Wednesday, 2 May 2018

5 Points I Learned from HRnetGroup AGM

HRnetGroup is the largest human resource recruitment agency in Asia (excluding Japan), with operations across 10 key cities such as Hong Kong, Beijing, Shanghai, Seoul, Taipei etc. It is also the largest player in Singapore according to Frost & Sullivan analysis in 2017. Its revenue and net profit derived from Singapore for FY17 is $298m and $37m respectively, while the second largest player Adecco, had revenue of $144m and net profit of $5.7m.

As a newly listed company that just IPO-ed last June, it recently held its first ever AGM just last week. As a shareholder intrigued by its business model and growth prospect, I attended its AGM at SGX auditorium to find out more.

Here are five key points that I learned from HRnetGroup FY17 AGM.

2017 Drop in NPAT Due to One Off Events
HRnetGroup has been growing its Net Profit After Tax (NPAT) at a Compounded Annual Growth Rate (CAGR) of 18.4% during the period of 2006 to 2016. In fact, management has got used to such a growth rate, and were surprised to see NPAT dropped 4.1% in 2017.

Management clarified that the negative growth of 2017 NPAT is due to one-off events that would not happen this year: a one-time IPO expense, fall of government subsidy, and China clients holding off recruitment activity before China's legislative national congress. Excluding the effect of these events, NPAT would have grown 15.4%.

Management is confident that the group would attain similar growth this year.

Indonesia Operations Would Commence Soon
HRnetGroup announced acquisition of PT Rimbun job agency in Jakarta earlier, which is a key market with big recruitment demand bolstered by strong economic growth.  During the meeting, management shared that the Indonesia operations would start very soon and it is expected to contribute to the company's top and bottom line.

It Covers Full Spectrum of Recruitment
HRnetGroup’s operations cover both the professional recruitment and flexible staffing that are complementary. During economic growth, it can ride on increase professional hiring that has a higher profit margin. During a downturn, recruitment activities may shift to contract-based flexible staffing that has a more stable demand. It gives rise to a business that is more resilient and less susceptible to economic seasonality. 

Management further shared that they typically earns 30% of a candidate's first year salary for professional recruitment. As for flexible staffing, margin is around 8%.

The Group is Heavy on Employees' Company Ownership
Prior to listing, HRnetGroup encourage employee ownership in company growth by encouraging them to develop the 'subsidiaries' in different cities using their own capital. This in large part contributed to strong interest alignment between staff and company, bringing about profitability in all 10 cities that the group operated in. 

Upon IPO, 22 of these co-owners saw 20% of their stake in the subsidiaries converted and elevated to common shares of the group as a listed entities. 80% of the remaining stakes continue to reside with the subsidiaries. 

Shareholders are Concerned about Employee Share Option Resulting in Share Dilution
The group is implementing the new 123GROW Plan, an employee share award scheme to spur higher staff performance. It is reserved for productive headcount, defined as staff that brings in gross profit in excess of three times of their payroll cost. And the staff has to be a productive headcount for 3 years, before company shares are given. To achieve this, management is exploring various methods including share buy back, issuing rights and convertible securities. 

Some shareholders are concerned about equity stake dilution from rights issue or convertible securities, even when management explained this has shown to be effective in encouraging larger employee sales and retaining good employees - the long term benefit for company development. 

Correspondingly, this resolution had a significant portion of shareholders voting against - 33.77%. Nevertheless, the resolution was still passed eventually. 

Lastly, there were plenty of employees present at the AGM as co-owners. Majority of them look young, vibrant and exude strong professionalism, very much the corporate-consultant look. Much of the shareholders were relatively young too, which I am guessing around the age of late 30s to early 50s. This is certainly a refreshing and unique AGM experience different from the blue chip companies with many more senior shareholders.

1 comment:

Recent Financial Statement Analysis Workshop

More investors are getting interested in using Fundamental Analysis to short list strong company stocks to invest in, especially in a lacklu...