Short seller takes aim at Seek's Chinese subsidiary, alleges fake postings at "rotten" platform

UPDATE (10.55am AEDT 30 Oct): Seek has issued a short statement regarding the Blue Orca report, and will provide a full response to the allegation on Monday 2 November.

Short seller Blue Orca has online job search platform Seek (ASX: SEK) in its sights, alleging the company's Chinese subsidiary Zhaopin is inundated with fake job postings.

Seek entered into a trading halt late this morning after the report was released.

As such, Blue Orca alleges Seek is overvalued, and instead should be valued at $7.20 per share, a 68 per cent downside from its last traded price.

Blue Orca has dubbed its allegations as "devastating" for Seek's prospects when considering the importance of Zhaopin, the number one player in the Chinese market, to the Australian giant's overall business.

"Our due diligence reveals that Zhaopin's platform is inundated with fake postings by companies which were deregistered, in liquidation or flagged as "abnormal operations" by Chinese authorities," alleged Blue Orca, led by US-based short seller Soren Aandahl (pictured right) who previously co-founded Glaucus Research, the group responsible for taking down Blue Sky Alternative Investments and Quintis.

"Companies we called about their job postings on the website even stated directly that the posts were fraudulent.  Our due diligence also uncovered a whistleblower claim by a Chinese college student alleging that Zhaopin pays people to submit fake resumes.

"We think Zhaopin's platform is rotten, which is devastating for Seek's prospects."

Blue Orca, named after a breed of a particularly powerful killer whale, also claims Seek's leverage is much higher than the company's numbers would imply.

"Seek has historically paid a dividend, giving the false impression that its business produces healthy profits and cash flows.  But these payments have been largely funded by debt," said Blue Orca.

"A serial acquirer, Seek has repeatedly tapped the capital markets to fund acquisitions, raising its Net Debt-to-reported EBITDA to 3.2x.  By our calculation, Seek's true leverage is much higher.

"Rather than valuing Seek as a fast-growing online recruiting platform, we value Seek for what it isa slow or no-growth platform whose core business is shrinking and which carries a dangerous amount of debt."

Overall, the short seller says even if it were to value Seek's Australian and non-China businesses at a "generous" 20.5x EV/adjusted EBITDA, it believes Zhaopin merits a "substantial discount".

"We value Seek at AUD 7.20 per share, a 68 per cent downside from its last traded price," said Blue Orca.

The short seller also alleges Seek is misrepresenting Zhaopin as the number one jobs platform in China, with data from QuestMobile showing BOSS Zhinpin is actually the market leader.

Other allegations include Seek inflating its profits by "dubious" non-cash gains and "questionable" step-up transactions, relating to its Maimai business in China.

Seek responds

Since the publication of the Blue Orca report Seek has issued a short statement and will remain in a trading halt until it provides a full response to the short seller.

"Given that the strategies of short-seller opinion writers such as Blue Orca Capital are generally to generate publicity by drawing companies into a public debate, SEEK's preferred response is simply to confirm that it continues to meet its continuous disclosure obligations and is confident of its long-term outlook," said Seek.

"While we do not believe reports of this nature warrant a response, the ASX has asked for one.

"SEEK has therefore asked for a trading halt until it provides this response and will do so by market open on Monday 2 November 2020."

The company entered into a trading halt this morning at 11.41am AEDT. Prior to that shares were down 6.67 per cent to $21.34 per share.

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