was lifted.

After the 924 policy, Sensor Tower's data shows that BOSS Zhipin's online iOS revenue quickly rebounded, but overall it is still slightly lower than the same period last year, which means that the improvement in the CB ratio at the end of November has not yet translated into enterprise paid conversions.

In contrast, due to the graduation season in the third quarter, the supply of labor in the market has seasonally increased. However, enterprise demand has not risen in tandem, leading to an increasing difficulty for job seekers to find jobs, even seeking resume optimization and job-seeking guidance on the platform. In the past two quarters, the average paid ARPU for job seekers calculated by Dolphin has increased by double digits year-on-year.

Therefore, with the user base also expanding, other income from providing services to job seekers grew by 48% year-on-year in the third quarter. However, this portion of income is too low, accounting for only 1.2%, so BOSS Zhipin's main source of revenue remains enterprise recruitment.

(2) Industry: Policy guidance is effective in the short term, but the supply-demand relationship remains unfavorable

The industry unemployment rate in the third quarter decreased compared to the second quarter, but by the end of September, Datayes data showed that the recruitment demand from enterprises (number of recruiting companies and new recruitment posts) excluding BOSS Zhipin had dropped to the lowest level in the past three years, indicating that the market's pessimistic expectations for the future have peaked.

Subsequently, the introduction of the 924 policy has somewhat alleviated the short-term pessimistic expectations, causing enterprise recruitment demand to rise slightly above the level of 2023. However, due to the increased supply of job seekers, the labor supply-demand relationship still shows no signs of marginal easing.

3. The Release of Profit Leverage is a Highlight During Adversity

In the third quarter, BOSS Zhipin's gross margin remained stable, with operating profit from its core business (revenue - cost - sales expenses - R&D expenses - administrative expenses) reaching 325 million, a profit margin of 17%, which is only a 1.5 percentage point improvement compared to last year's 15.4%.

Although the short-term increase in profit margin has significantly slowed, this is mainly due to one-time marketing expenditures (approximately 100 million) for events such as the Olympics in Q3, as well as increased management expenses due to personnel salary growth (please refer to the detailed explanation in the conference call) which have hindered the pace of profit margin improvement.

Ultimately, the Non-GAAP operating profit after excluding stock-based compensation was 605 million, with the profit margin declining year-on-year and quarter-on-quarter to 31.7%. Although the Non-GAAP net profit of 739 million exceeded the latest institutional expectations (660-680 million), this was mainly driven by interest income, equity earnings, foreign exchange gains, and other income. In the view of Dolphin Jun, this does not count as a truly sustainable beat, and we recommend primarily tracking changes in operating profit.

However, if we extend our perspective, from a medium to long-term view, there is considerable room for cost optimization, which means there is also significant space for the release of operating leverage:

(1) Customer Acquisition Cost Optimization

Dolphin Jun believes that periods of adversity often allow leading companies to further consolidate their barriers. This is especially true for recruitment platforms, where user job-seeking demands bring more organic traffic to the platform, meaning the platform can achieve user penetration at a lower customer acquisition cost.

BOSS Zhipin's relative advantage in customer acquisition compared to its peers also indicates that its leading brand awareness has been established, the competitive landscape of the industry is stable, and there is a good ecological phase of complementary traffic between B and C ends. Therefore, the optimization of sales expenses is not only a short-term action but also a long-term trend.

(2) SBC Expense Compression

At the same time, there is also room for optimization in stock-based compensation, which has not been low on domestic internet platforms. Previously, management provided a 1-3 year guidance—maintaining a continuous decline in the proportion of SBC to revenue in the short term, and expecting the absolute value of SBC to begin to decline after 2025 As of Q3 2024, BOSS Zhipin's SBC ratio is still 14.4%. The company expects that in a stable state, it can drop to a low single-digit number in the future, which means there is still nearly a 10-point improvement space for profit margins.

The company maintains its long-term Non-GAAP operating profit margin target at 40%, which still has nearly a 9-point improvement space compared to the current level. The main reason for the slowdown in profit margin progress towards the target is the macro pressure dragging down revenue growth.

At the same time, the market hopes that the company can leverage its leading advantage to accelerate the release of operational leverage during adverse periods. In the preview communication at the beginning of the month, the company expects a +30% growth in Non-GAAP operating profit margin to reach 3 billion by 2025. This implies that the profit margin will increase by 5 points from this year's 31% to 36%, with the compression likely mainly coming from marketing expenses.

Dolphin Investment Research "BOSS Zhipin" related articles:

Earnings Season

August 28, 2024 conference call "BOSS Zhipin: Not engaging in price wars, focusing resources on advantageous areas"

August 28, 2024 earnings commentary "BOSS Zhipin: Finally, 'small and beautiful' can't withstand Beta's 'big hammer'"

May 21, 2024 conference call "BOSS Zhipin: Large enterprise recruitment further recovers (1Q24 conference call summary)"

May 21, 2024 earnings commentary "BOSS Zhipin: Niche and beautiful, easily crosses cycles"

March 13, 2024 conference call "BOSS Zhipin: Corporate user online activity reaches a new high (4Q23 conference call summary)"

March 12, 2024 earnings commentary "Significant differences in perception? BOSS Zhipin 'stamps' recruitment recovery"

November 15, 2023 conference call "[Blue-collar service industry recovers the fastest (BOSS Zhipin 3Q23 conference call summary)

November 15, 2023 Financial Report Review: BOSS Zhipin: The coldest period of recruitment winter is over》

August 30, 2023 Conference Call: Blue-collar rapid penetration, large enterprises slow down layoffs (BOSS Zhipin 2Q23 Conference Call Summary)》

August 29, 2023 Financial Report Review: BOSS Zhipin: Stable performance, focus still on policy expectations》