HRnetgroup Ltd (SGX: CHZ) encountered a rare speed bump in the first three months of 2019. The group’s revenue and gross profit were both down 2.8% from the corresponding period last year, a stark reality check for investors who have been accustomed to double-digit growth over the past couple of years.
But should investors be worried? I don’t think so.
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Uplift from North Asia
Though the group recorded lower revenue overall, its operations in North Asia remain a shining light.
2019 first-quarter gross profit in the North Asia segment grew a healthy 8.8% from the corresponding period last year.
Moreover, HRnetGroup commenced its staffing units segment in Shanghai in April. It also incorporated RecruitFirst Services (Shanghai) Limited and RecruitFirst Taiwan in January and March, respectively.
The chart below shows the breakdown of gross profit by geographical segment.
Source: HRnet Group Ltd 2019 Q1 Earnings Presentation
As shown, the proportion of gross profit contributed by North Asia grew from 40% to 45%, demonstrating the growing importance of the region. With HRnet emphasising growth in North Asia and the sheer size of the Chinese market, investors should expect to see North Asia become an increasingly important part of the group’s overall business in the future.
Dependent on economy
It is also important for investors to realise that recruitment companies are, like most other companies, still dependent on the underlying economies they operate in.
The soft start to the year illustrated this fact as HRnet suffered from the uncertainties surrounding the US-China trade conflict and regional political tensions. This ultimately resulted in companies holding off hiring and expansions, which directly affects HRnetgroup’s professional recruitment arm.
However, investors should note that the long-term prospects of the group still look positive. The group has identified North Asia as an important market opportunity and has taken the right steps to grow its business there, with strategic acquisitions and the setting up of corporations in important cities.
Furthermore, HRnetgroup boasts a healthy cash position of S$242 million and generates consistent cash flow from its operations, allowing it the financial flexibility to continue pursuing growth in key markets.
The Foolish takeaway
All things considered, I think investors shouldn’t be too worried about the lower gross profit recorded in the first quarter of 2019.
Slight bumps along the road are to be expected as HRnet, like other large recruitment firms, is susceptible to the changing economic environment. However, the overall economy is set to expand over the next few years, with China’s economy specifically expected to expand in the middle-single digits.
HRnet has also initiated expansions into important markets and made acquisitions that should provide it with the platform to expand in regions that have much larger addressable markets than Singapore. Coupled with its strong balance sheet and healthy cash flow, I continue to be very optimistic about HRnetgroup’s long-term growth 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 HRnet Group Ltd. Motley Fool Singapore contributor Jeremy Chia owns shares in HRnet Group Ltd.