ZhongAn reported FY23 results with net profit attributable to shareholders turning positive to RMB4.1bn, from a net loss of RMB1.1bn in 2022. Excluding the one- off gain on disposal of ZA International at RMB3.78bn, the insurer recorded RMB 294mn net profit, in line with consensus. We see multiple highlights in the results: 1) domestic P&C growth momentum continued driven by digital lifestyle with premiums +33.1% YoY in 2H23 despite macro uncertainties; 2) revenue from domestic technology export rose 73% YoY to RMB504mn by riding the wave of Digital China; 3) ZA Bank breakeven was on track, with the bank’s net revenue +42.9% YoY and NIM +10bps to 1.94% on the back of a lower loan-to-deposit ratio at 46% (vs 2022: 53%). Looking ahead, we are positive on the InsurTech gene and expect ZhongAn to open up new space for fin-tech and rebuild the digital finance landscape, to propel the growth in proprietary channels and ZA Bank.
　　Domestic P&C driven by digital lifestyle ecosystem. While the underwriting
　　combined ratio (CoR) rose 1.0ppt to 95.2% in 2023, the insurer’s underwriting profit (UWP) rose 1.7% YoY to RMB1.3bn, thanks to a higher insurance revenue by +24.2% YoY. Among four ecosystems, digital lifestyle comprised of e-commerce related cargo insurance, travel insurance and innovative products such as pet insurance saw insurance revenue +40% YoY, sustaining the solid growth to 2H23 (+37.8% YoY, vs 1H: +42.5% YoY). Health segment recorded gross premiums (GWP) of critical illness by +130.6% YoY to RMB1.3bn in 2023, translating into a 7.2x spike in 2H; and the outpatient and emergency insurance premium was up by 157.3% YoY in 2023, reflecting the insurer’s intention on focusing medical diversification. As the No.1 domestic internet insurer, ZhongAn has the potential to achieve continued growth in GWP and underwriting profit of Health, Digital lifestyle and Auto ecosystems, but we remain conservative on consumer finance, for which we expect low- single digit premium growth in 1H24.
　　Proprietary channels empower cross-ecosystem penetration. Backed by
　　digital infrastructure and centralized data platform, the insurer realized 31.0% YoY premium growth in proprietary channels to RMB7.6bn, c. 26% of total GWP. In Health ecosystem, GWP from proprietary channels grew 45.0% YoY to RMB4.4bn, representing 44.5% of total Health GWP. By end-2023, the insurer’s enriched product mix in proprietary channels resulted in: 1) the number of paid customers +14.8% to 11.43mn, 2) premiums per user +14.4% YoY to RMB670, and 3) policy renewal rate +1.0ppt HoH to 88.3%.
　　ZA Bank launched US-stock trading with net revenue +43%. As the top-
　　ranking virtual bank in Hong Kong, ZA Bank is long-awaited by market for its breakeven progress. The bank’s net revenue rose 42.9% YoY to RMB366mn in 2023, underpinned by strong growth momentum in 2H23 (+76.2% YoY and +40.8% HoH). The NIM expanded 1.0ppt YoY to 1.94%, driven by more rapid growth in deposits (+27.4 YoY) versus loans and advances (+10.1% YoY). In Jan, the bank launched US-stock trading to cater to the tech-navvy customers’ demands, which, in our view, is a good strategy for new customer acquisition and raising retention amid competition. Maintain BUY with new TP at HK$22.0.
　　Valuation
　　Rerated based on P/B instead of P/S. ZhongAn (H) is now trading at FY24E
　　0.9x P/B and FY24E 0.5x P/S. The stock price was significantly down in 2023, in particular in 2H23, reflecting concerns about macro uncertainties. By excluding the one-off gain on disposal of ZA International at RMB3.78bn, we adjust the FY23 EPS to RMB 0.2 (vs reported: RMB 2.77), and the FY23 ROE to 1.6% (vs reported: 22.8%) accordingly. Considering investment volatilities and prolonged easing of market sentiment, we revise down the FY24-26E EPS to RMB0.30/RMB0.37/RMB0.46, with respective FY24-26E ROE at 2.1%/2.4%/2.9%. We previously value the stock on 1.25x FY23 P/S, considering: 1) an internet-based business nature poised for high growth; 2) unpromising financial performance in 2022, which ended up in RMB1.1bn of net loss after the HKFRS restatement.
　　We see positive outlook on the company’s growth trajectory, given a more mature P&C business model based on four ecosystems, and the expected breakeven in ZA Bank and technology export. We project the company’s underwriting combined ratio (COR) in FY24-26 at 95.8%/96.0%/96.0%, corresponding to FY24-26E underwriting profits at RMB1.38bn/ RMB1.56bn/RMB1.77bn. We intend to adopt a fair value FY24E P/B at 1.46x, based on assumptions of 1) 3% market risk-free rate; 2) 10% market required rate of return, implying 700bps of risk premiums; and 3) 1.4x beta, to derive the cost of equity at 12.8% on the basis of CAPM. For the sake of prudence, we do not incorporate value of ZA bank and Technology business yet. Our new price target is HK$22.0, focusing on ZhongAn’s domestic P&C insurance business, with an implied 20-year growth rate at 8%. Maintain BUY.