SEEK braces for $110m sales cut in China

With offices and factories closed across parts of China to try and keep the virus Covid-19 at bay, companies are more occupied implementing annual leave plans than recruitment.

It is a situation that leaves Melbourne-based SEEK (ASX: SEK) very exposed, as before the outbreak it was expecting half its revenue to come from Chinese job site Zhaopin.

In FY19 Zhaopin generated $647.9 million in sales out of a $1.54 billion total, following sales growth of 38 per cent for the Chinese business buoyed by a substantial reinvestment of profits back in the business.

In a statement today, SEEK explained short-term forecasting for Zhaopin was "extremely challenging" given the uncertainties around the duration and severity of impact from the coronavirus.

If billings end up 30 per cent lower than expected for March and April, followed by a recovery in May and June, then SEEK estimates revenue guidance could be slashed by $110-120 million.

Under the same scenario, EBITDA guidance would fall by $40-45 million and NPAT would be reduced by approximately $25 million.

"Our near-term results will be impacted by the Coronavirus, softer economic conditions and our investment bias," says Seek CEO and co-founder Andrew Bassat.

"It is impossible to forecast the impact of Coronavirus but we have provided a set of assumptions to help assess the negative flow through on our FY20 financial performance

"Due to these factors, we are significantly under-earning relative to our true earnings potential."

He says the group will continue prudently investing through the cycle, based on the belief the long-term pay-off will be significant.

"Over time we expect China and the rest of the world to return to more normal conditions, and are confident that our long-term strategy and aspirational targets remain intact. In the long-term our strategy and investment bias will grow SEEK's defensibility and profitability," he says.

In the first half, Zhaopin's revenue rose 27 per cent while investment continued in product & technology as well as data & artificial intelligence.

"Zhaopin's strong revenue result was driven by adjacent revenue growth which offset weaker demand for online services," says Bassat.

"Despite reaching a 'Phase One Trade Agreement' with the US in January 2020, near-term conditions in China are likely to remain challenging given the recent outbreak of the Coronavirus.

"Irrespective of the weak short-term economic conditions, our focus is to invest and innovate to capitalise on a significant opportunity in what we expect will be the world's largest human capital market. If we do this well significant value can be unlocked."

Meanwhile, SEEK Investments has increased its guidance for losses from $45-50 million up to $55 million, due to new investments such as jobandtalent and strong momentum in existing ventures that have given management the confidence to put in more capital.

"Across AP&A [Asia Pacific & Americas] and SEEK Investments, we will invest aggressively into high growth initiatives within our market leading businesses," he says.

Overall, SEEK reported a 16 per cent increase in revenue for the first half of FY20 at $875.5 million, while the aforementioned aggressive investments led to a 24 per cent decline in net profit after tax (NPAT) to $75.6 million.

"SEEK is investing and innovating to go after a A$5 billion aspirational revenue opportunity by FY25 and we made strong progress against this aspiration in the last six months," says Bassat.

"We achieved a good overall revenue result in challenging economic conditions, with our earnings and profit results reflecting a deliberate focus to invest in initiatives that are expected to significantly increase our long-term value.

"Subdued conditions in Australia and Hong Kong negatively impacted our financial results. Our results will fluctuate somewhat with the cycle but in the areas we can control we are pleased with our progress.

"ANZ and Asia delivered strong depth results, good progress was made to integrate ANZ and Asia, and ANZ changed their subscription contracts to achieve a more flexible and equitable marketplace."

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