Cheche Rides Renewed Optimism on Chinese Stocks to U.S. Listing

The Tencent-backed online auto insurance broker is seeking a U.S. listing through a backdoor SPAC merger, just as investors are flocking back to Chinese stocks

Key Takeaways:

• Cheche Technology plans to list in the U.S. by merging with Prime Impact Acquisition I, a special purpose acquisition company (SPAC), at a pre-money equity value of $760 million
• The deal comes as U.S.-listed Chinese stocks are rallying, buoyed by Beijing’s pivot away from strict Covid-control measures

By Warren Yang

Online auto insurer Cheche Technology Inc. is taking a short-cut to Wall Street through a backdoor SPAC listing, riding a renewed wave of optimism that has suddenly transformed Chinese stocks from investor pariahs to hot commodities.

The Tencent-backed operator of an online platform for auto and other non-life insurance policies aims to make its New York debut by merging with Prime Impact Acquisition I (PIAI.US), a special purpose acquisition company (SPAC) created by a San Jose-based investment firm, at a pre-money equity value of $760 million, the two companies said last week.

The transaction will let Cheche drive onto the New York Stock Exchange without having to deal with many of the lengthy hassles of a traditional IPO. That short-cut has been one of the primary factors fueling the boom in popularity for SPAC listings in the past few years.

Cheche will raise $68 million in gross proceeds from the deal, which is expected to close in the third quarter, assuming shareholders of both Cheche and Prime Impact approve the transaction and other conditions are met. Cheche founder and CEO Zhang Lei will remain at the helm.

The new year is rapidly shaping up as a good time for new Chinese listings, as investors embrace the stocks with a vengeance. One of the latest developments fueling that wave was China’s decision last December to finally drop its strict Covid-control measures and reopen its borders, fueling hopes that the world’s second-largest economy would rebound sharply after growing just 3% last year –one of its worst performances in decades.

Last December, the U.S. accounting regulator also signaled its satisfaction with its first-ever full inspections of U.S.-listed Chinese companies under a landmark information-sharing deal between the U.S. and Chinese securities regulators signed earlier in the year. That eliminated a huge risk for U.S.-listed Chinese stocks because the U.S. was threatening to de-list all Chinese stocks from its exchanges unless it could gain better access to their accounting records. 

With these risks removed, Chinese stocks have been taking off lately. The Shanghai Composite Index is up nearly 4% since the beginning of this year. The Hang Seng China Enterprises Index, which tracks offshore-listed Chinese stocks, is up by an even larger 5.6%. And even more impressively, e-commerce giant Alibaba (BABA.US), considered a bellwether for U.S.-listed Chinese stocks, is up more than 13% year-to-date.

While the broader sentiment is certainly positive, Cheche also has its own attractive story for investors. China is the world’s largest auto market, and its auto insurance market is equally big. Annual revenue from car insurance sales currently exceeds $100 billion, and there’s still lots of room for growth as car ownership becomes more common. One segment experiencing explosive growth now is electric vehicles (EVs), which will all require insurance policies as Beijing pushes for more environmentally friendly cars.

Created in 2014, Cheche is an broker selling car insurance for its 100-plus underwriting partners. That means it’s not subject to increasingly strict and complex capital requirements for actual insurers across the globe. It also doesn’t have to worry about managing premiums collected from insurance sales, which requires sophisticated investment strategies.

Promising peer

The similar online insurance broker Waterdrop Inc. (WDH.US) has posted quarterly profits for three consecutive quarters through last September. By contrast, ZhongAn Online P&C Insurance Co. Ltd. (6060.HK), China’s digital insurance pioneer that underwrites its own policies, made a net loss in the first half of last year as its investment income, the company’s main profit driver, all but evaporated during a dismal period for global stocks and bonds.

Cheche’s revenue, generated from fees, likely increased more than 40% to 2.5 billion yuan ($361 million) last year, and is projected to grow 25% this year, according to estimates in the company’s presentation for investors. It facilitated policies with gross written premiums of 15.2 billion yuan last year, up 36.3% from 2021. The company isn’t profitable yet, so cost control is critical. It appears to be making good progress in that regard too, with its operating expenses expected to be little changed this year after increasing 17% in 2022.

In a nutshell, Cheche offers many of the things investors typically want to see in an up-and-coming technology company. But making sense of the company’s post-merger valuation can be tricky.

A classic case of investor difficulty in determining some of these newly listed SPAC merger valuations is Lanvin (LANV.US), another China-based company that owns several global luxury brands. Since completing its own backdoor New York SPAC listing in mid-December, Lanvin’s shares have gyrated from as high as $10 to as low $4.51.  

Cheche highlights that the combined company’s implied pro-forma enterprise value, which adds debt to its market capitalization and subtracts its cash holdings, is about 1.9 times its projected revenue for this year. In its presentation, Cheche seemingly suggests that multiple is pretty modest by comparing it to much loftier figures of high-growth insurance brokers, financial service platforms and insurance software makers.

But Cheche’s enterprise value-to-revenue ratio is similar to ZhongAn’s and much higher than 0.28 for Waterdrop. And the multiple is based on Cheche’s projection for this year’s revenue, which may well be overly optimistic. Using revenue for 2021, the latest available annual period, the ratio jumps to more than 3.

From Prime Impact’s perspective, time is quickly running for it to find a listing partner. The company went public in 2020, and SPACs typically have 18 months to two years to find a target company to merge with to avoid dissolution. Prime Impact’s share price slipped a bit after the Cheche deal was announced, but has since climbed back to where it was pre-announcement. That suggests the SPAC’s shareholders don’t have strong views on the merger.

Cheche has yet to prove it can be profitable, but does appear to hold some promise due to its good positioning to capitalize on a solidly growing market. Sensing the current positive sentiment on Wall Street, it’s wasting no time to sell investors on its prospects through this SPAC deal.

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