Thursday, August 27, 2009

CNinsure (CISG) Report Solid but Many Acquisition Costs / Benefits Running Through Numbers

CNinsure (CISG), the Chinese insurance firm we highlighted Monday [Aug 24, 2009: CNinsure - China's Version of Prudential?] reported last night and it was a solid report. Analysts were in for 19 cents, and CNinsure came in at 27 cents.

Full earnings report here - it is quite comprehensive, more so than most US companies in fact. To reiterate this is a "roll up" type of company, trying to consolidate a portion of the insurance sector, so these are not organic growth figures. Since this is their long term strategy I'd expect every quarter to have the same issues. In a more mature market like the U.S. I traditionally don't like investing in roll ups because it is impossible to tell what is going on, but since the Chinese markets are relatively immature it's a bit different theory.

  • Total net revenues for the second quarter ended June 30, 2009 were RMB285.7 million (US$41.8 million), representing an increase of 33.0% from RMB214.8 million for the corresponding period of 2008.
Attributed to:
  1. Sales professionals +69.3%
  2. Claims adjustors +82.1%
  3. Operations in 22 provinces versus 13
  4. Newly acquired entities
Operating Expenses
  • Total operating costs and expenses were RMB203.3 million (US$29.8 million) for the second quarter of 2009, representing an increase of 41.1% from RMB144.1 million for the corresponding period of 2008.
Attributed to:
  1. Increase in office rental expense
  2. Increase in depreciation expense due to IT upgrades
  3. Increase in headcount and salaries
  4. Increase in amortization of intangible assets due to 2008 and 2009 acquisitions
So for now, expenses are increasing faster than revenue which is a net negative, but with all the acquisition activity there are a lot of accounting maneuvers being done - so it is hard to tell how linear the revenue v expense growth is. Since htis

Income / Operating Margin
  • As a result of the foregoing factors, income from operations was RMB82.4 million (US$12.1 million) for the second quarter of 2009, representing an increase of 16.5% from RMB70.7 million for the corresponding period of 2008.
  • Operating margin was 28.8% for the second quarter of 2009, compared to 32.9% for the corresponding period of 2008.
Net income
  • Net income attributable to the Company's shareholders was RMB84.6 million (US$12.4 million) for the second quarter of 2009, representing an increase of 39.5% from RMB60.6 million for the corresponding period of 2008.
  • BFully diluted net income per ADS was RMB1.835 (US$0.269) for the second quarter of 2009, compared to RMB1.329 for the corresponding period of 2008, representing an increase of 38.1% from the corresponding period of 2008.
Some language on the quarter
  • "During the first half of 2009, the Company continued its strategic investments in expanding its distribution and service network, especially that of Datong segment ("Datong"), the second distribution arm for life insurance products. The investment, though important strategically, will inevitably impose adverse impact on our current operating income.
  • As of June 30, 2009, Datong has already established 10 insurance agencies, 23 sales outlets and 126 sales teams in 10 provinces in China, with four more provincial agencies to be established later this year. We anticipate that Datong will contribute more significantly to our net income growth starting from the third quarter of this year.
  • In addition, the investment in replacing our legacy IT systems and deploying a new one, which started from the first half of 2008 and gradually being put into use in 2009, also imposed some pressure on our operating income. Excluding the aforementioned factors, our operating income would have grown by approximately 38% year-over-year in the first half of 2009.
  • Despite the short-term adverse impact, we believe that investing in our distribution network and IT system is essential to our long-term sustainable growth. That is why it is extremely important for the Company to allocate resources strategically to fund these investments while ensuring the delivery of our net income growth target. The sound bottom line for the second quarter has evidenced the management's effective allocation of resources to achieve our near-term net income target and facilitate our pursuit of medium-to-long term strategic objective.
Actually I could not agree more - I never have an issue with extra costs in the near term if they provide long tail revenue opportunities and improvements in efficiency (i.e. IT spending). The ability to invest in your own company for long term benefit is something that extremely short term oriented US public company managers might want to think about returning to.

  • For the third quarter 2009, CNinsure expects approximately 35% growth in its total net revenues from the corresponding period of 2008.
All in all solid; the mid 70 cents figure analysts have for CNinsure's 2009 earnings will probably come in at mid 80 cents. At $18 that is a forward PE of about 21. Not cheap so instead I might go buy some REIT or consumer discretionary company that will lose money the next 2 years and might eek out a profit in 2011. Those are the names that the market loves.

I have a limit purchase order down at $16 for this name; we'll see if it hits.

No position

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