CNinsure, Inc. CISG
November 28, 2008 - 9:26am EST by
pgu103
2008 2009
Price: 6.68 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 305 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

CNinsure (NASDAQ: CISG) is a busted IPO of the leading independent insurance broker in China. The stock sells for 2x earnings (stripping out the $5.22 of cash per share). Yes, 2x. The company is a true broker, takes no underwriting risk and generates fee income. With the tailwinds of a growing population and changing socioeconomic trends for China, the company should enjoy many years of growth of at least 25%+ a year (which would be well below its historical rate). As many of you know, the insurance brokerage business is an excellent business as it generates strong free cash flow and has very low capital intensity.

Morgan Stanley brought CISG public in October 2007 at $16. It’s easy to see how the company has been lost in the shuffle with all the distractions in the market and especially with the glow coming off of China. Morgan has only periodically written about the company. Piper actively follows the company and Fox Pitt covers it as well (though not very actively).

Background

Founded in 1999, CISG initially focused on the property and casualty business but branched out to life insurance a couple of years ago. The company has a large agency force (over 20K brokers) and is the first Chinese insurance broker to have gone public after the Chinese changed their laws in 2007 and allowed public ownership of brokerages. The brokerage business is extremely fragmented in China and CISG has an excellent opportunity to consolidate the industry. CISG has been highly acquisitive since its IPO. The consolidation in China seems to be shaping up similar to the way U.S. brokers consolidated (think HRH, now part of Willis). Even with a number of acquisitions completed, CISG’s ROIC is still above 100%.

The company currently operates 33 insurance agencies and four insurance brokerages in 15 provinces through 305 sales and service outlets. As CISG has continued to gain market share, it has been able to gain exclusive (if there is such a thing in China) distribution arrangements for certain products with Sino Life and Ping An Life.

The company was founded by Hu Yinan and Lai Qiuping who still own 24% of CNIN. Insiders in total own about 60% of CISG (not including options). Colleagues of mine have met management and were impressed. A transcript of their most recent conference call can be found at:

http://seekingalpha.com/article/107773-cninsure-inc-q3-2008-earnings-call-transcript?source=yahoo

Penetration of both the P&C business (1%) and life business (2%) is low compared to other markets, especially emerging markets. As a result, the insurance business in China should continue to enjoy growth of underlying premiums as China’s economy continues to grow, demographics continue to shift in favor of the life business and wealth accumulates. No doubt the Chinese economy is currently slowing but 2x earnings?? I think that’s a little short sighted to say the least.

One item to note as a concern as well as an opportunity is that the productivity of a typical CNInsure agent is lower than its peers (e.g., China Life). Given the relatively new nature of this line, the company is still ironing out the kinks and developing its processes.

Deloitte Touche Tohmatsu audits CISG and has issued clean opinions.

Valuation

To say that the valuation is insane would obviously be a significant understatement. The company has a market cap of $305 million, no debt and cash of $237 million for an enterprise value of $68 million (or $1.46/share). Last QUARTER alone CISG generated $8 million+ of EBIT. The TTM EPS are $.65. Morgan Stanley has them earning $.83 in 2009.

The company plans to use the excess cash to make acquisitions and to buy back stock.

Today, the average insurance broker trades for 12.5x earnings and 2.7x book value and has EPS growth of just 2%. Applying these metrics to CISG, the stock would sell for $15.60 and $14.60, respectively. Obviously these multiples should be much higher for a company growing like CISG.

Risks

The company has a relatively short track record in the life business.

Acquisition integration could be an issue along with managing the growth.

Given its low capital intensity, the business has low barriers to entry.

The agents could misrepresent products in order to make sales.

China recently implemented new regulations on commission rates for mandatory motor insurance. This will reduce commission income slightly but will largely be offset through commissions paid to agents. The net impact will be a slight margin compression.

The company could do something stupid with its cash.

Catalyst

Continued earnings growth

Closing of valuation gap

Stock buy backs

Improvement in sentiment regarding China
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