The first three months of 2020, was filled with challenge for Fanhua as the Company navigated work stoppages and stay-at-home orders by local governments desperately to stop spread of a coronavirus. The first quarter report revealed the bad news of lower revenue from insurance premiums as well as with indications the Company’s on-line platforms may have helped mitigate the negative effects of consumers sheltering at home. Shareholders appear to take in stride news that the Company had to make additional adjustment to the value of its investment in CNFinance by recording a significant loss as CNFinance recorded an non-cash expense related to anticipated credit losses.
Despite the tough quarter, Fanhua management appears to remain confident the Company can continue to turn a profit. Guidance for the June quarter is operating profit of RMB 70.0 million (US$10.0 million). We believe continued profitability bodes well for consistency in the Company’s dividend payout. Indeed, the board of directors recently declared the expected regular dividend.
While we have retained our Buy rating of FANH shares, our target price has been adjusted to US$32.00 (from US$35.00) to reflect changes in valuation metrics in the U.S. equity market. We continue to compare FANH to a group of China-based financial services companies with common stock listed or quoted on U.S. stock exchanges. The market appears to be taking into consideration reduced demand for insurance products as China’s economy deals with the coronavirus pandemic as well as the added costs of providing for employee safety and security. After recent price correction the stock is even more undervalued than ever in comparison to this peer group. It is noteworthy that the new target price coincides with a line of volume-related price support/resistance that has developed in historic trading of the shares. Better than expected fundamental performance as reported in coming quarters could help push the stock back to this level.
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