Seek Limited is an Australia-based company that consists of a portfolio of online employment, educational, commercial and volunteer businesses. The Company operates in 18 countries, including China and across South-East Asia and Latin America. The Company’s principal activities include online matching of hirers and candidate with career opportunities and other related services; investing in early-stage businesses and technologies which are in the human capital management market, and distribution and provision of higher education courses. The Company operates through three segments: SEEK Asia Pacific & Americas (AP&A), SEEK Investments and Corporate Costs. AP&A segment includes SEEK Australia and New Zealand (ANZ), SEEK Asia, Brasil Online, Mexico (OCC) and AP&A Other businesses. SEEK Investments segment includes Zhaopin, Online Education Services (OES) and Early Stage Ventures (ESVs).
The Company listed on the Australian Stock Exchange (ASX) in April 2005 raising A$162.30M in its IPO. Further share offering between 2005 and 2013 raised A$702.69M (Aug.2005: A$36.05M, Sep.2006: A$35.28M, Apr.2009: A$65.50M, Aug.2009: A$440.58M, Aug.2013: A$125.28M).
October 29, 2020 Blue Orca Capital released a short report on Seek which it stated that it believed Seek was a slow-growth platform whose core business was shrinking and that it carried a dangerous amount of debt. The areas of concern raised by Blue Orca were:
- Seek claimed that its most important business, Chinese online recruiting platform Zhaopin, was China’s #1 player and growing rapidly. In FY 2020, Zhaopin accounted for 48% of the Company’s consolidated revenues, and was Seek’s only segment which reportedly grew revenues and profits. However, Blue Orca's investigation revealed that Zhaopin’s platform was inundated with fake postings by companies which were deregistered, in liquidation or flagged as “abnormal operations” by Chinese authorities. Companies contacted called about their job postings on the website stated that the posts were fraudulent. Blue Orca uncovered a whistle-blower claim by a Chinese college student alleging that Zhaopin paid people to submit fake resumes.
- Seek had historically paid a dividend, giving the false impression that its business produced healthy profits and cash flows. But these payments had been largely funded by debt. A serial acquirer, Seek had repeatedly tapped the capital markets to fund acquisitions, raising its Net Debt-to-reported EBITDA to 3.2x. By Blue Orca's calculation, Seek’s true leverage was much higher.
- On paper, Seek appeared profitable. But look closer and such paper profits were facilitated by dubious non-cash gains and questionable step-up transactions with related parties. From FY 2015-2018, Seek reported cumulative fair value gains of AUD 336 million. Except for FY 2016, non-cash gains made up 26-41% of Seek’s annual profits.
- Seek was usually compared to 51job, a US-listed operator of a Chinese online recruiting platform. But the comparisons mistakenly relied on Seek’s reported EBITDA, which excluded significant capitalized software development costs and failed to back out minority interest. For valuation, Blue Orca believed investors must adjust Seek’s EBITDA for both. On an apples-to-apples basis, Seek was trading at 47x NTM EV/EBITDA and its net-debt-to-EBITDA ratio was a toxic 4.8x. This showed not only that the Company was significantly overvalued compared to other online recruiting platforms like 51job which did not capitalize such software costs, but also that Seek was dangerously over-levered.
Blue Orca concluded that in its opinion, Seek’s shares were grossly mispriced. That Covid-19 should not be an excuse. Seek’s Chinese business should have already emerged from the worst effects of the virus in its last fiscal year (ending June 2020), as the virus had retreated by then in China. Blue Orca had no doubt that Seek would blame the virus for its terrible results. But that investors should not be fooled: Blue Orca's examination of its primary Chinese platform showed the rot preceded the pandemic.
October 29, 2020 GMT Research published a review of Blue Orca's report on it's web-site. In summary it said that many of the allegations levelled against Australian online recruiter, Seek, by short-seller Blue Orca would likely be rebutted with relative ease, especially on the accounting. However, it noted, allegations of fraud levelled against Seek’s Chinese subsidiary, Zhaopin, were more of a concern, especially as its financials had fraud-like traits. For example, there was no evidence that Chinese profits had financed dividends or repaid creditors, meaning that it was not possible to verify if profits were real. Instead, there had been a concurrent build-up of debt and cash which was a trait of many past frauds. GMT added that although there might have been a rational explanation for this curious structure, it wouldn’t be the first time a foreign listed company had fabricated profits in an Asian jurisdiction. Concluding GMT noted to remember Wirecard and Folli Follie?, that leveraged companies with convoluted capital structures where dividends were debt-financed were best avoided or sold.
November 2, 2020 Seek released an announcement in response to the Blue Orca report. It strongly disagreed with the Report’s assertions regarding the Zhaopin platform and regarding Seek’s accounting practices.
November 2, 2020 Blue Orca issued a rebuttal. "Blue Orca's Rebuttal on Seek: Where is Zhaopin's Cash?" Blue Orca said the response was meaningless and did not properly address it's allegations on Zhaopin. It noted that Seek’s only response of substance was that Zhaopin was a “strong business with a long history” because it “continues to generate strong operating cash flows.” Blue Orca asked if this was true then where was Zhaopin's cash? It also asked If Zhaopin had really generated so much free cash flow, why did Zhaopin’s indebtedness keep increasing? Lastly Blue Orca questioned Zhaopin's dividend policy. It believed that Zhaopin’s failure to pay dividends was a major red flag and noted that Zhaopin's only recent dividend (FY 2018) was funded by drawing on newly created debt facilities.
Blue Orca Capital: Short Seek Ltd, 29 Oct 2020
Australian Financial Review: Short seller accuses Seek's Zhaopin of fake job posts, 29 Oct 2020
GMT Research: SEEK : Blue Orca attacks Seek, 29 Oct 2020
Seek Ltd: Response to Blue Orca's Report, 2 Nov 2020
Blue Orca Capital: Blue Orca's Rebuttal on Seek: Where is Zhaopin's Cash?, 2 Nov 2020
Seek Ltd: Annual Report YE Jun.2020
Seek Ltd: Annual Report YE Jun.2019