Funds fleeing, ZHONGMIAO (01471) trapped in growth anxiety, future uncertain?

Recently, the insurance sector in Hong Kong stock market has been active and showing clear upward trends, supported by the "New National Ten Articles" in the insurance industry. However, individual stocks have shown diverging trends, with some smaller companies facing the roller-coaster market of capital outflows. On September 11, the State Council issued the "Opinions on Strengthening Regulatory Control, Preventing Risks, and Promoting High-Quality Development of the Insurance Industry" (referred to as the "New National Ten Articles"). The "New National Ten Articles" systemically deploy the development of the insurance industry for the next 5-10 years. With the main line of "strict supervision, risk prevention, and development promotion," the document proposes ten development opinions for the high-quality development of the industry. Benefiting from favorable policies, the insurance sector in Hong Kong stock market has seen a new round of capital allocation. Data shows that on September 23, the insurance sector index surpassed 1065 points during the trading session, with a maximum increase of over 15.8% compared to the low point in August of 919.41 points. Under the stimulation of the sectoral market trends, a rising star in the Hong Kong stock market insurance sector, ZHONGMIAO (01471), has seen multiple price movements upwards in September. As of September 20, the highest monthly increase reached 18.17%. Unfortunately, ZHONGMIAO's share price failed to sustain the upward trend. On September 23, its share price opened low and fell, with a decline of over 10% at one point, showing the roller-coaster market trend. It is worth noting that the market generally looks favorably upon the introduction of the "New National Ten Articles," believing it will help boost the valuation of the insurance sector. However, for small and medium-sized insurance companies, how to maintain sustainable growth in long-term competition still needs further observation. Guotai Junan Securities believes that from the overall tone of the "New National Ten Articles," the future regulatory trends in the industry will further tighten, strengthening the competitive advantages of leading insurance companies in standardized operations. Therefore, the roller-coaster market trend of ZHONGMIAO signifies to a certain extent that the market believes the company is expected to benefit from the "New National Ten Articles" for new business growth, while also worrying about the risks it faces in long-term competition, especially in the background of the slowdown in company performance, pressure on gross profit margins, and the urgent need for further improvement in the quality of performance. Positioned as the insurance agent "little brother" backed by Haier Group Public information shows that ZHONGMIAO is an insurance agency service provider in Shandong Province, China, distributing various insurance products for enterprises and household insurance users, including property, life, health, accident, and automobile insurance products. According to the latest "China Insurance Yearbook" issued in December 2023, as of the end of 2022, the insurance industry in China is characterized by high competition and a decentralized market structure. By the end of 2022, there were 2,215 insurance intermediary companies in China, including 1,721 insurance agencies. In 2022, the insurance business income of ZHONGMIAO (i.e., the commission income earned by insurance companies through distributing insurance products based on policyholders' premiums) was approximately 131 million yuan, ranking 78th among all insurance agencies in China. It is worth noting that ZHONGMIAO's current industry position is due to its backing by the Haier Group. Public information shows that ZHONGMIAO, formerly known as Haier Insurance Agency, was established by the Haier Group in 2001. ZHONGMIAO was established in 2017 and obtained a national insurance intermediary license, being included in Haier Insurance Agency. After going public in August 2024, ZHONGMIAO indirectly held approximately 45.33% of the shares through Qingdao Haiyinghui and Qingdao Haichuanghui, both subsidiaries of the Haier Group. In terms of business, ZHONGMIAO, as an insurance intermediary company incubated internally by Haier, has a deep relationship in business development with the Haier Group. For the years ended December 31, 2021, 2022, 2023, and the first 4 months of 2024, the revenue attributable to the Haier Group or related to it accounted for approximately 25.3%, 32.0%, 25.5%, and 23.1% of ZHONGMIAO's total revenue, respectively. For ZHONGMIAO, having the support of Haier Group is an advantage that allows it to receive stable commission income from policies. However, this also brings some risks, such as being overly reliant on the Haier Group, which could put significant pressure on the company's performance if there are changes in demand from Haier. This trend has already been reflected in the company's performance in the past two years, with commission income from Haier Group remaining relatively stagnant at around 24 million yuan in 2022 and 2023, showing weak growth. Slowing business growth, profitability under pressure In fact, ZHONGMIAO's overall performance growth has clearly slowed down. From 2021 to 2023, the company's revenue increased from 120 million yuan to 174 million yuan, with a compound annual growth rate of 20.4%, and net profit increased from 26.99 million yuan to 35.99 million yuan, with a compound annual growth rate of 20.2% during the same period. In the first half of 2024, the company's revenue was 88.456 million yuan, an 8.37% year-on-year increase, and net profit attributable to the parent company was 21.588 million yuan, a 5.33% year-on-year increase. One of the main reasons for ZHONGMIAO's revenue growth slowing down is that the company's business still relies on insurance agency services. From 2021 to 2023, the revenue from insurance agency services for ZHONGMIAO was 116 million yuan, 131 million yuan, and 156 million yuan, accounting for 96.7%, 88.1%, and 89.5% of total revenue, respectively. In the first half of 2024, revenue from insurance agency services reached 82.213 million yuan, accounting for 92.94% of total revenue. On the other hand, reliance on a few customers and suppliers is also unfavorable for ZHONGMIAO's bargaining power and the healthy stability of its profitability structure. In 2023, revenue from ZHONGMIAO's top five customers accounted for a total of 65.1%, with the largest customer accounting for 35.6% of revenue. During the same period, the purchasing amount from the top five suppliers accounted for 74.3% of the total, with the largest supplier contributing 45.6%. Concentration of customers and suppliers often results in pressure on operating cash flow performance. From 2021 to 2023, the net cash inflow from operating activities for ZHONGMIAO was 24.586 million yuan, 27.202 million yuan, and 1.9.979 million, the "quality" is showing a downward trend.In the first half of 2024, ZHONGMIAO's overall gross profit margin was 42%, a decrease of 2.1 percentage points compared to the same period last year, mainly due to the gross profit margin of the company's insurance agency business dropping by 2.1 percentage points to 40.5% year-on-year. The company pointed out that this decrease was mainly attributed to two factors: first, the proportion of commission income contributed by accidental insurance products and car insurance products with relatively low distribution gross profit margins increased. Second, with the overall economic uncertainty, consumers' demand for certain life and health insurance products continues to decline, leading to a decrease in commission income from life and health insurance products with relatively high gross profit margins. It is understood that life and health insurance products are the second largest source of commission income for ZHONGMIAO, and the average commission fee rate for this business 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 maintaining stable commission income through a "price-for-volume" approach, reflecting the weakening market demand and intensifying industry competition. ZHONGMIAO's revenue and operating performance are directly affected by the scale of premiums and the commission fee rate of policies. In the future, as the regulatory trend towards increasing transparency in the industry continues, if the commission fee rate cannot be continuously increased, commission income may face a growth bottleneck. This is also one of the reasons why many companies in the insurance intermediary industry are striving to move away from the position of "middleman earning commissions" and instead engage in full-cycle risk management services. It is reported that ZHONGMIAO positions itself as a "leading digital insurance agency services and solutions provider in China." The company has established an integrated service model through Wuxi Online Offline Communication Information Technology Co., Ltd., providing services such as risk inspections, personalized consultations, selling insurance products, and insurance claims for customers. The future may be worth looking forward to. However, at present, ZHONGMIAO's business transformation path is still challenging. In the current situation where investors are pressing the "sell" button, how to regain investor confidence and avoid standing on the edge of a cliff is the first priority that Zhongmiao needs to address.