As far as the human services industry is concerned, choosing to go public in the US now doesn't seem like the best choice.

Using data, with Zhilian Recruitment, 58 Tongcheng, and Worry-Free Future, which once flourished in the US stock market, were privatized and delisted one after another, there are now almost few Chinese enterprises related to human resource management that are listed in the US. Currently, only the Internet recruitment giant BOSS directly hires. However, now that Rokos has moved to the NASDAQ, there is clearly no shortage of suspicions that it is “going against the water.”

On October 19, the International Cooperation Department of the China Securities Regulatory Commission issued a notice on the overseas issuance and listing of Rokos Technology Co., Ltd. (“ROKOS”). It plans to issue no more than 3,535,000 common shares and list them on the US NASDAQ stock exchange.

It is worth noting that in June of this year, Rokos once again updated its prospectus, increasing its IPO funding scale. It plans to issue 3.1 million shares at a price of 6-7 US dollars each, raise 20 million US dollars, and plan to go public on the NASDAQ IPO, with the stock code LGCL. The company publicly disclosed its prospectus at the US Securities Regulatory Commission (SEC) in early March this year. The stock code is LGCL, and it plans to be listed on the US NASDAQ IPO. It was previously listed on the China New Third Board in 2016, and later removed from the New Third Board in August 2018.

As the saying goes, “go against the water, if you don't advance, you retreat”. In a context where central and central enterprises in human resources management choose to privatize and delist one after another, Rokos chose to go against the current trend. What are the plans behind it? Also, can it ease hidden concerns about the company's fundamentals?

The problem of “increasing revenue without increasing profit” needs to be solved

Established in 2011, Rokos is a digital and intelligent human resources management service provider dedicated to the entire process of human capital management.

In 2019, the company launched the online platform Columbus, which allows the company's users to recommend job opportunities to their acquaintances in a private social network they trust. In 2022, the company further launched StarCareer StarWorkplace, a PaaS platform that allows the company's users to recommend job opportunities, health-related products, and training services to their acquaintances in a private social network they trust. As of December 31, 2022, there were approximately 431,220 active registered users on Star Career and Columbus.

Looking at industry status, as of June 30, 2022, based on the number of active users and total net revenue in the human resources industry, Rokos is the largest provider of technology-driven online agent-centered human capital management services based on PaaS in China.

Thanks to the establishment of its position in the industry, Rokos's revenue scale has continued to expand in recent years, showing the characteristics of steady growth.

According to the prospectus, in 2021 and 2022, the company's revenue was 652.2 million yuan (RMB, same below) and 766.6 million yuan respectively, an increase of 17.5% over the previous year.

Looking at the split business structure, Rox' main business showed two main trends — that is, the share of revenue from recruitment services declined sharply, while outsourcing services and other services continued to grow.

In 2021 and 2022, the company's recruitment service revenue was 497 million yuan and 413 million yuan respectively. The revenue share fell sharply from 76.3% in 2021 to 53.9% in 2022. Despite the decline in revenue from the recruitment business, the company's outsourcing services and other services have both increased in revenue and revenue share. During the period, the company's revenue from outsourcing services was 114 million yuan and 302 million yuan respectively, and the revenue share increased from 17.4% in 2021 to 39.4% in 2022; revenue from other services was 409.85 million yuan and 51.634 million yuan respectively, and the revenue share increased slightly to 6.7%.

As can be seen, although the share of revenue from recruitment services has declined, thanks to the sharp increase in the share of revenue from outsourcing services and other services, Roxos's revenue has shown an upward trend.

However, even though the scale of revenue continues to expand, Rokos has shown a state of “increasing revenue without increasing profit.” In 2021 and 2022, the company's net profit was 39.83 million yuan and 36.411 million yuan respectively, down 8.5% year on year. The reason for this is related to the company's sharp increase in operating expenses. During the reporting period, the company carried out a series of promotional activities to further promote its Star Career and Columbus platforms to achieve growth in new users and customers. This led to a year-on-year increase of 68.1% in the company's sales expenses.

As net profit declined, Rokos generated negative cash flow from operating activities. For the year ended December 31, 2022, the company's operating activities generated negative cash flow of RMB 15.1 million. Furthermore, the company also indicated risk in its prospectus that in the future, as it continues to develop and expand its business, especially investing heavily in R&D, the company may incur operating losses in the foreseeable future.

While profits have declined sharply, it has also generated negative cash flow. The intention of Rokos to go public in the US this time is clearly self-evident.

The industry can be expected and there is no shortage of pressure to survive

In recent years, with the increase in the number of Chinese enterprises, the market demand for human capital management services (hereinafter referred to as “HCM services”) has also increased.

In terms of revenue, the market size of professional HCM services in China increased from 89.4 billion yuan in 2017 to 16.4 billion yuan in 2021, with a compound annual growth rate of 15.7%. In the future, driven by technological progress and the impact of the epidemic, the digital transformation process of enterprises will accelerate, and the size of the digital HCM market will grow rapidly. This in turn will expand the overall market size of professional HCM services in China. In 2026, the revenue of the professional HCM market is expected to increase to RMB 367 billion. Compared with 2021, the compound annual growth rate is 18.0%.

Moreover, the professional IT outsourcing market is growing year by year, benefiting from the growth of China's domestic demand market, the deepening of strategic cooperation between international manufacturers and domestic IT service outsourcing companies, and the heightened awareness of outsourcing among Chinese enterprises in the process of upgrading the industrial structure.

According to prospectus data, the market size of China's professional ITO market (or “IT outsourcing”) increased from 409 million yuan in 2017 to 635 billion yuan in 2021, with a compound annual growth rate of 11.7%. It is expected to further increase to 117 billion yuan in 2026. Compared with 2021, the compound annual growth rate is expected to be 13.0%.

The promising prospects of the industry do not mean that Roxos can “do it once and for all” in the industry; the increasingly fierce competition pattern may become a “roadblock” for the company to vigorously seize market dividends.

Back to the current competitive landscape of the industry, in the human resources management industry, the market share of the three leading companies, Worry-Free, Boss Direct Recruitment, and Hiring, accounts for 70% of the entire online recruitment industry. Furthermore, there are also “veins” that emerged from the social racing circuit in the workplace, “quick recruitment”, a blue-collar recruitment platform launched by Kuaishou, and “quick recruitment” with live streaming recruitment as their core competitiveness. After the brand renewal, “rush to gather and direct recruitment” followed the lead.

In this “wolf before, tiger after” competitive environment, it is not easy for Rokos to attract and retain a large number of users. In response to this, the company also confessed in its prospectus that the company's growth depends on its ability to attract and retain a large number of users. Users can usually decide to stop using the company's platform at any time, so failure to maintain existing customers or attract new users may have a significant and adverse impact on its business.

Overall, there are hidden concerns about internal fundamentals and an external competitive pattern. Under multiple clashes, if Rokos wants to achieve more benign growth, it certainly needs capital and resource support, and this is probably also an important reason why Rokos chose to go public in the US to demand double support from the capital market.