Recently, with the support of the "New Ten Policies" in the insurance industry, the Hong Kong insurance sector has been active in trading with a clear upward trend. However, individual stocks have shown a differentiated market trend, and some small and medium companies with weak competitive strength have also encountered a "roller-coaster" market situation of capital outflows.

On September 11th, the State Council issued the "Opinions on Strengthening Regulation, Preventing Risks, and Promoting High-Quality Development of the Insurance Industry" (referred to as the "New Ten Policies"). The "New Ten Policies" systematically deploy the development of the insurance industry for the next 5-10 years. The document puts forward ten development opinions for high-quality development of the industry with a main focus on "strict regulation, risk prevention, and promoting development."

Benefiting from favorable policies, the Hong Kong insurance sector has ushered in a new round of capital allocation. Data from the Wisdom APP shows that on September 23rd, the insurance sector index once broke through 1065 points during trading hours, with a maximum increase of over 15.8% compared to the low point in August of 919.41 points.

Stimulated by the sectoral market trend, the Hong Kong insurance sector's "new star" - Zhongmiao Holdings (01471) saw multiple abnormal price movements in September, with the highest monthly increase reaching 18.17% as of September 20. Unfortunately, Zhongmiao Holdings' stock price failed to sustain its upward trend. On September 23, its stock price opened low and fell sharply during trading hours, with a decline of over 10%, experiencing a "roller-coaster" market trend.

The market generally bullish on the launch of the 'New Ten National Policies', which can 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 based on the overall tone of the 'New Ten National Policies', the future industry regulatory trend will further tighten, which is expected to strengthen the competitive advantage of leading insurance companies that operate in compliance.

Therefore, the 'roller coaster' market performance of Zhongmiao Holdings to some extent indicates that the market believes the company is expected to benefit from the 'New Ten National Policies' in achieving new business growth, while also concerned about the risks it faces in long-term competition, especially against the backdrop of slowing performance growth, pressure on gross margin, and the urgent need for further improvement in the quality of performance.

The insurance agent 'little brother' backed by Haier Group

Public information shows that Zhongmiao Holdings is a provider of insurance agency services in Shandong Province, China, distributing various insurance products for corporate and household insurance users, covering property insurance products, life and health insurance products, accident insurance products, and auto insurance products.

According to the latest 'China Insurance Yearbook' released in December 2023, as of the end of 2022, China's insurance industry has shown a highly competitive and fragmented market structure. By the end of 2022, there were 2,215 insurance intermediaries in China, including 1,721 insurance agencies. In 2022, Zhongmiao Holdings' insurance business income (i.e. the commission income earned by insurance companies based on the premiums distributed by policyholders for insurance products) was approximately 13.1 billion yuan, ranking 78th among all insurance agencies in China.

It is worth noting that Zhongmiao Holdings' current industry position is due to its backing by Haier Group. Public information shows that Zhongmiao Holdings was formerly known as Haier Insurance Agency Company, established by Haier Group in 2001. In 2017, Zhongmiao Holdings was established, obtained a national insurance intermediary license, and merged with Haier Insurance Agency. After its listing in August 2024, Haier Group indirectly holds approximately 45.33% of Zhongmiao Holdings through Qingdao Haiyinghui and Qingdao Haichuanghui.

In terms of business, as an insurance intermediary company internally incubated by Haier, Zhongmiao Holdings has a deep binding relationship with the business development of Haier Group. As of the years ended December 31, 2021, 2022, and 2023, as well as the first 4 months of 2024, the income attributable to Haier Group or related to it accounted for approximately 25.3%, 32.0%, 25.5%, and 23.1% of Zhongmiao Holdings' total income, respectively.

For Zhongmiao, having the support of Haier Group is its advantage, as it can obtain stable insurance commission income. However, this also brings certain risks - excessive reliance on Haier Group leads to deep binding, and once there is a change in demand from Haier, it will directly put huge pressure on the company's performance. This trend has already been reflected in the company's performance in the past two years. In 2022 and 2023, the company's commission income from Haier Group basically remained at 0.024 billion yuan, with weak growth.

Business growth slowing down, profitability under pressure.

In fact, Zhongmiao Holdings' overall performance growth rate has significantly slowed down. From 2021 to 2023, the company's revenue increased from 0.12 billion yuan to 0.174 billion yuan, with a compound annual growth rate of 20.4% during the period; while net income during the same period increased from 26.992 million yuan to 35.993 million yuan, with a compound annual growth rate of 20.2%. In the first half of 2024, the company's revenue was 88.456 million yuan, an 8.37% year-on-year increase; net income attributable to the parent company was 21.588 million yuan, a 5.33% year-on-year increase.

Zhongmiao Holdings' revenue growth rate has slowed down, one of the main reasons being the company's continued reliance on insurance agency business. From 2021 to 2023, the company's revenue from insurance agency business was 0.116 billion yuan, 0.131 billion yuan, and 0.156 billion yuan respectively, accounting for 96.7%, 88.1%, and 89.5% of total revenue. In the first half of 2024, revenue from insurance agency business reached 82.213 million yuan, accounting for 92.94% of total revenue.

On the other hand, business dependency on a few clients and suppliers is also not favorable for Zhongmiao's bargaining power and the health and stability of its profit structure. In 2023, revenue from the top five clients of Zhongmiao Holdings accounted for a total of 65.1%, with the revenue from the largest client accounting for 35.6%. During the same period, purchases from the top five suppliers of the company represented 74.3% of the total purchases, with the largest supplier's purchases accounting for 45.6%.

Client and supplier concentration often leads to pressure on operating cash flow performance. From 2021 to 2023, the cash flow generated from operating activities for Zhongmiao Holdings was 24.586 million yuan, 27.202 million yuan, and 19.979 million yuan respectively, showing a downward trend in quality.

In the first half of 2024, Zhongmiao Holdings' overall gross margin was 42%, a 2.1 percentage point decrease compared to the previous year, mainly due to the insurance agency business's gross margin declining by 2.1 percentage points year-on-year to 40.5%. The company pointed out that this decrease is mainly attributed to two factors: first, the increased proportion of commission income from accident insurance products and auto insurance products with relatively lower distribution gross margins. Second, due to overall economic uncertainty, consumer demand for certain life and health insurance products continues to weaken, leading to a decrease in commission income from life and health insurance products with relatively higher gross margins.

According to the Securities Times APP, life and health insurance products are the second largest source of revenue for Zhongmiao Holdings' commissions, with the average commission rate for this business dropping from 27.4% in 2021 to 14.8% in 2023, a decline of 12.8 percentage points over three years. This also means that the company is maintaining commission income stability through a "quantity over price" approach, indirectly reflecting a weakening market demand and increasing industry competition.

Zhongmiao Holdings' revenue and operating performance are directly impacted by the scale of premiums and commission rates of policies. Under the future industry trend of increasing transparency in fees, if the commission rate cannot continue to rise, 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 break away from the position of 'middlemen earning commissions' and instead engage in full-cycle risk management services.

Zhongmiao Holdings is positioned as a 'China's leading digital fast-growing insurance agency service and solution provider,' and claims that the company has established an integrated online and offline service model, providing customers with risk survey, personalized consulting, sales of insurance products, and insurance claims services.

The prospects may be worth looking forward to. However, at present, Zhongmiao Holdings' business transformation journey is still a long way to go. In the current scenario where investors are hitting the 'sell' button one after another, how to regain investors' confidence and avoid being in a precarious situation is the primary task that Zhongmiao needs to address.