Keeping a watchful eye on weak macro
? We see downside risks to our permanent placement volume assumptions given weak SG macro conditions and a challenging labour market in China.
? Latest commentary from staffing peers (Fig 1) indicates a weaker outlook for permanent placement volumes while flexible volumes should remain resilient.
? Downgrade to Hold with a lower TP of S$0.80. We expect more cuts to Bloomberg consensus estimates in the coming months.
Weakening SG economy is a key risk to HRnet’s volumes
Our economics team expects Singapore to record lacklustre GDP growth of 1.3% yoy in
2023F (2022: +3.6% yoy), given trade headwinds from a global slowdown. Key exports
declined steeply (-15% yoy) for the eighth consecutive month in May as electronics exports
came in weak. While the unemployment rate remained low at 1.8% (as at end-1Q23), the
job vacancies to unemployed persons ratio declined qoq to 2.28, signalling that labour
market tightness has started to ease, in our view. We believe HRnet could see volume
weakness in the coming quarters as clients slow their hiring activities further.
Pace of recovery in China looks uncertain
In its FY22 AGM minutes, HRnet said its China operations were “severely impacted in
1Q23” due to challenges in building business pipelines. Latest China economic data
released in Jun seem to corroborate this, with both industrial output and retail sales falling
short of Reuters consensus expectations. We turn more bearish on the pace of recovery
as HRnet’s China operations are mostly focused on clients in the industrial and technology
sectors, which we view as vulnerable to the ongoing slowdown in global demand.
Near-term hiring outlook looks bad for perm volumes
We see downside risks to our permanent placement (perm) volume assumptions as 1)
employers turn more cautious amidst weakening macro conditions, and 2) the labour
market recovery in China has been weaker than our expectations. We also expect slower
average placement revenue growth (despite rising wages) due to lower contribution from
tech and semicon industries (these sectors command higher salaries compared to sectors
such as retail and travel). While resilient flexible volumes and further recovery in travelrelated
revenue should help, we believe these are insufficient to offset the earnings impact
from weaker perm. As such, we cut our FY23-25F perm revenue by 4-6%; this reduces our
EPS forecasts by 4-8% due to the lower margin mix.
Downgrade to Hold; expecting more forecasts cuts from consensus
With our new assumptions, we lower our TP to S$0.80, now based on 13x FY24F P/E (0.5
s.d. below FY17-22 mean) as we see greater earnings uncertainty from unfavourable
macro conditions. Downgrade to Hold as we believe catalysts are lacking in the near term.
Upside risks include a stronger hiring outlook in North Asia and accretive M&A
opportunities. The key downside risk for HRnet is a steeper-than-expected decline in hiring
volumes amid deteriorating macro conditions.
