ANALYSIS: Huize Begins $150 Million U.S. IPO Effort
Huize (Nasdaq: HUIZ) has filed to raise gross proceeds of up to $150 million from a U.S. IPO, according to an F-1 registration statement.
The firm operates as an independent online insurance product and service marketplace in China.
HUIZ is growing quickly and producing impressive financial results.
Shenzhen, China-based Huize was founded in 2006 to develop an online marketplace where insurance companies can provide insurance products and services to consumers through a single platform.
Management is headed by Founder, Chairman and CEO Cunjun Ma, who previously served as the head of a subsidiary of Hua An Property Insurance.
Huize doesn't bear underwriting risks as it operates as a licensed insurance intermediary, providing a medium for companies to reach a larger audience.
The company is focused on providing long-term life and health-related as well as property and casualty insurance products with a term that is at least one year, while management claims that a ‘substantial portion of these products have payment terms of 20 years or more.'
As of the end of June 2019, the firm had cumulatively served 5.8 million insurance clients, the majority of which are part of a younger generation demographic, while management says it has worked with 67 insurer partners, ‘representing a substantial portion of all licensed insurance companies in China.'
Additionally, according to an Oliver Wyman Report, Huize was the largest independent online long-term life and health insurance product and service platform in China by gross written premiums facilitated in 2018.
The firm's primary source of income is insurance brokerage fees paid by its insurer partners.
The firm's life and health insurance products cover critical illnesses, typically offering the insured a lump-sum payment if they're diagnosed with a major illness as defined in the insurance policy.
Huize directly markets its offerings through professional financial media and social media channels as part of its cooperation with insurer partners.
The firm also utilizes social media influencers and financial institutions to promote its services.
Additionally, the company has a loyalty program that offers points to its users which can be exchanged in a mobile app and a website for a variety of gifts and services that Huize purchases from third-party providers.
Selling expenses as a percentage of revenue have been dropping sharply as the firm has scaled operations, per the table below:
Expenses vs. Revenue
To June 30, 2019
Image: Company registration statement
The selling efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of sales spend, was a very high 4.3x in the most recent six-month period, as shown in the table below:
To June 30, 2019
Image: Company registration statement
According to a 2018 market research report by Mordor Intelligence, the China online insurance market is projected to surpass $79 billion in 2019 and grow at an estimated CAGR of 41 percent between 2019 and 2024.
Property premiums in online insurance market in China grew significantly over H1 2018, reaching CNY 32.64 billion ($4.6 billion) and marking a 37.3 percent year-on-year increase, as per the Insurance Association of China.
Premium income of online insurance providers in China is estimated to surpass CNY 300 billion ($42.16 billion) in 2019.
Below is an overview graphic of the online insurance sector premium in China between 2013 and 2017:
According to another 2019 market research report by Deloitte, 2018 and 2019 are shaping up to be strong years for the insurance industry, however, concerns of an economic slowdown to the point of a full-fledged recession by 2020 as well as the ongoing trade disputes between the US and China has the potential to cloud the industry's optimistic overlook.
Financial Performance & IPO Details
Huize's recent financial results can be summarized as follows:
Sharply growing topline revenue
Strong increase in gross profit and stable gross margin
Variable but near breakeven operating profit
Strong growth in cash flow from operations
As of June 30, 2019, the company had $6.5 million in cash and $36.5 million in total liabilities. (Unaudited, interim)
Free cash flow during the twelve months ended June 30, 2019, was $16.6 million.
HUIZ intends to raise $150 million in gross proceeds from an IPO of its ADS, although the final figure may differ.
Per the firm's latest filing, it plans to use the net proceeds from the IPO as follows:
"...for investment in technology and big data analytics to further enhance our client acquisition efficiency and risk management capabilities;
for product design and development; and
for general corporate purpose and potential investments."
HUIZ is attempting to access U.S. public capital in a generally difficult period due to poor performance by most Chinese firms on U.S. markets.
Additionally, U.S. markets have been volatile recently due to trade tensions between the U.S. and China, which further complicates IPO transactions.
The company's financials show strong growth across most major metrics. The firm has an ‘asset-light' business model as it acts as an online marketplace in the consumer insurance space.
Selling costs as a percentage of revenue have been dropping and its selling efficiency has risen markedly, indicating a very capital efficient growth trajectory.
The market opportunity for online insurance product sales in China appears to be large but growing unevenly, possibly due to macroeconomic factors.
Unlike the shadow banking marketplace sector which has seen regulatory crackdowns, the online insurance sector would appear to be far more robust and relatively benign from a regulatory standpoint.
On the legal side, like many Chinese firms seeking to tap U.S. markets, the firm operates within a VIE structure or Variable Interest Entity. U.S. investors would only have an interest in an offshore firm with contractual rights to the firm's operational results but would not own the underlying assets.
Morgan Stanley is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 5.3% since their IPO. This is a middle-tier performance for all major underwriters during the period.
I look forward to learning more details about management's pricing and valuation assumptions as those figures will be critical to the IPO's prospects for success.
(The opinions expressed by contributing analysts do not reflect the position of CapitalWatch or its journalists. The analyst has no positions in any stocks mentioned, no plans to initiate any positions within the next 72 hours, and no business relationship with any company whose stock is mentioned in this article. Information provided is for educational purposes only, may be incomplete or out of date, and does not constitute financial, legal, or investment advice.)
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