New Stock Interpretation | Zhong Miao Chuangke, an insurance intermediary supported by Haier: Weak cash performance

In the first half of this year, the queue for domestic and foreign IPOs of insurance technology companies continued to expand, telling their own "stories" from multiple perspectives such as platform empowerment, solutions, and innovative products. In just six months, seven institutions have released relevant signals. According to the news from the Hong Kong Stock Exchange on July 22nd, Zomiao Innovation Technology (Qingdao) Co., Ltd. (hereinafter referred to as Zomiao Innovation) that has submitted applications twice, has finally passed the listing hearing on the main board of the Hong Kong Stock Exchange, with CITIC SEC and Ping An Insurance Capital (Hong Kong) as joint sponsors. According to GMTEight's understanding from the industry perspective, the performance of current insurance technology companies fluctuates greatly, the business lines are single, and they have been penalized by regulators multiple times. The market expectation is not very optimistic. In addition, the company itself also faces problems such as continuously declining commission rates and over-reliance on Haier Group. At this moment, can Zomiao Innovation be favored by capital after its Hong Kong IPO? Lowering commission rates to increase revenue Public information shows that Zomiao Innovation is a rapidly growing insurance agency service and solutions provider in China, dedicated to distributing various insurance products for enterprises and household insurance users, including property insurance products, life and health insurance products, accident insurance products, and car insurance products. The company was originally established by Haier Insurance Agency, set up by Haier Group in 2001, and Zomiao Innovation was established in 2017, obtaining a national insurance intermediary license and being incorporated into Haier Insurance Agency. In the same year, it launched an online platform including the "Quanzhangui" application. The "Quanzhangui" app provides personalized insurance product recommendations using the company's proprietary data analysis engine, offering personalized insurance product solutions. The enterprise insurance interactive service platform mainly serves enterprise insurance users, covering key stages of insurance transactions including policy interpretation, product purchase, and policy management. As of December 31, 2023, the company's online platform has over 236,000 registered users. Before the IPO application, Zomiao Innovation completed Series A and Series B funding rounds, raising a total of approximately 142 million yuan. In the process of its establishment, Haier Group has always held a controlling stake. The prospectus shows that Haier Group indirectly holds about 60.44% of Zomiao Innovation's equity through Qingdao Haiyinghui and Qingdao Haichuanghui. Financially, Zomiao Innovation has shown significant growth in performance in recent years, with both revenue and profits increasing. In the first four months of the 2021-2024 fiscal years (referred to as the reporting period), Zomiao Innovation achieved revenues of approximately 120 million yuan, 148 million yuan, 174 million yuan, and 58.644 million yuan respectively, with a three-year compound annual growth rate of 20.4%. Net profits were approximately 26.992 million yuan, 36.349 million yuan, 35.993 million yuan, and 14.829 million yuan respectively, with a three-year compound annual growth rate of 20.2%. In terms of profit margin, Zomiao Innovation has shown a fluctuating upward trend. During the reporting period, the company's gross profit margin was approximately 40%, 45.3%, 42.8%, and 42.4%, showing an upward fluctuation. The net profit margin was approximately 22.5%, 24.5%, 22.4%, and 25.3%, following a similar trend to the gross profit margin. Why the fluctuation in Zomiao Innovation's profit margin? This needs to be looked at from the perspective of its business. The company's business can be divided into three main categories: insurance agency business, IT services, and consulting services, with insurance agency business being the largest, accounting for nearly 90% of total revenue. During the reporting period, the revenue from insurance agency business was approximately 116 million yuan, 131 million yuan, 156 million yuan, and 54.802 million yuan respectively, accounting for 96.7%, 88.1%, 89.5%, and 93.2% of the total income. The revenue from IT services was approximately 1.264 million yuan, 14.953 million yuan, 15.782 million yuan, and 3.218 million yuan respectively, accounting for approximately 1.1%, 10.1%, 9.1%, and 5.5% of total revenue. The revenue from consulting services was approximately 2.654 million yuan, 2.724 million yuan, 2.481 million yuan, and 624,000 yuan respectively, accounting for approximately 2.2%, 1.8%, 1.4%, and 1.1% of total revenue. Overall, the scale of the insurance agency business is steadily growing and consistently contributing about 90% of revenue; IT services started to grow significantly in 2022 and expanded rapidly, while consulting services have remained stable. The gross profit margin of the insurance agency business during the reporting period was approximately 38.9%, 44.6%, 41.1%, and 41.2%, showing a fluctuating trend. Specifically, the insurance agency business mainly distributes four types of insurance products: property insurance products, life and health insurance products, accident insurance products, and car insurance products. During the reporting period, the commission income from distributing property insurance products, accident insurance products, and car insurance products continued to increase, with commission income from distributing property insurance products being approximately 39.658 million yuan, 47.620 million yuan, 59.806 million yuan, and 25.733 million yuan; commission income from distributing accident insurance products was approximately 16.171 million yuan, 24.096 million yuan, 27.830 million yuan, and 9.162 million yuan; commission income from distributing car insurance products was approximately 11.895 million yuan, 22.849 million yuan, 34.355 million yuan, and 11.805 million yuan. At the same time, the commission income from distributing life and health insurance products has been continuously declining, being approximately 48.332 million yuan, 36.156 million yuan, 33.757 million yuan, and 8.102 million yuan during the reporting period. Zomiao Innovation stated that this was mainly due to the decrease in average commission rates for life and health insurance products as a result of the COVID-19 pandemic. More importantly, the commission fee rate for property insurance products was 17.4% in 2021, only slightly increasing to 17.9% by 2023, with a weak increase. As for life and health insurance products, which are the second largest source of commission income for the company, the average commission fee rate has decreased from 27.4% in 2021 to 14.8% in 2023, a decrease of 12.8 percentage points over three years. This also means that the company is trading a lower commission rate for lower commission income.The increase in turnover reflects the fierce competition. Under the trend of increasing transparency in industry fees in the future, if commission rates cannot continue to rise, there may be a bottleneck in commission income growth.Can Haier's technology continue to beautify growth? Zhongmiao Chuangke, as an insurance intermediary company incubated within Haier, has a deep relationship with Haier Group in terms of business development. Firstly, Haier Group contributes to the company's revenue. During the reporting period, the commission income belonging to Haier Group's corporate insurance users from Zhongmiao Chuangke was 18.28 million yuan, 23.809 million yuan, 24.1 million yuan, and 9.107 million yuan, accounting for about 15.8%, 18.2%, 15.5%, and 16.6% of the total commission income. During the same period, the IT service income from Haier Group and its affiliated companies for Zhongmiao Chuangke was 577,000 yuan, 604.2 million yuan, 873.2 million yuan, and 166.5 million yuan; and the consulting service income from Haier Group and its affiliated companies was 790,000 yuan, 234.6 million yuan, 146 million yuan, and 28.5 million yuan. For the company itself, having the support of Haier Group is an advantage as it can receive stable insurance commission income, but this also brings certain risks. Over-reliance on Haier Group and deep integration may put pressure on the company's revenue growth if there are changes in demand from Haier Group. This trend has already been reflected in the company's performance in the past two years. The commission income from Haier Group in 2022 and 2023 remained at around 24 million yuan, showing weak growth. At the same time, the high gross profit from insurance policies from Haier Group further increased the company's gross profit margin in the enterprise sector. The prospectus shows that the company's gross profit margin from Haier Group's business has remained above 73% in the past three years, significantly higher than other insurance clients. With the gradual slowdown in commission income from Haier Group, coupled with the revenue growth of other low-margin businesses, there is a risk of a decrease in the company's overall gross profit margin in the future. Furthermore, the high concentration of upstream and downstream for Zhongmiao Chuangke may exacerbate its operational instability risk. On the customer side, from 2021 to 2023, the income from the top five customers for Zhongmiao Chuangke accounted for approximately 74.5%, 63.7%, and 65.1% of total income respectively. During the same period, the income from the largest customer accounted for 34.6%, 36.9%, and 35.6% of total income. On the supplier side, from 2021 to 2023, the top five suppliers of Zhongmiao Chuangke accounted for 58.1%, 71.7%, and 74.3% of total purchases, while the largest supplier accounted for 36.8%, 39.3%, and 45.6% of total purchases. The high concentration of customers and suppliers hinders the company's ability to negotiate market prices actively, which is unfavorable for the healthy and stable profit structure of the enterprise and may lack a strong foundation for high growth and potential. It is important to note that the long-term growth trend of the Chinese insurance intermediary industry remains stable. According to Frost & Sullivan, the underwriting scale of the Chinese insurance intermediary industry is expected to grow at a compound annual growth rate of 12.8% between 2024 and 2028, reaching 1.5055 trillion yuan in 2028. Currently, domestic professional insurance intermediary institutions have achieved an average annual compound growth rate of premium income of 11.61%, which is not low and is stronger than the entire insurance market. It is worth noting that, according to a report by Boston Consulting Group, many professional intermediary companies have accumulated expertise over the years, establishing some professional capabilities as a competitive advantage, which includes strong team capabilities, leading digital scenario operations, well-structured empowerment systems, and deep traditional risk pricing advantages. Thus, it is evident that the establishment of competitive barriers cannot be separated from a profound technological foundation. The data shows that Zhongmiao Chuangke's research and development costs have been consistently lower than marketing costs. During the reporting period, the company's research and development costs were 4.739 million yuan, 6.842 million yuan, 7.141 million yuan, and 2.809 million yuan; while the sales and marketing costs were approximately 6.836 million yuan, 9.948 million yuan, 11.871 million yuan, and 3.806 million yuan. This drawback is obvious, as opposed to traditional industries, for capital and technology-intensive digital insurance intermediary fields, research and development investment has become an important source to form differentiated competitive barriers, enhance core competitive strength, and is critical for the sustainable development of the enterprise. If Zhongmiao Chuangke does not focus on long-term technological research and development, it may have a detrimental impact on its long-term development. In terms of competitive landscape, the insurance industry in China is highly competitive and fragmented. According to the latest "China Insurance Yearbook" data and insights released in December 2023, as of the end of 2022, there were 2,215 insurance intermediary companies in China, including 1,721 insurance agencies. In 2022, Zhongmiao Chuangke's insurance business income was 131 million yuan, ranking 78th among all insurance agencies in China, which is not particularly impressive. Therefore, finding a healthier development path has become a top priority for Zhongmiao Chuangke.