OceanLink Partners Year-End 2018 Letter

OCEANLINK MANAGEMENT LTD. | FUND@OCEANLINKMGMT.
COM | (416) 323 - 5095
February 15, 2019

Dear Partners,
The OceanLink Partners Fund’s unaudited gross and net returns for the fourth quarter of 2018
were -18.29% and -15.76%. This puts our unaudited gross and net returns for the full year of
2018 at 0.5% and -1.0%, and returns since inception (2017/06/01) at 30.73% and 22.62%,
respectively.1
Given your and our long-term focus and the inherent volatility in our investment strategy, what
happens to the quoted value of the portfolio in a month, a quarter, or even a year should be of
little significance to you, and to us. As we have asked all of you to commit to a three year
investment, our preferred KPI for ourselves is a three-year CAGR, so we encourage you to sit
back and skip the first paragraph of our future investor letters until the Q2 issue of year 2020.
Not All Network Effects Are Created Equal

At OceanLink, our objective in China is to only invest in the highest quality businesses. A few
years ago, we thought that the Internet industry would be a good hunting ground for such
businesses. After all, Internet platforms offered direct exposure to the Chinese consumers, the
shift online was still in the early days, and the network effect usually made them winner-take-all
businesses, while providing a moat around them against competition.
Having observed China’s internet industry for the past several years, we have come to the
realization that perhaps things aren’t so easy. What we discovered is that while the network
effect is powerful, it is unreliable as a source of an enduring moat. This is especially the case in
China, where customer acquisition costs are reasonably transparent, and the cost of building a
network can be easily quantified by any potential entrant, especially those that are backed by
Alibaba or Tencent, who control the vast majority of top-of-the-funnel traffic resources. For
instance, if it costs 100 RMB to acquire a customer, the cost of recreating a 200 million user
platform only amounts of USD $3.0 billion. While a large investment in absolute terms, it is
insignificant relative to the market capitalizations ($20 - $50 billion) of public companies with
similar sized user bases. Alibaba and Tencent can easily fund this investment if they choose to
enter the vertical on their own, or partner with a startup and provide traffic and infrastructure
support as an alternative. China’s VC industry, already the best-funded in the world, also has
plenty of capacity to support the development of many vertical leaders of such size
simultaneously.
We believe this is the fundamental reason there are exceptionally few monopolies in China’s
internet sector, even in verticals that have traditionally seen winner-take-all dynamics in other
1
The performance results for Q4 2018 (period ending December 31 st) represent unaudited returns for the Class A Limited
Partnership interests, and the net returns are presented net of management fees, accrued performance allocation and all other
fund-level expenses. Each individual investor’s actual performance may be materially different.
1
OCEANLINK MANAGEMENT LTD. | 2 BLOOR STREET W | SUITE 1902 | TORONTO, ON | M4W 3E2
OCEANLINK MANAGEMENT LTD. | FUND@OCEANLINKMGMT.COM | (416) 323 - 5095
parts of the world. Even companies that presently enjoy dominant market shares (80%+) in their
respective verticals must constantly exercise restraint in monetization in order to fend off
advances by potential entrants, because they know their competitive positions are untenable the
moment they try to earn monopolistic profits. As a result, very few such companies earn margins
that are comparable to their Western counterparts. In other words, having a network effect alone
is no longer a sufficient condition to produce a sustainable moat in the hyper-competitive field of
China Internet. In some ways, China has successfully “commoditized” the network effect.
The online travel industry in China illustrates this dynamic perfectly. Ctrip, the largest OTA
platform, once enjoyed a near monopoly position in online travel. As a result, it chose to focus
on the most profitable segments of the travel industry, and charged a similar commission rate on
hotel bookings and air tickets as its Western counterparts. Ctrip’s scale and profitability afforded
the company with the largest R&D and marketing budgets, and its brand was nearly synonymous
with online travel in the minds of Chinese consumers. By 2010, Ctrip had won well over half of
the online travel market in China, was at least 6 times the size of the No.2 player, and earned an
operating margin of nearly 40%. To most industry observers, Ctrip’s competitive position looked
unchallengeable.
Ctrip’s good days did not last long, however. Qunar, a travel search upstart, took advantage of
Ctrip’s high profitability and sought to aggressively take share by undercutting Ctrip’s
commissions and offering large quantities of customer subsidies. By focusing on the underserved
low to mid end hotel segments and moving upmarket, Qunar amassed a large user base with the
traffic and funding support of Baidu, its majority owner at the time and China’s largest search
engine. Within 3 years, Qunar went from a relatively obscure upstart to nearly the industry
leader, overtaking Ctrip in air ticket volume and nearly matching Ctrip in market share of hotel
room nights. In the process, Ctrip’s operating margin declined from 40% to negative, as the
company lowered its take rate and matched Qunar’s price promotions to stay competitive.
By late 2015, the price war had taken a huge toll on both companies, and a truce was reached in
which Ctrip acquired Qunar. To ensure that its position would never be threatened again, Ctrip
also acquired control of several smaller competitors, including the No.3 and No.4 travel sites at
the time. By the end of 2015, Ctrip had more or less fully consolidated the OTA market with a
market share in excess of 80%. Shocked by the cost of its earlier complacency, Ctrip was
determined to not over-monetize again to leave room for new entrants to disrupt it. As a result,
the company held off from raising commission rates back to pre-price war levels, and the
company increased its investments in product and service quality to enhance customer loyalty.
Ctrip’s strengthened market position and its more sustainable approach to operating its platform
renewed optimism about its long-term prospects. By 2016, Ctrip had surpassed Expedia to
become the second most valuable OTA in the world. Its product was already considered world-
class, with a large number of innovative features that led companies such as Expedia and
booking.com by years. Unlike its Western counterparts, which relied on Google for traffic,
Ctrip’s business was built on real organic traffic, as more than 80% of its visits originated from
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mobile, almost all of which came directly to its native app. Confident about its domestic
prospects and its technology, Ctrip acquired Skyscanner to compete with Expedia and Booking
overseas. Little did Ctrip’s executives know that the company was on the cusp of being disrupted
again, this time by an even more formidable foe.
Meituan, the largest group-buying website for local services, was in the process of expanding
into new verticals to evolve its platform into an all-powerful “Super App”. The idea was simple:
if Meituan could offer all kinds of different services within the same app, it would become the
default “destination” for local services and result in the lowest traffic acquisition costs for all
verticals. Naturally, industry observers were skeptical about Meituan’s ability to compete in
travel, which required building a completely different supply chain from restaurant takeout or
movie ticket reservations. Meituan’s user base of price sensitive, lower income consumers in tier
3 and 4 cities also didn’t seem like the ideal customers. At the same time, travel was already the
most mature e-commerce vertical, reflected in China having one of the highest online
penetrations in the world. Finally, Meituan was fighting a multi-pronged war, being a late comer
to both the travel and food takeout verticals. Success in these new areas required not only
significant capital to spend on price wars, but also a different way of thinking and operating to
overcome its disadvantages as the new entrant. The chances simply didn’t look good for
Meituan, and the industry did not take Meituan seriously as a legitimate competitor.
The industry was wrong. Against all odds, Meituan’s travel business has taken off. They did it by
initially catering to the needs of their low income customers, acquiring hotel inventory on the
very low end and charging minimal commissions. While these transactions were not profit-
generating, they brought awareness to the Meituan platform as a legitimate place for purchasing
travel services and allowed Meituan to build up its hotel supply chain. As Meituan’s restaurant
takeout business took off concurrently, it brought increasingly higher income users to the
network, which referred higher quality traffic to the travel booking business. This allowed the
platform to move upmarket and position itself as an alternative to Ctrip to mid and high end hotel
owners. Today 4 and 5 star hotels are commonplace in most cities on Meituan, and within 3
years, Meituan has surpassed Ctrip in the volume of room nights booked.
The case study of Ctrip is instructive because it shows just how difficult it is to sustain a real
moat in Chinese Internet. Why is Ctrip, a reasonably well run company by most accounts, unable
to hold onto its dominance despite progressively giving back more economics to consumers and
vendors? Why is monopoly so elusive in the OTA industry?
We suspect this has more to do with the economic characteristics of the industry than Ctrip itself.
For starters, travel is a relatively low frequency consumption category with a high average ticket
value. Consumers are generally price sensitive about purchasing hotel rooms and air tickets and
because they don’t do it often, the aggregate cost of doing price comparisons is de minimus
compared to any potential savings. At the same time, OTAs are low-engagement platforms that
consumers seldom use and don’t spend much time on, so it’s very difficult to create user
stickiness. This inherently creates room for the market to adopt multiple platforms. On the
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supply side, airlines and hotels are largely fixed-cost businesses whose profitability is extremely
sensitive to utilization. The potential incremental profit that they can earn by listing inventory on
an alternative sales channel easily trumps the incremental costs associated with it, so when
presented with a legitimate alternative, most suppliers would not hesitate to get on it. With
neither the behavior pattern to create user loyalty nor the ability to enforce vendor lock-in, it’s
very difficult for a platform to maintain a dominant position, especially when ample capital is
available to fund potential competition. Within OceanLink’s framework of assessing Internet
businesses, we refer to the OTA business as an example of a “non-captive network” - a platform
that cannot convince its users or suppliers to not do business with rival platforms.
The reason this matters is that we believe the steady-state for a non-captive network in China is a
duopoly, not a monopoly. Having a market split two ways may result in a reasonable competitive
situation in the West (Expedia vs Booking), but in China, it often presents a long-term
profitability challenge for the industry. This is because in a fast growing and rapidly changing
environment, neither player trusts the other enough to “cooperate” on profitability, especially
when there are plenty of potential competitors just lurking in the shadows, waiting to jump in the
moment the incumbents show complacency.
The profit deficiency suffered by Internet duopolies is exacerbated by the role played by “super-
ecosystems”. Again, take the example of Meituan. Despite Meituan’s success in travel, its main
business is actually food takeout, which is many times larger in size. Similar to travel, Meituan
has captured a significant share (lately estimated to be around 60%) of the food takeout vertical
as a late-comer to the industry through superior execution. However, as a non-captive network,
food takeout faces similar challenges as the OTA industry: Price comparison is quite easy, and
user acquisition is done mainly by means of subsidies, so customer loyalty is relatively low
(though a small number of high-income urban customers may be less price-sensitive). Suppliers
(restaurants) also have high fixed costs, with profitability dependent on utilization, so most of
them are incentivized to use multiple platforms. With neither “captive demand” nor “captive
supply”, it’s extremely difficult for Meituan to truly “win” the food takeout market, especially
now that the competition is funded by a company with theoretically unlimited firepower.
Alibaba acquired Meituan’s main food takeout competitor, Eleme, when it became apparent that
Meituan was pulling ahead in the competition. Now having to compete with Alibaba head-to-
head, Meituan faces an awkward path to realizing profitability because Alibaba does not actually
need Eleme to make any profits in order to extract value out of it. For example, Alibaba can use
Eleme to refer traffic to its other services, converting its users into customers for its other
applications. In addition, Alibaba can integrate Eleme’s data with other platforms in the
ecosystem (e-commerce, payments, video entertainment, etc) to create more precise user
profiles, resulting in enhanced targeting and improved monetization for its advertising business.
Furthermore, Alibaba can take advantage of Eleme’s logistics infrastructure to enable its “New
Retail” strategy (shipping grocery items straight from retail stores as opposed to warehouses), or
provide “surge” capacity for last mile delivery of other e-commerce orders.
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These are just a few examples among the many ways that Alibaba can create “ecosystem” value
through owning Eleme, so it is quite conceivable that Alibaba can realize a handsome return on
its acquisition without Eleme ever having to generate a profit on its own. While there is no doubt
that Meituan is the more efficient operator today, with a bigger vendor selection and a slightly
better user experience, Alibaba can simply sustain Eleme’s market position through subsidies
while working to close the gap in technology, selection and service quality. This is not just a
theoretical strategy; in fact, it’s a playbook that Alibaba has used repeatedly for other
temporarily underperforming subsidiaries, often to great effect. Once Eleme is able to match the
efficiency and user experience of Meituan, Alibaba may choose to continue to operate the
vertical at a loss to further its market share gains. In this “worst-case”, it’s entirely realistic that
Meituan will never make a meaningful profit, in spite of its reputation for managerial and
operational excellence.
Effectively, the value of being part of a “super-ecosystem” like Alibaba is that the synergies with
the rest of the ecosystem can create advantages that cannot be replicated by a pure-play
competitor. Unfortunately, it’s very hard to avoid competing with a super-ecosystem in China
because Alibaba and Tencent have ambitions to dominate all Internet verticals and already
control all the necessary resources (traffic, infrastructure, talent and capital) for entering them.
Additionally, these super-ecosystems hold a crucial advantage that is often overlooked by
investors – time. Because a company like Alibaba doesn’t intend to exit its investments, it has
the patience and the foresight to endure losses while waiting for an investment to pay off,
something that pure-play platforms simply cannot match, as they are all funded by investors who
have a limited time horizon. If Alibaba deems the food takeout vertical to hold important
strategic value, then it is a “must-win” market regardless of cost. The underperformance of
Eleme today is nothing more than a temporary setback, because with enough time and money
any edge held by the competitor can be eliminated, no matter how wide the gap is today. Very
few Internet companies can afford such a mentality, and therefore very few of them can compete
against it over the long-run.
This is why in China Internet land, we tend to avoid businesses with non-captive networks,
especially those operating in verticals that are deemed as strategic imperatives by Alibaba or
Tencent. Because their long-term profitability is largely determined by the strategy department
of a super-ecosystem competitor, how much their equity is truly worth is practically impossible
to assess.
Instead, what we are interested in are captive networks, because the only way for a platform to
truly protect itself against competition is by obtaining exclusivity on one or both sides of its
network. Only these are the businesses that can become natural monopolies, allowing them to
dictate their own future and sustainably earn supernormal returns.
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Captive Networks
What kind of business models lend themselves well to creating “captive networks”? As a
definition, a captive network is characterized as one that has either captive demand (loyal users)
or captive supply (exclusive suppliers), or occasionally, a combination of both. In other words, a
captive network must have the ability to convince either its customers or suppliers to not do
business with a competing platform.
We believe for a platform to sustain captive demand, a necessary but not sufficient condition is
“disincentive or inability to conduct price comparison”, because when the product can be easily
price-compared, consumers inherently try to use competing platforms to get the best deal. This
naturally excludes most e-commerce businesses from the list. In addition, a captive demand
platform usually meets at least one of the (but not limited to) following three conditions:
1. High convenience cost to using multiple platforms: for instance, the effort required in
recreating one’s Wechat contact list is clearly too high compared to the potential benefits
of using two redundant chat apps.
2. A strong social community: a strong social element can also create switch cost, this is
why many people are still playing MMORPG games created 15 years ago.
3. Data lock-in: on some platforms, the accumulation of past data materially enhances the
experience of using the service, giving the incumbent an advantage that’s impossible for
new entrants to replicate.
There are also several ways that “captive supply” can be created, below are a few examples:
1. Exclusive suppliers: there are certain verticals in which the dominant platforms can
coerce suppliers into not selling on competing platforms.
2. Low inventory depth: if a SKU only has a few products in inventory, it may not be
worthwhile for the supplier to list it on multiple sites.
3. High incremental cost/effort: for certain verticals, the incremental cost and effort required
to set up and operate a new store may not justify the potential benefit.
The best example of a business model with captive demand is social media. Social media
platforms are one-sided networks whose demand and supply originate from the same group of
users. Because social media is “free”, and consumers do not choose their platform based on
which one is cheaper, there is no incentive to conduct price comparison. It’s also inconvenient to
use multiple platforms that serve the same purpose, since recreating one’s profile and sending
redundant updates can take a lot of time but serve no useful purpose. The social element further
increases stickiness, because for an alternative platform to attract someone as a user, it must first
attract a large enough critical mass of her friends. If her friends don’t want to use it, then there is
no reason for her to use it either. Finally, there is strong data lock-in. All of the pictures she
uploaded from the past are part of her identity and enhance her friends’ understanding of herself
in the present.
6
As a result, social media platforms tend to have a lot of the right ingredients for captive demand.
Within the same use case, social media platforms are almost always monopolies, and China is no
exception to this.
A good example of a business model with captive supply is C2C used goods trading sites. This is
primarily due to the “low inventory depth” effect. Because each used item is unique and its own
SKU (as opposed to “new goods” e-commerce in which the same SKU is sold over and over
again), there is no incremental revenue that can be generated from listing an item on multiple
sites. In addition, the average order value is relatively low, so it may not justify the effort
required to put up a redundant listing. Therefore, most people find it more efficient to only list
their items on one site, accruing an overwhelming liquidity advantage to the dominant platform.
We believe this explains why Craigslist is still a near monopoly in used goods in the US despite
not updating the website for nearly 25 years.
And then there is the rare breed of business models that enjoy both captive demand and captive
supply. These businesses have the widest moats in the Internet space and are among the best
businesses in the world.
One such business that all of us are familiar with is YouTube.
YouTube has captive demand. The platform is free, so there’s no financial incentive to compare
prices. It also has strong data lock-in, because YouTube’s accumulation of user behavior data has
created a massive advantage in its ability to match users with the right type of content. This is
key to the short-form video business model because the content is by nature long-tail and
discovery-driven. There are millions if not billions of YouTube videos that have ever been
uploaded, how do we know which one is right for us? Since a substantial portion of videos on
YouTube are consumed through the recommendation engine (which we suspect to be more
numerous than those through the search engine), and recommendation technology is built on
machine learning that perfects its algorithm based on past data, YouTube’s huge database of user
behavior and preferences makes it far better equipped to provide relevant recommendations than
a video site that consumers are new to visit. This makes a huge difference in user experience and
discourages users from using other video sites.
On the other side of the network, YouTube’s model naturally encourages captive supply. First,
it’s actually quite a bit of work to manage a video channel. Since most content creators upload
videos as a hobby, they may find hosting videos on multiple platforms too much effort to be
worthwhile when YouTube already offers near maximum exposure. Secondly, for the
professional YouTubers, no other platform offers monetization that’s remotely comparable to
YouTube. Uploading content onto a competing platform may take away views from the
YouTube video that ultimately result in reduced monetization overall. Unsurprisingly, the vast
majority of content contributors host videos exclusively on YouTube (hence YouTubers).
With both captive demand and captive supply, it is no wonder that YouTube is a monopoly in the
short-form video industry, with no serious challengers in sight.
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Alibaba’s Taobao actually shares somewhat similar attributes as YouTube as a captive network.
Normally, the e-commerce business model does not lend itself well to creating captive demand,
but Taobao is an exception because it specializes in long-tail categories such as apparel. It is
estimated that there are over 300 million apparel SKUs in China, compared to just a few
thousand SKUs of smartphones. Very few apparel products have a recognizable name and this
actually makes it quite difficult, if not downright impossible to conduct price comparisons. For
example, searching “black dress” on Taobao and JD is likely to yield completely different results
– how can you price compare if you can’t even find the same product on different platforms?
Unlike standardized categories such as electronics and appliances, apparel purchases are almost
entirely discovery-driven. When someone purchases an iPhone, he likely already knows what he
wants to buy before even going into the store. But when people shop for clothes and shoes, they
usually don’t have a predetermined idea of what to buy. Instead they visit the store, take a visual
survey of what’s available so they can “discover” what looks best on them. This behavioral
difference is well documented in user data on Taobao, where the majority of purchases are
matched through its recommendation engine as opposed to search queries. In comparison, a
platform like Amazon, which is weak in apparel but strong in standardized products, derives
more than 90% of purchases through search. Taobao’s huge trove of accumulated user data thus
gives the platform a massive advantage in providing high quality product recommendations,
making the shopping experience more efficient for the customers.
Furthermore, there is a strong social element in shopping on Taobao, so much so that the
shopping experience is often referred to as “social commerce”. For instance, one of the most
used features of Taobao is the social newsfeed, where shoppers share photos and reviews of their
latest purchases and follow posts from key opinion leaders. Taobao’s short form video feature is
also one of the largest video platforms in China, with nearly 2 billion videos viewed per day
(compared to 5 billion for YouTube). Taobao’s strong social attributes have made it the most
engaging e-commerce website in the world, with a DAU/MAU ratio of 45%, and an average
daily user spending more than 25 minutes a day on the platform.
Taobao also has a captive supplier base. The vast majority of Taobao’s merchants are small
sellers of long-tail products, which tend to have very low inventory depth. For example, a T-shirt
with 8 colors and 5 size options alone has 40 SKUs. A small apparel seller at most has a few
products for each SKU in stock due to limited resources and the need to control inventory risk. If
the entire inventory stock of a given product is only worth a few hundred RMB in cost, is it
really worth the effort to open a second store on another website to sell it? Consequently, most of
Taobao’s 10 million sellers sell exclusively on Taobao (China’s other C2C platform, Pinduoduo,
only has 1.7 million sellers). For bigger brands that do not suffer from low inventory depth,
Alibaba simply takes advantage of their reliance on Taobao to discourage them from selling on
competing platforms (ex. increased traffic support in exchange for going exclusive).
As a result, Taobao is a captive network and has a near monopoly position in C2C e-commerce,
with a GMV share in excess of 90%. This makes Taobao one of the best businesses in China.
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Just for fun, now that we have seen some examples of great business models with captive
networks, it follows that we can use the same principles to describe some characteristics that
produce a subpar Internet business model:
1. To start, it sells products/services that naturally encourage price comparison.
2. There’s no social element to using the platform.
3. The shopping experience is not discovery-driven, but search-driven, such that the
platform cannot take advantage of a positive feedback loop of continuously improving
recommendations.
4. It does not have the market power to force suppliers to go exclusive.
5. The products are standardized and inventory depth is high, which means the suppliers are
likely medium to large sized brands.
6. It requires no specialized logistics through which the platform can differentiate itself.
7. In addition, it is a pure-play aggregator competing against a super-ecosystem platform.
8. To make things worse, the product category in which the platform specializes is sold by
the super-ecosystem competitor as a loss leader to generate cross-selling traffic to more
profitable categories which are inaccessible to the pure-play platform.
It appears that we’ve just described most of the public e-commerce companies in the world!
Liepin (Wise Talent Information Technology)

Liepin is one of the few Internet platforms in China that we think could have a captive network.
Founded in 2011, Liepin is the now largest online recruitment platform for mid-to-high end jobs
in China, classified as those earning an annual income of RMB 100,000 and above.
The online recruitment industry in China is well segmented. There is 58.com that monopolizes
the hiring of blue collar workers, 51job and zhaopin.com that dominate recruitment of low-end
white collar employees, and several vertical-focused platforms that specialize in recruitment for
specific industries, such as Internet and finance. Liepin occupies the smallest and fastest growing
segment of mid-to-high-end white collar jobs.
There is good industrial logic for this kind of segmentation. Blue collar jobs in China’s big cities
tend to be predominantly short-term positions in the service sector filled by migrant workers.
These workers have little preferences about the employer and most of them don’t even have
resumes, so the most efficient method for recruiting them is the online classifieds model -
broadcast the position on a job board in the hiring season and interview large volumes of
applicants on the same spot. Low-end white collar jobs are different – the positions last a bit
longer and candidates tend to have preferences. While the roles are quite standardized, not
everyone is qualified. So the optimal model is a search engine on which candidates can look for
positions they are interested in and submit resumes to recruiters for initial screening before
conducting interviews.
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The mid-to-high-end job market is quite different. Generally speaking, these professionals are
more educated and experienced (5 years plus is typical). Their experiences tend to be more
specialized, and they switch jobs infrequently - it’s estimated that the average job turnover is
once every 4.5 years for mid-to-high-end workers compared to 18 months for low-end workers.
From the recruiter’s point of view, the job requirements tend to be specific (the number of
potential candidates that are qualified to be a product manager at Alibaba is just a tiny fraction of
the number qualified to be a sales assistant), the cost of a bad hire is high and there are usually
more senior people involved in the hiring effort. In addition, adverse selection is more
pronounced – the best candidates are rarely unemployed, so the ideal method of recruitment is to
poach existing employees from other companies rather than posting on a job board and selecting
candidates from a large pool of applications.
Given the unstandardized nature of mid-to-high-end jobs, recruiters have traditionally sourced
candidates by working with headhunters. Headhunters’ existing relationships with professionals
facilitate trust and give them a better understanding of the candidate’s experiences and job
preferences, but they also charge a hefty price for their service – normally 20 – 25% of the
candidate’s first year salary upon a successful hire. Consequently, headhunters make up a
massive industry, earning almost RMB 100bn in commissions in 2018.
In the West, the mid-to-high-end talent acquisition market has been tremendously affected by the
emergence of Linkedin. Since the ideal mid-to-high-end candidate is a current employee at
another company, Linkedin provides the ideal platform on which internal recruiters can search
for and poach potential candidates, in the process bypassing expensive headhunters.
The Linkedin model has not worked very well in China, however. The biggest challenge to
selling the concept of professional social media to the Chinese public has been cultural – in a
society that values modesty and humility in the workplace, the Western concepts of self-
promotion and personal brandbuilding create an image of insecurity and inauthenticity which in
fact weaken trust and relationships. Also, a Linkedin profile is basically a public resume.
Publishing job experiences in a public setting is not the best way to demonstrate loyalty to the
current employer. In fact, In Japan, where loyalty and modesty are even more highly valued,
Linkedin has also failed to gain a meaningful presence. Furthermore, most Chinese people don’t
use emails, so it’s actually a challenge to try to reach someone on the platform. As a result, after
8 years in China, Linkedin has only accumulated a user base of 37 million. Engagement is
abysmal, with only 7% of users having uploaded basic information such as location and past
work experiences.
Liepin approached the problem differently, through a keen understanding of the needs and
preferences of the “passive jobseeker”. Since most mid-to-high-end professionals are already
employed and the unemployed ones tend not to make the best candidates, the biggest difficulty in
building a mid-to-high-end job site is convincing those passive jobseekers to use the platform.
As it turns out, while passive jobseekers do not actively apply for jobs, most are open to hearing
about job opportunities from headhunters, so Liepin’s solution was to make the platform free and
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friendly to use for headhunters. This helped Liepin create the largest network of headhunters in
China, with over 120,000 actively using the platform. Last year, Liepin users received on
average 15 headhunting inquiries. The presence of headhunters then attracted users, since few
people want to miss out on so many potential opportunities delivered to them for free. As Liepin
gained a critical mass of users, they brought enterprise recruiters to the platform so that they can
reach out directly to potential candidates (similar to the Linkedin model). To complete this
“three-sided network”, Liepin created additional services for enterprises where headhunters can
take “orders” from HRs to help fill positions, with Liepin taking a commission in the middle.
The network effect then helped Liepin scale organically, and today Liepin has almost 50 million
users, or 55% of China’s mid-to-high-end talent pool.
So why do we think Liepin a captive network? We suspect Liepin’s focus on passive jobseekers
creates captive demand. There are two reasons that might explain why many mid-to-high-income
professionals use Liepin exclusively. The first is signaling value. Liepin is the only recruitment
platform in China that has positioned itself on the mid-to-high end. Uploading a resume on a
competing recruitment site can be seen as “devaluing” the candidate. Since most recruiters use
all of the major recruitment platforms, they may question the candidate’s credibility if they also
see his resume on the low end sites. The second, arguably more important reason is that passive
jobseekers, especially those with a high income, are very busy people; their time is too limited to
engage multiple job platforms at once, particularly when there’s no strong intent to switch jobs to
begin with. Just Liepin alone, with its several headhunter and HR inquiries a month, is already
plenty to deal with. Lower end recruitment sites are also populated with less relevant jobs or
worse, scams, which can be quite disruptive to the users’ lives.
Another advantage of Liepin’s focus on passive job seekers is quality of resumes. Passive job
seekers are less desperate to find jobs so they are less likely to exaggerate their experiences. In
addition, because they use the platform more regularly (to interact with headhunters and HRs),
not just when they are actively looking for jobs, they update their resumes more frequently to
ensure that recruiters can see their latest experience. Liepin’s high quality model has paid off.
Our conversations with recruiters reveal that it is widely accepted that Liepin’s candidate quality
is the highest among recruitment sites. This results in higher conversion rates for recruiters and
less time wasted on unqualified candidates, and consequently, pricing power. The average Liepin
resume costs 40 RMB, four times as much as the price of resumes on lower-end job sites.
Liepin has cemented its leadership position by investing heavily in innovation. For example,
Liepin launched its “Interview Express” (HRs paying headhunters to recommend candidates for
interviews) and “Onboarding Express” (HRs paying headhunters for hires) products in 2015. Not
only do these “close-loop” services help address unserved customer needs, they also for the first
time provide a recruiting platform with conversion data that now can be fed into machine
learning to help improve its recommendation engine. Today, over 70% of jobs recommended to
users are generated by AI, which will likely improve to 100% in the coming year. On the user
11
side, Liepin has also introduced innovative features to improve engagement, such as personality
assessment tools, resume and career advisory services.
So how big is Liepin’s opportunity? It is estimated that in 2018, there were around 83 million
people in China earning more than RMB 100k a year, with the average earning approximately
RMB 160k. Adjusted for purchasing power parity, their wages are broadly comparable to
workers in developed countries. Even though China’s overall labor force has not grown in the
past several years, the mid-to-high-end segment has been growing in excess of 10% as a result of
China’s economic development. If a ~10% growth is to be sustained for the next several years, as
is expected by most human resource industry observers, it will take no more than 6 years for this
population to exceed the entire labor force of the US. Meanwhile, wage growth for the group has
also remained above double digits, so the overall market for mid-to-high-end talent acquisition
has sustained growth rates in excess of 20%. We would not be surprised if the industry continued
to grow rapidly going forward.
Interestingly, even though the mid-to-high-end segment represents only 20% of China’s overall
workforce, it accounts for more than 85% of China’s talent acquisition spending. The
unstandardized nature of these jobs means search costs are simply much higher. Online
penetration in mid-to-high-end recruitment is extremely low, as only RMB 1bn out of the RMB
96bn of total recruitment spending was estimated to be spent on online services (with most of the
remaining spent on headhunters), according to China Insight Consultancy (CIC). In comparison,
the online penetration of low-end recruitment market is in excess of 40%.
Liepin’s monetization model is to sell subscription packages to business customers, so that they
can bypass headhunters and utilize internal HR to hire employees. Each package entitles them to
download a certain number of resumes and access some value added services. In 2017, Liepin
accounted for just over RMB 800 million of the RMB 1 billion online spending for mid-to-high-
end recruitment, and we believe the company has only scratched the surface of its addressable
market.
This is because the value proposition of Liepin’s product is extremely competitive. On average a
resume on Liepin costs only 40 RMB. Based on our extensive conversations with headhunters
and HRs, we estimate that it generally takes 10 – 100 resumes (varies between different
industries and different sized firms) to convert into a hire, so the cost of hiring an employee
comes out to about 400 to 4,000 RMB. In comparison, headhunters charge at least 20% of salary
for a successful hire, so the cost of recruiting for a RMB 150k position would amount to over
30,000 RMB! In other words, by using Liepin over headhunters, companies can save 80 – 95%
on the cost of new hires.
With less than 50,000 paying business customers, Liepin’s market penetration is quite low,
especially considering that almost every business in China has some mid-to-high-end hiring
needs. If Linkedin’s success provides any indicators for Liepin’s growth runway, it would seem
12
that Liepin can multiply many times in size and still be under-penetrated, as Linkedin’s US
business alone generated nearly 20 times the revenue of Liepin in 2018.
Unlike most SaaS companies in the US that are growing at a similar rate, Liepin is already
profitable, with a clear path to reaching a high 20s% operating margin by next year. Considering
that the platform will still be in growth mode by then, it is plausible that Liepin’s steady-state
margins could be even higher. So while a business like Liepin can be somewhat cyclical
(recruiting is sensitive to the macro-economy), at under 5x our estimate of 2019 sales, Liepin
looks inexpensive for a business that just grew 50%+ last year and has the potential to grow 10x
in size in the long run.
So what can go wrong? Our biggest concern relates to the rapid growth of certain vertical-
focused players that employ new innovative models for matching employers with potential job
applicants. For instance, Boss Zhipin, a recruitment platform specializing in the Internet sector,
built its model on direct interactions between the boss and the candidate. We think it is too early
to conclude whether this model can replace the need for recruiters or whether it can be scaled to
other sectors, but if it can, it certainly may pose a threat to Liepin. Fortunately, it appears the
current overlap (income, age) between Boss and Liepin is low and the two platforms are not
competing too directly. We are also not totally certain that Liepin’s captive network
characteristics apply to all of its user base. For example, we estimate that 20% of Liepin’s users
are active job seekers. There is probably also a portion of mid-end users whose needs can be
addressed by lower-end platforms. Time will tell if our assessment of Liepin’s moat is right, but
given the low valuation, we feel there is enough margin of safety in the stock for us to take on
these risks.
Administrative
Our auditor is currently in the process of preparing your K-1s. We expect that you will receive
them in early April.
We thank you for your trust and support, allowing us to invest for the long-term,
Steven & Richard
13
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OCEANLINK MANAGEMENT LTD. | FUND@OCEANLINKMGMT.

COM | (416) 323 - 5095

February 15, 2019

Not All Network Effects Are Created Equal

Liepin (Wise Talent Information Technology)

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