Fanhua, Inc. is an insurance agency representing life, property and casualty products to China consumers. Additionally, the Company provides claims adjusting services for insurance providers. The Company has an enviable competitive position in China’s fast growing insurance sector. The Company has a market presence with sales and services offices as well as a large and growing sales representative network in a number of desirable urban centers where the middle income target group can be found. Importantly, aggressive adoption of digital technologies such as mobile applications and social media platforms is making it possible for Fanhua to reach an even wider audience. Low penetration rates for insurance products in the China market suggest there will be ample opportunity for Fanhua to capture market share.
We have initiated coverage of Fanhua’s American Depository Shares (ADS) with a Buy rating and a $41.00 target price for year-end 2019. The Company has a decades-long track record in earning profits by offering high quality products to consumers and leveraging relationships with reliable insurance providers. Profits have been elevated through critical strategic decisions by Fanhua’s management team to divest of unprofitable brokerage operations and to fundamentally change sales tactics from a dedicated sales team to a platform model for property and casualty insurance products. Our earnings model reflects management’s guidance and appears to support the view that Fanhua can deliver strong sales growth and profit. A valuation exercise suggests the intrinsic value of the ADS is $37.45 while the implied future price at year end is year-end 2019 is $41.00. We propose investors take advantage of the current undervaluation through long positions in Fanhua’s ADS and hold for future price appreciation.
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