Juicy margins set Zhongmiao apart among stodgy insurers

The insurance broker controlled by home-appliance maker Haier has filed for an IPO, boasting solid profits underpinned by its focus on corporate policies and a light cost structure

Key Takeaways:

• Insurance broker Zhongmiao, backed by appliance giant Haier Group, has filed to list in Hong Kong
• The company has a small revenue base but boasts strong profits by focusing on lucrative corporate insurance and using a light cost structure

By Warren Yang

Investors understandably don’t often get too excited about insurance brokers that typically lack glamorous growth stories like those for high-flying tech companies. But anyone seeking a highly profitable business may want to give Zhongmiao Innovation Technology (Qingdao) Co. Ltd. a serious look.

At first glance, one of the most eye-catching things about Zhongmiao is its majority ownership by Haier Group, one of China’s best-known home appliance makers. But what’s really outstanding about the company, which applied for a Hong Kong IPO last week, is its high-margin business model that’s underpinned by a focus on corporate insurance and a light cost structure.

To be sure, Zhongmiao isn’t immune from fallout in China’s rapidly slowing economy, as shown by a slowdown in its revenue growth in recent years. Even so, it’s firmly in the black, thanks in no small part to its efficient business model.

The insurance broker’s total revenue increased about 17% to 174 million yuan ($24 million) in 2023 year-on-year, slower than the 24% growth in 2022. Considering its small revenue base and relative youth, only founded in only 2017, the company’s pace of revenue gains may look underwhelming. But its gross profit margin exceeds 40%, allowing it to retain more than 20% of its revenue as bottom-line profit.

Zhongmiao’s cost of sales – the cost to generate every dollar of revenue – comes mostly from referral fees and commissions it pays to its distribution channel partners and agents. And its operating expenses amount to less than a quarter of its revenue.

By comparison, rival insurance broker Fanhua’s (FANH.US) operating expenses erased more than 90% of its revenue last year, while online specialist Waterdrop (WDH.US) actually booked an operating loss. In all fairness, both Fanhua and Waterdrop are much larger than Zhongmiao, and have different business focuses that can add complexities to their operations and make it harder to control costs.

But Zhongmiao’s superior operating efficiency does seem to show that sometimes simpler is better. The company’s operations are quite neatly streamlined around its main insurance business, without reliance on investment income that can be lucrative for many insurers in good times but also a liability when financial markets perform poorly.

Zhongmiao also derives a significant proportion of its revenue by selling insurance to companies, rather than consumers. Such insurance can be a steadier source of income since companies often purchase long-term policies. Protection plans for companies also tend to be more complex to put together, so insurers can charge more for them.

Zhongmiao’s average commission rate for property insurance, which the company mainly sells to businesses, was nearly 18% last year, meaning it pocketed $18 for every $100 in premiums it collected. The rate for auto insurance, mostly for consumers, was much lower at just 5.6%. The rate for accident insurance, which Zhongmiao sells to both enterprises and individuals, was the highest at more than 30%. That high rate meant that even though accident insurance’s share of the company’s overall gross written premiums was small, it made a substantial contribution to its revenue.

Corporate focus

All told, corporate insurance sales made up about 41% of Zhongmiao’s revenue, with a gross profit margin of 66% last year. That’s far better than the 24% margin for its insurance for individuals. As such, corporate insurance accounted for two thirds of the company’s overall gross profit, despite its smaller revenue contribution.

Zhongmiao was created by a Haier entity seven years ago to take over Haier Insurance Agency, which served customers within the home appliance group. The company still sells insurance to Haier, but it has been reducing its reliance on that business. Last year, Zhongmiao’s sales to non-Haier companies exceeded the contribution from companies within its parent group. At the same time, the proportion of sales to consumers has been decreasing over the years, which is good for its margins.

Zhongmiao does have vulnerabilities. Chief among those is its heavy reliance on a handful of underwriters for its insurance policies. Among them, Ping An Property & Casualty Insurance alone accounted for more than 35% of its revenue last year, and Zhongmiao’s top five underwriting partners together contributed nearly two thirds of its sales. That means the loss of even one of those could deal a huge blow to Zhongmiao.

Competition is another element, especially for middlemen like Zhongmiao, if its underwriters decide to focus on their own direct business. The company’s reliance on Haier is also a potential vulnerability if the two companies ultimately go their separate ways. And last but certainly not least, there’s always the potential for regulatory crackdowns that have been quite common over the last five or six years in China’s private financial sector.

Such risks aside, Zhongmiao will ultimately need to show it can preserve its margins while growing to retain investor interest as a listed company. If it can, it will have plenty to offer for investors looking for a steadily profitable business.

At this point, it’s not clear how much money Zhongmiao is looking to raise from the Hong Kong IPO, nor what it would do with the proceeds. The company generates its own cash from operations but has also been raising money from outside investors. Most recently, it raised 14 million yuan in 2021 from a group created by Haier employees in a deal that valued the company about 930 million yuan.

That valuation translates into a price-to-earnings (P/E) ratio of more than 30 based on Zhongmiao’s net profit for 2021. Even based on its higher profit for 2023, the ratio well exceeds 20, far ahead of the 4.7 for Fanhua but quite close to 23 for Waterdrop. Zhongmiao’s superior profitability may justify an even higher valuation for its Hong Kong IPO.

Its ability to sell investors on such a high valuation may depend on whether it can convince them that its good margins are sustainable over the long term. An acceleration of revenue growth, potentially through acquisitions, would also probably boost its investor appeal.

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