Matters:

Zhongan Online published its 2024 semi-annual report. 24H1 achieved premium income of 15.238 billion yuan, +5.4% year over year; the comprehensive cost ratio was +2.1pct year over year to 97.9%. 24H1 achieved insurance service revenue of 15.088 billion yuan, +19.0% year-on-year; net profit to mother of 0.055 billion yuan. Net assets attributable to the mother at the end of the reporting period were 20.24 billion yuan, +0.8% compared to the end of the previous year; the total insurance business/return on net investment was 3.3%/2.3%, -0.7pct/+0.1pct year-on-year.

Commentary:

Basic market: Domestic insurance business continues to be profitable. 2024H1 achieved insurance service revenue of 15.088 billion yuan under the new standards, +19.0% year-on-year; the comprehensive cost ratio increased by 2.1 pct to 97.9% compared to last year. Among them, in a complex market environment, the payout rate was +3.6 pct to 60.7% year on year; the fee rate improved, -1.5 pct to 37.2% year over year.

(1) Healthy ecology: The multi-product matrix highlights product strength. Under the new guidelines, the 2024H1 health ecosystem achieved insurance service revenue of 4.867 billion yuan, +22.7% year over year; the share of insurance service revenue increased by 1.0 pct to 32.3% year over year. Among them, the flagship product “Exclusive e-Student” has gone through 24 iterations and made breakthrough progress in the coverage of visiting hospitals, expanding from public medical institutions to private medical institutions. The company made efforts to expand the range of people covered by health benefits. The total premium for 24H1 non-standard inclusive products exceeded 0.33 billion yuan, an increase of 270% over the previous year. Meanwhile, outpatient emergency insurance and critical illness insurance achieved total premiums of 0.421/0.812 billion yuan respectively, +321.2%/+4.5% compared with the same period last year. During the reporting period, the comprehensive cost rate of health ecology was +3.2% to 95.7%, with a compensation rate of +0.1 pct to 38.1% year over year; the cost rate was +3.1 pct to 57.6% year over year, mainly due to increased investment in service infrastructure for customer operation and maintenance.

(2) Digital lifestyle ecosystem: leading mature e-commerce and air travel businesses, exploring new growth points with innovative businesses. Under the new guidelines, the 2024H1 digital lifestyle ecosystem achieved insurance service revenue of 7.078 billion yuan, +24.2% year over year; the share of insurance service revenue increased by 2.0pct to 46.9% year over year. The digital lifestyle ecosystem mainly includes three modules: e-commerce, air travel, and innovation. The e-commerce business and air travel business are the company's more mature businesses. The premiums account for 58% and 18% of the total digital lifestyle premiums, respectively. The innovative business focuses on incremental market expansion and introduces innovative insurance types such as accident insurance, pet insurance, bank card security insurance, and broken screen insurance. Among them, the company continues to be deeply involved in the pet sector, and the total 24H1 premium increased 2.8 times over the same period last year. During the reporting period, the comprehensive cost rate of the digital lifestyle ecosystem was 99.9%. The payout rate was +3.3 pct to 71.7% year over year; the cost rate was -3.2 pct to 28.2% year over year, mainly benefiting from continuous optimization of the product structure.

(3) Consumer finance ecosystem: prudent management, manageable risk. Based on the judgment of the market environment, the company actively reduced the scale of the consumer finance business, focusing mainly on small, scattered, and short-term Internet consumer finance assets, and the stock business risk is manageable. Under the new standards, the 2024H1 consumer finance ecosystem achieved insurance service revenue of 2.28 billion yuan, -1.7% year over year; accounting for -3.2 pct to 15.1% of insurance service revenue year over year. At the end of the reporting period, the company's underwriting loan balance was 23.028 billion yuan, down 15.0% from the end of the previous year. During the reporting period, the comprehensive cost ratio of the consumer finance ecosystem increased sharply by 8.4 pct to 99.1%. Mainly due to the increase in 24H1 asset quality risk, the payout rate was +13.0 pct to 73.8% year over year; the cost ratio was -4.6 pct to 25.3% year over year.

(4) Automobile ecology: Quantity and quality have increased rapidly, and new energy vehicle insurance has increased. Under the new standards, the 2024H1 automotive ecosystem achieved insurance service revenue of 0.863 billion yuan, +24.2% year over year; accounting for an insurance service revenue ratio of +0.2 pct to 5.7% year over year. The company seizes NEV insurance opportunities and policy dividends, continuously improves the pricing risk control model, and provides products for NEV owners of more than 100 brands. 2024H1 achieved a 214.8% increase in total NEV premiums, accounting for more than 10% of total vehicle insurance premiums. During the reporting period, the overall cost ratio of automobile ecology was optimized, -3.1 pct to 94.2% year on year, mainly due to a sharp drop in the cost rate. Affected by the increase in travel, the company's payout rate was +7.6pct to 66.7% year over year, the expense ratio was -10.7pct to 27.5% year over year, and operating profit further improved.

Zhongan International: In August 2023, the company sold part of Zhongan International's shares. Since then, Zhongan International (including ZA Tech, an international technology export business under the Technology Division, ZA Bank, and ZA Life business under other divisions) has ceased to be a subsidiary of the company and is listed as a joint venture. In the first half of 2024, multiple indicators of ZA Bank and ZA Tech (renamed Peak 3) were comprehensively improved, and the goal of break-even is expected to be gradually achieved.

(1) ZA Bank: The scale effect was evident, and losses narrowed drastically. ZA Bank is the first digital bank in Hong Kong and has a certain first-mover advantage. 2024H1, ZA Bank achieved net revenue of HK$0.255 billion, +45.9% year over year, and the net loss ratio narrowed by 71.7 pct to 42.9% year over year. Benefiting from the high interest rate environment in the market, ZA Bank's net interest spread increased from 1.87% of 23H1 to 2.21% of 24H1, driving net interest income to HK$0.208 billion. Currently, ZA Bank has become one of the most feature-rich digital banks in the Hong Kong market. Following the launch of fund services in August 2022, ZA Bank officially launched a US stock trading service in February 2024. 24H1, non-interest income accounts for 18.4%. Looking forward to the future, as the market enters a cycle of interest rate cuts, diversified non-interest income is expected to provide the company with an impetus for sustainable development.

(2) Peak 3: Reduce costs and increase efficiency, and the overseas footprint continues to expand. 2024H1, Peak 3 Technology's output revenue was 0.123 billion yuan, +3.8% year-on-year; gross margin stabilized at 32.0%, and the net loss ratio narrowed by 55.2 pct. The company currently has offices in 16 countries or regions, and has now formed differentiated solutions such as Graphene (distributed insurance core system) and Fusion (low code insurance distribution solution) for both insurance companies and internet companies. In June 2024, Peak 3 closed a Series A funding round of $35 million. In the future, the company will accelerate its business expansion in Europe, the Middle East and Africa.

Domestic technology business: In line with the new opportunities in the industry, revenue has increased dramatically. 2024H1, domestic technology export revenue was 0.319 billion yuan, +112.7% YoY. Domestic technology products mainly include business production series, business growth series and new digital infrastructure series. During the reporting period, the company signed 56 new insurance industry chain customers, and further expanded the coverage of the industry. At the same time, the company has seized the opportunity of the industry to implement the new IFRS17 standard for insurance contracts, and has signed contracts with more than 10 IFRS17 customers so far.

Investment side: The allocation is still dominated by fixed income, and the net return on investment has increased slightly. By the end of the reporting period, the total investment assets of Zhongan's domestic insurance funds were 37.698 billion yuan, -1.3% compared to the beginning of the period. In terms of allocation structure, fixed income accounts for 75.4% (+0.1pct at the beginning of the period), of which bonds 49.1%, monetary funds and bond funds 16.2%, and equity funds account for 21.8% (-0.2pct compared to the beginning of the period), of which stocks and equity funds account for 6.4%.

2024H1's total investment income was 0.62 billion yuan, a year-on-year decrease of 14.2%. Annualized total/net return on investment 3.3%/2.3%, -0.7pct/+0.1pct year over year.

Investment suggestions: 2024H1, the four major ecological strategies of the company's insurance business are clear and unique, driving premium growth; on the cost side, the comprehensive payout rate increased 3.6 pct to 60.7% year on year, with consumer finance payout rates rising sharply by 13.0 pcts to 73.8%, or dragging down insurance service performance; on the investment side, the total return on investment fell 0.7 pct to 3.3%. Technology exports and the digital banking sector are gradually showing results in reducing costs and increasing efficiency, and many indicators have improved across the board.

Looking forward to the future, it is expected that the company will continue to promote high-quality development and innovative exploration in various ecosystems, and build a second growth curve in the technology and banking sectors. Considering the overall market situation and the company's strategic layout, we adjusted the 2024-2026 EPS forecast value to 0.6/0.7/0.8 yuan (2024-2026E was 0.6/0.8/0.8 yuan) and the BPS forecast value to 14.5/15.4/16.5 yuan (2024-2026E's original value was 14.4/15.4/16.5 yuan). Due to differences in the business models of the company's various businesses, the segmental valuation method was used to give 2024 insurance+other business 0.75xPB, digital banking business 3-6x PB, and technology export business, corresponding to a target market value of 18.8-22.47 billion yuan in 2024, with a target price cap of HK$16.5, maintaining a “recommended” rating.

Risk warning: Increased downward pressure on the economy, fluctuations in equity markets, and changes in regulatory policies.