Chinese online insurance company ascends toward IPO

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(Bloomberg Gadfly) -- Like electric cars, whose era of global dominance has yet to arrive, the app-driven insurance industry is more of a concept than reality. That doesn't mean investors should dismiss the Hong Kong initial public offering of ZhongAn Online P&C Insurance Co., despite its hefty price tag.

ZhongAn is China's first internet-only insurer, as well as being Hong Kong's first major fintech flotation. The firm's backers -- from billionaire Jack Ma to potential investor SoftBank Group Corp. -- are just too big to ignore.

Bankers are currently sounding out investors for an IPO that could raise as much as $1.5 billion, giving ZhongAn a valuation of $11 billion. That's well above CLSA's $8 billion estimate, which already ranks the online insurer as China's third-most valuable fintech company after Ant Financial, an affiliate of Ma's Alibaba Group Holding Ltd., and Lufax, the peer-to-peer lender owned by Ping An Insurance (Group) Co. Ant and Ping An are both shareholders of ZhongAn.

So here's the bad news. ZhongAn is tiny. Its net written premiums were a mere 3.4 billion yuan ($520 million) last year, or 0.5 percent of China's insurance industry, according to Bernstein Research analyst Linda Sun-Mattison.

It's also expensive. The $11 billion valuation implies an adjusted price-to-book level of 4.3 times, Smartkarma analyst Ke Yan estimates. That's more than triple the 1.3 times for PICC Property & Casualty Co., which had revenue of 301 billion yuan last year, according to data compiled by Bloomberg. As a multiple of earnings, ZhongAn would be valued at 7,685 times its reported 2016 profit. PICC trades at a price-earnings ratio of 8.8.

While ZhongAn is growing fast, it's dependent on so-called ecosystem partners that allow the company to piggyback on their products. They account for 89 percent of ZhongAn's premiums, Bernstein says. These partners charge a lot for the privilege and may, at any time, set up their own insurance outfit.

Chief among them is Alibaba. "Shipping return insurance," where consumers pay a small fee to cover products largely bought on Alibaba's Taobao website, made up almost half of ZhongAn's premiums last year, but health and travel insurance is also growing.

Alibaba takes a 26 percent cut of the revenue ZhongAn derives from selling insurance to the e-commerce company's customers, according to Bernstein, while International Ltd., another partner, charges 45 percent.

Still, these big backers have helped ZhongAn chalk up impressive growth. Between its founding in 2013 and 2016, the company recorded a 544 percent compound annual growth rate in premiums.

Most importantly, there aren't many shares up for grabs. SoftBank Vision Fund, the giant technology investor started late last year by the Japanese company's billionaire founder Masayoshi Son, may buy a stake of between $400 million and $500 million in the IPO. Such a vote of confidence will be a draw, but at the same time will reduce the number of shares available to other investors.

The fund would be a so-called cornerstone investor, committing to hold its shares for a minimum of several months. SoftBank could also become another ecosystem partner for the company, whose growth hinges on being used in as many websites as possible at a relatively low cost.

The IPO will test the appetite for fintech among a Hong Kong investor public more accustomed to floats by staid Chinese state-owned companies. A successful listing may hasten offerings by Ant Financial, which has been valued at $75 billion by CLSA, and Lufax.

ZhongAn needs its heavyweight partners. They also may need it.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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