• Singapore reported its strongest net employment outlook (+15%) in six years while China expects a moderate hiring climate (+5%) in 1Q21.
• Our channel checks with recruiters/headhunters in Singapore and China found strong hiring prospects in technology, finance, healthcare and retail.
• We continue to expect flexible staffing to drive revenue and gross profit margin for HRnetGroup in FY21F.

Channel Checks Reaffirm Our Positive Job Market Conviction for 2021

• Our conversations with recruiters and headhunters on the ground in Singapore and China reaffirm our positive job market outlook in 2021. While employers remain cautious, their sentiment and confidence levels are picking up from 4Q20 and plans are in the pipeline to add headcount post-restructuring activities in 2020.
• Questions we asked recruiters and headhunters included
  1. their growth expectations of hiring activities versus pre-COVID-19 (2019) levels,
  2. employers’ demand for flexible and permanent headcount in Singapore and China, and
  3. sectors that are seeing the strongest hiring prospects from employers in Singapore and China.
• We also understand that the technology, finance, healthcare and retail sectors are seeing strong hiring prospects in Singapore and Tier 1 cities in China; this should drive recruitment volume for HRnetGroup (SGX:CHZ) which has a large concentration in those sectors (~65% of its 1H20 revenue).

Recruiters in Singapore we talked to generally believe that hiring activities in 2021 will be stronger than pre-COVID-19 levels in 2019.

• Findings from our channel checks also suggest that employers in Singapore are likely to continue to keep their headcount variable in 2021 until they see earnings stabilise. Meanwhile, a headhunter we spoke to in China is seeing a mix in demand for permanent and flexible staffing from employers.
• Our channel checks reaffirm our positive job market outlook in 2021, barring any sudden spike of COVID-19 cases in Singapore and China. We believe headcount will still be largely kept variable in 2021. We continue to expect flexible staffing to drive revenue and gross profit margin for HRnetGroup in FY21F.

Positive Hiring Outlook Across Key Markets

• In Manpower Group’s global employment outlook survey 1Q21 involving over 37,500 employers in 43 countries, HRnetGroup’s key markets of Singapore and North Asia (expect Hong Kong) found strengthening hiring sentiment as measured by the net employment outlook. The net employment outlook is derived by taking the percentage of employers anticipating total employment to increase and subtracting from this the percentage expecting to see a decrease in employment in the next quarter, according to ManpowerGroup.

For 1Q21, Singapore reported its strongest net employment outlook in 6 years

• For 1Q21, Singapore reported its strongest net employment outlook in 6 years since 1Q15 at +15% with all 7 sectors in the survey reporting improvements in hiring prospects according to ManpowerGroup. The top 3 sectors with the best hiring prospects in Singapore for 1Q21 are mining and construction (+26%), services (+18%) and transportation and utilities (+17%), indicating strong hiring plans from these respective employers according to ManpowerGroup.
• The survey also reported that 12% of employers in Singapore expect hiring activities to return to pre-COVID-19 (2019) levels by 1Q21. Our economics team expects resident unemployment rate in Singapore to improve to 4.0% for 2021F as compared to 4.9% in 2020F (4.8% in Oct 2020).

Short Term Tailwinds for HRnetGroup From Continued Travel Restrictions in Singapore and Movement Control Order (MCOs) in Malaysia

• We understand from our previous conversations with management in Dec 2020 that travel restrictions imposed between Singapore and other countries as well as the MCOs in Malaysia have caused a shortage of staffing supply in Singapore.
• According to the Straits Times, Singapore continues to impose travel restrictions, and Malaysia has extended the Recovery Movement Control Order to 31 Mar 2021 as well as reimposed MCO on certain states in Malaysia until 26 Jan 2021.
• In our view, the construction, transportation and services sectors in Singapore which relies heavily on foreign workers will continue to experience staffing shortages on the back of these restrictions. We believe that these will be short term tailwinds for HRnetGroup and should help drive flexible staffing volume for 1H21.

For 1Q21, HRNET’s key markets in North Asia except Hong Kong reported positive hiring outlook, led by Taiwan according to ManpowerGroup; we expect China and Taiwan to drive HRNET’s North Asia business.

• Net employment outlook for Taiwan was reported at +23%, which is the highest globally, followed by Japan (+6%) and China (+5%) according to Manpower Group. Despite the uncertainties brought about by COVID-19, Tier 1 cities where HRnetGroup’s China businesses are concentrated in are all expecting job gains for 1Q21. The top four sectors with the best hiring prospects in China for 1Q21 are finance, insurance and real estate (+6%), transportation and utilities (+6%), services (+5%) and manufacturing (+5%). The survey also reported that 44% of employers in China expect hiring activities to return to pre-COVID-19 (2019) levels.
• We expect China and Taiwan to drive HRnetGroup’s North Asia segment for FY21F, underpinned by a robust job market outlook and positive hiring sentiment among employers in these markets. Hong Kong will continue to be a drag in North Asia, but will be offset by growth in China and Taiwan, in our view.
• We forecast North Asia to account for 48% of gross profit in FY21F.

HRnetGroup's 2H20 Earnings Preview: Lower Margins Flexible Staffing to Drive Earnings

• We expect HRnetGroup to post revenue of S$210m (-0.5% y-o-y; -0.4% h-o-h) and gross profit of S$63m (-12% y-o-y; +1.3% h-o-h), driven by flexible staffing as employers adopt a lean business model in 2H20F.
• We also forecast HRnetGroup's 2H20F core earnings to come in at S$15m (-26% y-o-y; -31% h-o-h) on lower gross profit margin flexible staffing business.

Reiterate ADD on HRnetGroup

• We like HRnetGroup for its large exposure to Singapore/North Asia which accounted for 56%/40% of its 1H20 gross profit. Given that the pandemic has been kept largely under control in these markets, the hiring activities here should accelerate in 2021F, in our view.
• We reiterate our ADD call on HRnetGroup with target price of $0.635 based on 13.2x 2021F P/E, which is around 1 s.d. below its 3-year historical mean.
• Potential re-rating catalysts are synergistic M&As and more job creation.
• Key downside risk is deteriorating macro conditions.
• HRnetGroup had S$286m net cash as of end-Jun 20 (forming ~50% of market cap) and offers 4.3% FY21-22F dividend yields.

Source: CGS-CIMB Research - 18 Jan 2021