In the first half of this year, the queue for domestic and foreign IPOs of insurance technology companies continued to expand, with its own story told from multiple angles such as platform empowerment, solution, and innovative products. In just six months, seven institutions have released relevant signals.

According to the Hong Kong Stock Exchange on July 22, Zhongmiao Innovation Technology (Qingdao) Co., Ltd. (hereinafter referred to as 'Zhongmiao Chuangke') that submitted twice finally passed the listing hearing of the Hong Kong Stock Exchange main board. Citic Securities and Ping An Capital (Hong Kong) are the joint sponsors.

From the perspective of the industry, the performance of insurance technology companies is very volatile, with single business lines and multiple regulatory penalties, and market expectations are not optimistic. In addition, the company itself also has problems such as continuous decline in commission rates and excessive reliance on Haier Group.

Can Zhongmiao Chuangke's IPO on the Hong Kong Stock Exchange be favored by investors?

Reducing the commission ratio to seek income growth.

According to public information, Zhongmiao Chuangke is a growing insurance agency service and solution provider in China, dedicated to distributing various insurance products for corporate and household insurance users, including property insurance products, life and health insurance products, accident insurance products, and car insurance products. The company's 'predecessor' was Haier Insurance Agency Company, which was established by Haier Group in 2001. Zhongmiao Chuangke was established in 2017 and obtained a national insurance intermediary license, which was included in Haier Insurance Agency. In the same year, it launched an online platform, including the 'Quanzhangui' application.

The 'Quanzhangui' APP recommends insurance products by using the company's proprietary data analysis engine to provide personalized insurance product solutions; the enterprise insurance interaction service platform mainly serves enterprise insurance users, covering important stages of insurance transactions including policy interpretation, product purchase, and policy management. As of December 31, 2023, the company's online platform has more than 236,000 registered users.

Before applying for an IPO, Zhongmiao Chuangke completed Series A and Series B financing, with a total financing of about 0.142 billion yuan. Among the changes in equity during the establishment process, Haier Group has always maintained a controlling position. The prospectus shows that Haier Group indirectly holds approximately 60.44% of the equity of Zhongmiao Chuangke through Qingdao Haiyinghui and Qingdao Haichuanghui.

In terms of finance, Zhongmiao Innovation Technology has achieved significant growth in recent years, with both revenue and profit increasing rapidly. In the first four months of the fiscal years 2021 to 2024 (hereinafter referred to as the 'reporting period'), Zhongmiao Chuangke achieved revenue of approximately 0.12 billion yuan, 0.148 billion yuan, 0.174 billion yuan, and 58.644 million yuan respectively; the three-year compound annual growth rate from 2021 to 2023 was 20.4%. Net profit was approximately 26.992 million yuan, 36.349 million yuan, 35.993 million yuan, and 14.829 million yuan respectively; the three-year compound annual growth rate from 2021 to 2023 was 20.2%.

In terms of profit margin, Zhongmiao Chuangke has shown an upward trend. During the reporting period, the company's gross profit margin was approximately 40%, 45.3%, 42.8%, and 42.4%, fluctuating upward; the net profit margin was approximately 22.5%, 24.5%, 22.4%, and 25.3%, which followed a similar trend to the gross profit margin.

Why is the profit margin of Zhongmiao Chuangke fluctuating? Let's look at its business.

The company's business can be divided into three categories: insurance agency business, IT services, and consulting services, among which insurance agency business is the largest, accounting for nearly 90% of total revenue. During the reporting period, the revenue of the insurance agency business was approximately 0.116 billion yuan, 0.131 billion yuan, 0.156 billion yuan, and 54.802 million yuan, accounting for 96.7%, 88.1%, 89.5%, and 93.2% of the revenue proportion, respectively; the revenue of IT services was approximately 1.264 million yuan, 14.953 million yuan, 15.782 million yuan, and 3.218 million yuan, accounting for approximately 1.1%, 10.1%, 9.1%, and 5.5% of the total revenue proportion respectively; consulting services revenue was approximately 2.654 million yuan, 2.724 million yuan, 2.481 million yuan, and 0.624 million yuan, accounting for approximately 2.2%, 1.8%, 1.4%, and 1.1% of total revenue proportion, respectively. Overall, the scale of the insurance agency business has steadily grown and has steadily contributed nearly 90% of the revenue; IT services began to grow significantly in 2022 and rapidly expanded in scale; consulting services remained stable.

During the reporting period, the gross profit margin of the insurance agency business fluctuated, with approximately 38.9%, 44.6%, 41.1%, and 41.2%.

Specifically, the insurance agency business mainly distributes four types of insurance products, namely property insurance products, life and health insurance products, accident insurance products, and car insurance products.

During the reporting period, the commission income of distributing property insurance products, accident insurance products, and car insurance products continued to increase. Among them, the commission income of distributing property insurance products was 39.658 million yuan, 47.62 million yuan, 59.806 million yuan, and 25.733 million yuan, respectively; the commission income of accident insurance products was 16.171 million yuan, 24.096 million yuan, 27.83 million yuan, and 9.162 million yuan, respectively; the commission income of car insurance products was 11.895 million yuan, 22.849 million yuan, 34.355 million yuan, and 11.805 million yuan, respectively.

Meanwhile, there was a continuous decline in commission income for distributors of life and health insurance products, which were 48.332 million yuan, 36.156 million yuan, 33.757 million yuan, and 8.102 million yuan respectively during the reporting period. Zhongmiao Chuangke said that this was mainly due to the decline in the average commission rate of life and health insurance products and the outbreak of the COVID-19 pandemic.

What is more important is that the commission rate for property insurance products in 2021 was 17.4%, which only slightly increased to 17.9% by 2023, with a minimal increase. However, the average commission rate for life and health insurance products, as the company's second largest source of commission income, declined 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 exchanges growth in commission income by lowering the commission ratio, which indirectly reflects the fierce competition. Under the trend of increasingly transparent supervision of industry charges in the future, if the commission rate cannot continue to increase, there may be a bottleneck in the growth of commission income.

Can backed by Haier Technology continue to become more beautiful?

Zhongmiao Chuangke, as an insurance intermediary company incubated within Haier, has a close relationship with Haier Group in its business development.

Firstly, Haier Group contributes part of the company's income. During the reporting period, the commission income of Zhongmiao Chuangke belonging to Haier Group's corporate insurance users was 18.288 million yuan, 23.809 million yuan, 24.1 million yuan, and 9.107 million yuan, accounting for approximately 15.8%, 18.2%, 15.5%, and 16.6% of the total commission income respectively.

During the same period, Zhongmiao Chuangke's IT service income from Haier Group and its affiliates was 0.577 million yuan, 6.042 million yuan, 8.732 million yuan, and 1.665 million yuan; The consulting service income from Haier Group and its affiliated companies was 0.79 million yuan, 2.346 million yuan, 1.46 million yuan, and 0.285 million yuan.

For the company itself, being supported by Haier Group is its advantage, and can obtain stable policy commission income, but it also brings certain risks. Over-dependence on Haier Group may lead to deep binding, which will directly put pressure on the company's revenue growth if there are changes in Haier Group's demand side.

This trend has already been reflected in the company's performance in the past two years. The commission income from Haier Group in 2022 and 2023 has remained at around 0.024 billion yuan, with a weak growth.

At the same time, the high gross profit from insurance policies from Haier Group further boosted the company's gross margin on the enterprise side.

The prospectus shows that the company's gross margin from Haier Group's business in the past three years has been maintained at over 73%, significantly higher than other insurance clients.

Under the background of the commission income from Haier Group gradually slowing down, there is a risk of declining overall gross margin in the future, along with the revenue growth of other low gross profit rate businesses.

What's more important, Zhongmiao Chuangke has a high concentration of upstream and downstream, which may exacerbate its operating risks.

On the client side, from 2021 to 2023, the total income from the top five clients of Zhongmiao Chuangke accounts for approximately 74.5%, 63.7%, and 65.1% of the total income. During the same period, income from the largest client accounted for 34.6%, 36.9%, and 35.6% of the total income. On the supplier side, from 2021 to 2023, the purchase amount from the top five suppliers of Zhongmiao Chuangke accounted for 58.1%, 71.7%, and 74.3% of the total purchasing amount, while the purchase amount from the largest supplier accounted for 36.8%, 39.3%, and 45.6% of the total purchasing amount.

The concentration of clients and suppliers means that the enterprise lacks the initiative of market price negotiation, which is not conducive to the healthy and stable profit structure of the enterprise and may also lack the foundation and potential for high growth. In terms of finance, this is reflected in the "gold content" of performance declining despite the continued growth of performance. During each reporting period, the company's operating cash flow shows a fluctuating downward trend, which were 24.586 million yuan, 27.202 million yuan, 19.979 million yuan, and 16.092 million yuan, respectively.

It is gratifying that the growth trend of China's insurance intermediary industry is stable in the long run. According to Frost Sullivan, the underwriting scale of China's insurance intermediary industry will increase at a compound annual growth rate of 12.8% from 2024 to 2028, reaching RMB 1505.5 billion in 2028. From a data perspective, the average annual compound growth rate of premium income for domestic professional insurance intermediary institutions is 11.61%, which is not low and stronger than the entire insurance market.

It is worth noting that, according to a Boston Consulting Group research report, after years of accumulation, many professional intermediaries have built part of their professional capabilities as a market competition "moat," characterized by strong team capabilities, leading digital scene operations, a solid empowerment system, and profound traditional risk control pricing advantages. It can be seen that the establishment of competitive barriers cannot be separated from deep technological accumulation.

Data shows that Zhongmiao Chuangke's R&D costs have been long-term lower than its marketing costs. During the reporting period, the company's R&D costs were 4.739 million yuan, 6.842 million yuan, 7.141 million yuan, and 2.809 million yuan respectively; while the sales and marketing costs during the same period were about 6.836 million yuan, 9.948 million yuan, 11.871 million yuan, and 3.806 million yuan, respectively. The disadvantage is obvious. Unlike traditional industries, for capital- and technology-intensive digital insurance intermediaries, R&D investment has become an important source of forming differentiated competitiveness barriers, strengthening core competitiveness, and driving the sustainable development of enterprises. If Zhongmiao Chuangke does not pay attention to technology research and development in the long term, it may have a negative impact on its long-term development.

From the perspective of competition pattern, China's insurance industry shows high competition and dispersion. According to the latest "China Insurance Yearbook" released in December 2023, as of the end of 2022, there were 2,215 insurance intermediaries in China, including 1,721 insurance agencies. In 2022, the insurance business income of Zhongmiao Chuangke was 0.131 billion yuan, ranking 78th among all insurance agencies in China, which is not a remarkable ranking. Therefore, finding a healthier development path has become an urgent task for Zhongmiao Chuangke.