Growth-hungry Fanhua finds a potential benefactor in Singaporean investor

The insurance broker has struck a deal to receive up to $1 billion in new investment for itself and recently acquired wealth manager unit Puyi

Key Takeaways:

• Singapore-based White Group has agreed to invest as much as $500 million each in Fanhua and its Puyi wealth management unit
• The deal is the latest in a series engineered by Fanhua as it seeks to accelerate its faltering growth

By Warren Yang

Insurance broker Fanhua Inc. (FANH.US) is increasingly looking like a low-key deal-making machine, as it tries to boost its faltering growth.

The company last week announced major new investments for itself and its recently acquired wealth manager, Puyi Inc. (PUYI.US), adding a major new achievement to its recent string of deals that could become key drivers to jumpstart its growth. Now, investors will be watching to see whether it can actually shore up its growth as easily as its financial maneuvering.

Last Friday, Fanhua and Puyi said a group led by Singaporean private investment firm White Group will invest up to $500 million in each company. The new funds would represent a substantial amount for both Fanhua and Puyi, exceeding each company’s latest market value of less than $400 million.

The amount is also more than double Fanhua’s cash holdings at the end of September and more than four times Puyi’s. Last month, Puyi and some of its shareholders also signed a deal to raise a far more modest $13 million by selling a combination of new and existing shares to an entity named New Dragon Group.

Neither Fanhua nor Puyi provided more details about the new funding, so it’s unclear how much existing shareholders might be diluted by the issue of new shares to White Group that would almost certainly be part of any new deal of such magnitude. It’s also anyone’s guess how either company would use the new funds. Fanhua and Puyi said they will finalize details of the investment agreement “soon.”

Neither company’s stock reacted dramatically to the news, indicating investors are probably waiting for more details before passing judgment. Many may not be familiar with White Group, which is a Singapore-based boutique investment firm established in 2005 primarily targeting companies in China and Southeast Asia, according to its website.

White Group is led by Peh Chin Hua, who was a career politician in Singapore for more than 10 years until the early 2000s. But White Group touts that he also has more than five decades of experience in real estate, publishing and finance. One of his most notable achievements as a businessman seems to be his founding of property developer Dragon Land, which he later took public in Singapore. Reflecting that background, White Group’s portfolio has a strong focus on real estate. But it also appears interested in tech-driven companies, based on its investments in a developer of artificial intelligence-enabled robots, a mobile healthcare platform and an unmanned convenience store operator.

That growing technology focus is probably what makes Fanhua and Puyi attractive to White Group. Fanhua is seeking to transform from an old school insurance agency to operator of a technology-driven insurance platform that provides a range of services, including IT systems and digital solutions.

Technology focus

Thus, Fanhua might use the new capital from White Group to acquire technology that can help accelerate its own digitalization journey. White Group may have similar plans for Puyi by adding more technology-based services to Puyi’s core wealth management business. Expansion into Southeast Asia through acquisitions also seems plausible for both companies, given White Group’s ties to the region. And Southeast Asia is often the first overseas market that Chinese companies look to for growth when they’re ready to move beyond China.

Such scenarios look all the more feasible because White Group will probably become a major shareholder of Fanhua and Puyi if and when it invests, meaning it would become involved in management of both companies.

Before this latest announcement, Fanhua’s latest deal-making involved its own marriage with Puyi. That occurred just two months ago, when a group of Fanhua shareholders, including CEO Hu Yinan, conducted a share swap that gave them a combined stake of about 77% in Puyi, while a Puyi group came out with 50.1% of Fanhua. Fanhua shareholders paid a hefty premium for their new majority Puyi stake, hinting that perhaps they had more plans for Puyi through the White Group investment that was announced just two months later.

From Fanhua’s perspectives, one nice thing about the December transaction was that it gave it a majority stake in Puyi without spending any cash. And the Fanhua shareholder group, meanwhile, still controls Fanhua through its majority ownership of Puyi. Prior to the Fanhua-Puyi deal, Fanhua already made three acquisitions in the first quarter of last year, all by swapping shares.

Fanhua’s acquisition push is understandable, as it looks for ways to boost its profits in a slowing Chinese economy. The company’s revenue grew just 1.6% year-on-year in the first nine months of last year, although its net profit surged due to a gain in the value of its stake in Cheche Group (CCG.US) following Cheche’s IPO last September.

Pressure to improve its financials is greater for Puyi, whose revenue dropped by nearly a third year-on-year in the second half of last year. Both companies are coping with a weak economy as China’s growth falters, which is making consumers increasingly hesitant to buy non-essential items like insurance. At the same time, weak performance of China’s stock and property markets is making retail investors similarly reluctant about buying wealth management products like the ones from Puyi.

Fanhua share currently trade at a trailing price-to-earnings (P/E) ratio of just 6. But the figure balloons to 20 on a forward basis, indicating investors expect its earnings to decline substantially as the economy slows. At the same time, loss-making Puyi commands a lofty price-to-sale (P/S) ratio of 24, which looks inflated given the bleak prospects for Chinese stock and real estate these days.

All this is probably leaving investors wondering what White Group has up its sleeve with its grand investment plans that might boost their Fanhua and Puyi’s earnings and validate their high valuations. Can White Group be the white knight to rescue these companies’ otherwise dim prospects? We’ll need to wait for more details of its new investment plan to say more.

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