Shouhui files for IPO

The online insurance broker is well positioned in a market expected to grow strongly in the next five years, but faces uncertainty due to regulatory risk

Key Takeaways:

  • Shouhui has filed for a Hong Kong IPO that could value it at around $200 million
  • The company is China’s third-largest insurance broker for long-term life and health policies, but has experienced uneven growth in the last three years

  

By Doug Young

Life hasn’t been easy for Chinese fintechs these last few years due to an ever-changing regulatory landscape as Beijing tightens oversight of this emerging group of private sector companies. But that hasn’t stopped the small field of remaining players from forging ahead in the space, seeking to tap huge demand from consumers and small businesses for products like loans and insurance.

The latest to test out investor appetite is Shouhui Tech Ltd., an online insurance broker whose listing application shows the huge growth potential in China for its core life and health insurance products. But the company’s results also show how volatile the China market can be, resulting in big swings in its revenue over the last two years.

Reflecting how tough the market is, two of Shouhui’s private sector competitors, U.S.-listed Fanhua (FANH.US) and Hong Kong-listed Zhongan (6060.HK) currently trade at price-to-sales (P/S) ratios of just around 0.8 – hardly what one would expect for an industry with such big growth potential. A similar ratio for Shouhui would value the company at about $200 million, putting it behind the $360 million for Fanhua and a much-larger $5 billion for Zhongan.

Shouhui and Fanhua are probably valued lower due to their status as insurance brokers, compared with Zhongan’s as a seller of its own insurance policies. Such brokers are essentially middlemen that make their money from fees selling other companies’ policies – a business that carries less risk but also less profit potential.

Many of China’s fintechs, most of them private companies, have shifted from providing actual financial products to acting as middlemen in recent years, following a government crackdown on the group over concerns about their inexperience at risk control.

In its prospectus filed last week, Shouhui points out that it currently sells products from about 100 insurance companies, including most of China’s top-listed carriers. It also points out that it doesn’t simply just resell its partners’ existing products, but also has collaborated with them to create its own customized products since 2017. Such customized products have become Shouhui’s most important revenue source since then, accounting for 57.8% of the company’s first-year premiums (FYP) in the first nine months of last year.

Truth be told, China’s insurance market really does hold huge potential due to its relatively low penetration rates. The older generation generally shuns such products, having grown up during a socialist period when insurance was automatically provided by their state-run employers. Most buyers today come from a younger generation of people aged 30-45 who grew up in the post-socialist era. People from that age group accounted for 71% of Shouhui’s policies sold in the last three years.

Third-party data cited in Shouhui’s prospectus shows just how rapidly the market for long-term health and life insurance has grown in China in recent years, rising from just 7 billion yuan ($984 million) in gross written premiums (GWP) in 2018 to 52 billion yuan last year, representing huge annual growth rate of 65%. The rate is expected to slow slightly to 50% in the next five years, reaching 391 billion yuan by 2027.

Unimpressive growth

Despite the market’s big potential, Shouhui’s own track record is a bit spottier. The company says it was China’s third-largest insurance broker for long-term life and health policies in terms of GWP in 2022 with 7.1% of the market. But its growth over the last three years has largely trailed the industry.

The company did report big growth last year, with revenue more than doubling to 1.34 billion yuan in the first nine months of 2023 from just 555 million yuan for the comparable period of 2022 when China’s strict pandemic-control measures put a big damper on demand. On an annualized basis, revenue from the first nine months of last year would represent just a 13% increase over the 1.5 billion yuan in revenue the company recorded for all of 2021.

Most of the company’s user metrics are also relatively unimpressive in terms of growth, ranging from a 7.6% rise in registered users to 18.3 million at the end of September last year from 17 million at the end of 2022; to a 19% rise in policyholders to 2.83 million from 2.38 million over that same period.

One area where the company does better is in selling more policies to its existing customers. It said its average policies per customer rose to 3.5 at the end of September from 3.2 at the end of 2022 and just 2.7 at the end of 2021. That’s a good sign as it shows a certain level of “stickiness” among customers who like the company enough to buy more of its products.

One of the best places where we can compare Shouhui to its peers is in gross margin, which generally reflects how profitable a company’s operations are. In that regard, Shouhui’s most recent gross margin of 32.5% for the first nine months of last year lags Fanhua’s 37.6% for its life insurance business in last year’s third quarter. But both are well ahead of Zhongan’s 17.1% gross margin in the first half of last year.

That discrepancy shines a spotlight on a major difference between direct insurance providers like Zhongan, and insurance brokers like Shouhui and Fanhua, which are relatively protected from financial market downturns. By comparison, actual insurance providers like Zhongan are quite exposed to such financial market movements, since they use a big portion of their revenue from selling policies to invest in financial markets.

Shouhui lost money last year, but that was all due to non-operational items. Excluding those items the company recorded a non-IFRS profit of 209 million yuan in the first nine months of last year, quadruple the 50 million yuan profit it recorded on that basis a year earlier. Still, that profit would translate to a P/E ratio of just 7 using our $200 million valuation – not exactly too impressive.

At the end of the day, Shouhui looks like yet another fintech for investors to choose from in the insurance sector. Its relatively profitability status and big market share could make it slightly more attractive than smaller peers. But the biggest risk factor for the company, and all of its peers, will continue to be China’s fickle regulators.

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