Entry price: $51
Target price: $57,25
Growth Potential: 12.25%
Time horizon: 6 months
Position size: 1%
51job Inc. is a leading nationwide provider of comprehensive HR services in China. The company focuses on online recruitment advertising: their websites and associated mobile apps are used by a wide base of corporate employers, reach a broad and diverse audience of job seekers and collect job postings from nearly 200 cities across China.
What's the idea?
Earn money on 51job shares, which could rise thanks to an expected acquisition by a consortium consisting of DCP Capital Partners, Ocean Link Partners and 51job CEO Rick Yang for $57.25 a share in cash.
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Why do we like 51job Inc.?
Reason 1. Attractive premium
Mergers without regulatory or other risks tend to offer small returns - while high-risk deals have huge premiums and are more of a gamble than arbitrage. This case falls between these two extremes.
We believe that because of delisting concerns many investors are avoiding the possibility of making money on a potential merger, which in turn creates an attractive opportunity.
- On 17 September 2020, JOBS received a preliminary non-binding cash offer of $79.05 from DCP Capital Partners.
- On 4 May 2021, DCP submits an updated offer with the same remuneration of $79.05
- On 21 June 2021, JOBS signs a definitive agreement with the consortium for $79.05
- On 8 November 2021, the Consortium negotiates with the regulators about the latest regulatory changes that may affect the deal. The price is reduced by more than 20%.
- On 12 January 2022, the Consortium proposes to reduce the price by 28% from $79.05 to $57.25 per share. They have reportedly made changes to the structure of their offer to help gain regulatory approval in China. The company did not provide a definitive completion date for the deal in its latest report.
Today, the shares are trading at a 24% discount to the planned buyout price . Normally this would mean that a deal is likely to fall through. But Chinese ADRs in the midst of a merger often trade at steep discounts compared with US companies.
Reason 2. A multi-product strategy linking the entire HR value chain in a scalable business model
The company provides a wide range of HR services in the following segments:
1) online recruitment services (58% of revenue)
2) Business process outsourcing, campus recruitment, training, assessment and placement services (42% of revenue)
The recruitment segment has the following advantages
- Primarily targeting white collar workers in the service sector;
- Multiple targeting platforms targeting specific labour force segments and employee demographics:
- Developing communities of job seekers to increase engagement and efficiency
- Provision of opportunities and support throughout the employee's career path, including every stage of the talent lifecycle
In the other human resources services segment, there are a number of offshoots that provide a competitive advantage for the company:
- HR outsourcing - social security and benefits processing, payroll, payroll and taxes, compliance
- Training and assessment - live seminars and workshops, experiential learning, behavioural and technical assessment tests, podcasts, videos and e-learning platform
- Campus services - helping employers to develop a campus recruitment strategy, promoting the employer brand among alumni and students
- Placement projects - outsourcing the recruitment process, job fairs and recruitment abroad, executive search and placement services
In the last 12 months, the company's revenue has been above 2019. Judging by revenue, the company has recovered from the pandemic. However, EBITDA has stopped repeating the revenue trend:
Source: Thomson Reuters Eikon
The reason for this is an increase in administrative costs, namely marketing and sales expenses. Due to the lack of debt, the company's net profit tends to converge with operating profit, with a difference in tax delta as well as accounting accruals. Therefore, operating profit can represent a smoothed net profit. The graph shows a strong inverse correlation between costs (SG&A) and operating profit. The figures are shown as a percentage of revenue.
Source: Thomson Reuters Eikon
These multiples signal to us that despite the emergence of an acquisition contender, its shares are trading at optimal levels relative to its competitors, without being overvalued:
- EV/EBITDA (TTM) - 16.68x vs. industry average of 16.3x
- EV/EBITDA (FWD) - 8.45x vs. industry average of 11.8x
- EV/Revenue - 2.71x versus industry average of 4.23x
- P/CF - 15.37x vs. industry average - 31.8x
Source: Seeking alpha
Below is the company's historical P/E range. It has been table in the 25-40 range over the last year:
Source: Thomson Reuters Eikon
1) Concerns amid geopolitics
Stocks closed a few weeks ago at a low. With the current situation on the Chinese stock exchanges, the risk is significant. Many investors are fearful. Here are some of the recent headlines:
- China proposes stricter rules for overseas listings
- DiDi Global to be delisted in the US
- China seeks to ban companies from listing abroad
None of this directly affects the JOBS merger, but fears of potential deal cancellation due to regulatory restrictions worry investors and arbitrage traders
2) Uncertainty on the part of the company's board
The board warns the company's shareholders that they have only received the offer letter and that no decisions have been taken in relation to the proposed revised transaction. The company also makes no commitment to provide an update on the proposed revised transaction.
3) Downside risk
Prior to the consortium's first offer (September 2020) to acquire the company, the price was $66 per share, today the price is $49.8 per share. If the deal is cancelled, downside risk will be limited to the exit of the remaining arbitrage investors/traders from the stock.
Before the first offer to buy the company the share price was higher than now, many arbitrage traders lost faith in a positive outcome, exited the stock and thereby limited our downside risk. In our view, the trade is still highly probable. With an expected premium and limited downside, this idea offers a favourable risk/reward ratio.
How to take advantage of the idea?
- Buy shares at a price of $51.
- Allocate no more than 1% of your portfolio to buying. You can use our analysts' recommendations to build a balanced portfolio.
- Sell when the price reaches $57,25.
How to Buy 51job Inc. shares?
If you don't have an investment account yet, open it now: this can be done online, in just 10 minutes. All you need to do is fill out a short form and verify your account.
After opening an account, you can buy shares in either of the following ways:
Freedom24 Web Platform: In the Web Terminal section, type JOBS.US (51job Inc. ticker in the NASDAQ) in the search box, and select 51job Inc. in the results. Open a secure session in the trading window on the right, select the number of shares you want to buy, and click Buy.
Freedom24 iPhone or Android App: Go to the Price screen and tab the search icon in the top right corner. In the search dialog that will show up, type JOBS.US (51job Inc. ticker in the NASDAQ) and select 51job Inc. in the search results. You will then see the stock in the market watch; tap it and go to the Order tab in the dialog that shows up. Specify the number of shares you want to buy and click Buy.
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