The Capital Cycle Podcast - Job Lot on Sale

Episode Date: December 23, 2025

The rise of Kanzhun’s online recruitment business, Boss Zhipin, in China. Edward Chancellor talks Kai Chen, an Emerging Markets Analyst.For more information, or to access select articles from Marathon’s Global Investment Review publications which accompany this podcast series, please visit www.thecapitalcycle.co.uk Hosted on Acast. See acast.com/privacy for more information.

Hello, this is Edward Chancellor with another episode of the Capital Cycle podcast. And I have with me, Kai Chen, who is an analyst with Marathon on its emerging markets portfolio. So welcome again, Kai. Thanks for having you, Everett. So we seem to be talking, or at least when I talk with your colleagues, the subject of network effects come up a lot on the Capital Cycle podcast. And in a recent podcast, I talked with your colleague Ben Slingsby about the network benefits enjoyed by European grid operators. And now we're going to go to the other side of the world.

And you're sitting as we speak in Hong Kong. We're going to discuss the network benefits enjoyed by a Chinese online recruitment business that you write about. You start your recent piece with what seemed to me a pretty good definition of what we mean by network. effects. Can you give me that? Yeah, it's actually a quote from Michael Mabuzin, but for a network effect at its core, it exists when a product or a service becomes more valuable to its users as more and more people use it.

Once network effect is reached, it becomes very difficult for the users to switch to another platform. A network's effects were discussed by another of your colleagues earlier this summer with regard to the Japanese car auction business. Yeah, just a few months ago, Toma wrote a piece to talk about a dominant use car platform in Japan that really thrive on network effect. And if you look at the last 10 years, this used car platform has exerted significant pricing power to increase pricing and improve margin.

So that was quite impressive by leveraging the network effect. And you write that one of the best predictors of company's ability to compound its long-term returns. is the gap between what you call value creation and value extraction. Can you explain that a bit? The whole idea here is that when there is a large gap between value creation and value capture, then there's a lot of room for the company to create shareholder value over the medium to longer term. You say the value gap is associated with network effects. They don't have to, but they can come hand in hand.

And when you combine both of these concepts together and find a company where the network effect is just starting to emerge and the platform is at the very early stage of monetization, then you're potentially looking at an attractive investment opportunity for the long term. And this is because at the point where the platform is creating far more value than it captures, the network effect will also enable the company to exert significant. power and capture an increasing share of that value creation. And you've identified, you believe, a Chinese company that enjoys both a network effect with a positive value gap. Earlier this year, we got interested in this company called Kan Zhen. It is the company behind Boss Ziping, which is an online recruitment platform in China. We believe that the company is possibly at a critical juncture where the number.

network effect is just starting to emerge and the platform is creating far more value than it captures. And can you explain in a bit more detail the network effects on online recruitment platforms? Yeah, sure. These online recruitment platforms tend to exhibit strong network effect because the more job postings you have on the platform, the more job seekers it attracts, which in turn draws more companies to post jobs creating this virtual cycle. Similarly, the platform, when the platform accumulates more data, job matching recommendation naturally improves over time with better data, thereby enhancing the user experience. And this would also naturally attract more users and create the additional data that sustain the flywheel. And you describe an Australian

business in the online recruitment world that is showing, these network effects you talk about? Yeah. So this company is called Seek. We believe it's a very good study here. It is the most dominant online recruitment platform in Australia. The company actually has many different business segments. But if we just zoom in on its Australia and New Zealand subsidiary,

where it has already established that network effect in online recruitment, we can see that its revenue compounded at 12% annually over the past decade. while EBITDA margin was consistently over 50%, creating a ton of value for the company. Interestingly, almost all of that growth and value creation came from average selling price increase. Volume contribution during this period was actually quite limited. This demonstrates that the online recruitment platform can have strong pricing power once network effect is established. So tell me, how does boss Xi Ping compared to? The biggest difference here is where the two companies sit in their life cycle. For SEK,

it already reached that critical scale many years ago. In the past 10 to 15 years, it has exerted a lot of pricing power and dowling up the monetization levers to capture an increasing share of that value creation. Whereas for BOSS Zipin is still at a very early stage of that monetization journey, Just to give you a sense of the growth one way, currently only about 30% of Boss Zipin's job postings are actually monetized. For a mature platform like Seek in Australia and New Zealand, the monetization rate is 100%. And for the job posting that Boss Zipin does monetize, the price is only 100 R&B per month. That is less than 1 15th of what Seek charges in Australia, even if you adjust

for the wage differences between the two regions, the gap is still massive. Lastly, Sikh is considered quite mature in terms of the online recruitment market in Australia. That's why in the last 10 years, you didn't have that much volume growth. But for Boss Zipin, management still believes that it can double the user base over the medium to longer term. Basically, for Boss Ziping here, what we have is a platform where each of the three main growth jobs, drivers can double. And if you have something that is 2x times 2x times 2x, that's the potential for the company's revenue size to increase by 8 times over the longer term. So can you say that Bosch-Gipin is doing well because it's disrupting the existing online

Chinese recruitment businesses by offering a better value proposition? Yeah. In a traditional job portal, normally what you would do, is to upload a resume into a black hole and pray for the HR to call you at some point. In contrast, Boss Ziping actually offers a direct chat function that enables the job seekers to directly contact the hiring managers and the business owners who are the actual decision makers in this hiring process. Even if they don't reply, at least you know they are not interested and you can just move on. For the hiring companies, instead of waiting weeks for the HR department to screen a pile of resumes, the hiring managers can actually take control

through a feed-based recommendation very similar to TikTok. They receive many profiles of candidates that best match the job requirements. The hiring managers can then immediately initiate a chat with the candidates to gauge their interest and fit, and these often quickly turn into formal interviews within days. And this process is much more efficient than the traditional job portals. The feed-based recommendations are powered by AI and big data analytics. You don't search for jobs and companies don't search for candidates. The algorithm will handle that for you.

Furthermore, the direct chat functionality removes the middle layers that existed between the job seekers and the hiring managers in the past, making the process much more efficient. And so you say they can bypass HR, which in my book is always a good thing. You say that also that BOS Xi PIN's innovative approaches is helping it gain market share. Yeah, these differentiations have definitely made BOS Zipin the clear market leader in China. The company was actually launched in 2014, so it's still a relatively young company. But for the last 11 years, through the differentiated business model, it has captured massive amount of market share. Now it commends over 50% share in daily active users and that

share continue to expand and the competitors are just gradually losing relevance over time. And Kai, competitors are starting to suffer as one would expect when network effects reach critical scale. Yeah, from market data, we are already seeing that the smaller companies are losing market share. All of these competitors are no longer listed, but see, Hs 23% of Ziliang Zao Ping, which is the second largest online recruitment platform in China. Through the limited financial disclosure from Sikh, we can see that Zhao Ping's revenue has declined every year since 2020, and its margin has collapsed over the years, and it's now barely profitable. And this is exactly what you wanted to see.

It's a good sign because it demonstrates the network effect. It's working as magic. So, Kai, you believe that as Boss Xipin's network effects become more and more evident, they will be able to extract more money to monetize, as you call it, the transactions. Yeah, in the early days, Boss Zipin primarily focused on gaining users and market share without really worrying about monetization. In recent years, it has reached that critical scale. so it started to gradually monetize more and more. In fact, the company turned profitable two years ago,

and the margin continues to expand today. As we mentioned before, there's a great potential for the company to increase the revenue size significantly over the longer term, and during this process, the company is going to create a lot of value. And through better monetization, the company will be able to capture an increasing share

of that value creation. also. Now, Kai, investors expect to pay up for network effects. That's what we all know. But you argue that Bosch-Sheepin is, in fact, very reasonably priced for a business that is exhibiting network effects and what you call the flywheel. Can you talk through the valuation? Yeah, the stock is currently trading on only 20 times PE with 6% free cash for yield. Net cash represents over 30% of the market cap and management has been actively buying back share. So we believe valuation is quite reasonable and given there is a large potential for the company to increase this revenue with margin expansion and at the same time generate a whole bunch of cash flow, we don't think

the valuation currently is discounting all that long-term positives into the share price. Now there's a catch. Western investors can only buy. this stock through that curious Chinese corporate structure known as a variable interest entity, which doesn't give them ultimate control over the firm's assets. Investing in variable interest entities or VID does come with regulatory and geopolitical risk. However, today, for an investor who wants to invest in China, it's really difficult to avoid these variable interest entities because some of the best and most dominant businesses in China continue to have a VIE structure. These include Tencent, NetEase, Maytuan, Chip.com and more. That's the reality that

it's just very difficult to bypass the VIE structure altogether. One of your colleagues wrote about the VIE structure a few years back. Were they writing at the time when the Chinese online tutorial businesses? had had the rug pulled from under their feet by Beijing. Was that the concern? As far as I remember, some of these VIEs, they plunged to zero in very short amount of time. Yeah, my colleague Alex Duffy, wrote a piece

exactly around the time that you described. At that time, indeed, the education sector was basically wiped out, but it's less to do with the VIE structure and more to do with the government policy to completely ban after-school tutoring. But from time to time, you do have these concerns arising because the VIE structure essentially is a way to bypass Chinese government's ban to invest in restricted sectors. So there's always that uncertainty that that will be an overhang for these stocks.

But in the case of Bosch-Sheeping, you're relatively sanguine. You don't think Beijing is going to ban online recruitment. and you think that the VIE structure is relatively robust. Or put a different way that the interest of Western investors, shareholders, the company is aligned with their interests. Maybe if we take a step back. In Alex Duffy's piece, he talks about a good VIE and a bad VIE. In a good VIE set up, most of the profit and cash flow actually take place at the foreign entity,

not at the VIE entity. So the investors can readily access the cash. In a bad VIE setup, the cash is trapped inside the local variable interest entity company. So it's incredibly difficult and tax inefficient to get the cash out. Unfortunately, currently, Cungent is in that bad VIE bucket. Most of the profit and cash flow generation are still occurring in the local VIEE entity. However, we remain constructive because we're talking with the management, it seems that management is well aware of that issue and they are committed to improve the VIE structure. Furthermore, the CEO has significant personal holdings in the U.S. listed shares with a VIE structure.

And at the same time, there's wide equity ownership across the company investing in the same structure. In that sense, there is decent alignment here that the management will fix the structure. We are watching this very closely, but we believe that management will do the right thing. So can I give me, in summary, the elevator pitch? So Kanjin exhibits an emerging network effect where value creation far exceeds value capture. There is a long growth runway here that allows revenue to scale up significantly. and in the process drive operating leverage and margin expansion. What's really nice about this is that all that growth is self-funded.

The company runs a huge negative networking capital hold so that its free cash flow generation actually accelerates as the business expense. This combination of duration and cash generation creates a compelling long-term investment opportunity for the patient investor. Great. Thank you very much, Kai. Thank you, Robert. Thank you for your time today. I hope you will listen to the next edition of the Capital Cycle.

This communication is provided for information purposes only. Please refer to Marathon's website and the Global Investment Reviews for further information, including important disclosures.