The money-losing online recruitment platform has filed for a Hong Kong listing, even as it operates with negative cash flow

Key Takeaways:

  • With cumulative losses of more than 540 million yuan in the past three and a half years, Youlife International has filed for Hong Kong IPO
  • The company is trying to reduce its reliance on employee management services and expand in higher-margin vocational education

By Fai Pui

China’s sudden pivot from “zero Covid” could provide a much-needed reboot for the country’s embattled labor market now swollen with millions of newly unemployed, especially among the nation’s youth. But a disconnect between lower-skilled workers the market needs, rather than the abundant college grads now looking for jobs, could make it hard to satisfy employers.

One company that looks well-positioned to seize on demand at the lower end of the market is Youlife International Holdings Inc., whose name has “blue collar” written all over it and filed last week for a listing in Hong Kong. The company offers not only recruitment services for blue-collar workers, but also bills itself as China’s largest provider of secondary vocational education training management services.

According to its prospectus, Youlife provides a wide range of services focused on blue collar workers, including vocational education, talent recruitment, employee management and marketing services for students, blue-collar workers and corporate clients. The company portrays itself as a one-stop shop providing services spanning every aspect of the blue-collar worker’s career.

China’s manufacturing industry currently suffers from a serious worker shortage, especially in skilled trades. Auto mechanics, welders, assembly and instrumentation workers and automobile production line workers were among the top 20 on a list of the “100 occupations with the greatest worker shortages” released by China’s Ministry of Human Resources and Social Security in November.

China had 576 million non-farm workers last year, with blue-collars accounting for 68.7% of that, according to China Insights Consultancy. With such big numbers, the blue-collar lifelong services industry is expected to grow at a compound annual rate of 13.3% from 2021 to 2026, and will exceed 2 trillion yuan ($287 billion) in 2026.

At first glance, Youlife looks like it should be a superstar due to its positioning to capitalize on such growth. With revenue of 670 million yuan from blue-collar lifelong services last year, the company ranks first in its class nationwide. But the market is highly fragmented and intensely competitive, with the top five companies generating only 2.6 billion yuan in annual revenue, or a tiny 0.22% of the overall market.

Pandemic hit

Despite its seemingly good potential, Youlife’s financials tell another story. Its revenue has grown over the past three years, though hardly at a breakneck pace, rising from 665 million yuan in 2019 to 738 million yuan last year. But then things stalled this year as the figure fell 21.4% year-on-year to 304 million yuan in the first half of 2022. Tough Covid control measures that restricted the movement of customers, blue-collar talents and students were mainly to blame for the sudden decline.

A deeper dive into Youlife’s portfolio shows employee management services is its major money spinner, accounting for 77% to 92% of revenue in the past three years. But the situation shifted in the first half of this year, mainly due to a 37% year-on-year drop in revenue from the segment to 206 million yuan, reducing its share to 67.8%. At the same time, revenue from the other two major businesses, vocational education training and HR recruitment services, were on the rise.

Growth from its smaller revenue sources makes Youlife more diverse, but has yet to translate to its bottom line. The company has accumulated combined losses of more than 540 million yuan over the past three and a half years, including a 118 million yuan loss in the first half of this year, more than triple the loss a year earlier. It’s also worth noting the company’s operating cash flow has been negative for the past two and a half years, leaving it with cash and cash equivalents of just 442 million yuan at the end of June, down nearly 30% year-on-year.

The ongoing cash outflows owe partly to the company’s own high personnel costs. In the past three years, its cost of sales was equal to 99.6%, 90.5% and 78.4% of total revenue, respectively, with the vast majority coming from salary costs related to its outsourced services. The company indicated it’s trying to control such costs, which are on a downward trend for now. But it said they will remain its most significant operating expense going forward. That means such costs will almost certainly continue to rise in absolute terms, especially as the company looks to expand.

Such expansion is listed in Youlife’s prospectus as one of the uses for proceeds from the listing, along with spending on IT infrastructure upgrades and general operations to seize on opportunity created by China’s post-Covid economic reboot.

Despite its money-losing ways, Youlife hasn’t had much difficulty attracting investors. The company has completed six financing rounds since 2016, raising about 1.3 billion yuan, from shareholders including Hangzhou Electronic Soul, a subsidiary of Hangzhou Electronic Soul Network Technology (603258.SH); Anhui Shangqu Play, a subsidiary of 37 Interactive Entertainment Network (002555.SZ); Haining Zhongnan and New Oriental Fund. Its latest valuation stood at up to 3.3 billion yuan.

That gives Youlife a price-to-sales (P/S) ratio of about 5.4 times, lower than internet recruitment platform Kanzhun’s (BZ.US) inflated 13.3 times. But Kanzhun, known in China for its Boss Zhipin service, may merit the higher valuation given its profitability since last year.

Vocational education focus

In addition to its blue-collar recruiting services, Youlife also runs a vocational education business that could benefit from Beijing’s strong official policy support for that sector. The company used to provide such services using an asset-light model, mainly by helping local governments to manage vocational schools. But it became more serious in June last year with its acquisition of Tengfei School, a vocational college in Hefei, capital of Eastern China’s Anhui province, as its first self-operated school.

Such vocational education services have continued to rise in recent years as a percentage of the company’s revenue, accounting for 11.2% in the first half of this year, nearly doubled its 6.3% contribution a year earlier before the acquisition. The business clearly has big potential. Such educational services have the additional advantage of acting as a breeding ground for the company’s other services, forming a sort of ecosystem centered on the blue-collar talent chain.

In fact, Youlfie’s core employee management services have long been one of its least profitable businesses, with gross margin of just 12.7% in the first half of this year. By comparison, its vocational education training services had a gross margin of 41.3% in the same period.

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