Description

104 Corp is Taiwan’s largest online job bank (3130 on the Taiwan Stock Exchange). The company is highly cash-generative, run by a shareholder friendly management team with skin in the game, and attractively valued on an absolute and relative basis (10% FCF/EV and 4% yield). The company is rolling out a number of new products, including a new career oriented social media platform called 104+, which we believe should accelerate revenue and profit growth over the next few years. This combination of high quality business, strong management, new earnings growth drivers, and plenty of scope for rerating make this a compelling and timely investment opportunity.

Company Description

104 Corp (“104”) was founded in 1996 by Chi-Kuan “Rocky” Yang. The company reached break-even in the first year and has been profitable ever since. By 1999, 104.com became the largest online job bank in Taiwan, a position it has retained ever since. In 2006, the company IPOed on the Taiwan Stock Exchange. Management and employees own approximately 50% of the company and Malaysia-listed Jobstreet owns an additional 23%. 104 has two primary business lines, Online and Offline. Online accounts for 45% of sales but closer to 80% of profit.

The Online business consists of the job bank, advertising, and value-add services. 104.com.tw has more than 6m resumes out of a total workforce in Taiwan of 10m. 78% of the resumes are college educated. The site also has 267,000 registered corporate clients, which is about 20% of the total in Taiwan, but it includes >90% of the largest 1,000 corporations. 104 charges corporations for access to the job bank for a set period of time and jobseekers can post their resumes for free. This means corporations can post an unlimited number of resumes for a specified time: 2 weeks, 1 month, 3 months, 6 months, or 1 year. Pricing starts at NT$2,800 for 2 weeks up to NT$31,500 for 1 year. 50% of revenue is from 6 month and 1 year contracts. However, pricing is higher for very large corporations which post large volumes of jobs every year, with the largest corporations paying around NT$1m per year. 104 has only raised pricing once in 2007 so revenue growth is driven by volume.

The offline business consists of temporary staffing, headhunting, and HR academy but about 80% of the division is temp staffing. 104 Corp has approximately 2,300 temporary staff which it deploys to corporate customers. The operating margin in the offline business is single digit so the overall profit contribution to the group is not very significant.

Competition

While 104 has the #1 position in the industry, there are several significant domestic competitors detailed below. LinkedIn and other foreign job sites have only a limited presence in Taiwan presently.

1111.com.tw - #2 position in the industry. Lower listing fees than 104 and a somewhat larger selection of government jobs

yes.123.com.tw – Founded in 2008 by Liberty News, one of the largest newspaper publishers.

518.com.tw – established in 2009 by ADDCN Technology (5287 TT), which is a diversified online classifieds business. Job postings are more focused on retail store staff and blue collar manufacturing jobs.

Taiwanjobs.gov.tw – government website for government jobs as well as jobs from private companies. Listing service for private companies is free of charge.

Unsurprisingly, there is a lot of overlap between resumes listed on each of the sites. Numerical market share is not readily available because most of the competitors are private, but 104 estimates that it has more than 50% share based on job listings and about 60-70% share based on recruitment budgets. According to an ACNielson survey, 81% of corporates mentioned 104 as the top site for recruitment. We also searched the major sites for various jobs and the results supported 104’s leading position. For example, Foxconn, Taiwan’s largest company, exclusively had listings on 104. Web traffic rankings also support 104s popularity vs. other sites. Competitors typically price at a 50% discount to 104, while the government website is free.

New Products and Services

104 will be launching a few new online services and products in 2015. While we don’t expect a dramatic step-change in revenue in 2015, we do think new online products will likely accelerate the company’s growth over the next several years. Management believes the combined revenue opportunity from new products could be NT$1.0 billion, vs. current online revenue of NT$1.1 billion (NT$2.5b total revenue).

Opening Job Bank to Headhunters: Historically 104 has not allowed head hunting firms and executive search firms to access the 104 job bank but management is planning to open the platform to them now. This will transform 104 into a job aggregator, similar to Indeed.com in the US. It is likely that the headhunters will be charged around NT$100,000 each for access. The company has decided to allow this starting in the second half of 2015. Management is conservatively guiding for a NT$10m revenue contribution from this initiative in 2015, but the opportunity should be larger over the next few years.

104+ : 104+ is a career oriented social media platform which shares many of the features of LinkedIn as well as Facebook. This is designed to increase the stickiness and usage of job seekers. The features are available now for existing users when they log in to their 104 account, but the official marketing campaign launch of 104+ will take place in Q1 2015. There are a number of new services within 104+ such as Dream Cradle (crowd-funding, similar to Kickstarter), Green Tutor (tutoring service), and 4 Minutes (learning platform). Management does plan to monetize new features on 104+ but the initial focus will be on usage and user engagement. It should however start generating some additional advertising revenue in 2015.

HR Portal: 104 already provides HR consulting services to about 500 large corporations, which includes recruitment services, payroll, and employee welfare services. Large corporations spend $100k-$10m per year for these services through 104, which is too expensive for small companies. Therefore, 104 is planning to roll out a cloud based HR platform which will be free to join and will charge based on usage. This should appeal more to small companies and expand the potential market size. Roll-out is planned for late 2015 so revenue from this product won’t contribute until 2016.

Cash Flow / Balance Sheet / Dividends

104 generates very consistent cash flow, with FCF typically higher than net income due to a negative working capital cycle. The company has NT$1.5b of net cash which is nearly 30% of market cap. Management is shareholder friendly and targets an 80-90% dividend payout ratio.

Valuation

104 is trading at trailing multiples of 17x P/E, 10% FCF/EV, 10x EV/EBIT, and a 4% dividend yield. The valuation is a significant discount to regional and global peers, which mostly trade at 20-30x P/E (>100x in the case of LinkedIn) and FCF/EV of 3-7%. Therefore if 104 can accelerate revenue growth from the launch of new products and transform into a dominant career oriented social media business, there would appear to be plenty of scope for re-rating.

Risks

Taiwan Economy: As with any recruitment based business, 104 is sensitive to changes in the economy. The business typically grows at GDP+ rates but this also works in reverse. In 2009, operating profit declined 37% although it bounced back 73% in 2010. Taiwan’s economy appears relatively stable right now, although GDP growth is unlikely to be more than 2-3%. 104’s recent monthly revenue has continued to grow at a high-single-digit / low-double-digit year-over-year rate.

LinkedIn: LinkedIn may pose a threat over time to job listing businesses in the US and other countries. While we do see some challenges for LinkedIn to successfully localize the product in Chinese, this may not be an insurmountable hurdle. However, we think 104’s management is taking a proactive approach with 104+ to add social media aspects to the product to create additional stickiness with jobseekers. Given 104’s dominant positioning today, it may be very difficult for LinkedIn to gain significant traction in Taiwan in the future.

Catalyst

New product launches, cash generation and compounding of business