HRNetGroup(SGX:CHZ) Staffing in Asia

HRNetGroup is a Singapore listed professional recruiting and temporary staffing company currently operating in 15 cities across Asia. The company’s largest operation is in Singapore which makes up over half its revenues and is the largest player. The company has been expanding both domestically and internationally through both organic and inorganic means. The company is trading at an attractive multiple with good growth prospects, pristine balance sheet, and a unique insider ownership model. The staffing industry can be quite cyclical but they do bounce back rather quickly and the company’s pristine balance sheet can pretty much weather anything.

Currency

As a US based investor the exchange rate is important to think about as it could significantly affect my returns. My thoughts on the Singapore dollar which is HRNetGroups largest currency exposure hasn’t changed much since my article on Singapore O&G in Jan 2022 and I remain bullish on the currency. To summarize, the large current account surplus and undervaluation of currency should be two factors continuing the appreciation of the Singapore Dollar against the US Dollar thus boosting the return that investments in Singapore can garner.

About the Company

HRNetGroup was founded in 1992 in Singapore and has expanded to 33 business units. The company has operations in 15 cities which are split in 3 regions including Singapore, North Asia and Rest of Asia. North Asia includes Beijing, Shanghai, Shenzhen, Guangzhou, Suzhou, Chengdu, Taipei, Kaohsiung, Hong Kong, Tokyo and Seoul. Rest of Asia includes Kuala Lumpur, Jakarta and Bangkok. Singapore makes up a majority of the revenue of the company. 

Source: HRNetGroup 2022 Presentation

HRNetGroup has a diverse base of customers with no large customer or industry concentration. HRNetGroups top 10 customers only contributed 21.6% of revenue as of 2022. 

Source: HRNetGroup 2022 Presentation

The company has two segments which include professional recruitment and flexible staffing. Professional recruitment is for permanent hires usually for mid to senior level positions where HRNetGroup and its various business units search for potential candidates and screen them. Flexible staffing is for temporary labor which is more used for entry level positions, whether it’s for a short-term project-based work or as temporary replacement to permanent hires, or even a low risk way to hire permanent employees. 

“Revenue from professional recruitment comprises fees charged to clients as a percentage of the remuneration of the candidate placed with the relevant client in his first year of employment, and is recognised upon successful placement of the candidate in a permanent position with the client.”

– HRNetGroup IPO Prospectus

“ Revenue from flexible staffing comprises fees charged to our customers that covers the relevant Contractor Employee’s payroll in full and a portion of his payroll costs or such other fixed sums that we agree with the corporate customer. Revenue from flexible staffing services is recognised at the time that the Contractor Employee provides services to the corporate customer.”

– HRNetGroup IPO Prospectus

Flexible staffing is HRNetGroups main growth driver going from S$236m in 2014 to S$510m in 2022. At the same time professional staffing has been flat. The flat growth for the professional segment is mostly due to covid and the late reopenings that occurred in Singapore and China and I expect professional staffing placements to recover and grow from 2018 levels. Also the sector composition has changed from 2018 to 2022 which has favored flexible staffing over professional services which I suspect is due to covid. The professional staffing segment is 100% gross margin due to the fact that the company is being paid a percentage of the hired candidates salary. Flexible staffing is much lower gross margin around the 14-16% range due to them being responsible for paying the employee and only making a spread on top. Looking at growth by country Singapore revenue growth was a 6% CAGR from 2014-2022 while both their North Asia and Rest of Asia businesses grew revenue at a 14% CAGR in that same time.

Year	2022	2021	2020	2019	2018	2017	2016	2015	2014
Professional Staffing(In Millions SGD)	97	94	72	95	103	86	87	86	85
Flexible Staffing(In Millions SGD)	510	493	358	324	322	302	274	267	236
Singapore(In Millions SGD)	397	411	312	300	316	298	276	273	246
North Asia(In Millions SGD)	186	158	111	114	103	85	81	75	68
Rest of Asia(In Millions SGD)	28.7	21	10.4	8.9	9.4	8.9	7.8	8.4	9.9

As a consequence of the expansion in flexible staffing, the overall gross margin of the company has experienced a decline. Nonetheless, this decline is not a major concern due to the company’s asset-light nature. Despite the decreasing trend, the returns on capital have remained favorable. HRNetGroup IPO’ed in 2017 and ROA has declined since then but is still averaging over 40% which is quite amazing. ROE for HRNetGroup is low due to the high cash balance so for the ROA calculation I subtracted the cash to give a better picture of the operating business. 

Year	2022	2021	2020	2019	2018	2017	2016	2015	2014
ROA(1)	44%	42%	49%	45%	49%	66%	82%	76%	67%
ROIC(2)	89%	126%	332%	78%	90%	180%	N/A	N/A	N/A

Another way to look at the returns of the business is to take the change of income over a period and divide it by the change in assets in the same period to see the incremental returns on capital. The change in assets minus cash from 2014-2022 was $104M with the change in EBIT being S$41M. This comes out to a 40% incremental ROA which is still quite good even though it’s declining over time. An ROA of over 60% is obviously unsustainable as a company grows so this isn’t a big issue for me. ROIC is even higher than ROA but I focus on ROA because it is less volatile. Also a side note is that both metrics would be lower if the fair value of an investment HRNetGroup made did not dip lower. HRNetGroup made a total investment of S$66M into Staffline and Bamboos in 2019 both of which are publicly traded staffing companies. Both of the companies share prices were heavily affected by covid and have yet to recover. Accounting for the investments on the balance sheet without the fair value loss would lower ROA and ROIC. It’s good to see that incremental returns are still high for HRNetGroup because they have been growing a lot in markets where they don’t have dominant market share.

Year	Change	2022	2014
Assets Minus Cash	S$104M	S$171M	S$67M
EBIT	S$41M	S$87M	S$46M
ROA	40%	44%	67%

Growth Prospects

The global staffing market was estimated to be $482.5B by SIA. The top 100 staffing companies represent 43% of global revenue which means the market is quite fragmented.The APAC market is estimated to be $181B with almost half of that total being just Japan. From 2006 to now the APAC market grew from $44B to $181B which is a 9% CAGR. The APAC market is estimated to be growing at a 11% CAGR through 2028. The growth is supported by increasing wage growth and employment growth. Overall Asian countries contributed almost half of the total global labor pool with a workforce weighted to a younger demographic. GDP per capita is much lower than western countries for most of APAC but growing much faster. The Asian staffing market is one of the fastest growing markets especially when you exclude the more developed markets of Japan and Australia. HRNetGroup is positioned to capitalize off the APAC market growth as they themselves are growing their North Asian and Rest of Asia business segments faster than the market. Meaning HRNetGroup is capturing share.

HRNetGroup has expanded their business mostly through organic growth. 28 of HRNetGroups 33 business units were opened organically with only 5 being acquisitions. Since IPO in 2017 the company has recruited 15 new business owners and established 8 of the 33 business units. 4 of the 5 Acquisitions have also been since IPO. So far it looks like the company has been quite successful at least when I look at revenue growth and returns on capital.

Looking at Acquisitions only one of the four HRNetGroups acquisitions was significant to look at. This was REForce back in 2018 when the company acquired a 51% stake for S$14M. Using the footnotes the profit attributable to the company for a full year was around S$1.6M and revenue of S$10M. That would put the multiple at 9 times earnings and 1.4 times Sales. This is a reasonable multiple. Also so far the companies acquisitions have been small tuck-ins which I find is a favorable strategy compared to larger company changing transactions which would carry a lot more risk. 

HRNetGroup’s continued growth can be attributed to two key factors: their strong customer relationships and the presence of switching costs in the industry. In the highly competitive staffing industry with low barriers to entry, successful execution becomes crucial for sustained success. HRNetGroup stands out in terms of customer satisfaction, with an exceptional average rating of over 4.5 stars across their major brands on Google Maps. Furthermore, their top five clients have remained loyal for an average of 19 years, indicating the strength of their customer relationships. The presence of switching costs in the flexible staffing segment further reinforces HRNetGroup’s position, as clients would need to replace all the contractors provided by HRNetGroup if they were to switch, making it less likely for them to switch providers. These factors contribute to HRNetGroup’s ability to retain and expand its client base, supporting their growth trajectory.

Brand	Rating	Number of Ratings
HRNetGroupone Singapore	4.9	333
HRNetGroupone Malaysia	5.0	368
PeopleSearch Singapore	4.8	241
PeopleSearch Taiwan	4.8	206
RecruitFirst Singapore	4.7	2452
HRNetGroup Rimbun	4.9	725
HRNetGroupOne Japan	5.0	64
RecruitFirst Hong Kong	4.8	93
RecruitFirst Malaysia	4.9	671
HRNetGroupOne Hong Kong	4.9	59

Cyclicality of the Business

The business of staffing is heavily tied to the economic cycle. I fully expect HRNetGroup to grow in the future but their growth may be lumpy. Looking at one of HRNetGroups American peers, Robert Half profits exporated in the 09 recession going from a high of $290M in 07 to $37M in 09. Profits eventually recovered by 2013.

Source: Robert Half Annual Report

As for HRNetGroup I expect growth to be lumpy but probably not as lumpy as Robert Half. If you look at Singapore’s unemployment rate in previous recessions the highest it has gone to was 4.8%. This is quite low especially compared to the United States where in 09 unemployment was 10%. Not sure what they’re doing in Singapore but economic fluctuations seem to hit the economy less.

Source: Tradingeconomics

These smaller fluctuations have benefited HRNetGroup as they have also not experienced as severe of fluctuations as American peers. With profit only declining by half in the 09 recession.

Source: HRNetGroup 2022 Annual Report

Even in the future if things get really bad the company has a pristine balance sheet. Currently the company has S$313m in cash on the balance sheet. This represents 64% of assets or over 4 years of earnings. Also the company has no financial debt. This allows the company to weather all but the most brutal of economic storms. This compares favorably to other staffing companies as for the most part they’re heavily leveraged.

2022 Balance Sheet HRNetGroup
Total Assets	S$483m
Cash	S$313m
Financial Debt	S$0m

In the short term the cyclicality seems to be coming. If you look at US peers like Robert Half, Korn Ferry, and Manpower Group as of their Q1 2023 reports most staffing companies are reporting YOY declines in revenue and income. Luckily due to HRNetGroups balance sheet and execution in business they should be able to survive and get to the other side.

Management/Insiders

One unique aspect of HRNetGroup that I haven’t seen in any other staffing company is their ownership model. Currently the Simco trust and insiders own 83% of the company. The Simco trust is owned by the Sim family and employees of the company. The Sim family is the founder’s family Peter Sim. The company HRNetGroup is still led by their founder Peter Sim who founded the company back in 1992.

The unique initiative HRNetGroup introduced is the 123GROW and Co-Ownership schemes. The 123GROW program allows selected employees to buy shares in the company, with bonus shares awarded to those who meet performance criteria done on a profit basis. The company also allows the most important people in overseas subsidiaries to purchase ownership interests in their respective subsidiaries.These schemes help align employees with shareholders and have help increase retention among those employees. The company reports much higher retention of employees in the program then not in the program. As of December 2022, there were 151 employees participating in the Co-Ownership scheme, accounting for 17% of the permanent employee base, demonstrating the program’s positive impact. The 123GROW plan was paused in 2021 due to the pandemic but I do believe management will reinstate the program eventually.

Source: 2022 HRNetGroup Annual Report

The high insider ownership and co ownership initiative give me high confidence management is aligned with shareholders as they have lots of skin in the game.

Valuation

Due to the cyclical nature of the company I look at multiples based on 5 year average earnings and EBIT. The company is trading at 13 times earnings or 8 times earnings ex cash or 7 times EV/EBIT. Those multiples are all based on 5 year average earnings to remove some cyclicality. As you can see this company is beyond cheap especially when you consider the growth prospects and return on capital. Even if the company blows all the cash the company is still trading at a 13 times multiple. 

Year	5 YR AVG	2022	2021	2020	2019	2018
EBIT( In Millions SGD)	73.15	87.18	85.26	59.45	68.71	65.17
Earnings net interests( In Millions SGD)	55.94	67.56	65.47	46.89	51.58	48.22
Market Cap( In Millions SGD)		748
EV( In Millions SGD)		540

Risks

For risks to the investment I identified three. They’re capital allocation, government policy, and international expansion.

Capital Allocation

The company HRNetGroup has spent almost S$66m in cash on what I can only describe as value investments on certain UK listed staffing companies with the majority being put into Staffline PLC. The Investment was made in 2019 and around 100 pence per share which was significantly lower than the market price in the previous year, as the company was going through some profitability challenges. The reason I say it seems almost like a value investment is the company was purchased at a market cap of 200m vs revenue of 900M which is cheap for a staffing company. Since the purchase however Stafflines stock is down 75%. I haven’t looked at Staffline too much because it isn’t really a large part of the company. Also management has stated they will not be investing more into Staffline. However one odd thing is that one of Stafflines management team joined HRNetGroups board. Not sure how these investments will turn out and I don’t know if the company will continue to pursue such transactions in the future.

Government Policy

The government can have outsized effects on the labor market. For HRNetGroup the government to look out for in particular is the Singapore government. The government can make it easier or harder for foreign workers to come into a country, shutting down the economy over a viral disease, or creating or removing subsidies. For example, income from subsidies for HRNetGroup has declined from 2016 to 2022 from S$11.4m to S$6.9m.

International Expansion

The company’s primary means to grow will be through international expansion. This includes Southeast Asia and China currently. These markets are places where the Group is not dominant and could have geopolitical or competitive risks the company isn’t thinking about. So far gross margins for the other regions don’t seem to be out of whack so they seem to be executing well in their expansion plans. Management on every report I can find says they want to grow profitably so that does make me feel alittle easier when it comes to their expansion.

Conclusion

In conclusion, HRNetGroup is a Singaporean listed professional recruiting and temporary staffing company with a strong presence across Asia. The company has achieved growth through organic and inorganic expansion, both domestically and internationally. With an attractive valuation, promising growth prospects, a solid balance sheet, and a unique insider ownership model, HRNetGroup is well-positioned for success. Although the staffing industry can be cyclical, HRNetGroup’s resilience, supported by its strong balance sheet, enables it to withstand market fluctuations effectively.

Top Four Metrics To Watch for Future

• Gross profit per employee
• Gross profit
• ROIC
• GM Margin