Stock price of Zhong An has performed rigorously since the coronavirus outbreak, in light of deeper online insurance penetration. Speaking of firm fundamentals, however, we think the upward trend is steady but may not be linear. Challenges still lie ahead with respect to underwriting margin and tech business monetization. In the near term, 2H19 is likely to incur net loss again.
- Underwriting business to prioritize quality growth. GWP growth in 2019 is likely to be driven by health and lifestyle consumption (+150% YoY via platforms of Ant Financial Group). The Company is getting more selective in its underwriting business, by 1) trimming group health insurance business, which carried much higher loss ratio; 2) pausing certain travel insurance products which paid high services fees to platforms; and 3) cutting underwriting to consumer finance platforms and being alert to industry risks. Product optimization helped improving combined ratio, which is guided at 110-115% for 2019 (vs. 120.9% in 2018).
- Expect loss in 2H19 and FY19. Although the Company achieved positive profit in 1H19, we expect net loss to incur in 2H19 due to 1) enlarged underwriting loss in 2H19. We forecast combined ratio to rise to 114% in 2019 vs. 108.3% in 1H19; 2) greater technology expenses in 2H19 (we estimate RMB 600mn loss of tech business in 2019). Investment gains likely outperform.
- COVID-19 impact mixed. On one hand, premium income from lifestyle consumption, travel, automobile was muted due to coronavirus and may not necessarily recover in full amount after the disease is under control. On the other hand, COVID-19 invoked people’s insurance awareness and promoted online insurance penetration. Premium income from the health ecosystem is likely to continue high growth momentum in 2020.
- Risks. 1) Underwriting margin pressure; 2) investment income growth may decelerate on high base and market uncertainties; 3) weaker-than-expected technology business monetization progress.
- Valuation. We revise up major estimates of financial metrics to reflect improvement in underwriting margin and investment income. While we acknowledge the Company’s efforts towards a more profit-oriented and lean business model, we remain cautious regarding 2020 outlook. We raise TP to HK$ 34.21, based on 3.0x FY20E P/B. Maintain HOLD.
