Huize Holdings - A Fast Growing Insurance Broker In The Rapidly Expanding Chinese Market

Business plans

Being in the right marketplace, with the right sort of product, at the right time - that's what business success is made of. Sure, of course, execution also matters but our first query about any adventure or investment has to be about whether the basic idea is right for the time and place. We'd not, for example, be selling bikinis in Afghanistan right now, pork in Israel has a limited market, and so on.

However, we do know that certain goods and services become much more heavily desired as a place becomes richer. We also know the effects of state provision - or not state provision - on the desire for certain types of insurance.

So, if you're providing these types of insurance in a place getting swiftly richer, in a place where the state provision is widely seen as useful but not enough, then you should be in a good place as far as business plans are concerned. This is where we find ourselves when considering this company.

The general background For Huize Holdings HUIZ

Certain things are "luxury goods". That does not mean they're luxuries, only for the richer among us. Rather, the jargon means that as incomes rise then the portion of incomes spent upon them rises. Pensions and health care, even more insurance for both of them, are known to be such luxury goods.

The intuition should be obvious enough, if the worry is what's for lunch today then what happens in 40 years' time becomes something well over the event horizon. But once the basics are sorted, that long-term future is definitely going to happen, then provisioning for that future becomes something we'll all spend good money upon. It simply is true that as countries become richer then the health care, pension, and insurance sectors become much larger.

This can also divide one of two ways, into state provision or into the private sector. Everywhere has some mix of the two of course, so it's always a tendency either way. China has public health care, state pensions, but there's a huge hunger to provide more than that through the private sector.

It's a standard part of the analysis that the truly vast savings rate (45% perhaps) is households putting resources aside to pay for those future pensions and health care bills. This is also what finances the truly vast investment to GDP ratio, also in that 45% range. Insurance is, to some extent, a substitute for direct savings to pay for these things.

So, we've China getting very much richer very quickly, we've a hunger for private sector solutions to future lifetime costs and also a population that is, by western standards, remarkably uninsured.

This sounds like an excellent business line to be in and so it indeed is.

We're not the only people who can do this sort of analysis of course, meaning that there's something of a landrace going on to occupy the territory.

Regulatory problems

As we know the Chinese authorities are cracking down on varied parts of the internet economy. Gaming companies are suffering from time limits imposed upon how long children may play for. The education sector is under a lot of pressure as foreign capital, even for profit companies, is being turfed out of mirroring or tutoring to the state school syllabus. Those company leaders who are seen as getting too large for their boots are being hauled back into line.

In the insurance sector this is manifesting itself as an entirely welcome crackdown upon the more fly by night insurance companies. Collecting premiums then not being around to pay out on claims is a very old scam and it's just and righteous that the sector is properly regulated to prevent this.

Brokerage

The joy though is that greater regulation of insurance companies only benefits insurance brokers. Buyers will be happier taking out policies on the basis of accurate pricing and so on, knowing there are no scams hidden in offerings. But the costs of having to actually be legal are upon the insurance companies, not the broker.

Which is where Huize is

So, we've a previously underserved market in a country rapidly getting richer, an insurance sector where demand is growing by leaps and bounds, one which is being currently sorted out by the imposition of good and proper regulation. This is a market we'd like to be an insurance broker in, or to perhaps own a piece of one.

The next question

Having checked on all those basics we now want to think about the details of implementation and execution. We know, given the landrace nature of the sector, that three aren't going to be significant profits at this stage. Indeed, we'd be expecting losses as territory is staked out. But we do want to see significant growth as this is going on.

Which brings us to the Q2 results:

• Gross Written Premiums (“GWP”) facilitated on our platform increased by 72.7% to RMB2.06 billion (US$319.1 million) from RMB1.19 billion in the first half of 2020. Of the total GWP facilitated, first year premiums (“FYP”) accounted for RMB1.19 billion (57.9%) and renewal premiums accounted for RMB868.8 million (42.1%).
• Operating revenue increased by 97.1% to RMB953.6 million (US$147.7 million), from RMB483.7 million in the first half of 2020.

 OK, taking part in the landrace, conquering the territory, is happening and happening nicely.

However, we do want to know whether profit is being made:

Net loss in the first half of 2021 was RMB48.7 million (US$7.5 million), compared to a net loss of RMB6.0 million in the same period of 2020. 

No, no profit. But that's OK, we know it's necessary to invest in order to gain market size. Our question then becomes about the run rate:

As of June 30, 2021, the combined balance of the Company's cash and cash equivalents amounted to RMB430.7 million (US$66.7 million), compared to RMB404.6 million as of December 31, 2020.

Ah, that's good, cash held is going up. My assumption would be that cash incomes in faster than cash-out has to be paid. Therefore there can be that loss booked while also cash at hand rises. That is, we have positive cash flow even if not accounting profit. That makes our next measure less of a worry. For that next measure is usually how long can they carry the losses given resources within the company? If losses are still accompanied by positive cash flow then that's something that can go on near indefinitely.

So, the company isn't facing a funding crunch any time soon. Like, for years, even if then.

We don't in fact need to go further in our financial analysis. We know that the company is focused on growth, which is what it is achieving. The limitation to being able to chase growth is negative cash flow against capital retained. That's not a limitation as to the cash flow, despite losses, is positive.

My view

As I say up at the top the most important question is always whether we believe the base story about the marketplace and the positioning within it. Selling health and pension insurance products into a fast-growing economy like China - especially given the state's light tough in this area - hits all the economic basics. Selling a luxury good into a rapidly getting richer country is an excellent idea.

The company clearly has the resources to be able to continue chasing that market. Further, the results so far do show that they're capturing significant growth.

If we're interested in small-cap Chinese stocks then this looks like a good one.

The investor view

Risk is everything in investing. But a small and speculative position from the risk on end of a portfolio? Why not?