Key Takeaways:
- Having finally turned a profit, Kanzhun has filed for a dual primary listing on the Hong Kong Stock Exchange to insure against its shares being pulled from New York
- A ban on registering new users on its employment platform has been lifted, but the company’s profit outlook is clouded by China’s economic downturn and reduced job vacancies
By Fai Pui
Hong Kong’s dual listing bandwagon is picking up speed as more Chinese companies seek to hedge the risk of being excluded from U.S. stock exchanges. And the latest IPO hopeful to hop aboard the double-destination express is Kanzhun Ltd. (NASDAQ:BZ), China’s leading online recruitment firm.
The jobs platform filed last week for a Hong Kong IPO with dual primary listing status. Kanzhun, which went public in New York last year, is not alone in seeking the security of a second share-trading venue in case U.S. regulators deliver on threats to expel companies that breach their rules, or if U.S.-China relations otherwise take another grave turn.
And with dual primary listing status, Kanzhun would gain the added benefit of making its shares available to Chinese investors through a program linking the Hong Kong exchange with its counterparts in mainland China, although the route to primary status is more rigorous than for a secondary listing.
It’s no surprise that Chinese Internet companies, beset by challenges from both sides of the Pacific, are looking to hedge their bets. Under China’s tough regulatory policies, some tech companies holding vast amounts of sensitive data have been banned from registering new users. Meanwhile, U.S. regulatory moves have put New York-listed Chinese Internet companies on a path towards delisting, if they fail to meet auditing standards applied by the U.S. Securities and Exchange Commission.
Tension eased somewhat when the U.S. and China agreed an information-sharing deal and a U.S. audit team arrived in Hong Kong last month to start a review of Chinese companies. But the trend towards taking out dual-listing insurance has still gathered pace.
Companies such as Zhihu (NYSE:ZH), KE Holdings (NYSE:BEKE), OneConnect Financial Technology (NYSE:OCFT), Tuya (NYSE:TUYA) and Miniso Group (NYSE:MNSO) have listed in Hong Kong on a dual primary basis in recent months. Even Alibaba Group (NYSE:BABA), a tech giant with secondary listing status in Hong Kong, plans to switch to a dual primary listing in Hong Kong and New York by the end of this year, aiming to stay in the Hong Kong marketplace if its shares are ousted from the U.S. stock market.
In the preliminary prospectus, Kanzhun is upfront about the potential for a forced delisting over the next two years under the “Holding Foreign Companies Accountable Act”, if the Public Company Accounting Oversight Board (PCAOB), the auditing arm of the U.S. securities regulatory body, is unable to make full inspections of China-based auditors, or if proposed changes to the law are enacted.
The clock is clearly ticking. A dual primary listing in Hong Kong is a pressing task for Kanzhun, but the IPO journey can be time-consuming, with candidates needing to meet a set of requirements covering profitability, revenue and market capitalization.
Revenue regression
So how does the profit performance stack up? According to the prospectus, Kanzhun’s revenue rose more than four-fold from 999 million yuan ($138 million) in 2019 to 4.26 billion yuan last year. However, Covid-19 containment measures and a ban on registering new users weighed heavily in the first half, with revenue rising only 15% year-on-year to 2.25 billion yuan. After it went public in the U.S. last July, Kanzhun was subjected to a government data security review that prevented it from registering new users until the restriction was lifted at the end of June this year.
Kanzhun’s revenue rose 43% to 1.14 billion yuan in the first quarter year-on-year, but it contracted 5% in the second quarter from the prior-year period to just 1.11 billion yuan, as renewed lockdown measures to stamp out Covid slammed the brakes on the labor market in multiple Chinese cities, dragging on the firm’s first-half performance.
On the plus side, new users flocked to its platform, but the boom was most likely driven by an abundance of job seekers in an oversupplied labor market. The company gained
more than 10 million new user registrations as of August, and monthly active users rose 16% in July to a record high. Company forecasts for third-quarter performance are less than cheery, as China’s economic downturn continues to dampen employers’ hiring plans. Third-quarter revenue is projected to come in between 1.14 billion yuan and 1.16 billion yuan, a decline of around 4% to 6% from the year-earlier period.
Like many fledgling Chinese Internet companies, Kanzhun has struggled to achieve profitability. It accumulated a net loss of more than 2.5 billion yuan over the past three years, with the first half of last year alone accounting for 1.59 billion yuan of the deficit. By tightening its belt after that, the company managed to turn a profit of 80.32 million yuan in the first half of this year.
Kanzhun slashed its sales and marketing expenses by 20% to 920 million yuan, the main factor in the improved first-half results. Operating costs fell nearly 39% year-on-year to 2.19 billion yuan, mainly thanks to an absence of one-off expenses for equity incentives. As a result, general and administrative expenses fell a hefty 82% to 316 million yuan.
Higher valuation
Kanzhun started out in 2013 as a company review website and soon launched an app focusing on the recruitment industry, attracting notable investors such as Lei Jun, the founder of Xiaomi Corp. (1810.HK), and Neil Shen, the founder of Sequoia Capital.
Buoyed by the rapid growth of the Internet industry, Kanzhun went on to become China’s biggest online recruitment platform, with 100 million users and over 6 million partnering companies in 2021. In June that year, it listed in the U.S. at an IPO price of $19, soaring nearly 96% on its debut day to close at $37.20. It later reached a share price of $43.22 and market capitalization of $18.8 billion.
But like many of its peers, it has plummeted from those lofty heights. Kanzhun’s share price closed at just $14.44 on Thursday, more than 66% below its peak. If its net profit is sustained through the rest of the year, the company’s price-to-earnings (P/E) ratio may still be up to 262 times, dwarfing the 15 times of its domestic counterpart Tongdao Liepin (6100.HK) and the 8.6 times of U.S. recruitment giant Manpower Group (NYSE:MAN) at 8.6 times.
The company has gained some breathing space after emerging from the data security review. It has even been awarded a data security certification by an influential Chinese institute, adding to its online safety credentials. In fact, most of the IPO proceeds will go towards data security measures to stay on the right side of the official red line.
But with Covid economic effects forcing companies to lay off staff and cut salaries, other challenges remain. The fate of Kanzhun’s dual primary listing will also depend on whether Hong Kong’s weak stock market can recover in the fourth quarter. Otherwise, a good valuation may be out of reach, even if the exchange approves the listing.
