Zhong An’s 2019 annual results were satisfactory, incurring net loss of RMB 454mn (vs. CMBIS estimate of RMB 546mn). As the Company sought to purse a lean and quality-oriented business model, underwriting loss narrowed, investment income beefed up and technology business offered more visibility. We think disciplined control of business quality and deepened cooperation with Ant Financial bode well for future performance. Upgrade to BUY.
- Underwriting quality solidified. Combined ratio declined 7.6ppt YoY to 113.3%, slightly beating our estimate at 114%, whereas underwriting loss narrowed 7.4% YoY to RMB 1.7bn. This achievement was underpinned by, 1) product optimization - health and lifestyle consumption drove premium growth, up 68%/131% YoY, respectively. The Company has become more selective in underwriting business and trimmed group health insurance, travel insurance as well as consumer finance business; 2) channel optimization - premium income from proprietary platforms rose to RMB1.1bn, five times its amount in 2018, bringing expense ratio down by 15.1ppt to 45.9%.
- Investment income surged. Total investment yield rose to 9.3% in 2019, thanks primarily to 1) realized gains of RMB 712mn (vs. loss of RMB 68.6mn in 2018), and 2) an increase in dividend income from investment fund and wealth management products.
- More visibility in technology business, which recorded revenue of RMB 270mn, up 140% YoY and outpacing cost, thereby narrowing net loss to RMB 334mn. Overseas market expansion also proved successful by entering into cooperation with leading insurers and O2O platforms in Japan and Southeast Asian countries.
- Result negatives. 1) Loss ratio hiked in the consumer finance ecosystem to 97%, and may stay high in 2020 due to economic slowdown although the Company has reduced exposure (outstanding loan balance decline 22% YoY and 14% HoH). 2) Net loss enlarged in 2H19 with respect to both underwriting and technology business. 3) Investment gains in 2019 were exceptionally good and may not be replicated when interest rate goes down.
- Upgrade to BUY. Better-than-anticipated 2019 results cleared some of our concerns over the Company’s financial performance in the years to follow. We revise up earnings metrics. However, we adjust valuation multiple and derive TP based on 2.8x FY20E P/B due to market volatilities. TP is slightly trimmed to HK$32.13. Recent plunge offers good opportunity to accumulate.
