To The Moon

Key takeaways:

1、Kanzhun has posted its first-ever quarterly profit, fueled by a 174% jump in revenue

2、Company warns that a cybersecurity review and concurrent freeze on new user signups is affecting its business, and could last through at least the end of September

The maiden quarterly earnings report from leading online jobs specialist Kanzhun Ltd. (BZ.US), best known in China for its Boss Zhipin service, contains both good news and bad news.

If you’re a “glass-half-full” type of person, you’re probably focused on the good news that showed the 7-year-old company passed a significant milestone in this year’s second-quarter by posting its first-ever profit. But if you’re a “glass-half-empty” type, you probably focused on an ongoing cybersecurity review that has forced the company to stop signing up new users and is having a clear impact on its business.

The bulls outnumbered the bears, with Kanzhun’s shares gaining 3.7% on Friday in New York after the release of its first quarterly report following its spectacular June IPO that raised just over $1 billion.

Considering everything that Kanzhun and China tech stocks have been through these last couple of months, the company’s newly listed shares have held up remarkably well. Kanzhun came out of the gate with a bang, with its shares nearly doubling on their first trading day back on June 11. Investors were impressed by its strong growth story, as it used technology to tackle a wide range of issues in the job-matching market to steal share from much older rivals.

But the bloom suddenly fell off the rose less than a month after its New York debut, when the company abruptly disclosed it was being subjected to a data security review by China’s cyber regulator. It made that disclosure the same day as a nearly identical disclosure from another recently listed firm, trucking data specialist Full Truck Alliance, and just days after the also recently listed Uber-like DiDi Global made a similar disclosure.

Despite all the volatility surrounding the company, Kanzhun’s stock has remained remarkably stable since its debut. It has mostly traded in the $35 to $40 range, which is still well above its $19 IPO price. And Kanzhun is still quite richly valued by investors, which is something you can’t say for many U.S.-listed Chinese tech companies these days.

We’ll return to the valuation topic in the second part of this article, as well as the “glass-half-full” news of Kanzhun’s first-ever profit.

But first we’ll look at what the company said about the ongoing cybersecurity review and the impact the concurrent suspension of new user signups is having on its business. For that, it’s probably best to start with a direct quote from company founder and Chairman Zhao Peng on the company’s maiden earnings call.

“In compliance with regulatory requirements, our new user registration remains suspended on our Boss Zhipin app, which will to some extent impact the company’s user growth and revenue,” he said. “However, the company does not yet have a clear timetable for either the completion of reviewing or when shall we be able to review new users with registrations.”

At Least Another Month

While the company was clearly reluctant to say exactly how long it will be barred from signing up new users, it did say it expects the suspension to last at least through the current quarter that ends Sept. 30. As a result, it said it expects its third-quarter revenue to “only” roughly double to about 1.2 billion yuan ($185 million) from the year-ago level, according to its report.

We are putting the word “only” in quotes here because revenue doubling would normally be quite a positive thing for just about any other company. But in Kanzhun’s case, that growth rate represents a sharp slowdown from its second-quarter results that saw its revenue grow 174% to 1.17 billion yuan. Thus, the company clearly sees the freeze on new user signups as putting a major chill on its growth – something that could get worrisome if the suspension extends to the end of the year.

But enough of the bad news for now.

The much-better news was that the strong revenue growth, coupled with good cost controls, allowed the company to post its first-ever profit of 246.5 million yuan in the three months through June, compared with a 143 million yuan loss a year earlier.

Here we do need to note the profit is an adjusted figure that doesn’t include a massive one-time non-cash cost related to share compensation. Including that cost, the company posted a second-quarter loss of 1.4 billion yuan, versus a 167 million yuan loss a year earlier.

In terms of market cap, Kanzhun looks quite richly valued with a price-to-earnings (PE) ratio of 141 based on analysts’ forecasts from Yahoo Finance for this year, which presumably are using the adjusted profit figure. The number drops to 61 based on forecasts for next year, which is still quite high and almost certainly assumes the company will be allowed to resume signing up new users by then.

By comparison, the much older 51jobs Inc., which is currently in the process of privatizing, trades at a PE of 24 based on a forecast for this year’s profit. Here it’s worth noting that 51job posted just 13% revenue growth in the first quarter, and has posted mostly single-digit revenue growth since 2019. So that means it can’t blame the pandemic for its recent anemic growth, and instead is probably feeling effects of competition from the better-run Kanzhun.

Global peer Ranstad NV, owner of the formerly U.S.-listed Monster Worldwide, trades at a PE of 39, which is in between Kanzhun and 51job, based on its 2020 profit. But U.S.-based ManpowerGroup, which lost money last year during the pandemic, trades at a far lower 17, based on profit forecasts for this year.

The bottom line seems to be that investors are betting that China’s won’t want to risk killing a goose that lays the golden eggs like Kanzhun by cutting off the new business that is vital to any company’s survival. We’ve previously said that the cybersecurity review and concurrent freeze on new customer signups is most likely a move by the regulator to flex its muscles and show these companies who’s boss. Now it seems like investors, once quite worried, are starting to take a similar view.