Fanhua hits reset button, but has yet to say where exactly it’s going

The company will change its name from next month and installed a new chairman, as it tries to move beyond its original business in China’s heavily regulated insurance market

Key Takeaways:

• Fanhua will change its name to AIX Inc. from Nov. 1 as it looks set to diversify beyond its original insurance brokerage business
• The company appointed Hang Suong Nguyen as its chairman late last month, possibly signaling it’s eyeing Vietnam as a new growth market

By Warren Yang

It ain’t easy playing in China’s heavily regulated financial services sector, as many private startups have discovered in recent years in a constantly tightening regulatory landscape that has forced many players from the space. The latest moving in that direction could be Fanhua Inc., (AIFU.US) which is finding it increasingly hard surviving as an online insurance broker.   

The companyis trying to diversify, both in terms of its business and also geographically, to ensure its longer-term viability, hoping investors will give it another shot. Reflecting that evolution, Fanhua will change its name to AIX Inc. from Nov. 1 if shareholders approve the move at a meeting scheduled a day earlier, according to a statement released last Friday.

That process is likely just a formality, and we expect the Fanhua name will soon disappear from the Nasdaq, where the company was originally listed as CNinsure back in 2007. To pave the way for the latest name change, the company’s stock will start trading under a new ticker from Wednesday this week. Its new Chinese name translates roughly to “Future Intelligence,” giving a general hint, albeit quite vague, at the new direction it hopes to take.

At the end of last month, Fanhua also brought in a new chairman with the naming of Hang Suong Nguyen to lead its board.

Fanhua made the changes as it looks to forge a new growth path, with capital support from White Group, an investment vehicle led by former Singaporean career politician Peh Chin Hua. In February, Fanhua and its affiliated wealth manager, Highest Performances Holdings Inc. (HPH.US), both signed deals to each receive as much as $500 million in new investment from White Group as each sought to shift its focus. Fanhua and High Performances are affiliated through their significant shareholdings in each other.

Shortly after the investment agreement, Fanhua indicated it would use the new funds to expand beyond insurance through the acquisitions of telehealth and medical robot companies. White Group also planned to inject assets to help the company with artificial intelligence (AI) development and to expand beyond Mainland China by setting up new offices in Singapore, Vietnam, Europe, the U.S. and Hong Kong.

White Group’s Peh took over as chairman of Fanhua immediately after announcement of the deals, though now he’s giving up that role to Nguyen.

Fanhua’s results for the first half of this year make it easy to understand why the company wants to diversify or possibly even jettison its original business completely. Its total revenue tanked more than 40% year-on-year to 1.1 billion yuan ($155 million), with nearly all its profit disappearing, putting the company on the brink of falling into the red.

A big drag on Fanhua’s revenue was a new government rule that imposes a cap on commissions for insurance brokers, which caused an “unprecedented disruption” for the industry, founder and CEO Yinan Hu said in the company’s late earnings release in September. Reflecting the impact of that regulatory bombshell, the total amount of gross written premiums from life insurance policies that Fanhua distributed decreased only marginally during the quarter, which means the fees it received for individual sales must have plunged.

The company is trying to use AI to do more with less, and is trialing an AI model it created with Baidu, one of China’s leaders in the space. Perhaps thanks to the adoption of that technology, Fanhua was able to slash the number of its life insurance sales agents by more than a third in the first half of this year from a year earlier.

Vietnam ties

Apart from Fanhua’s interest in AI, its choice of Nguyen as its new chairman may signal the company is eyeing Vietnam as a new growth market, given her Vietnamese background. According to her official bio from Fanhua, she has business degrees from Vietnam National University and Hanoi University of Science and Technology. 

It’s not clear what Fanhua has in mind for Vietnam, or any other overseas market for that matter. But the company, as well as its Highest Performances wealth management affiliate, both appear to be moving away from their roots in China. Like Fanhua, Highest Performances isn’t faring so well.

Highest Performances’ total revenue dropped nearly 50% year-on-year in the six months to last December, the first half of its fiscal year, as weakness in China’s stock markets dampened investor demand for related wealth management products.

On the surface, High Performances has made some progress in expanding into new business areas by acquiring assets from White Group. Earlier this year, the company agreed to buy an AI humanoid robot maker and a stake in an international sporting event organizer from White Group. How much these acquisitions will actually help Highest Performance in the long term remains to be seen, particularly given that they are completely unrelated to its expertise.

As to Fanhua, the company has yet to publicly disclose what it wants to be. Despite all the movement pointing to a Southeast Asian pivot, the company has continued to describe itself as a “technology-driven financial services provider in China” in all its recent announcements.

Fanhua and Highest Performances may hope to ultimately become diversified conglomerates, even though markets have historically valued such companies at a discount to the sum of their parts due to their relative lack of focus.

So, it’s questionable if such a transformation will help boost either company’s stock much, if at all. Fanhua’s shares certainly have a lot of ground to recover after losing more than 90% of their value in the past five years. That’s given them a price-to-earnings (P/E) ratio of about 4, which looks small but is quite typical for China fintechs. The company’s price-to-sales (P/S) ratio is also quite depressed at 0.8, compared to 1.2 for rival insurance broker Waterdrop (WDH.US).  

Fanhua has a good case for business diversification, given the difficult regulatory and economic conditions for insurance companies in China right now. But it needs to tell investors more clearly where it’s heading rather than just sending out signals that keep people guessing. Investors who have given the company the benefit of the doubt so far may be growing impatient, though perhaps the naming of a new chairman could indicate it is finally settling on a new direction.

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