Monday, August 24, 2009

CNinsure (CISG) - China's Version of Prudential? (PRU)

While I am seriously starting to question the need for any fundamental research anymore when stocks with the poorest decile of earnings (read: none) are performing as good, or better than those with the best (i.e. buy anything, it all goes up) I still need to pretend to have justification for buying ABC stock. For example I could of bought AIG (AIG) a few weeks ago, after a 20 to 1 reverse split (in normal times that is an extremely bearish thing) and made close to 200%... reasoning? You don't need any - bad fundamentals, good fundamentals; they all go up when central bankers throw money in every direction.

CNinsure (CISG) is one of a bevy of Chinese smaller cap stocks I've had on a watch list to "get to"; I've been trying to present some of these over the past few weeks as time becomes available. Think of CNinsure as China's version of AIG. Wait! Strike that! Think of CNinsure as China's version of Prudential....

CNinsure Inc., together with its subsidiaries, operates as an independent insurance intermediary company in the People's Republic of China. It provides insurance brokerage and agency services, and insurance claims adjusting services, such as assessment, survey, authentication, and loss estimation to individuals and institutions.

Since Investor's Business Daily was kind enough to provide a good overview of the company let me not reinvent the wheel and instead let them describe the background and market opportunity. CNinsure was a late 2007 IPO benefiting from the fall 2007 craze for anything related to China. It's had it's up and downs as any stock, Chinese or otherwise, has had in the past few years and now is approaching original IPO valuation... currently is is just over $800M in market cap.

Bubble via loan growth or not; there are some exciting companies in the early stages of growth in China. While their valuation will be driven by the ebbs and flows of investor sentiment in the short run, the market opportunities for some of these companies - either through acquisition or organic growth (or both) far surpass anything we see in the U.S. as China is far earlier in its modernization push.

The company reports earnings Wednesday; I'll be considering a position after that point.
  • CNinsure sells life, property and casualty insurance underwritten by domestic and foreign insurance companies operating in China. It also offers insurance claims adjusting services, such as assessment, survey and loss estimation.
  • Soon after going public nearly two years ago, CNinsure hit the acquisition trail with a vengeance. From its Oct. 31, 2007, market debut to April 30, 2009, the China-based insurance broker and agent closed on 29 deals to expand its distribution and service offerings. Through these deals, it gained a controlling stake in 11 insurance agencies, one insurance broker and three insurance claims adjusters and established 14 new insurance agencies.
  • Now, as CNinsure's (NasdaqGS:CISG - News) management embarks on a new game plan that will take the company onto new turf, watchers see more deals on the horizon. Aggressive acquisitions have helped drive the company's growth, said Roth Capital Partners analyst Sean Jiang in an e-mail.
  • Earnings have climbed at double-digit rates in all but one of the past five quarters. And sales have soared by double and triple digits over that time frame. (of course that is acquisition driven, nor organic growth)
Potentially this could become more than just a pure play on insurance.
  • Last month, management unveiled a strategy aimed at expanding the company's scope beyond selling insurance and turning it into a diversified financial services group. Management expects to move into the fast-growing financial services sector, it said in a statement without giving a timeline.
  • Once it does, it plans to expand CNinsure's offerings to include other financial products, such as mortgage loans, mutual funds and securities.
  • "Expansion of CNinsure has been achieved mainly through acquisitions," said Jiang. "My speculation is that (it) will likely use the same strategy by acquiring other companies in the financial services business."
Ahem... well maybe it will become more like AIG rather than Prudential...
  • The company said as it diversifies it will stay focused on its current business model and market positioning. That means it will limit its scope to brokerage and service outsourcing without assuming underwriting or credit risks.
Whew - ok, not like AIG then.
  • The rationale behind the new strategy? "As Chinese people accumulate significant levels of wealth as a result of China's economic growth, we have seen growing demand for more diversified financial solutions and huge potential in the consumer financial market," said Chief Executive Yinan Hu in a statement.
  • He said the move will also increase profitability by drawing on its existing distribution network and operating platform to achieve better economies of scale and lower operating costs.
How have they been doing thus far?
  • CNinsure is faring well with its current lineup. In the first quarter, earnings rose 36% to 15 cents per American depositary receipt, or ADR. Sales surged 62% to $31.6 million.
  • But followers forecast CNinsure's growth will stay flat when it reports results Wednesday. Analysts polled by Thomson Reuters expect it to earn 19 cents a share, the same as last year. Why the flat earnings forecast? Jiang says its operating margin was likely squeezed in the second quarter vs. 2008 because of business expansion and acquisitions, and its gross margin was lower than the prior year.
  • Still, analysts expect the company to regain momentum in the third and fourth quarters for a full-year rise of 25% to 76 cents per ADR. They see 2010 earnings up 26%.
Analysts' view on expansion into new business lines.
  • Jiang gives the new game plan to move into financial services a thumbs up. He says the strategic change makes sense because areas it's likely to move into, such as mortgage and auto loan brokerage, have a similar business model as its current one. Plus it can draw on its existing distribution network.
  • That network is vast. As of April 30, the company had 29,215 sales professionals, 866 claims adjusters and 367 sales and service outlets operating in 21 provinces. Its distribution and service network reaches some of China's most economically developed regions and some of the most affluent cities in China, such as Beijing, Shanghai, Guangzhou and Shenzhen.
  • "I think there's a high possibility for them to be successful, given their excellent acquisition record," he said. "The management has been very prudent and experienced in making acquisitions, including proper structuring of the deals and setting performance targets to former management."
  • He says given the company's strong cash position, management could start to implement its new strategy this year if it can find a suitable target to acquire.
  • Piper Jaffray analyst Michael Grasher says the financial services products the company is looking into carry higher margins than the property and casualty brokerage business. "They have developed quite a good reputation," he said. "They have eight to 10 of the top 20 insurance agencies in China. They're building a platform where they'll be a financial supermarket."

No position

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