• HRnetGroup's 1Q19 core earnings decline was a result of cautious hiring and exit of startups in Singapore, partially offset by stronger performance from North Asia.
• We expect new overseas offices and greater penetration into public sector/ healthcare jobs to drive potential 3Q19F earnings recovery.
• Maintain ADD on lower EPS and Target Price; supported by 7.4x ex-cash CY20F P/E.

Employment Survey Suggests Stable Outlook in Singapore

• In a recent Manpower Group survey of over 59k employers globally, Singapore recorded 3Q19 net employment outlook of +12% (relatively stable y-o-y and q-o-q), ranking 14th out of the 44 countries. Among the seven sectors in Singapore, public admin & education has the strongest hiring intentions at 22% (5%-pt q-o-q and 6%-pt y-o-y improvement), followed by services (+18%) and transportation & utilities (+10%).

Overseas Presence as the New Growth Engine

• Cautious hiring in Singapore led to 1Q19 gross profit declining S$2.4m (-11.6% y-o-y), though partially mitigated by higher professional recruitment in North Asia (+S$1.3m).
• While HRNETGROUP LIMITED (SGX:CHZ) continues to face softer demand from some multinational clients in China, it is actively pursuing new domestic customers, which could contribute more meaningfully from 3Q19F.
• We are also positive on its new overseas offices which have started to gain traction e.g. REForce, Career Personnel in Hong Kong, RecruitFirst in Shanghai and HK.

Expect Stronger Pick-up From 3Q19F

• HRnetGroup posted 1Q19 topline decline in both professional recruitment (-1.5% y-o-y) and flexible staffing (-4.1% y-o-y). We expect flexible staffing to remain under pressure in 2Q19F due to the exit of some start-ups in Singapore; recovery in professional recruitment could be more visible from 3Q19F as HRnetGroup secures more public sector jobs in Singapore.
• 1Q19 headline PATMI of S$19.3m (+18.5% y-o-y) was boosted by S$5.6m Fair Value gain on financial assets, which could see a reversal in 2Q19F. There will also be zero government subsidies in 2Q19F (1Q19: S$4.5m, 2Q18: S$0.5m).

Increasing Defensive Angle to Hiring Business

• In May 2019, HRnetGroup bought a 7.85% stake of Bamboos Healthcare Holdings (2293 HK, Not rated), a fast-growing healthcare staffing solutions provider for clients like hospitals and social service organisations, with a portfolio of 20k healthcare professionals in HK.
• While healthcare life science sector accounted for 10% of HRnetGroup’s revenue in FY17-18, Bamboos is not an existing customer and we see potential for further collaboration.

Maintain ADD, Supported by Strong Net Cash and 3-4% Yield

• We cut our Target Price of S$1.01, still pegged to 18x CY20F P/E.
• Downside risks to our call are global economic slowdown and poor overseas execution.
• Earnings-accretive M&As could re-rate the stock.

Source: CGS-CIMB Research - 13 Jun 2019