HRnetgroup - RHB Invest 2018-01-15: Expanding Its Footprint In China

HRNETGROUP LIMITED CHZ.SI

HRnetgroup - Expanding Its Footprint In China

After Indonesia, HRnetgroup has just announced entering into a binding term sheet on 11 Jan to set up a JV in China, in which they will acquire a 51% stake in REForce and its relevant assets and affiliates in cash.
We are positive on this acquisition, as it would hasten expansion of its footprint in China, especially in new cities like Suzhou. With SGD200m budgeted for M&As, we think more acquisitions are likely – which would bump up its NPAT.

With a positive 4Q17 due to Christmas and the New Year, we maintain our BUY call and SGD1.14 Target Price (37% upside).

HRnetgroup’s binding term sheet to set up a JV in China, comprising three staggered payments, is based on a tiered P/E multiple of REForce Group’s actual NPAT, as agreed between the parties (which has not yet been disclosed).
In the event that REForce does not achieve the minimum agreed level of NPAT by a variance of 5% or more for two consecutive years, HRnetgroup shall be entitled to terminate the acquisition and to require the JV partners to purchase its shares in REForce. HRnetgroup is to extend a CNY3m loan to REForce for operation and expansion purposes.
We are positive on this proposed acquisition as it would hasten expansion of its footprint in China, especially in new cities like Suzhou and also in existing cities like Shanghai, Beijing and Guangzhou.
REForce Group specialises in middle to senior level recruitment and HR consulting services for multinational and domestic organisations across various industries. This is in line with HRnetgroup’s business model. It started operations in 2015, and now has offices in Beijing, Shanghai, Suzhou and Guangzhou, with an estimated 51-200 employees in total.

With a net cash hoard of SGD280m – coupled with SGD15-20m of free cash flow per year and low capex requirements – we believe the group is well positioned to go on an acquisition spree.
Management has expressed interest in growing inorganically through acquisitions, especially in other parts of the world. To this extent, several non-disclosure agreements (NDAs) have already been signed.
We believe HRnetgroup is likely to target recruitment firms that specialise in specific sectors – this would further add an edge and niche to its existing profile. Management has already started with Rimbun Job Agency, and we think that there would be larger-sized acquisitions to come, especially in 1Q18-2Q18.

We believe HRnetgroup is likely to increase its acquisitions in the near future and focus on new markets it has yet to penetrate, eg Japan, China, Australia and Europe.
We also expect a better 4Q17 on stronger growth in flexible staffing in Singapore. With a positive outlook ahead, we maintain our BUY call and SGD1.14 Target Price.
Key risks include increased competition and fluctuations in general economic activity.

Jarick Seet RHB Invest | http://www.rhbinvest.com.sg/ 2018-01-15

RHB Invest SGX Stock Analyst Report BUY Maintain BUY 1.140 Same 1.140