June 9, 2021

Hiring season around the corner

■Twin engines of flexible staffing and permanent placements are on track for recovery; management is cautiously optimistic on the FY21F outlook.

■We raise FY21F-23F permanent placement (GPM: c.100%) volume expectations by c.3-12%on potential labour market recovery.

■Reiterate Add, with a higher TP of S$0.82. HRNET had net cash of S$332m (zero debt) as at end-Dec 20 and a 3.9% FY21F dividend yield.

Reiterate Add with higher TP of S$0.82

We raise our FY21F-23F EPS by 8.3-24.7%to pencil in higher permanent placement volume expectations on a potential recovery in labour markets, supported by 1) improving economic fundamentals, 2) declining unemployment rates, and 3) positive hiring sentiment across its key markets in Singapore and North Asia. We raise our TP to S$0.82, still pegged to 14x FY22F P/E (5-year historical mean). Potential catalysts are faster than expected recovery from Covid-19 raising hiring sentiments. Key downside risk is slower-than-expected recovery from Covid-19 dampening hiring sentiments.

Key takeaways from HRNET’s NDR

We hosted HRNET on an NDR on 4 Jun 2021;key takeaways are:1) its flexible staffing and permanent placement businesses are recovering, 2) to date, HRNET is seeing good volumes for both business segments vs. FY20, 3) permanent placements can be better than FY20’s,and 4) trade sectors that offer bright spots include technology, healthcare, government, financial services (wealth and consumer banking), e-commerce, logistics and supply chain. We also observed that management was cautiously optimistic about its FY21F performance, barring any unforeseen circumstances.

Singapore’s labour market potentially at an inflection point?

Historically, Singapore labour markets recovered following 2-3 quarters of GDP growth post a crisis. We think labour markets could be turning the corner given that Singapore reported its third consecutive quarter of GDP growth in 1Q21. We also note that while the Covid-19 pandemic is far from over, with Singapore re-entering Phase 2 (Heightened Alert), we view this as a small speed bump to a gradual recovery and do not expect this to dampen hiring sentiment. Key dates to watch out for are 14-18 Jun 2021,when the Ministry of Manpower publishes its ‘Labour Market Report First Quarter 2021’report. Positive data points will be tailwinds for the stock, in our view.

3Q21 employment survey finds strengthening hiring sentiments

In ManpowerGroup’s global employment outlook survey for 3Q21 involving more than 45,000 employers, HRNET’s key markets of Singapore, Taiwan and China all reported positive net employment outlooks. Singapore and Taiwan were among the top countries for the strongest hiring sentiment globally while China reported its strongest hiring outlook in six years. This reflects increasing business confidence and should translate into more hiring activities as well as job creation, in our view.

Hiring season around the corner

Key takeaways from HRNET’s NDR

HRNET’s twin engines of flexible staffing and permanent placements are in recovery mode across key markets; management is cautiously optimistic about its outlook for FY21F. We hosted the management team of HRNET for a virtual NDR on 4 Jun 2021. We share our key takeaways and observations from the event:

·Flexible staffing business provides a “security blanket” to help HRNET cover costs in challenging times, while the permanent placement business is well positioned to capture growth from high margins during recovery.

·Companies experienced “pandemic fatigue” in 4Q20 and decided that they needed to hire talent to continue growing.

·Permanent placements can be better than in FY20. Companies continue to like the flexibility that the flexible staffing option provides in FY21F.

·To date, HRNET continues to see good volume for both business segments vs. FY20.

·Trade sectors with demand for labour include technology, healthcare, government, financial services (wealth and consumer banking), e-commerce, logistics and supply chain.

·There is a trend of outsourcing of talent by overseas and local companies into and out of Singapore. Companies are also increasingly preferring to hire locals (citizens and permanent residents).

Reiterate Add with a higher TP of $0.82

We primarily raise our FY21F-23F permanent placement volume assumptions by 2.7-12.4% to 8,214-9,668. Economic rebounds typically drive permanent placements, which tend to outperform in times of strong economic fundamentals as businesses increase their full-time headcount for expansion. We fine-tune our flexible staffing volume assumptions and expect sustained growth for this segment in FY21F,given that:1) employers continue to enjoy the flexibility of variable headcounts, and 2) HRNET continues to see demand from opportunities in its overseas markets.

We raise our FY21F-23F EPS by 8.3-24.7% to factor in our higher volume expectations for permanent placements on the back of labour market recovery. Our target price increases to S$0.82, still pegged to 14.0x FY22F P/E (5-year historical average) supported by 1) improving economic fundamentals, 2) declining unemployment rates, and 3) positive hiring sentiment across its key markets in Singapore and North Asia. We believe the recovery theme is underway, which should help propel hiring activities to pre-Covid-19 levels.

Currently, HRNET trades at 11.5x forward FY22F P/E (close to 1 s.d. below its 5-year historical mean and c.49% discount to peers). HRNET had a net cash position of S$332m as at end-Dec 20. We forecast FY21F-22F dividend yields of 3.9-4.4%. Potential catalysts include improving macro conditions leading to more job creation and synergistic M&As. Key catalyst is faster than expected recovery from Covid-19, accelerating hiring sentiment. Key downside risks are weaker than expected economic growth and weaker-than expected recovery from Covid-19 dampening hiring sentiments.

Labour markets potentially at a turning point?

We think the labour market could be at an inflection point in Singapore, based on historical trends. On average, declines in Singapore unemployment rates generally follow 2-3 quarters of economic growth post a crisis. Our analysis of historical quarterly unemployment rates and GDP growth data signal that labour markets may beat a turning point. Given that the government had largely contained the spread of the virus, economic activity was gradually allowed to resume from 2 Jun 2020 starting with Phase 1 of reopening. Further relaxation of restrictions subsequently led Singapore to report its third consecutive quarter of GDP growth at 3.1% in 1Q21; meanwhile, preliminary estimates put resident unemployment rates at 4.0% (-0.4% pts qoq), similarly improving for the third consecutive quarter in 1Q21, according to data from the Singapore Department of Statistics and Ministry of Manpower.

Singapore’s labour market strengthened to reachpre-Covid-19 levels in 2Q21. The ratio of job vacancies to unemployed persons in Singapore, which is a proxy for the strength of the labour market, improved to 0.8 in 4Q20, that is, back to pre-Covid-19 levels in 4Q19, according to the Singapore Department of Statistics. Covid-19 community cases in Singapore have also been on the decline, according to data from the Ministry of Health, after Singapore re-entered Phase 2 (Heightened Alert) from 13 May 2021-16 Jun 2021 and tightened restrictions to contain the spread of the virus within the community.

We expect labour market recovery to be uneven across sectors and favour recruitment companies with sector exposure to technology, healthcare, finance, and government. We believe that declining community cases will encourage further easing of restrictions and allow the economy to gradually resume. In our view, this should spur more job creation and further improve the ratio of job vacancies to unemployed persons. We understand that the technology, finance, government and healthcare sectors remain the bright spots for hiring, according to our NDR with management. HRNET, which derived c.60%of its total revenue in FY20 from these three sectors, should be a beneficiary, in our view.

Hiring sentiment remains positive across key markets for HRNET in 3Q21

According to ManpowerGroup’s global employment outlook survey 3Q21 involving over 45,000 employers, HRNET’s key markets of Singapore, China and Taiwan reported positive net employment outlook. The Net Employment Outlook is derived by taking the percentage of employers anticipating anincrease in hiring activity and subtracting from this the percentage of employers expecting a decrease in hiring activity, according to ManpowerGroup. We expect HRNET to be well positioned to ride the tailwinds of greater volume of job creation, driven by positive hiring sentiment across its core markets of Singapore, Taiwan and China.

Singapore’s 3Q21 net employment outlook remains high at +15% (+43% pts yoy), among top markets in hiring sentiment globally. All seven sectors surveyed by ManpowerGroup reflected positive hiring sentiment. The top three sectors with the best hiring prospects are finance, insurance and real estate (+27%), public administration and education (+21%) and mining and construction (+20%). For 3Q21, ManpowerGroup reported that the labour market is experiencing talent shortages, with 64% of Singapore employers experiencing difficulty in hiring despite the recent return to Phase 2 (Heightened Alert) on 16 May 2021, highlighting strong demand for labour and intentions to add headcount, in our view.

Given the stronger sentiment of employers qoq, supported by improving labour market data in Singapore, we have turned more positive on the pace of recovery of hiring activities in FY21F. We believe improving hiring sentiment among employers and demand for talent should translate into more job opportunities and new job creation in the labour market. As such, we expect HRNET to be able to register stronger recruitment volumes in FY21F in both its flexible staffing and permanent placement businesses in Singapore (which contributed 55% of FY20 gross profits) to pre-Covid-19 levels in FY19.

China reported a net employment outlook of +13%,strongest in six years, while hiring intentions in Taiwan (+24%) continue to rank high, coming in second globally for 3Q21. Tier-1 cities where HRNET’s China operations are concentrated continue to expect positive job gains while all sectors surveyed expect payroll increases for 3Q21,according to ManpowerGroup. In Taiwan, 31% of employers surveyed by ManpowerGroup anticipate an increase in staffing levels and all seven sectors are expected to register job gains in 3Q21. In our view, HRNET’s key markets in North Asia are reflecting upbeat hiring intentions and a robust labour market outlook, which should drive recruitment volume for the company there.

We continue to expect the main driver of growth for HRNET’s North Asia business to be Taiwan and China in FY21F. According to data from CEIC, quarterly real GDP growth was 18.3%/8.2% yoy in China and Taiwan, respectively, in 1Q21, both stronger than pre-Covid-19 levels in 4Q19. Similarly, unemployment rates in China and Taiwan improved in tandem with economic growth. We believe labour markets in Taiwan and China remain strong, supported by economic growth, improving unemployment rates towards pre-Covid-19 levels in 2019. This should also translate into better permanent placements and flexible staffing volume for North Asia, as employers in these markets accelerate hiring activities on the back of positive hiring sentiment, in our view.

Covid-19 updates across HRNET’s key markets

Recent Covid-19 resurgence in Singapore, China and Taiwan is a small speed bump, in our view, and should not dampen hiring sentiment for FY21F. We remain cautiously optimistic that hiring sentiment in these markets would remain strong as continued ramp-up of vaccinations and testing should help contain and slow down the spread of the virus. We believe hiring activities will remain robust in FY21F barring any unforeseen circumstances arising from Covid-19 in 2H21F.

Singapore: Singapore has re-imposed Phase 2 (Heightened Alert) from 16 May 2021-13 Jun 2021 on the back of rising Covid-19 community cases. Restrictions include the limiting of groups to two persons, no indoor dining and default work-from-home requirement, according to the Singapore government.

China: Guangzhou, China, reported a surge in Covid-19 cases on 31 May 2021,which led the government to suspend flights to and from Guangzhou, according to Channel News Asia. 38 zones in Guangzhou entered into a lockdown, while restaurants now provide takeaways only, according to the South China Morning Post and The Guardian.

Taiwan: The government tightened restrictions in May 2021 after reporting a surge in Covid-19 cases, according to Reuters. Restrictions include only take-outs for restaurants, fines for not wearing face masks and a halt on wedding banquets. Libraries and internet cafes are ordered to close and gyms are limited to 100 people at a time, according to Reuters.

ADD by CGS-CIMB Research. Share price closed at $0.715.