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3 Dangers That Could Derail HRnetGroup Ltd’s Business

HRnetGroup Ltd (SGX: CHZ) is the biggest recruitment firm in the Asia-Pacific region (excluding Japan). The company has certainly done well over the past few years. Revenue grew from S$324 million in 2014 to S$429 million in 2018, while net profit increased from S$33 million to S$48 million during the same time frame.

Even though HRnetGroup has done well financially, there are some risks related to the company that shareholders should take note of as they have the potential to hit both revenue and earnings.

Fluctuations in the general economy

When the economy does not do well, companies usually cut costs, including reducing headcount and freezing new hires. That’s precisely what happened in HRnetGroup’s most recent quarter. Revenue for the 2019 first quarter tumbled 2.8% year on year to S$104.0 million on the back of cautious hiring.

In the earnings release, HRnetGroup’s Executive Director Adeline Sim commented:

“As the leading recruitment company in Asia ex-Japan, our performance is in some ways dependent on the underlying economies we operate in. If the headwinds persist into the year, it will likely have an impact on our business, particularly for our biggest and most open market, Singapore.”

Expiry of government grants

HRnetGroup’s operating costs are partly offset by the various Singapore government credit schemes, such as the Wage Credit Scheme (WCS), the Special Employment Credit Scheme (SEC), and the Temporary Employment Credit Scheme (TEC). The credit schemes will cease at certain points in time, as shown below:

Source: HRnetGroup 1Q 2019 earnings presentation

If the company does not receive alternative grants that make up for the loss of the subsidies from those three credit schemes, HRnetGroup’s financial results could be affected in the short term.

Disruption by new technologies

New technologies such as artificial intelligence (AI) hold much promise and have the potential to even replace human labour. If AI indeed begins to replace human beings, HRnetGroup’s clients may require fewer workers, and demand for the company’s services may drop. This, in turn, could affect HRnetGroup’s business and prospects.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of HRnetGroup Ltd. Motley Fool Singapore contributor Sudhan P owns shares in HRnetGroup Ltd.