Fanhua To Leave Wall Street. Next Stop, Hong Kong?

Key takeaways:

• Online insurance broker announces plan to privatize as China gets set to roll out tough new regulations in January
• Company could go public again in Hong Kong, but analysis suggests such a listing would have difficulty achieving a high valuation

By Jony Ho

Of the three major U.S.-listed Chinese online insurance brokers, the oldest has just announced a plan to go private. That would leave the field with just two, though it’s anyone’s guess how long the remaining pair will stay.

Fanhua Inc. FANH was the first of the trio to list in New York, leading some to call it “Asia’s first insurance broker,” offering life, property and casualty insurance through its online and offline channels. We recently reported on Fanhua’s third-quarter results, which showed declines in both revenue and earnings. Now three weeks later, the company is telling the world it may soon leave New York.

Overtaken by younger rival

Fanhua announced last Thursday that its board of directors had received a preliminary non-binding proposal from a group led by founder Hu Yinan to take the company private for $9.80 per American depositary share (ADS), representing a premium of approximately 10.2% to the closing price the previous trading day.

The market greeted the news with some brief euphoria before reason returned. Fanhua shares initially surged 17.3% after the announcement to a high of $10.43, higher than the privatization bid price. But sensing the reaction may have been overblown, many investors dumped their shares and the stock ultimately rose only 1.1% to $8.99 that day. As the enthusiasm waned, the shares fell by a further 5.4% the next day. The stock fell again this week and closed at $7.80 on Monday, 20% below the offer price, indicating investors may worry the bid may not succeed.

Hu is Fanhua’s largest shareholder with about 18.6% of its outstanding common shares. Under terms of the offer, he will form a buyer group consisting of other shareholders and investors. Meanwhile, Fanhua announced Chairman and CEO Wang Chunlin has resigned from the company’s board, leaving Hu, who previously served as chairman for 20 years, in charge again.

Founded in 1998 and listed on Nasdaq in 2007, Fanhua, along with Huize HUIZ and Waterdrop WDH, which went public last year and this year, respectively, are like the Three Kingdoms of Wei, Shu and Wu from the historical Chinese classic, only in the far more modern online insurance brokerage market.

Fanhua, China’s first listed insurance broker, earned 683 million yuan ($107 million) in revenue in this year’s third quarter. But it was overtaken for the first time by the younger rising star, Waterdrop, which logged 780 million yuan. Fanhua remained profitable, but the loss of its longtime No. 1 status marked a sort of warning signal for the former leader.

Regulatory challenge

Another big challenge for Fanhua and its peers is regulatory risk. On Oct. 25, the China Banking and Insurance Regulatory Commission issued a notice stating it will tighten rules for internet life insurance products starting next year, including more restrictions on product types and the introduction of fee controls. It said several life insurance products will need to be removed from online shops by the end of next year, while offline products must only be sold offline and online products sold online. Industry insiders say the shuffle is hardest on online life insurance products.

Fanhua’s management believes the new rules could work to its advantage, since some insurance companies may close their own internet business and work with intermediaries such as Fanhua instead. But the company hasn’t provided any information either to show whether it is fully compliant with the new rules.

Some analysts predict the market for online insurance is set for huge changes, as new restrictions are placed on both intermediaries like Fanhua and also on the internet business of actual insurance providers. That could lead to a major reshuffling next year.

Against that backdrop, Fanhua’s choice to privatize now is probably aimed at giving it more flexibility when the industry consolidates. The company could ultimately return to China’s domestic A-shares market or list in Hong Kong to raise fresh capital at a better valuation and strengthen its capital to meet tougher requirements. As Sino-U.S. relations continue to sour, U.S. investors have also become much less interested in Chinese stocks.

As investor interest wanes and regulatory pressure builds, Fanhua’s shares have fallen 44% in the last six months alone. That drop, despite its stable business and sustained profits, makes it look undervalued by U.S. investors, especially when one considers that many U.S.-listed Chinese biopharmaceutical and technology companies may be more highly valued despite never earning a penny.

Fanhua currently trades at a forecast price-to-earnings (P/E) ratio of about 11 times and a price-to-book (P/B) of 1.95 times. By comparison, Huize and Waterdrop are both expected to lose money this year and thus have no P/E ratios. Their P/B ratios stand at 1.48 times and 0.9 times, respectively, showing Fanhua is still valued relatively high compared to them.

On a broader basis, poor performance of both the Hong Kong and mainland Chinese stock markets in recent months, coupled with changing official policies in China, has caused investors to become conservative toward Chinese stocks, said Francis Kwok, vice chairman of the Hong Kong Institute of Financial Analysts and Professional Commentators. That contrasts sharply with the more exuberant atmosphere of a year or two ago.

Kwok said that European and U.S. funds trading in Hong Kong have changed their views on Chinese stocks, and even large tech companies such as Kuaishou (1024.HK) and Bilibili BILI, which are well-known and whose Hong Kong IPOs were heavily oversubscribed, have come under significant pressure in recent months.

“As a downstream insurance brokerage, Fanhua is less profitable than traditional insurers and is already less attractive. With shares of upstream insurance companies not performing well and an uncertain outlook for the insurance industry as a whole, Fanhua could face difficulty getting a high valuation if it goes public in Hong Kong in the future,” Kwok said.

With stricter regulation in the U.S. and fading interest from local funds in Chinese stocks, Kwok believes that companies like Fanhua “will eventually come back” regardless of how well Chinese A-shares and Hong Kong stocks perform. But the good old days of high valuations for those returning companies may be gone for now.