HONG KONG When the heads of three of China's most prominent companies join hands to launch a startup, investors notice.
Jack Ma Yun of Alibaba Group Holding, Tencent Holdings' Pony Ma Huateng, and Peter Ma Mingzhe of Ping An Insurance Group did just that when they founded ZhongAn Online P&C Insurance, China's first online-only insurer, four years ago. It was a company with an untested business model and one that had yet to make a single yuan from underwriting, but it sparked an investment frenzy.
That fever is still going strong. ZhongAn began trading on the Hong Kong stock exchange on Sept. 28, having raised $1.53 billion in Hong Kong's largest initial public offering this year. Shares in the insurer -- the first fintech offering in the city -- jumped more than 9% on their first day to 65.20 Hong Kong dollars, before declining 2.7% the following day on profit-taking.
"Such market response was not unanticipated," said Alvin Cheung Chi-wai, associate director at Prudential Brokerage in Hong Kong. "The main reason is not ZhongAn displaying attractive quality, but the three 'horses' backing it," he said, referring to the company's founders -- the surname "Ma" translates as "horse."
ZhongAn, which launched in October 2013 and began operating the following month, started out working with Alibaba to help address online shoppers' concerns over erroneous or unwanted purchases by underwriting the delivery costs of returned goods. Its largest shareholder is Jack Ma's Ant Financial, which operates Alibaba's payment system, followed by Tencent and Ping An, the country's largest insurance company by market cap.
"Shipping insurance is useful when shopping at unfamiliar stores, since you can't tell if they're selling you shoddy products," said 27-year-old Luo Lu of Shenzhen, an avid shopper on Taobao, Alibaba's e-commerce site. "You also have to worry about size and fit when you buy clothes online," she said.
Services offered by Alibaba and Tencent, which run the gamut from social media and entertainment to digital payment, have become an almost inextricable part of everyday life in China. Because ZhongAn is embedded in these companies' ecosystems -- as well as those of other digital players, such as ride-hailing company Didi Chuxing -- the insurer has been able to tap into a wealth of data for developing new products.
Analysts have hailed ZhongAn's ability to pioneer a wide range of innovative insurance products that capture unmet -- or create new -- demand.
In addition to its flagship insurance policy for returning goods, ZhongAn also sells policies that cover flight delays, broken smartphone screens, accidents involving drones, consumer loans and e-wallet deposits. The need to diversify from its partners has prompted the company to start selling health insurance, and plans for life insurance policies are in the works.
"For customers, ZhongAn provides personalized product offerings, customized dynamic pricing and automated services," Leon Qi, an analyst at Daiwa Capital Markets, wrote in a July 3 note. "For its ecosystem partners, ZhongAn offers an additional level of protection to consumers during the purchasing process, improves the customer experience by lowering the frequency of disputes, and hence creates a virtuous cycle with its ecosystem partners," he said.
INNOVATION POWERED China's insurance technology, or insurtech, market is expected to grow from 363 billion yuan in 2016 to 1.4 trillion yuan in 2021, when the entire insurance market will be worth 4.9 trillion yuan, according to financial services consultancy Oliver Wyman.
ZhongAn's business model -- using big data to drive innovation -- represents the smallest subset of insurtech in China, with online distribution and the use of technology to better price insurance policies making up the bulk of the segment. The innovation segment is forecast to grow, however, at an annual compound rate of 62% over the next five years to make up 16% of the country's insurtech market and 5% of the overall insurance market, compared with the current 5% and 0.5%, respectively.
ZhongAn, which obtained a special online insurance license ahead of its rivals, had a 0.9% share of China's insurtech market as of 2016, according to its IPO prospectus.
The power of the "three Mas" was on full display during ZhongAn's IPO. Its shares were reportedly oversubscribed more than 400 times, with retail investors taking out margin loans of more than HK$80 billion to join the crowded field. The frenzy not only triggered a provision expanding the amount of retail shares up to 20%, it also meant the company's 199.3 million shares were priced at the top end of their range, at HK$59.70.
The strong demand came despite ZhongAn's 79% decline in net profit to 9.37 million yuan ($1.41 million) in 2016, and a net loss of 202.1 million yuan for the three months through March 2017. Excluding gains from investment, the company has yet to turn a profit. Losses from its core business -- underwriting -- swelled one and a half times from 2014 to 2016 and widened to 205.5 million yuan in the first quarter of this year.
Even the company's senior management is unable to say when exactly the company will earn a profit, but investors do not seem overly concerned.
"Although [ZhongAn] has yet to generate profits, it is riding on some awesome concepts," said Edmond Hui Yik-bun, CEO of Bright Smart Securities, which extended the largest amount of margin financing for the IPO among all Hong Kong brokers, a record HK$21 billion. Hui said the bet was made on ZhongAn's ability to radically transform lifestyles and consumer behavior in China, citing WeChat and Alipay, two homegrown apps that are helping push the country toward a cashless future.
UNCERTAIN VALUE There is no general consensus among analysts on how to value ZhongAn. The company challenges conventional metrics because it straddles both insurance and technology, and there is no similar rival to act as a benchmark.
Compared with other property and casualty insurers, which are trading at around 1.1 times book value, on average, ZhongAn appears expensive, with a valuation of four to five times book value, according to Ke Yan, an analyst at Smartkarma, a Singapore-based online-investment research company.
The insurer is more in line with software as a service or platform as a service companies, which are trading at around seven to eight times price-to-sales ratio. "It is not going to be a value-investor's pick, but rather for people betting [on] its longer-term leadership as an insurtech company," Ke said.
Another concern for investors is ZhongAn's dependence on its platform partners, which accounted for 75% of its gross written premiums -- the income from underwriting insurance policies for a given period -- as of March. The total fees it pays to maintain these alliances rose to 43.6% of its premium income for the three months through March, compared with 39% a year earlier.
"ZhongAn will need to ensure it doesn't become overreliant on its most powerful partners," said Matthew Wong, lead analyst at New York-based tech research company CB Insights.
That will be especially important because some of those partners are creating potential rivals. Tencent, for example, is teaming with Taiwan's Fubon Financial Holding to sell insurance on its WeChat messaging service in mainland China. Alibaba, too, has invested in other insurance companies.
"It's true that some [of our] business lines are very similar, but we are all positioned differently," Chen Jin, ZhongAn's chief executive, said at a press conference on Sept. 21. "Tencent and Alibaba attach more emphasis to 'open platforms,' while ZhongAn focuses more on growing our roots and development in the space of insurance technology," Chen said.
This development is managed through ZhongAn Information and Technology Services, a wholly owned subsidiary established in July 2016 to drive advancements in artificial intelligence, blockchain technology, cloud computing and data-driven marketing. Spending on research and development represented 8.9% of ZhongAn's gross written premiums as of March, up from 2.8% in 2014.
"I believe ZhongAn Technology is the real golden goose," Paul Schulte, an analyst and founder of Schulte Research, wrote in a Sept. 11 paper. "ZhongAn Insurance was just a warmup. Look at the pattern of Jack Ma's build-out and acquisitions. He built Alipay, and now that serves as the software platform of Ant. He bought Hundsun, and that was the hardware platform of the banks," said Schulte, who added that ZhongAn will need to invest more in hiring world-class data scientists going forward.
Yet in its IPO prospectus, ZhongAn said it intends to place the net proceeds from the IPO "into short-term interest-bearing deposits and/or money market instruments" for a stronger capital base.
Beyond its technological pursuits, ZhongAn is also setting up a small-loan company in Chongqing. The company will be a joint venture with Sinolink Worldwide Holdings, a Hong Kong-listed real estate company that the current chairman of ZhongAn, Ou Yaping, founded in 1992. Ou now has a 45% stake in Sinolink as a nonexecutive director.
Ou Yaping and his elder brother, Ou Yafei, have a roughly 15% indirect stake in ZhongAn. Ou Yaping's 25-year-old son, Hugo Ou Jinyi, was appointed as a nonexecutive director of ZhongAn in April. Ou Yaping, known to have more experience with old-economy industries than with tech startups, has served on the boards of midtier lender China Merchants Bank, energy company Panva Gas Holdings (now Towngas China), and investment-holding company Enerchina Holdings.
Speaking at a forum on Sept. 26, Cheah Cheng-hye, chairman of Hong Kong-based asset manager Value Partners Group, said ZhongAn exemplified the ongoing market distortions, in which low-cost funding has led to inflated asset prices.
"The world has too much savings. There's a huge surplus of capital all over the world and insufficient good investment opportunity because of massively stalled global growth, especially since 2008," Cheah said. "This IPO will be many, many times oversubscribed despite, in fact, not being a very profitable company."
Nikkei staff writers Yasuo Awai and Zheng Zhi in Hong Kong contributed to this story.