Get a Job: In China

05/26/2006 12:00 am EST

Focus:

Paul Goodwin

Emerging Markets Specialist and Analyst, Cabot Heritage Corporation

"Despite stocks around the globe being hit hard, our China-Timer is still bullish," says Paul Goodwin, a leading expert on the China region and editor of the Cabot China Investor. For his latest featured stock recommendation he turns to online recruiter, 51job.

"Of course, we realize that China doesn't exist in a vacuum; if the US markets continue to give ground, it's likely that Chinese (and other international) stocks will follow. Yet anticipating what comes next is a fool's errand. Just stick with the China-Timer's message. Meanwhile, our latest featured stock is 51job (JOBS NASDAQ).

"When China first appeared on economists’ and investors’ radar screens, it was because of one main thing: It has a lot of people. And thanks to the booming Chinese economy of the past few years, as well as its move towards a more capitalist system, millions of these people are moving to the ever-expanding cities and getting jobs.

"Of course, at the beginning, nearly all these jobs were either in the government, or involved working in some type of manufacturing plant. Hence, economists’ quipped that China was the ‘factory floor for the world.’ But now more positions are being created in different, service-oriented industries, as well as nitty-gritty manufacturing. The result: China has developed a fluid job market, where workers not only are happy to have jobs, but are looking to improve their lifestyle with work that pays better and offers more benefits.

"This leads us to 51job, a company that dubs itself as ‘a leading provider of integrated human resource services in China.’ Translation: It helps job providers connect with job seekers. 51job actually has three business lines and, interestingly, the largest is still print advertising. Chalk it up to the fact that China is still behind the US and some European countries (but catching up fast) in terms of integrating the Internet with business. Even so, the just-reported first quarter saw print ad revenues grow 14% to $13.3 million, as 51job ran a total of 3,043 ad pages during the three months.

"The company also helps recruit executives and does some corporate training, but together these bring in just about $2 million a quarter profitable, but nothing that’s going to get your stock moving up. The real gravy is 51job’s online recruitment services. It’s in this segment that growth has been robust, and it’s driven better-than-expected results to the bottom line. The fourth quarter of last year saw 50% growth, while the first quarter registered 52% growth, to $6.1 million in revenue.

"Even better is the scale the company is developing; the number of employers using 51job’s online offerings leaped to more than 38,000 in the first quarter, up from ‘just’ 25,600 in the year-ago quarter. It’s only a matter of time before the fast-growing online business overtakes slowly-improving print sales. Not only will that bring about faster growth, but also higher margins.

"Already the company is seeing the benefits of this ‘online’ effect; gross margins reached 55% in the quarter, while after-tax profit margins marched above 20%. These measures should only improve over time…but 51job doesn’t have to wait for that to earn great money. Indeed, earnings per share have been $0.07, $0.08 and now $0.15 the past three quarters, with management expecting $0.13 to $0.15 per share in the second quarter.

"Beyond the great numbers, there’s another factor working in favor of 51job. Recruit, Inc., a Japanese human resource company, has recently acquired 15% of 51job (at $26 per share), and also struck a business alliance that will help 51job expand its business in China. According to the deal, Recruit could acquire up to 40% of 51job within three years. Whether an outright takeover occurs, or 51job simply gains a valuable big brother in the industry, it can’t be anything but good news for shareholders.

"Now, there are risks here. One is that any weakness in China’s job market would knock 51job for a loop. Further, because institutions aren’t in total control of the stock – there are just a handful of funds on board at this point the stock can swing wildly. Thus, we’re not advising you to jump in with both feet here. In fact, it wouldn’t be a sin to hold off buying until you see some type of pullback. Officially, we’ll rate the stock a buy, but if you choose to pick up shares, buy just a little now. We think the longer-term picture looks great, but short-term, we should see a better entry point."

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