We expect FY24 revenue to grow 14%YoY and see a sequential recovery led by core HRM and some pick up in recruitment modules. Better competitive environment should also set Beisen up well for FY25 growth. Reiterate OW.

We forecast 2H FY24 revenue to grow 14%YoY:

We expect ARR (annualized recurring revenue) to grow 16.3%YoY in FY24 to reach Rmb756mn driven by solid growth form Core HRM (Human Resource Management) and growth pick up in recruitment modules. Despite similar revenue growth in 1H and 2H at 14%, we expect ARR growth to have accelerated meaningfully from 5% to 16% in the same period, which better reflects the underlying demand trend. Business momentum saw improvement in CY24 with new bookings and ARR accelerating sequentially. Ex-SBC gross margin should further improve by ~6ppt to 65% for the full year. We expect ex-SBC opex to decrease 23%YoY as total headcount was reduced to ~1,800 from 2,215 in FY23. As a result of cost control, we expect adjusted net losses to narrow to Rmb149mn.

Easing competition:

We think the competitive environment in the HR software space improved in 2023 after an industry downturn and less private equity financing. Most long tail private players are experiencing business continuity issues, but Beisen is in a better position with close to OCF breakeven and Rmb1.6bn cash equivalents on hand. This translate into less pressure on sales and marketing as well as a lower discounts during tenders. The only notable competitor now in Kingdee's HR module, which Beisen believes is manageable as its products/targeted markets are differentiated.

Beisen clear industry leader:

The HR software market (Payroll + HCM) was US $1.1bn in China, according to IDC in 2023, up 16%YoY on a constant currency basis and the public cloud market grew faster at 22%. Beisen was a clear leader in the market with 13.9% revenue share in the cloud market followed by SAP at 9.8% and Yonyou at 6.0%. In terms of Beisen's revenue mix, recruitment (talent acquisition) declined due to previous weak labor market, and the remainder of its business remains steady.

What to expect in FY25?

We think topline could continue to grow in the 15-17% range with more stable retention rates. CoreHR should remain the key revenue driver. Headcount is likely to remain stable at 1,800, which also translates to more stabilized opex growth. The company's cash flow turnaround target for FY25 remains intact.