SEEK or FAKE?

In case you’re wondering what’s happened to SEEK today:

It’s this report by Blue Orca that doing the damage:

Seek Limited (ASX: SEK) (“Seek” or the “Company”) is an Australian-listed roll-up of online recruiting platforms. Even though its legacy platform in Australia (seek.com.au) is stagnating, Seek trades at 404x forward earnings because of the Company’s claims that its most important business, Chinese online recruiting platform Zhaopin, is China’s #1 player and growing rapidly. In FY 2020, Zhaopin accounted for 48% of the Company’s consolidated revenues, and was Seek’s only segment which reportedly grew revenues and profits.

However, our due diligence reveals that Zhaopin’s platform is inundated with fake postings by companies which were deregistered, in liquidation or flagged as “abnormal operations” by Chinese authorities. Companies we called about their job postings on the website even stated directly that the posts were fraudulent. Our due diligence also uncovered a whistleblower claim by a Chinese college student alleging that Zhaopin pays people to submit fake resumes.

We think Zhaopin’s platform is rotten, which is devastating for Seek’s prospects. Seek has historically paid a dividend, giving the false impression that its business produces healthy profits and cash flows. But these payments have been largely funded by debt. A serial acquirer, Seek has repeatedly tapped the capital markets to fund acquisitions, raising its Net Debt-to-reported EBITDA to 3.2x. By our calculation, Seek’s true leverage is much higher.

Rather than valuing Seek as a fast-growing online recruiting platform, we value Seek for what it is—a slow or no-growth platform whose core business is shrinking and which carries a dangerous amount of debt. Even if we value Seek’s Australian and nonChina businesses at a generous 20.5x EV/adjusted EBITDA, we believe Zhaopin merits a substantial discount. We value Seek at AUD 7.20 per share, a 69% downside from its last traded price.

1. Zhaopin’s High End Jobs Platform Lists Mostly Fake or Expired Posts. Highpin is Zhaopin’s online recruiting platform for high-end jobs with an annual salary above RMB 100,000. Prominently featured on Zhaopin’s website, Seek has implied that the platform generates tens of millions of annual revenues and that Highpin will be a key driver of Zhaopin’s growth in China. Yet our due diligence revealed that the vast majority of the posts on Highpin appear to be either fake or expired. Of the 3,000 postings for high-end jobs, 44% were expired. Of the remaining posts, many were posted either by companies in liquidation, companies with minimal operations, or companies designated by Chinese authorities as in non-compliance with regulatory requirements or in “abnormal operations.” One prominently featured company denied posting on Highpin and stated explicitly that the posts attributed to them were fake. Another company, which accounted for 12% of the posts on the high-end job platform, was already in liquidation before supposedly posting for 360 openings. This indicates that Seek has been overstating Highpin’s revenues and misleading investors regarding Highpin’s contribution to the Company’s growth.

2. Fake Resumes on Zhaopin. In 2019, a college student made detailed whistleblower allegations that Zhaopin paid people pretending to be jobseekers to submit fake resumes to jobs on its platform. The student admitted that he submitted 11,400 fake resumes in a month. Zhaopin denied the allegations, but our due diligence found several recent allegations by employers complaining that Zhaopin is so riddled with fake resumes that the platform is essentially useless. Together with evidence of fake job postings, allegations of fake resumes paint a bleak picture of the recruiting site. This suggests Seek has misrepresented Zhaopin’s growth and performance; and corroborates independent traffic data indicating Zhaopin’s relative popularity is plummeting.

3. Main Zhaopin Platform Inundated with Fake Posts. To vet Zhaopin, we designed an algorithm to scrape the main platform to determine which companies posted the most job openings. We analyzed the results for three, randomly selected, major cities in China where Zhaopin claims to be strongest. We then conducted due diligence on the top 100 companies in each city, as they accounted for a disproportionate number of job posts in these places. Many of the postings from the top 100 in these three cities were from companies which were deregistered, or whose operations were labelled “abnormal” by China authorities. We also found hundreds of posts from companies with no website or WeChat account – many of these businesses were simply uncontactable. In another instance, when we called, the employer denied ever posting for positions on Zhaopin and told us that the posts were fake. In other instances, users identified posts as fake.

This has two implications for investors. First, since the fake posts are supposedly posted by Zhaopin’s customers, we question the authenticity of Zhaopin’s reported revenues. Second, our study suggests that Zhaopin’s popularity will only continue to plummet. After all, why would a job seeker bother with a platform with so many fake posts?

4. Seek Misrepresents Zhaopin as the #1 Platform in China. Seek claims that Zhaopin is the number one employment platform in China. Yet we reviewed the QuestMobile data and it shows otherwise—not only is Zhaopin’s popularity similar to 51job’s, but Zhaopin lost its leading position to BOSS Zhipin (“BOSS”) in August 2019. By August 2020, BOSS’s monthly active users were 60% greater than Zhaopin’s, indicating Zhaopin is nowhere near the #1 platform in China.

5. Profits Inflated by Questionable Non-Cash Gains and Aggressive Accounting. On paper, Seek appears profitable. But look closer and such paper profits were facilitated by dubious non-cash gains and questionable step-up transactions with related parties. From FY 2015-2018, Seek reported cumulative fair value gains of AUD 336 million. Except for FY 2016, non-cash gains made up 26-41% of Seek’s annual profits.

a. Maimai. In FY 2018, Seek recognized a non-cash gain of AUD 59 million on its investment in Maimai, a China-based career and social-networking platform. This gain made up 34% of Seek’s reported profit that year. According to Seek, Maimai’s valuation increased 4x in 180 days from the time of its initial investment. Seek claimed Maimai was worth USD 250 million in November 2017, but worth USD 1 billion six months later when it completed a subsequent round of fund raising. Yet this valuation is directly contradicted by Maimai’s CEO, who stated unambiguously that Maimai was already worth nearly USD 1 billion at the time of Seek’s initial investment. Rather than quadruple in value, Maimai was already nearly a unicorn when Seek invested. In our opinion, Seek simply conjured 34% of its profit by inappropriately recognizing a non-cash gain on investment.
b. Step-Up Transactions. Seek has also recognized non-cash gains from a particularly dubious accounting trick: step-up transactions; in which Seek marks up the value of its initial investment when it increases its stake in a portfolio company. Since Seek is the buyer, the Company has full discretion to inflate the price of its subsequent investments. This appears particularly questionable with respect to Seek’s step-up transaction in Online Education Services. Not only did OES’s profitability decline immediately after the transaction, but Seek’s current chairman was affiliated with the seller.
6. Misleading EBITDA: apples-to-oranges. Seek is usually compared to 51job, a US-listed operator of a Chinese online recruiting platform. But the comparisons mistakenly rely on Seek’s reported EBITDA, which excludes significant capitalized software development costs and fails to back out minority interest. For valuation, we believe investors must adjust Seek’s EBITDA for both. On an apples-to-apples basis, Seek is currently trading at 47x NTM EV/EBITDA and its net-debt-to-EBITDA ratio is a toxic 4.8x. This shows not only that the Company is significantly overvalued compared to other online recruiting platforms like 51job which do not capitalize such software costs, but also that Seek is dangerously over-levered.

Seek is a roll-up of flat-growth online recruiting platforms and a supposedly fast-growing Chinese platform, Zhaopin, which Seek claims is the #1 player in China. We think this picture is false. Rather, our investigation suggests that Seek is a flat-growth Australian platform rolled up with a fading Chinese online recruiting platform besot by fake resumes and fake job postings.

Rather than valuing Seek as a fast-growing online recruiting platform, we value Seek for what it is—a slow-growth platform whose core business is shrinking and that carries a dangerous amount of debt.

To value Seek, we use a sum-of-the-parts methodology. We assign Seek’s legacy Australian and non-China businesses a generous 20.5x EV/EBITDA multiple, the same multiple at which 51job is being taken private. However, we think Zhaopin is worth far less.

There is overwhelming evidence that Zhaopin is a fading platform inundated with fake job postings and fake resumes.

This is likely to have a compounding effect on the already declining popularity of the platform. The more fake resumes on the site, the fewer employers will pay to post. The fewer real employers, the more fake posts will appear, further driving away job seekers. This will likely beget even more fake resumes, creating a vicious downward spiral.

Not only does our due diligence suggest that Zhaopin has been misrepresenting the activity on its platform to investors, we believe that the volume of fake resumes and posts requires at least a 30% discount on the valuation multiple of the Chinese platform.

Unlike 51job, Seek excludes development costs and minority interest in its reported EBITDA. To make the comparison flush, these two items should be deducted from EBITDA when valuing the Company. The two items contributed AUD 156 million to Seek’s reported EBITDA in FY2020 and an estimated AUD 134 million in FY2021.1

After adjusting for the estimated capitalized development costs and Zhaopin’s minority interest, we estimate that Seek’s NTM EBITDA will be AUD 196 million. We value Seek at AUD 7.20 per share, a 69% downside from its last traded price.

We consider this valuation to be very conservative. Seek’s guidance for net profit after tax is AUD 20 million in FY 2021. Even if we generously apply a 100x NTM P/E multiple to its guided EPS, Seek’s shares would be worth only AUD 5.67 per share.

In our opinion, Seek’s shares are grossly mispriced. Nor should Covid-19 provide any cover. Seek’s Chinese business should have already emerged from the worst effects of the virus in its last fiscal year (ending June 2020), as the virus had retreated by then in China. We have no doubt that Seek will blame the virus for its terrible results. But investors should not be fooled: our examination of its primary Chinese platform shows the rot preceded the pandemic.

David Llewellyn-Smith
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