ZhongAn’s share price surged 55% in the week of 26 May, propelled by aresurgence of sentiment spurred by the passage of the Stablecoins Bill by the HKLegCo on 21 May, and the GENIUS Act advancement to the US Senate on 20 May.
　　Despite the surge was to some extent driven by a round of FOMO sentiment, weexpect the valuation re-rating of ZhongAn starts to gain traction in the marketalongside underwriting improvement in insurance segment, leaving limiteddownside risk for the stock’s valuation reverting to the previous low of 0.7x-0.8x FY25E P/B. With the Stablecoins Ordinance to come into effect this year, webelieve the first batch of participants of the HKMA’s stablecoin issuer sandboxcould be key beneficiaries for capitalizing on the fund flow momentum on virtualassets in HK, and bring tailwinds of topline upside to affiliated companies. ZhongAnOnline holds 8.7% in RD Technologies (Fig.3) which is potentially an undervaluedtarget, in our view. For insurance, we see topline growth on robust health and autopremiums and improved CoR to underpin margin profile. On banking, we raise thetarget P/B multiple for it being HK’s first digital bank to provide reserve bankingservice for stablecoin issuers and crypto trading services to retail investors with reference to the valuation of global peers (Fig.2). We lift our FY25-27E EPSforecasts to RMB 0.69/0.79/0.93 (prev. RMB 0.63/0.74/0.87) and target P/B forbanking to 2.3x (prev.1.12x). Based on SOTP, we derive our new 12m forwardtarget price to HK$20.4 (Fig.1), which implies 1.29x FY25E P/B. Maintain BUY.
　　ZA Bank likely to ride on the tailwind of HK stablecoin boom. As one of theinitial stakeholders in the seed round financing of RD Technologies, Zhong An Digital Asset held 20% interests in RD Wallet, a subsidiary of RD Technologies.
　　RD InnoTech, another subsidiary of RD Technologies, was approved as one ofthe sandbox participants to launch the fiat-referenced stablecoin HKDR, whichis expected to be 1:1 backed by HKD. ZA Bank, the operating entity of ZhongAnDigital Asset, thereby can provide custody services for the stablecoin issuer andbenefit from the potential statutory reserve inflows. ZhongAn Online indirectlyholds 8.7% of RD Technologies, making it a key beneficiary of the boom.
　　Looking ahead, we expect the reserve banking services for stablecoin issuerscould boost the bank’s net interest income, as the fiat-referenced reserves canexpand the lower-cost savings deposit balance, and thus enhance the NIM. Wemaintain the bank’s bottom-line forecast at HK$1.9mn in FY25E, equivalent toRMB 0.77mn in Group P/L, and raise the target P/B by referring to that of globaldigital banks to 2.3x (Fig.2), corresponding to recent momentum of stablecoins.
　　Expect insurance fundamentals to outperform. In 1-4M25, the insurer grewtotal premiums by 12.7% YoY to RMB 10.9bn. We expect the trend of doubledigitincrease to sustain in year, underpinned by health and auto insurance. Wemaintain our forecast on full-year premium rise of 14.6% YoY and revisedown our CoR estimate to 96.9% (prev. 97.2%), thanks to an improved mix ofproduct as the insurer proactively scaled down low-margin businesses, i.e.
　　digital lifestyle and consumer finance. The newly launched Zhong Min Bao Midto-High-End medical insurance (“众民保中高端医疗险”) continued to outgrowand accumulate over RMB300mn by end May, above 50% of scale in last year.
　　Valuation. The stock is trading at 1.3x FY25E P/B, at 26% premium (or 0.7std)above its 3yr historical average. Despite the surge of stablecoin momentum,current valuation of the stock still ranks at 10% of historical P/B(x) from listing.
　　With the HK Stablecoin Ordinance to take effect in 2025, we see a path forupward revision on ZA bank’s valuation and topline growth driven by UWperformance. Our new TP based on SOTP is HK$20.4 implying 1.29x FY25EP/B. Maintain BUY.
　　Key risks: heightened market fluctuations on stablecoin and cryptocurrencies;slower-than-expected execution of licensed stablecoin issuers; prolonged low interest rate environment; and sharpened equity market volatilities, etc.