BridgeHR files for Hong Kong IPO

China’s largest supplier of temporary employees is hoping to tempt investors with ‘its gig economy’ story, even as it relies heavily on one major customer

Key Takeways:

  • BridgeHR has filed for a Hong Kong IPO, with plans to explore senior caregiving and domestic helper services, as it looks to diversify beyond the delivery industry
  • The human resource company’s overwhelming dependence on a single customer poses a key risk for investors

  

By Edith Terry

As a young man, Hou Zhengyu, who harkens from a small town in Hongze county of Jiangsu province, was focused on owning an 80-square-meter apartment in Shanghai and marrying a Shanghainese woman. A fresh break-up in the early 2000s had sent him from his hometown to China’s commercial capital where he found work as a safety inspector at a local shipyard.

When the labor department from his hometown asked him to help place workers with foreign companies in Shanghai, he seized on the opportunity, using an aging bicycle and pager as his main work tools. In 2004 he acquired his first company, Shanghai Zhengdong Human Resources Co., from the Shanghai Pudong Labor Department. That would become the nucleus of his current company, BridgeHR Tech Group Inc., which two decades later has filed for an IPO on the Hong Kong Stock Exchange.

BridgeHR bills itself as China’s largest “alternative HR management” firm with 13.2% of the alternative workforce platform sector in 2022, making its money by placing temporary workers with employers, according to its preliminary IPO prospectus filed late last month. The company plans to use funds from the IPO to expand beyond its current business of mostly providing temporary workers in the delivery services industry, to also providing caregivers for the elderly and domestic workers, the prospectus says.

In his early days, Hou filled an important niche by supplying vocational school graduates to foreign factories that were setting up shop in coastal cities in the mid-2000s as China earned its place as the “world’s workshop.” He has gradually expanded to providing other types of workers as well, from temporary employees for back-office tax services to helping to staff industrial parks.

Hou’s story highlights the increasing role of freelance workers, often called the “gig economy,” that are increasingly popular in China and around the world. Such workers are cheaper for employers because they don’t require benefits and are only used when needed. Such workers also give employers more flexibility than hiring full-time workers.

Commissioned third-party research in the preliminary prospectus shows the Chinese market for HR services providing such alternative workers more than tripled from 283 billion yuan ($39 billion) in 2017 to 889.8 billion yuan last year. By comparison, the overall industry for HR services roughly doubled from 1.7 trillion yuan to 3.5 trillion yuan over the same period. As suppliers of alternative HR services, BridgeHR and its peers look well positioned to cater to booming demand for temporary workers that are their specialty.

Rival employment service providers like Kanzhun (BZ.US, 2076.HK), which focuses more on white-collar jobs, saw its profit rise 10-fold last year, spotlighting the market’s big potential. But another firm, Tongdao Liepin (6100.HK), saw its profits tumble last year on falling revenue, also highlighting the stiff competition. Kanzhun and Tongdao Liepin could also offer some cautionary lessons for BridgeHR on the perils of being publicly listed, since both stocks are down significantly from their IPO prices in 2021 and 2018, respectively.

Despite the big potential for the broader HR services market, BridgeHR has its own clear weaknesses. One of the biggest of those is its revenue mix, with a single, unnamed customer providing more than 85% of its total in each of the last three years. That customer provided on-demand workers for the delivery services industry.

Bumpy revenue ride

BridgeHR’s revenue has been on a bumpy ride these last three years. It reported revenue of 948 million yuan last year, down 7% from the roughly 1 billion yuan in 2022 but not far off its 2021 revenue of 987.5 million yuan. 2022 was a slight anomaly, as it benefitted from a spike in demand during the pandemic as people were frequently confined to their homes and forced to rely on deliveries for many of their daily needs. The spike in demand that year helped to boost BridgeHR’s profit to 51.4 million yuan in 2022, though the figure fell to 31.9 million last year as more normal conditions returned.

During the last year of the pandemic the company also enjoyed a spike in its gross profit margin, which rose nearly 3 percentage points to 15.1% in 2022, before falling back to a more typical 12.7% last year.

The 2022 Covid boost aside, BridgeHR’s revenue and profit declines last year were also influenced by a spate of legal disputes involving mainly delivery riders, which led to higher compensation for those workers last year.

The company’s cost of revenue comes overwhelmingly from driver-related fees, which totaled between 828 million yuan and 868 million yuan annually over the last three years. Of that, about three-quarters went to commissions paid to delivery riders. Staff costs for BridgeHR’s own 300 employees were far lower, averaging around 80 million yuan over the last three years.

The company has been largely self-sufficient in recent years, raising the equivalent of just about $15 million in 2021 and 2022 by selling preferred shares to three investors that valued BridgeHR at just over 1 billion yuan, according to the prospectus.

Despite challenges created by China’s slowing economy, BridgeHR looks well positioned to benefit from growing demand for increasingly popular delivery services that provide Chinese consumers with everything from e-commerce products to takeout meals. China’s express parcel delivery services index was up by 26.7% year-on-year to 329.6 in the first four months of this year, according to the State Post Bureau, indicating that consumer demand for delivery services might be picking up.

BridgeHR’s IPO application doesn’t include any fundraising targets, and, based on past experience, the company may be just testing the waters to gage investor demand for its shares. Its Suzhou Offer subsidiary listed on China’s over-the-counter National Equities Exchange and Quotations (NEEQ) market in 2016, only to de-list a little more than a year later.

In terms of valuation, we could look at price-to-sales (P/S) ratios from Tongdao Liepin’s 1.77 to Kanzhun’s 9.61 to get an idea of how BridgeHR might be valued if it makes it to market. A P/S of 5, placing the company midway between those two peers, would give it a market cap of 4.7 billion yuan, well ahead of the 1 billion yuan it was valued at during its last fundraising in 2021/2022. That’s not bad for a company founded by a small-town boy with large ambitions.

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