Fanhua Seeks Support In Share Buyback As Global Expansion Stalls

Key Takeaways:

• Fanhua’s board has doubled the size of a previous share repurchase program, while its top executives have also pledged to buy more of the company’s plunging shares
• The moves come as a plan to expand into new businesses with a Singaporean investor appears to have stalled

By Warren Yang

A decline in a company’s stock can have business implications beyond simply eroding shareholder value. One such case is online insurance broker Fanhua Inc. FANH, whose recently freefalling stock and market value seem to be throwing a spanner into a major tie-up with a Singaporean investor. That said, it’s no wonder the company is doubling down on efforts to stop the recent hemorrhaging of shareholder value.

Last Friday, the insurance broker said its board has approved doubling the size of a previously announced share buyback program to a total of $40 million. It added that top executives of the company, including founder and CEO Hu Yinan, will collectively buy as much as an additional $5 million of its shares to boost their personal stakes.

The purchases are an obvious attempt to resuscitate Fanhua’s stock, which has lost nearly 80% of its value in the past year and now trades at a miserable price-to-sales (P/S) ratio of just 0.2 and an equally dismal price-to-book (P/B) ratio of 0.3. By comparison, rival Waterdrop WDH, whose market performance hasn’t exactly been stellar either, has a P/S ratio still exceeding 1, although the company’s P/B ratio is also well below 1.

“The board’s authorization to expand the share repurchase program demonstrates its confidence in our strategic plan for long-term growth and commitment to shareholder value,” Fanhua said. “We firmly believe that the current stock price is significantly undervalued, as the stock trades at a substantial discount to our net cash value and net asset value and fails to reflect our long-term growth potential.”

Fanhua shares are tanking at a critical time. In February, the company and its then-newly acquired wealth manager, Highest Performances Holdings Inc. HPH – formerly known as Puyi Inc. before being renamed in March – signed deals with a group led by Singapore’s White Group to each receive as much as $500 million in new investment. Following the announcement, Peh Chin Hua, a former Singaporean career politician who now leads White Group, became Fanhua’s chairman.

Later in the month, Fanhua indicated it would use the new funds to expand beyond its traditional insurance business through the acquisitions of telehealth and medical robot companies. White Group also planned to inject assets to help the company with AI development and to expand beyond Mainland China by setting up new offices in Singapore, Vietnam, Europe, the U.S. and Hong Kong. Fanhua didn’t detail how the deal was structured, though we can find some hints from subsequent transactions between Highest Performances and White Group, which we’ll look at shortly.

Without a further update from Fanhua, it’s not clear where the White Group deal stands now and whether it is advancing, especially as the drop in Fanhua’s share price may complicate things. For Fanhua, $500 million is a substantial amount of new investment, considering that its market capitalization in February was less than $400 million. Now, the gap has become even wider as Fanhua shares have lost more than 70% of their value since the deal was announced. In that process, Fanhua’s market value has shriveled to just $85 million.

If White Group was set to receive a stake in Fanhua as part of the tie-up, that equity interest would now be worth far less than when the deal was announced. Thus, if the deal has yet to close, White Group could delay its plans or even try to nullify the deal.

Highest Performances Fares Better

While Fanhua shares have tanked, the opposite has been true for Highest Performances after the signing of the deal in February. Highest Performances shares rose by as much as 50% in the months after the deal’s announcement, though recently they have given back most of those gains. Still, its strong share performance after the deal’s announcement led to some follow-up activity. That action also provided some more clues about the relationship between White Group and the Fanhua-Highest Performances camp.

Building on their initial investment deal, Highest Performances and White Group signed a supplementary agreement in late February singling out an AI humanoid maker and a “sports entertainment investment” company as future investment targets.

Not long afterwards, Highest Performances agreed to buy about 78% of Singapore White Lingjun, a maker of AI humanoids, from White Group. Under the deal, which was supposed to close last month, Highest Performances gave 20.8 million of its American depositary shares (ADSs), or about 7.7% of the company to White Group.

And in April, Highest Performances signed another deal to acquire about 27% of Zhongxin International Sports Group from White Group, probably using another share swap whose terms had yet to be finalized. By the time of the second deal, Highest Performances was describing itself as a “a leading provider of smart home and enterprise services,” dropping its previous self-designation as a third-party provider of wealth management services.

As part of the second deal, Highest Performances said it would fund any Zhongxin bids for rights for matches organized by International Tennis Federation and Formula 1 World Championship car races, and that it would also be entitled to all profits from the events.

Fanhua’s own supplementary agreement after the original February announcement specified it would also invest in an AI humanoid manufacturer and a telehealth service provider. But unlike Highest Performances, Fanhua has never reported any additional progress.

All these moves seem aimed at making Fanhua and Highest Performances, which have majority stakes in each other, investment holding companies for non-Chinese assets introduced by White Group. Interestingly, in two new Fanhua announcements released on Monday, including one repeating the doubling of its share buyback plan, the company began referring to itself as a “subsidiary of Highest Performances Holdings.”  

Regardless of the evolving relationship between these two Chinese companies, Fanhua’s current valuation would undoubtedly make it difficult to proceed with any planned acquisitions from White Group, which it was probably banking on in the pivot away from its original insurance business. The story seems to be evolving quickly as Fanhua’s value shrinks.

If Fanhua shares don’t recover, it may even be plausible for Highest Performances to buy it out for a complete merger. Such a scenario may not be too far fetched as Highest Performances is by far the better performer of the two after all.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.