It's almost as if fundamentals no longer matter in this market, especially when it comes to Chinese stocks. Thankfully, the Chinese government has finally spoken out re: ending its crackdown on Chinese companies and throwing support behind foreign listings of their companies. This immediately sent the beaten-down Chinese stocks up, with some gaining up to 50% in one day. However, that pales in comparison to the precipitous 90% drop many have seen over the past year alone.
In the case of HUIZ, we have an inefficient micro cap market valuing a leading Chinese online insurance brokerage platform at ~$66 million despite triple digit revenue growth and LTM revenue of $351.3 MILLION. For context, its closest peer, SelectQuote (SLQT), generated $674 million in revenue on just 5% growth, but is valued at $512 million... the risk in China is certainly not worth that much of a difference in valuation, especially given the strong future prospects for HUIZ.
The Asian B2B2C insurance market is already much bigger than North America's and is expected to grow at a faster rate over the next decade. However, the market is currently valuing this leading Chinese B2B2C online insurance broker like it will be going bankrupt in the next year, rather than a company with more market share in a faster growing market than its peers valued at up to 20x more.
Source: Polaris Market Research
Company Overview
HUIZ is a hyper growth online B2B2C online insurance broker in China. In other words, HUIZ offers comparisons of insurance policies for consumers without taking on any of the underwriting risks. With a focus in driving higher LTV (life time value) per customer, HUIZ partners with 109 insurer partners, including 66 life and health insurance companies and 43 property & casualty insurance companies, to offer a wide spectrum of products, one-stop services, and AI assisted Smart Insurance. They then collect the brokerage fee from the underwriters without any of the risk - a beautiful thing.
Led by a 23-year veteran of the Chinese insurance industry, Cunjun Ma, HUIZ has been growing at over 100% YoY since listing its ADRs in the US in February 2020. The online platform is clearly gaining traction with the younger generation of Chinese consumers, as the average customer age is under 33 years old. Despite all of the fear around investing in China, companies like HUIZ only continue to get stronger as the economy in China continues to develop.
Key Investment Points
We have been buying the equity, as there are no LEAPS available
Stock Price as of 3/25: $1.50
We bought as much as we could under $1, but we still love the stock under $3 after the recent earnings run up
This is by far one of the most fundamentally mispriced equities we have ever seen:
HUIZ grows 20x faster than its American peer, SLQT.... but SLQT is valued at 9x more than HUIZ
HUIZ generates over 5x more revenue than Wall Street darling, LMND.... but LMND is valued at 26x more than HUIZ
These valuations are backwards, even if you factor in the Chinese risk factor, which we feel is greatly overestimated by the market
Q4 revenue just came in at $153.2 million, marking a 157.5% increase YoY
One quarter of revenue is over 2x the market cap of a stock growing at over 100% YoY? That makes no sense
HUIZ is already becoming a profitable company operating well ahead of its peers in the US, as they were at breakeven EPS last quarter
Because of this profitability and large cash position, HUIZ has now announced a $5 million stock buyback -- this represents almost 10% of the company at these prices!
There is plenty of room for HUIZ to increase these buybacks at these low prices and puts a floor under the stock price, as the company will buy up dips in support
As we stated with HUYA, the delisting risk of Chinese equities is vastly overstated and provides an amazing opportunity for astute investors to buy the fear in China and reap the rewards down the line:
"The delisting issue got a lot of attention when DiDi Global (DIDI) delisting news got public, but investors should consider that this is most likely an isolated case. Importantly, Chinese regulators also sounded dovish in a recent statement. The China Securities Regulatory Commission stated that it was respectful of companies' decisions to list their shares where the company desires. It should also be noted that delisting of companies does not at all mean that these companies become worthless. Instead, shares of BABA could likely still be traded through OTC trading, as demand for that would likely be strong. Investors could also exchange their shares for Hongkong-listed shares of Alibaba, which would not be delisted even in an, I believe unlikely, US delisting scenario." - Jonathan Weber on Seeking Alpha
HUIZ is a leading player in the Chinese insurance brokerage marker with a 25% share of a rapidly expanding market that should grow to $440 billion by 2024, yet this company is somehow only worth $66 million as of today.
Key Metrics:
Price/Sales: ~.19x
This is one of the lowest P/S ratios we have ever seen. While they do have high cost of revenues, HUIZ is now moving into profitability in an expanding market, paving the way for huge earnings growth well into the future
HUIZ is stickier than SLQT over the past year
"First we can look at persistency rates. Persistency can be defined as the percentage of clients that an insurance company or broker has retained for a specific product. According to its Q2 2021 transcripts, SelectQuote boasts an impressive 90% persistency rate for its business. The Q1 2021 transcripts similarly place the persistency rate at 87%. According to Huize’s investor presentation, the company boasts an average 94% persistency rate." - Eric Grovenhoff
While SLQT boasts an impressive 25% repeat purchase rate, HUIZ has been able to generate repeat purchases from existing users for savings products at a rate of 39%
The stock has fallen >80% from its February high despite doubling the size of the company over the same period
My Favorite Links
From folks much smarter than I....
- Direct comparison to SLQT, illustrating how the valuation gap does not make any sense
- Provides a great overview of SLQT and its advantages, but really drives home the growth prospects of HUIZ
- Helpful to get the perspective of a Chinese analyst who is very bullish on the company
- Solid fundamental analysis that goes over all of the relevant financial metrics that show how undervalued HUIZ is