The 2023 interim results are in line with expectations. The underwriting side performed brilliantly. Premium growth was rapid year-on-year (health insurance +15.9%, digital life +52.8%, consumer finance +52.0%, car insurance +54.3%), digital life became the largest ecosystem; the share of premiums from self-operated channels rose to 30.6%, and the comprehensive cost ratio was optimized to 95.8%. The tech and banking sectors cut losses. After considering exchange losses on US dollar notes, investment returns are expected to remain under pressure throughout the year. Referring to the valuation center since 2022, the company was given 1.8XPb in 2023, corresponding to a target price of HK$27, maintaining the “increase in holdings” rating.
The net profit of 2023H1 was 221 million yuan, and the performance was basically in line with expectations. 2023H1 Zhongan Online's total premium was 14.463 billion yuan, up 37.5% year on year; Gimu's net profit was 221 million yuan, a significant improvement over the net loss of 636 million yuan in the same period last year. Specific core business: The insurance division achieved a net profit of 447 million yuan, the technology division achieved a net loss of 247 million yuan, and the bank branch had a net loss of 177 million yuan. The domestic financial insurance business is still the main source of value.
All financial insurance ecosystems have performed well, and underwriting profits have continued to improve. The four major ecosystems of 2023H1 health, digital lifestyle, consumer finance, and automotive achieved total premiums of 5.018 billion yuan/5.836 billion yuan/2,787 million yuan/822 million yuan respectively, accounting for 34.7%/40.4%/19.3%/5.7%, respectively. The comprehensive cost rate for domestic financial insurance underwriting was further optimized to 95.8%, an improvement of 0.7 pct over the same period last year, and achieved underwriting profit of 532 million yuan. The comprehensive cost rate for all four major ecosystems was less than 100%.
The performance of the health ecosystem is steady, and premiums for core products and self-operated channels have increased. The total premium for health ecology was 5.018 billion yuan, an increase of 15.9% over the previous year, and the per capita premium was about 489 yuan, an increase of 8.5% over the previous year. Core retail insurance types achieved rapid year-on-year growth. The total premiums for the 2023H1 million medical insurance flagship product, the exclusive e-student series, reached 3.469 billion yuan, an increase of 51.5% over the previous year; in addition, the total premiums for critical illness insurance reached 777 million, an increase of 267.6% over the previous year; the total premium for outpatient emergency insurance was about 100 million yuan, an increase of about 52.8% over the previous year.
The comprehensive cost rate of 2023H1 Health Ecology fell to 92.5% (vs. 2022H1 96.3%), of which the payout rate fell from 55.1% to 38.0%, mainly due to the increase in the share of new insurance, which is mainly individual insurance, and the share of group insurance with a higher payout rate declined; the fee rate rose from 41.2% to 54.5%. This is due to the company increasing investment in short video marketing and customer acquisition in order to seize the time window. The total premium of the 2023H1 Health Ecology self-operated channel increased by about 163.1% year-on-year.
Digital life has become the largest ecosystem, and e-commerce, air travel, and innovative businesses are all expanding smoothly. The 2023H1 digital lifestyle ecosystem achieved total premiums of 5.836 billion yuan, an increase of 52.8% over the previous year, and all three sectors achieved rapid growth. Total premiums in the 2023H1 e-commerce sector were 3,098 billion yuan, up 35.8% year on year, of which total return insurance premiums were 2,958 billion yuan, up 45.9% year on year. The increase still mainly comes from new platform scenarios such as Douyin. The total premium for the 2023H1 air travel sector was 1,442 billion yuan, an increase of 118.1% over the previous year, benefiting from the recovery of the industry and the release of backlog travel demand. Total premiums for the 2023H1 innovative business segment reached 1,296 million yuan, an increase of 47.9% over the previous year. Among them, the total amount of pet insurance premium transactions was about 200 million yuan, an increase of nearly 100% over the previous year, served more than 620,000 pet owners and continued to enrich products and services; total drone insurance premiums reached 274 million yuan, an increase of 31.5% over the previous year. The comprehensive cost rate of the digital lifestyle ecosystem is 99.8%, which is the same as the same period last year.
Consumer finance continues to pick up, and underwriting profit margins have remained stable. The total premium of the 2023H1 consumer finance ecosystem was 2,787 billion yuan, an increase of 52.0% over the previous year, accounting for 19.3%; an increase of 3% over 2022 H2, and returned to normal levels. At the end of June 2023, the underwritten loan balance was 26.477 billion yuan, an increase of 30.6% over the previous year, and an increase of 14% over the end of 2022. The comprehensive cost ratio of the 2023H1 consumer finance ecosystem was 90.7%, up 0.4 pct from 2022 H1, and remained stable.
The passenger car market is picking up, and the automobile ecosystem is growing faster than the industry. 2023H1 Domestic passenger car sales increased 9.8% year on year, industry car insurance premiums increased 5.5% year on year, and Zhongan Automobile's total ecological premium was 822 million yuan, up 54.3% year on year, higher than the industry. Zhongan actively embraces NEV insurance opportunities and policy dividends. The total premium for 2023H1 NEV insurance increased by more than 228.7% year-on-year. The comprehensive cost rate of the 2023H1 automobile ecosystem is 97.3% (vs. 2022H1 97.9%).
Channel construction has achieved remarkable results, and future cost rates are expected to continue to improve. Zhongan continues to increase dividend mining for major traffic scenarios. The number of fans on mainstream short video platforms such as Douyin and Kuaishou is at the leading level in the industry, and has accumulated over 25 million followers through more than 30 self-operated channels and social networking accounts. Relying on data platforms and algorithm capabilities, 2023H1 Zhongan continues to increase public domain traffic delivery in the real-time advertising RTA model, optimizes live streaming content and user matching, improves public and private traffic conversion efficiency, and has achieved remarkable results in self-operated channel construction. The average daily usage time of the Zhongan Insurance App increased by 42.0% over the same period last year. 2023H1 Zhongan's total premiums were 4.425 billion yuan, up 90.6% year on year; channel share reached 30.6%, up 8.6pcts year on year; number of self-operated channel paying users reached 6.18 million, up 24.8% year on year; self-operated channel multi-policy users reached 54%, the number of insurance policies per paying user reached 1.5, and the per capita premium of users was 712 yuan, up 52.7% year on year. As the share of self-operated channels increases, the effects of marginal cost dilution will gradually become apparent in the future, and the cost ratio is expected to continue to improve.
The technology and banking sectors cut losses, and are expected to turn losses into profits after 1-2 years. The 2023H1 Technology Division had revenue of 267 million yuan, an increase of 22.0% over the previous year, and a net loss of 247 million yuan. ZA Bank's net revenue in the 2023H1 banking division was HK$152 million, up 13.0% year on year, of which non-interest income accounted for about 25.8%; net loss improved by HK$57 million over the same period last year, and the net loss ratio fell to 131.8% from 191.6% in H1 2022, narrowing by about 60 pcts. It is expected that with the gradual stabilization of business development, the Technology and Banking segment will turn a loss into a profit after 1-2 years.
Investment returns have improved markedly, but pressure remains throughout the year, and it is expected that there will still be significant exchange losses in 2023. On June 30, 2023, the company's total investment assets were 41.1 billion yuan, with cash, bank deposits and other financial institutions and fixed income investments accounting for about 89.0% in total. Benefiting from the recovery of the capital market, especially the strengthening of the bond market, the 2023H1 Group's total annual return on investment was 4.4% (vs. 2022H1 1.8%), and the annualized net return on investment was 2.4% (vs. 2022H1 2.3%); of these, the insurance business segment had an annualized return on total investment of 4.0% (vs2.22H1 0.6%), and an annualized net return on investment of 2.2% (vs. 2022H1 2.2%). Looking at the whole year, due to increased equity market fluctuations since 2Q23, there is still some pressure on the investment side. Additionally, the company issued a total of $1 billion in notes in 2020. Affected by the strength of the US dollar, 2023H1 continued to incur exchange losses of 195 million yuan (549 million yuan in 2022). As of the end of June 2023, the principal balance of bonds payable by the company was US$950 million. We expect that there will still be significant exchange losses throughout the year. We expect the company to increase debt repurchase efforts to effectively reduce the impact of exchange rate fluctuations on profits.
Zhongan International announced that it expects to confirm investment income of about 3.8 billion yuan for the whole year. According to the company's announcement, on May 31, 2023, Zhongan International signed a share purchase agreement with Zhongan Technology, Baishida, etc., Baishida conditionally agreed to subscribe, and Zhongan International conditionally agreed to issue an additional 0.66 US dollars. The matter was approved by the company and Baishida shareholders respectively in July 2023. According to the company's financial report, in August 2023, Baishida invested 320 million yuan into Zhongan International for an additional subscription. After the first delivery, the voting equity ratio of Zhongan Technology's holding to Zhongan International fell to 43.65%, and Baishida's voting equity ratio rose to 46.04%. Zhongan International is no longer a subsidiary of Zhongan Online, but is instead registered as a joint venture. The company expects the transaction to confirm investment income of about 3.8 billion yuan in 2023.
risk factors. Regulatory tightening has exceeded expectations; the level of intense market competition has exceeded expectations, product and service innovation has not been iterated enough; the growth rate of insurance types such as e-commerce and pets has slowed down, and incremental expansion has fallen short of expectations; the quality of ecological assets in consumer finance has deteriorated; shares of self-operated channels cannot be maintained and marketing expenses have exceeded expectations; investment returns have fallen short of expectations due to large fluctuations in the stock and bond market; exchange losses have further increased due to continued rise in the US dollar exchange rate; investment in technology and banking services has exceeded expectations, and losses have fallen short of expectations.
Profit forecasting, valuation and ratings. According to the company's 2023H1 financial report and current market conditions, with reference to the new accounting standards, we adjusted the company's total revenue forecast for 2023/24/25 to 353/390/46.7 billion yuan (previous forecast value of 29.6 billion/33.7 billion/37.5 billion yuan), a year-on-year increase of 51%/10%/20%, respectively; adjusted the 2023/24/25 net profit forecast to 46/14.7 billion yuan (previous forecast value of 1 billion/1.3 billion/1.7 billion yuan), of which net profit was achieved after excluding the impact of Zhongan International's announcement in 2023 800 million yuan. The net asset forecast for 2023/24/25 was adjusted accordingly to 20.5 billion/22 billion/23.8 billion yuan (previous forecast value of 16.2 billion/175 billion/191 billion yuan), corresponding to its BVPS forecast to 13.97/14.97/16.17 yuan (previous forecast value of 11.03/11.89/12.98 yuan), and the corresponding PB of the company's current price was 1.6/1.5/1.3x. Considering that the underwriting business is healthy and is expected to maintain rapid growth among the company's sustainable profit sources, referring to the company's valuation center of 1.8x since 2022, the target price is 1.8xPb in 2023, with a target price of HK$27, maintaining the “increase in holdings” rating.