ZhongAn Insurance, which will begin trading on the Hong Kong Stock Exchange on September 28, is less than four years old and can only be regarded as a young player in the insurance industry. However, its shareholders are highly prestigious -- Ant Financial, Tencent and Ping An Insurance were all major shareholders holding more than 10% before the completion of its global offering. ZhongAn Insurance has also been enthusiastically embraced by investors, receiving heavy oversubscription in the public subscription stage of its IPO.
However, a National Business Daily reporter noted that although the internet finance concept and the backing of the "Three Mas" are eye-catching, volatile net profit and an extremely high price-earnings ratio have become hidden concerns for ZhongAn Insurance.
The "Three Mas" are all major shareholders
For ordinary investors, ZhongAn Insurance may not be very familiar, as it has not been established for long.
ZhongAn Insurance was incorporated on October 9, 2013. It was the first internet company in mainland China to obtain an insurance company legal person license, and it provides a variety of internet insurance products and solutions to the mainland market.
Beyond the internet insurance "hot spot," ZhongAn's shareholders are all big names. Before the completion of ZhongAn's global offering, its largest shareholder was Ant Financial with a 16.04% stake, while Tencent and Ping An Insurance each held 12.09% of ZhongAn. As is well known, the leaders of these three institutions are the "Three Mas" -- Jack Ma (Ma Yun), Pony Ma (Ma Huateng) and Ma Mingzhe.
For this Hong Kong listing, ZhongAn's joint sponsors are also top-tier institutions, such as J.P. Morgan, Credit Suisse, UBS and CMB International.
Regarding its own business, ZhongAn Insurance said: "We are a pure online insurance technology company in China. From our establishment in October 2013 to December 31, 2016, the company cumulatively sold more than 7.2 billion policies and served about 492 million policyholders and insureds." According to a report by third-party consultancy Oliver Wyman, by that standard over that period, ZhongAn Insurance ranked first among Chinese insurers.
Net profit plunged in 2016
ZhongAn's main insurance business is concentrated in five areas. First, meeting customers' protection needs in e-commerce and electronics-related consumption scenarios; second, providing insurance products and solutions that protect fund providers from default and facilitate consumer lending and consumption on certain internet financing platforms; third, providing insurance products and solutions for the risk of customers incurring medical expenses; fourth, providing insurance products covering vehicle damage, personal injury and vehicle theft; and fifth, providing insurance products and solutions for various travel-related risks.
A National Business Daily reporter noted that ZhongAn was profitable in each of the past three years, but its profit declined significantly in 2016. From 2014 to 2016, ZhongAn recorded net profits of RMB 36.98 million, RMB 44.26 million and RMB 9.37 million respectively. It is worth noting that ZhongAn said it recorded underwriting losses of RMB 61.5 million, RMB 512 million and RMB 153 million in those three years respectively, and that the net profits in those years mainly came from net investment income, which reached RMB 80.1 million, RMB 521 million and RMB 98.6 million respectively. ZhongAn also noted: "Our net investment income has fluctuated and will continue to fluctuate with the performance of China's securities markets."
In addition, some analysts pointed out that this can be seen from ZhongAn's operating figures. According to the prospectus, from its establishment to the end of 2016, ZhongAn sold a total of 7.2 billion policies, but premium income was only about RMB 6.5 billion -- meaning the average premium per policy was less than RMB 1.
Last year's P/E ratio was 6,697 times
ZhongAn, to be listed on September 28, previously published its offering data. The prospectus shows the offer price was HK$59.7 per share; based on its total share capital of about 1.24 billion shares, ZhongAn's market capitalization at the offer price reached HK$74 billion. Compared with ZhongAn's 2016 net profit of RMB 9.37 million (equivalent to HK$11.05 million), the company's 2016 price-earnings ratio was 6,697 times.
Industrial Securities noted that ZhongAn received RMB 5.78 billion of Series A funding in 2015 at a valuation as high as RMB 50 billion (at the time), showing capital's strong favor for this rising insurance star. However, controversy over ZhongAn's valuation has persisted, with the core question being whether RMB 3.41 billion of premium income can support a RMB 50 billion valuation, and whether the existing product structure can deliver sustained rapid growth. Industrial Securities also believes ZhongAn's current high valuation cannot be based on the valuation logic of an insurance company, but follows the valuation logic of internet companies centered on metrics such as user numbers and market share. Globally, there are few listed fintech companies and a lack of reference points. As ZhongAn's business lines expand further in the future, and even enter the life insurance sector, its valuation may change significantly.
The market, however, does not seem to mind ZhongAn's valuation. Guoyuan Securities said that on the first day of ZhongAn's offering, nine brokerages reported that margin lending for ZhongAn subscriptions had risen to HK$49.413 billion on day one.
A National Business Daily reporter also interviewed Ye Shangzhi, chief strategist at First Shanghai Securities, who said: "The market currently views ZhongAn as an internet finance company, and with new economy leaders participating, the market is inclined to value ZhongAn at a higher level. Whether all parties can ultimately generate synergies, and whether ZhongAn's business development can outperform traditional insurers, will take time to observe and verify."
Source: National Business Daily 2018-03-06