Kanzhun: Potential Q1 Beat Overshadowed By Long-Term Concerns (NASDAQ:BZ)

Elevator Pitch

I rate Kanzhun Limited (NASDAQ:BZ) [2076:HK] stock as a Hold. I previously outlined my expectations for BZ’s Q4 2023 and full-year 2024 financial performance in a February 6, 2024 write-up.

This article touches on the long-term outlook for the Chinese employment market and previews Kanzhun’s financial results for the first quarter of this year. In the near-term, I think that BZ’s Q1 results can be a positive surprise. On the flip side, I have a negative view of recruitment services demand in China for the long run. Therefore, I have chosen to retain a Hold rating for Kanzhun.

My Bet Is On A First Quarter Earnings Beat

Kanzhun is expected to reveal its Q1 2024 financial numbers next month, or May 21 to be specific.

The market currently sees BZ’s top line and normalized net profit expanding by +31% and +87% to RMB1,672 million and RMB458 million, respectively for Q1 2024. The current sell side consensus first quarter revenue projection for Kanzhun is largely in line with the mid-point of the management’s Q1 top-line guidance of RMB1,655 million as indicated in its Q4 results release.

I have identified a number of indicators which imply that there is a good chance of Kanzhun delivering above-expectations first quarter results in the following month.

The first indicator of a potential Q1 2024 earnings beat lies with the company’s comments at an investor meeting last month.

Stockbroker China Renaissance organized an investor call with BZ’s Head of Investor Relations & Capital Markets on March 26 this year. The sell side research firm subsequently published a report (not publicly available) titled “Call Takeaways: Operational Details Reaffirm Our Positive View” detailing the read-throughs from this event on March 27, 2024.

According to China Renaissance’s March 27 research report, Kanzhun shared its observations at the recent March 2024 investor meeting that “competitors did not make significant progress in product development or scale.” The company also indicated at the investor call last month that it saw an “opportunity to further increase both job post pricing and conversion of more free job posts to paid posts.”

Therefore, it is realistic to think that BZ would have likely achieved solid revenue growth and decent margin improvement in Q1 2024 due to potential market share loss for its rivals and favorable pricing trends, respectively.

The second indicator is that China’s latest employment numbers appear to be pretty stable.

As per an April 16, 2024 China Daily news report, the “surveyed urban unemployment rate” for China decreased by -30 basis points to 5.2% for Q1 2024. This bodes well for Kanzhun’s business performance in the near term.

The third indicator is Kanzhun’s recent shareholder capital return initiatives.

In the prior month, BZ revealed a new one-year “$200 million share repurchase program” as indicated in the company’s March 12, 2024 press release. Earlier in November 2023, Kanzhun disclosed a special dividend distribution of $80 million, which was paid out in late December 2023.

It is probably fair to assume that Kanzhun has confidence in generating sufficient cash flow to finance its future share repurchases. This suggests that the company’s financial performance for Q1 2024 and full-year 2024 should be reasonably good.

To sum things up, my opinion is that the likelihood of above-expectations first quarter results for BZ is high.

Question Marks About China’s Recruitment Market For The Long Run

In its annual report, BZ highlighted that “substantially all of the Group’s revenues are derived from entities within the PRC” or People’s Republic of China. But it seems like Kanzhun is now considering the growth of the company’s business operations outside its home market, China.

At the company’s March 26, 2024 investor meeting mentioned in the preceding section, Kanzhun noted that “early-stage preparation for overseas expansion is underway” according to China Renaissance’s March 27 research report. On one hand, this could be an indication of BZ’s international growth ambitions. On the other hand, it might be a reflection of the potential long-term challenges for the Chinese employment market.

Specifically, China’s labor force is shrinking due to an aging population, while the growing use of robots and increased automation will eventually translate to lower recruitment demand.

The “working age population” in China as a proportion of the country’s total population decreased from 62% for 2022 to 61.3% in 2023 as per a January 18, 2024 CNBC news article. A Reuters report in the same month highlighted that “300 million people currently aged 50 to 60” in China are expected to retire in the coming decade. A contracting labor force for the country means that demand for workers and recruitment services offered by BZ will likely decline in the future.

Separately, the latest commentary piece published by South China Morning Post on April 8, 2024 mentioned that “Chinese workers are being replaced by robots at the fastest rate in the world” as evidenced by the fact that China accounts for more than half of worldwide “industrial robots.” Also, an earlier 2022 research paper issued by the Wharton School of the University of Pennsylvania forecasted that “5% of China’s workforce will be replaced by machines” next year and projected that “2.28 million jobs in China’s banking, insurance, and securities sectors will be automated” in 2027. It isn’t far-fetched to assume that there will be fewer workers and weaker demand for employment solutions going forward with the increased adoption of robots and other automation tools.

It will probably take some time for Kanzhun to venture abroad in a big way. For now, BZ’s future growth is closely linked to recruitment demand in the Chinese market. The long-term outlook for China’s employment market and related services is unfavorable, taking into account the country’s shrinking workforce, and the growing reliance on robots and automation.

Concluding Thoughts

My Hold rating for BZ stays unchanged in view of the company’s short-term prospects and long-term outlook. Also, Kanzhun seems to be fairly valued, considering an implied PEG (Price-to-Earnings Growth) valuation metric of close to 1 (22.4/22.0). The stock trades at 22.4 times consensus next twelve months’ normalized P/E, while the company’s consensus FY 2023-2027 normalized EPS CAGR forecast is +22.0% (source: S&P Capital IQ).