Three horses, one unicorn

Jack Ma, Pony Ma and Peter Ma could be termed China’s ‘thoroughbred trio’. The three tycoons share the same surname – Ma – which means ‘horse’ in written Chinese. So perhaps it’s no coincidence that investors seem ready to have a flutter on whichever commercial field the equine threesome race to enter.

The latest bet is on ZhongAn Insurance, a company they jointly founded four years ago and which was valued at $10 billion when it listed in Hong Kong late last month.

That’s given ZhongAn an equine angle too, making it the nation’s latest ‘unicorn’ (the Oxford English Dictionary defines a unicorn as “a mythical animal typically represented as a horse with a single straight horn”, but in the investment world a unicorn is a term for a start-up that grows to exceed $1 billion in value).

The combination of three thoroughbred backers and unicorn status made ZhongAn’s IPO the hottest deal to come from China this year.

Backed by the big three…

ZhongAn Online Property and Casualty Insurance – to give the newly floated firm its full name – only does one speed: the gallop. From day one the local media has devoted rapt attention to the online insurer, predicting it would lead the field after Alipay, Tencent and Ping An Insurance announced they’d teamed up to be its founding shareholders.

The grouping paired China’s two undisputed internet titans with Peter Ma’s Ping An, an established financial services conglomerate that had already made a series of bold investments in the fintech space.

“The three Ma’s have joined the same stable to sell insurance. There will be enough horsepower to push the insurance industry online or even turn it upside down,” Beijing News raved in October 2013, shortly after ZhongAn was incorporated.

ZhongAn appeared to have got the blessing of regulators too – perhaps helped by Ping An’s involvement (the insurer was established in 1988). Indeed, it was the first internet company to obtain a licence from the China Insurance Regulatory Commission (CIRC).

It initially sold short-term health and accident policies, which typically cost small amounts. But by May 2015 the CIRC had also granted ZhongAn the all-clear to move into the more lucrative car insurance market, making it the first O2O (online-to-offline) auto insurer.

More astute investors spotted the potential. A month later, ZhongAn raised about $1 billion by selling a minority stake to a group of private equity investors, including CICC and CDH Investments. According to CBN, a newspaper, ZhongAn was founded with registered capital of Rmb1 billion, but this round of pre-IPO investment already valued the insurer at more than Rmb50 billion (or $7.5 billion).

When ZhongAn launched its initial public offering in Hong Kong last month, Softbank also emerged as a cornerstone investor, taking a 5% stake which valued the Chinese firm at over $10 billion.

Who runs ZhongAn?

ZhongAn differs from fellow upstart insurer Anbang – which first made international headlines after it bought New York’s iconic Waldorf-Astoria hotel in 2015 – in one key respect: it has a very clear shareholding structure.

However, somewhat akin to Anbang’s chairman Wu Xiaohui, who is the grandson-in-law of Deng Xiaoping, ZhongAn is also chaired by a well-connected but low-key tycoon.

Step forward Chairman Ou Yaping, who is in charge of the company’s “strategic planning and business direction”.

The three Ma’s have been attracting most of the media attention but they are not even the biggest shareholders in ZhongAn. Following the company’s Hong Kong listing, Ant Financial has a 13.5% stake, while Tencent and Ping An own about 10.2% apiece. Ou and his family members, meanwhile, control more than 15% of the insurer. “Behind the halo of the three Ma’s, outsiders have forgotten ZhongAn’s actual steersman,” Caixin Weekly wrote. “ZhongAn is always in the hands of Ou Yaping.”

Ou was born in 1962 in Hunan’s provincial capital of Changsha and got a degree in engineering management from the Beijing Institute of Technology in 1984. After teaching briefly at a Nanjing college, he returned to Hunan and worked for trading firms that were connected to the provincial government (these unusual entities were known at the time as ‘window’ companies).

The role had Ou walking a high wire because many of these window companies occupied deliberately grey areas where the level of local government support and ownership was never very transparent.

Moreover, at a time when price controls were still imposed over a wide range of imported goods (such as TV sets), working at the window companies was often precarious: officials in many of the trading roles were purged for profiteering on goods.

Ou thrived in the uncertain landscape and by the early 1990s he had amassed enough capital to acquire a stake in China Merchants Bank and became a director of the state-controlled lender. In 1992 he started a real estate firm known as Sinolink, which went public in Hong Kong in 1998. He was soon famed in business circles for winning a hotly contested land auction for a prime residential site in Shenzhen in 2001.

How well-connected is Ou?

Little about Ou’s family background has been made public. If the 55 year-old has friends or relatives who are senior politicians, the source of his guanxi isn’t apparent (yet).

However, on the business side, his social network is a who’s who of Chinese tycoons, including those in Hong Kong.

One of the trading firms Ou had worked for in the 1980s, according to the Hong Kong press, was a joint venture between the Hunan government and Hutchison, the flagship company of Hong Kong’s richest man Li Ka-shing.

By 2002 Ou had graduated from being Li’s employee to becoming his business partner, when Hutchison bought a stake in Ou’s Panva Gas, a gas distributor listed in Hong Kong. Li wanted to use the firm as a springboard to enter China’s booming gas business. The plan didn’t work out but Ou was able to sell the company to Lee Shau-kee, another of Hong Kong’s property moguls, in 2006. (Panva Gas has since been renamed Towngas China, and is the China-focused unit of Lee’s Hong Kong and China Gas.)

Hong Kong’s Apple Daily describes Ou as “a super agent” who specialises in lining up “potentially lucrative deals” for tycoons from both Hong Kong and the mainland.

Caixin Weekly says his “ability to perform a balancing act” and win the trust of the wealthiest tycoons was the main reason the three Ma’s backed Ou, even though he lacked any experience in the insurance market (although he was involved in a failed bid to buy an insurer in Taiwan in 2010).

What is ZhongAn worth now?

During its roadshow ZhongAn positioned itself as the first Chinese fintech firm to go public in Hong Kong.

The territory’s investors embraced the concept eagerly, the Hong Kong Economic Times reports, noting that more than 100,000 retail investors subscribed to the insurer’s IPO and placed orders as much as 400 times the offering’s size.

ZhongAn also picked a good time to sell its shares, given the Hong Kong stock market has been on a bull run, having gained over 30% this year. It raised $1.5 billion in what was Hong Kong’s largest IPO so far this year. The share price performance has not disappointed either. It closed its first trading session last month 9% higher than its IPO price (which had been set at the upper end of the range).

“Investors are attracted by the ‘three-horses concept’. Some might also be betting on Ou’s ability to pull the strings for ZhongAn,” Ming Pao, a local newspaper said, noting that the shares of Sinolink also enjoyed a halo effect (they have surged 80% since ZhongAn obtained listing approval in June). Earlier last week, the online insurer’s shares traded for as much as HK$90 apiece (the IPO was priced at HK$59.70) – equating to a market value of $17 billion .

Is ZhongAn overly expensive?

Ping An was valued by the market at around $160 billion as of this week, or about 17 times its 2016 net profit. This valuation appears reasonable compared with ZhongAn. The fintech player reported net profit of Rmb9.4 million last year. That means that at one point last week it was trading at more than 12,000 times its 2016 earnings.

Supporters of ZhongAn believe conventional valuation measures such as price-to-earnings ratios or embedded value don’t reflect the potential of an innovative start-up like Ou’s firm. “There was no such thing as a smartphone when Tencent went public in Hong Kong in 2004 [for HK$3.7 apiece]. Would you have believed it if someone told you back then the company’s share price would climb to today’s level [HK$1,765, if you factor in share-splits]?” an internet analyst told Caixin Weekly. “ZhongAn is similar to Tencent in the way that both could change our way of life in the long run.”

Apart from its headquarters in Shanghai, ZhongAn operates no physical branches. There is no army of salepeople either. All business is conducted online and the company uses Big Data and artificial intelligence technology to sell cheaper insurance policies to the mass market.

From its inception to December last year, ZhongAn said it had sold over 7.2 billion insurance policies and served about 492 million policyholders – making it “China’s biggest insurer” on both counts.

Most of these policies, however, involve tiny financial commitments. For instance, ZhongAn sold 100 million shipping return policies during Alibaba’s Singles’ Day in November last year. The upshot of selling large amounts of low-value business can be seen in the stark comparisons of its premium income versus its peers. ZhongAn’s premiums last year were just Rmb3.4 billion, or about 0.5% of China’s insurance industry in general, while sector leader PICC sold Rmb300 billion of policies over the same period.

Can its rapid growth continue?

The internet has already disrupted longstanding industries across China and insurance doesn’t look likely to be an exception.

China’s insurance technology market (or “insurtech”, to use the buzz term) is expected to grow from Rmb363 billion last year to Rmb1.4 trillion in 2021, according to market consultancy firm Oliver Wyman.

In addition to its flagship product of insuring the deliveries of Taobao – Alibaba’s dominant e-commerce site – ZhongAn also sells policies for flight delays, broken smartphones and accidents with drones. Perhaps more worryingly for incumbent insurers like China Life, the company has started selling health insurance, and ZhongAn executives are talking about life insurance and wealth management products too.

Will it be allowed to expand into these areas? The attitude of the Chinese regulators will be key, especially if the judgment is that a disruptor like ZhongAn might threaten the broader stability of the financial system.

After all, ZhongAn obtained its initial licence when Xiang Junbo was the head of CIRC but Xiang has since been sacked amid an anti-graft investigation (see WiC362). The CIRC has also recently taken a tougher line on the sector in general, clamping down on aggressive moves by the likes of Anbang.

Another concern for investors, the Nikkei Asian Review has noted, is ZhongAn’s reliance on its key shareholders, including Tencent and Ping An, which accounted for 75% of its gross written premiums as of March. The total of service fees it pays to both firms to maintain these alliances amounted to 43.6% of its premium income.

There is also the issue of the fast-shifting alliances across the tech and internet sectors (often compared by analysts to the Three Kingdoms and Warring States periods, where rival kings forged and fractured pacts). Tencent, for instance, has recently secured a new licence from CIRC to sell insurance products on its popular messaging app WeChat. Ping An has also been keen to grow its online business. The three Ma’s laid the foundations for ZhongAn’s initial growth. But paradoxically they could pose one of the biggest threats to the insurer’s future.

Ou Yaping, the master balancer, will have to be on top form to make sure his top three shareholders don’t canter off in different directions.

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