CNinsure (CISG) Undervalued by a Wide Margin

CNinsure is a rather small Chinese insurance company. Obviously, the first thoughts that come to mind when hearing the words ‘small Chinese company’ are probably quite negative, however, that simply means that others do not take the time to look into these kinds of companies, and us as investors can benefit greatly from them.

Total Cash Greater than Market Cap

One of the primary ways to measure the size of a company is by its market cap, which is mostly influenced by the company’s share price. The odd thing about CNinsure is that the company has more cash ($409 million) than its market cap ($348 million). This overwhelming amount of cash could serve as a very high margin of safety in buying into a relatively stable underlying insurance business, as their revenues have been increasing for over a decade straight, cutting right through the Great Recession like it was nothing. This excessive cash pile combined with such a sturdy business is almost unbelievable. I believe some knowledgeable investors would now be assuming that the company simply shorts stocks with its float from its insurance business, as that would require the borrowing of money to first sell the stock and buy into it again at a lower price, however, this is not the case, as the company did not state the cash in its annual report as ‘restricted cash’ which is the term for cash derived from un-covered shorts, meaning that this cash is both tangible and usable on short notice. The company also has no debt whatsoever, meaning that none of the cash was borrowed on loans.

Miscalculations based on ADRs

Keep in mind that this is a comparison of the cash of the company to the company’s ADR’s market cap, meaning that these are only the shares traded on the NASDAQ Global Fund, and the company could have more shares being traded on the SSE (Shanghai Stock Exchange), which would inflate its market cap. However, investors could then compare the company’s cash to their book value, since that would include all operations and does not change based on where it is being traded. Through this comparison, as the company’s book value is approximately $500 million, the cash of the company still makes up for 80% of the total book value, meaning that, when buying this stock, you are essentially only paying $100 million for a business that earned $19 million last year, equating to a P/E ratio of just 5. While the company still has many growth prospects ahead of them based on their past revenue growth. The reason many investors have not found this company yet is perhaps easily attributed to its tiny market cap in a foreign country that many investors prefer to avoid.

Update: I’ve asked the CNinsure company; they do not have any listing in China, so their total market cap is only the $350 million in America, rendering the entire third paragraph obsolete, although it is good knowledge to know anyway. This also further strengthens my argument and makes CNinsure even more undervalued.

CNinsure is an odd, small company in a country that is notorious for bad investments (China), however, the company itself seems unknown and unloved, and investors can take advantage of the public’s general avoidance of it to buy a company at a very cheap price.