Last week, 51job (Nasdaq: JOBS), the Chinese online job ad platform, reported its third quarter 2018 earnings result. The result was very strong, and given that the stock has been beaten up by the market over the last few months, one would expect that the stock would rally as a result. However, somewhat surprisingly, 51job stock ended the post-result trading session down 1%. We will dissect the result and attempt to make sense of the puzzling market reaction.

JOBS managed to grow revenues by an impressive 31% year-over-year (YoY) in Q3, with the company’s online recruitment revenues –that is, the portion of revenues that come from online job ads and related online products and services –growing by 33% YoY. Online recruitment revenues were driven by a very impressive 38.6% YoY increase in the average revenue per employer, with the growth rate accelerating compared to preceding quarters.

Source: Company data; MGI

This strong top-line growth translated into solid earnings growth, with operating income increasing by 34.6% YoY, and fully diluted adjusted EPS rising by 53% YoY. There are few businesses out there that are capable of even achieving this level of growth. So what’s driving the persistently weak stock price? We believe the reasons for the weakness in JOBS’s share price can be segmented into two categories: fundamental factors, and non-fundamental factors.

Fundamental factors relate to developments in the underlying business, and in the case of JOBS, investor concern over potential fallout from the U.S. and China trade tensions is likely to be contributing to recent stock price negativity. The mechanics behind how this trade dispute impacts 51job are as follows: (i) trade tensions have led to tariffs, which reduce trade flows between China and the U.S.; (ii) as certain products imported into the U.S. from China are now more expensive under this tariff regime, this leads to lower aggregate demand for Chinese goods; (iii) this can potentially translate into reduced hiring activity if less workers are needed to support this lower level of aggregate demand; and (iv) any reduction in hiring activity would mean a lower volume of job ads are posted on 51job’s platform, reducing the company’s revenues.

Concerns about fallout from the U.S./China trade spat are valid, and we share these same concerns. However, with any equity security you are paying a price; and embedded in that price are a set of assumptions for growth and margins. When 51job reached its nadir of $52/sh in late October, what were the set of assumptions we needed to believe to justify that share price?

On a view that considers purely the fundamentals, 51job is demonstrably cheap. However, as was alluded to above, there are non-fundamental factors that can whipsaw a share price, and these can be especially difficult to identify before they are set in motion. The Montaka team is of the belief that non-fundamental factors are playing a prominent role in depressing 51job’s share price.

We have witnessed outflows from many exchange-traded funds (ETFs) that hold JOBS, precipitating indiscriminate selling of JOBS as these ETFs have to sell to meet redemptions. Said another way, there is selling activity occurring that is decoupled from, and ignorant of the fundamentals of 51job. Exacerbating this is the relative illiquidity of JOBS, and the difficulty in absorbing sell orders arising from these ETF outflows, putting downward pressure on the share price. My colleague Chris Demasi has previously written on this topic.

Over time, non-fundamental trading activity should wash out, and we invest on the premise that longer term the growth in a company’s stock price should mirror the fundamentals of the underlying business. We took the opportunity to add to our 51job position significantly before the Q3 2018 earnings result. The stock is currently up around 9% from its post-result stock price close, and is now up over 30% from its 52-week low in late October. We continue to believe 51job is very cheap, and we await an environment where fundamentals take over, and once again become the key driver of stock prices.

Montaka owns shares in 51job (Nasdaq: JOBS)


George Hadjia is a Research Analyst with Montaka Global Investments. To learn more about Montaka, please call +612 7202 0100.

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