Besta Holdings, which is majority-owned by Ou Yaping, chairman of Zhongan Insurance, will provide approximately US$103 million in new capital for Zhongan Insurance's subsidiary to develop overseas business
Focus:
- Besta Holdings will acquire approximately 156 million new shares of Zhongan International, the overseas business development department of Zhongan Insurance, for approximately US$103 million. While the transaction is underway, Zhongan Insurance is experiencing a difficult year, and the company's cash holdings are decreasing
Author of this article Liang Wuren
2013, , ant group (BABA.US; 9988.HK), and , Tencent (0700.HK) and Ping An Insurance (2318.HK; Zhongan Online Property Insurance Co., Ltd. (6060.HK), co-founded by 601318.SS), has been working hard to downplay the relationship with these well-known founders since its establishment. Today, ZhongAn Insurance is seeking to use another layer of relationship to raise funds for its loss-making subsidiary responsible for developing overseas businesses.
When there is no choice, it may be wise to find cash as much as possible. However, ZhongAn Insurance has no extra capital, which seems to be one of the reasons why it has not participated in the latest transactions, and this may not help stimulate investor confidence.
According to the online insurer's announcement on the Hong Kong Stock Exchange , last Friday, the investment company Besta Holdings (1168.HK) will spend about US$103 million (710 million yuan) to acquire approximately 156 million new shares of Zhongan International. After the transaction is completed, ZhongAn Insurance's shareholding ratio in the subsidiary will drop from the current 47.32% to 44.7%. Besta Holdings' shareholding ratio will increase from 41.5% to 44.75%, becoming its largest shareholder. Zhongan Insurance will continue to have the right to nominate three of Zhongan International’s four board members, and hold Zhongan International firmly in its hands.
Zhongan Insurance said that the proceeds from this transaction will be used for Zhongan International's operating funds. Zhongan International was founded by Zhongan Insurance and Besta Holdings in late 2017 to expand its virtual banking and other financial technology businesses overseas. Zhongan Insurance initially held 51% of the shares, while Besta Holdings held the remaining shares. They have since introduced two more investors, including the venture capital fund of AIA (1299.HK).
Besta Holdings does not mind injecting more capital into Zhongan International without gaining additional control, perhaps because it is itself controlled by Ou Yaping, chairman of Zhongan Insurance. Ou Yaping holds approximately 5.5% of Zhongan Insurance through an entity ultimately controlled by Besta Holdings. Ou Yaping's brother is also the executive director of Besta Holdings, and his 30-year-old son at the end of last year served as non-executive directors in Besta and ZhongAn Insurance. What a real brother who fights tigers, father and son fights. However, this phenomenon of cross-holding in different assets owned by a family is not uncommon in China.
Zhongan Insurance said that Ou Yaping and his son abstained in the vote to decide to buy Zhongan International shares. But given the close relationship between the two entities, other directors of Besta Holdings may vote in favor under pressure.
Besta Holdings focuses on real estate investment, but it is using its relationship with ZhongAn Insurance to expand into the fintech field. ZhongAn International's first major achievement is ZhongAn Bank, which began operations in March 2020 and is one of the first virtual banks in Hong Kong. The business has been growing rapidly, and by the end of last year, it accumulated more than 500,000 customers in the Hong Kong market, which has a population of 7.5 million. Zhongan International has also jointly launched Zhongan Life Insurance, a subsidiary of Taiwan's Fubon Financial Holdings (2881.TW), and cooperated with the Vision Fund of SoftBank (9984.T), to establish ZA Tech Global, a technology service provider for overseas insurance and Internet companies.
The shrinking cash
Although these milestone achievements have been achieved, Zhongan International is still far from profits, with its net loss last year expanding by more than 50% from 2020 to around HK$760 million (667 million yuan). In its latest annual report, Besta Holdings defended its investment in the business, saying a fintech company usually needs to invest a lot of money to develop hardware and technology, and it takes time to make a profit.
Before injecting new funds into Zhongan International, Zhongan Insurance and Besta Holdings jointly invested $103 million in exchange for the company's new shares in October last year. Last year's deal also included ZhongAn Insurance's option to invest additionally in ZhongAn International by June, although this has never been achieved.
ZhongAn Insurance has not made further financial commitments to ZhongAn International, partly because its own cash holdings are decreasing. Last year, the company's cash and cash equivalents were cut by more than half to around 3.8 billion yuan as its operations generated net negative cash flow.
But Besta has not had enough cash in hand. Although the company's cash and cash equivalents increased slightly last year, the total cash and cash equivalents in USD were only slightly higher than $191 million as of the end of December last year. Zhongan Insurance said that Besta will use internal resources to provide funds for its investment in Zhongan International. If it uses existing funds to finance the transaction, Besta's current assets will be significantly reduced, and it can only barely cover its short-term liabilities.
Investors obviously don’t like this deal, both ZhongAn Insurance and Besta investors. ZhongAn Insurance's share price fell 2.6% on Monday after the after-hours announcement on the previous trading day, while Besta's share price fell about 1%. Both stocks recovered some of the lost ground on Tuesday.
ZhongAn Insurance seems to lack funds to invest in a potential company, and perhaps this fact has brought investors attention to the financial constraints faced by the insurance company. ZhongAn Insurance's initial business was unique, and it underwrites the cost of returning and exchanging products for Taobao (Alibaba's online C2C market), and it has made great progress after that. Currently, it offers various types of insurance and achieved annual profit for the first time last year.
It also reduces its dependence on its business on its founders, seeks to make more use of its own distribution channels, and strives to get rid of its reliance on popular platforms such as Alibaba and Tencent. Tencent and Ant Group both reduced their holdings in ZhongAn Insurance this year.
Although ZhongAn profited from insurance underwriting last year, the amount was insignificant and it continued to rely heavily on investment returns. Due to the weak stock and bond markets, ZhongAn Insurance has suffered a heavy blow this year and suffered losses in the first half of the year.
However, for ZhongAn Insurance, it is not all pessimism and bad luck. It may safely survive the current financial turmoil and start making money from investments again when the market improves. As a pioneer in online insurance in China, it is in a good position to benefit from market growth. Its stock's record price-to-earnings ratio is still around 25 times, far higher than other profitable financial technology companies, such as , which has a record price-to-earnings ratio of less than 4 times, and we can see the potential of ZhongAn Insurance.
