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Three Wireless Carriers Set To Dominate World’s Second Largest Telecom Market

Pie chart showing Indian operators’ wireless subscriber base market share as at August 2017. Bharti Airtel led the way with a market share of 23.70%. Other players ranked in order of market share are Vodafone (17.55%), Idea Cellular (16.11%), Reliance Jio (11.19%). BSNL (8.88%), Aircel (7.52%), Reliance Communications (6.51%), Telenor (3.96%), Tata (3.96%). Sistema (0.31%) and MTNL (0.30%).

Darwinian forces are at work in India’s debt-laden mobile network operator market where fierce competition has brought forth a wave of consolidation which is expected to result in an oligopoly of three major carriers, namely Bharti Airtel (BOM:532454) (NSE:BHARTIARTL), Reliance Jio (BOM:500325) (NSE:RELIANCE) and a merged entity between Idea Cellular (BOM:532822) (NSE:IDEA) and Vodafone India which is the Indian arm of British telco Vodafone PLC (LON:VOD) (NASDAQ:VOD). Brokerage firm CLSA says the trio could account for as much as 90% of industry revenues going forward.

India’s anticipated triopolistic mobile operator market is akin to the mobile operator market in countries such as China (China Mobile, China Unicom and China Telecom), South Korea (SK Telecom, KT Corp and LG Uplus Corp), Japan (NTT DoCoMo, KDDI and Softbank Mobile) and Canada (Telus Corp, Rogers Communications and Bell Canada Enterprises).

The catalyst is newcomer Reliance Jio, the telecom arm of Reliance Industries which is owned by India’s richest man Mukesh Ambani. Founded less than a decade ago (in 2010) but having begun operations in September last year, the new kid on the block disrupted the Indian mobile operator market with free voice calls and ultra-low price data services - a game-changing move in India’s price sensitive market. In less than a year of its launch, Reliance Jio amassed over 100 million subscribers (132.67 million subscribers as at August this year according to data from the Telecom Regulatory Authority of India) and emerged as India’s fourth largest wireless carrier by subscriber number.

Pie chart showing Indian operators’ wireless subscriber base market share as at August 2017. Bharti Airtel led the way with a market share of 23.70%. Other players ranked in order of market share are Vodafone (17.55%), Idea Cellular (16.11%), Reliance Jio (11.19%). BSNL (8.88%), Aircel (7.52%), Reliance Communications (6.51%), Telenor (3.96%), Tata (3.96%). Sistema (0.31%) and MTNL (0.30%).

Jio’s aggressive entry forced India’s Big Three operators - Bharti Airtel, Vodafone and Idea Cellular - to cut tariffs which squeezed profits and put pressure on smaller, financially distressed operators. The turmoil spurred a wave of consolidation in what was a Darwinian moment in which the weaker players were gradually being forced into extinction while only the fittest survive and thrive. Heavily indebted Tata Teleservices, owned by Tata Group was acquired by Bharti Airtel at a bargain price, marking Airtel’s seventh acquisition in five years.

Malaysia’s Maxis-owned (KLSE:MAXIS) Aircel which is heavily in debt may be forced to close shop according to news reports after a failed merger with Reliance Communications (BOM:532712) (NSE:RCOM), which is owned by Mukesh Ambani’s younger brother Anil. Reliance Communications, also faced with its own set of financial troubles, is now forced to make operational changes to pay off its debt such as by scaling down operations (it is shutting down its voice services for its 2G and 3G customers which account for the majority of its revenues and customer base) and selling assets (such as its cell towers). Having missed local and international debt interest payments this month, Reliance Communications’ stocks and bonds tumbled are at record lows.

Meanwhile, Vodafone India (India’s number 2 telco) and Birla-owned Idea Cellular (India’s number 3 telco), have agreed to merge, which would create India’s largest telecom company with over 400 million customers and a market share of 34%, overtaking Bharti Airtel which will have a market share of less than 32% after its acquisition of Tata Teleservices and Telenor (India) Communications (the Indian arm of Norways’ Telenor). According to data from the Telecom Regulatory Authority of India, as of August 2017, Vodafone India had 208,144,702 subscribers while Idea Cellular had 191,059,301. By contrast, Bharti Airtel served 281,043,837 subscribers.

Reliance Jio’s advantage could partly be attributed to its new all 4G LTE network, touted as the world’s largest 4G LTE network when launched in September last year. The network cost US$ 25 billion and six years to build which meant Reliance Jio was a late entrant to India’s 4G arena, given that competitors Bharti Airtel, Vodafone India and Idea Cellular launched 4G services much earlier, despite all players receiving the spectrum at the same time in 2010. Reliance Jio’s 4G LTE network, based on the VoLTE protocol, offers lower operational cost, spectral efficiency and better user experience compared to previous telecommunication technologies.

VoLTE is essentially HD voice calling services over a 4G LTE network rather than over 2G/3G networks. This means voice calls and mobile data are sent over one network i.e. 4G LTE, rather than managing different network layers for voice and mobile data. This compares with the traditional circuit-switched networks in which data would be sent through 4G for instance but the customer would switch to 2G during a voice call. For the customer, call quality is inferior on the older technology compared to VoLTE. For the wireless carrier, a VoLTE network is considered to be more cost efficient to operate, compared to managing multiple network layers i.e., 2G, 3G and 4G. Additionally, with a VoLTE network, operators can free up spectrum that had been used for traditional voice services and put them to use for more lucrative data services. The end result is that VoLTE network operators can deliver voice services at a lower cost per minute compared to traditional voice and it is this technology that enables Reliance Jio to offer ultra-cheap data services and free voice calls without a significant dent to their bottom line. Reliance Jio surprised analysts when it reported a solid ARPU (Average Revenue Per User) of 156.4 during the quarter ended September 2017, and is expected to post a net profit in its next financial year.

Reliance Jio’s disruptive entry with its all-VoLTE network hastened the demise of 3G in India. Reliance Jio is currently the only operator offering VoLTE services throughout India and while the company has the first mover advantage, incumbent operators, which currently offer voice calling services on legacy circuit-switch technology, are moving quickly to narrow the technology gap. Bharti Airtel, Vodafone India and Idea Cellular all plan on introducing VoLTE services throughout India in the coming months. Bharti Airtel is particularly aggressive having plans to, shift its 3G users to 4G, shut down its 3G services within two years and refarm the spectrum linked with it for 4G services.

 

Enormous growth potential

The surviving trio stands to gain from India’s mobile market, the world’s second-largest. India has witnessed a steady increase in its mobile phone user base over the past decade. However, with nearly 1.2 billion mobile subscribers currently, the vast majority of India’s population (estimated at some 1.3 billion) has a mobile subscription, and thus subscriber growth in the country is likely to have reached its zenith even if the potential growth of users with two or more handsets is considered. According to data released by the Telecom Regulatory Authority of India (TRAI), the number of mobile phone subscribers in India fell by nearly one million from 1,186,790,005 at the end of July this year to 1,185,841,228 at the end of August this year.

The growth opportunity is likely to lie in mobile data consumption which is projected to rise exponentially as India’s telecom sector shifts from a voice-based model to a data-centric one driven by rising smartphone penetration among other factors.

This year, India overtook the US to be the world’s second largest smartphone market in the world, behind China according to tech analyst Canalys. However, nearly half of India’s over 1 billion mobile phone users are on feature phones, making up the largest feature phone population in the world. The majority of India’s feature phone users are located in rural towns and villages where smartphones are relatively unaffordable for compared to urban dwellers. This may explain why despite offering data services at cut-throat prices, Reliance Jio’s customer base is relatively urban-centric compared to the incumbent telecom operators Bharti Airtel, Vodafone and Idea Cellular which all have a balanced mix of urban and rural subscribers.

Bar chart showing the proportion of rural vs urban subscribers of Indian wireless carriers’ mobile subscriber base. The breakdown is as follows: Idea Cellular (55.2% rural, 44.8% urban), Vodafone (54.2% rural, 45.8% urban), Bharti Airtel (50.3% rural, 49.7% urban), Aircel (35.5% rural, 64.5% urban), BSNL (32.2% rural, 67.8% urban), Telenor (28.8% rural, 71.2% urban), Reliance Jio (24.8% rural, 75.2% urban), Reliance Communications (21.8% rural, 78.2% urban), Sistema (21.8% rural, 78.2% urban), Tata (20.4% rural, 79.6% urban) and MTNL (1.3% rural, 98.7% urban).

Noticing a business opportunity, Reliance Jio launched a cheap 4G enabled feature phone, targeted at price-sensitive rural customers. To counter Jio’s move, Airtel quickly moved to launch its affordable Airtel 4G smartphone in partnership with Indian handset manufacturer Karbonn, and is also reportedly partnering with Lava, another homegrown manufacture to launch another affordable Airtel 4G smartphone.

Smartphone companies are also getting into the game. China’s ZTE (SHE:000063) is targeting India’s rural mobile phone user base with its entry-level smartphones while Xiaomi and Samsung (KRX:005930) are ramping up their retail networks to better serve rural customers. Over the long run, these feature phone users will upgrade to smartphones, which should drive India’s mobile data consumption.

Indian telcos currently derive bulk of their revenue from traditional voice however the ratio is expected to reverse as the country is expected to follow a trend playing out in major telecom markets in which rising mobile data usage is leading to rapid data revenue growth while voice revenues decline. For instance, in China, the world’s largest mobile market by subscriber number with about 1.3 billion subscribers, booming data consumption is a major growth driver and the country’s Big Three carriers China Mobile (HKG:0941) (NYSE:CHL), China Telecom (NYSE:CHA) and China Unicom (HKG:0762) (NYSE:CHU) have seen mobile data emerge as their largest revenue source, surpassing the combined revenues from traditional voice and text messages.

By contrast for wireless operators in India, the world’s second biggest mobile market after China, traditional voice remains their biggest cash cow although this is changing. According to a report by Deutsche Bank, in FY 2015, voice revenue accounted for 80% of India’s telecom industry revenues. In FY 2016, this declined to 74.3% and to 73.45% in FY 2017. It is expected to fall to 69% in FY 2018, 61% in FY 2019, 56% in FY 2020 and will make up less than half of total industry revenues in FY 2021 which means data revenues will emerge as the sector’s dominant revenue source for the first time.

As the battle for mobile data revenue heats up, the incumbent operators may have a near term opportunity in their hands that disruptor Reliance Jio may be unable to reach. Reliance Communications has announced its intentions on exiting the 2G business by the end of November this year, which means all of the company’s 2G customers, numbered at approximately 40 million, would need to port out to another network operator, presenting an opportunity for Bharti Airtel, Idea Cellular and Vodafone India which operate 2G networks. This customer base is out of reach for Reliance Jio, a pure-play 4G operator and while Jio could woo them with its 4G feature phone, how many take the offer remains to be seen.

 

2G likely to remain strong

The world has been moving away from 2G. Japan was the first country to begin switching off 2G networks and South Korea followed suit, setting off a trend worldwide as countries see declining numbers of 2G users. For instance, when Singapore switched off its 2G networks in April this year, the country’s 2G user population amounting to about 100,000 people made up less than 3% of the country’s mobile user base at the end of March according to data from the Infocomm Media Development Authority (IMDA). In Australia, where 2G networks were retired a few months later, less than 2% of mobile phone users were using 2G services.

By contrast, about 50% of India’s mobile phone users are still on 2G networks. According to the Indian Cellular Association, India has about 400-500 million feature phone users (roughly half of the country’s total mobile phone user base) with 130-140 million feature phones being sold each year. These feature phone users, mostly located in rural towns and villages, are still on 2G networks, primarily to make voice calls. Although they will account for a shrinking portion of mobile subscribers with cheap 4G LTE devices are gradually penetrating the market such as those by Reliance Jio and Airtel, the high number and proportion of 2G users means 2G is unlikely to fade away in India in the near future - offering a captive market for operators Bharti Airtel, Idea Cellular and Vodafone.

 

 

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Indonesia’s Thriving Startup Scene Has Ample Potential For Growth

Pie chart showing startup investment in Indonesia by sector (% of total investment value during 2012 - Aug 2017). 58% of startup investments during the period were taken up by the e-commerce sector, 38% in the transport sector, 1% in the finance sector, 1% in the classified/directory sector, 1% in the payment sector and 2% in other sectors.
Indonesia’s startup scene is booming as investors and startup entrepreneurs scramble to capitalize on a potentially lucrative opportunity in the Southeast Asian archipelago’s emerging digital economy which is driven by a growing middle class, a young demographic, rising internet penetration and a supportive regulative environment.While the United States remains the world’s “startup hub” accounting for over 50% of deals and investment value, Singapore is the main startup hub in Southeast Asia. However, other Southeast Asian nations led by Indonesia are fast catching up leading to a flurry of views that Indonesia could emerge as a startup hub in Southeast Asia in its own right.

Two pie charts showing startup investment in Southeast Asia in 2012 and 2016. In 2012, startup investment in Southeast Asia was US$ 0.3 billion, with 83% of that amount invested in Singapore, 14% in Indonesia and 2% in other Southeast Asian countries. In 2012, startup investment in Southeast Asia was US$ 6.8 billion (23 times higher than in 2012) with 41% of that amount invested in Singapore, 19% in Indonesia, and 40% in other Southeast Asian nations.

A report by consulting firm AT Kearney and Google found that startup funding in Indonesia soared 68 times in the last five years reaching US$ 1.4 billion in 2016. The funding momentum accelerated this year with the report stating that in the first eight months of 2017, Indonesian startups collectively raised US$ 3 billion in 53 investment deals.

Bar chart showing startup investment in Indonesia (in US$ billions) in 2012, 2016 and Jan-Aug 2017. Startup investment in Indonesia amounted to US$ 0.44 billion in 2012, US$ 1.4 billion 2016 and US$ 3 billion during the first eight months of 2017.

Most startup investments in Indonesia are still in the seed or early stages by volume, but by value, late stage investments account for the lion’s share.

Pie charts showing venture capital investment in Indonesia by stage during the January - August period of 2017. Indonesia saw a total of 53 deals during the period, of which 43% were seed stage, 30% were Series A, 8% were Series B, 15% were Series C or later and 4% were debt/PE. By deal value, total venture capital investment in Indonesia during the period amounted to US$ 3 billion, of which 0% were seed stage investments, 15% were Series A, 1% was Series B, 43% were Series C or later, and 40% were debt/PE.

Indonesia’s e-commerce and transport sectors have taken the lion’s share of startup funding over the past few years.

Pie chart showing startup investment in Indonesia by sector (% of total investment value during 2012 - Aug 2017). 58% of startup investments during the period were taken up by the e-commerce sector, 38% in the transport sector, 1% in the finance sector, 1% in the classified/directory sector, 1% in the payment sector and 2% in other sectors.

 

Tremendous Potential

Still, Indonesia offers vast untapped potential. With a population of over 250 million, Indonesia is the fourth most populous nation in the world. Over 60% of Indonesians are aged between 20 to 65 i.e., their principal working years, and 27% of Indonesians are less than 15 years of age. Thus, Indonesia has a young demographic, a low dependence ratio and a sizeable domestic market (over 50% of Indonesia’s GDP is derived from domestic demand).

Consequently, the country has the ingredients for strong economic growth which in turn is contributing to an expanding middle class; according to the International Monetary Fund’s “World Economic Outlook” report published this month, Indonesia is among the top five ASEAN countries to surpass 5% GDP growth rate this year. Already Southeast Asia’s largest economy, the Indonesian government aims to be a top ten economy by 2030 and Pricewaterhouse Coopers projects Indonesia to be the world’s fourth largest economy (in terms of GDP at PPIs) by 2050, up from 8th place in 2016.

In 2016 Indonesia had the world’s fourth largest middle class with 19.6 million households according to Euromonitor International and this is set to increase to 23.9 million by 2030, making this group a significant consumption driver in the country.

Indonesia’s growing young consumer base is also increasingly getting connected; the country has over 100 million internet users (the majority use their smartphones for the purpose) and with just 53% of Indonesia’s population having internet access, there is tremendous potential for the country’s internet population to expand. Indonesia is poised to be the world’s fourth largest internet market by 2020 according to a joint report by Google and Temasek.

With Indonesia’s growing population of young consumers increasingly turning to the internet for a multitude of reasons, be it to look for online shopping deals or watch online videos the country is seeing a growing digital population which in turn is giving rise to a growing digital economy with tremendous opportunities.

 

Thriving Startup Ecosystem

Unsurprisingly, Indonesia is becoming a hotspot of startup and investor activity. A number of homegrown startups have mushroomed and foreign players have jumped in as well. Notable homegrown success stories include Go-Jek, Taveloka, and Tokopedia, and there are numerous others aiming to strike gold. Kredivo (an online credit provider), Investree (a P2P lending marketplace), CekAja (a financial product comparison service), Bukalapak (an e-commerce platform), DokterSehat (an online health portal), Mivo (a life streaming service) and Socialla (an e-commerce platform focused on cosmetics) are just a few examples in Indonesia’s long list of startups.

Kredivo, an Indonesia-based online credit provider successfully completed its Series A round, co-led by Jungle Ventures and Singapore-based NSI Ventures earlier this year. The amount raised was undisclosed.

This January it was reported that Socialla raised an undisclosed amount in its Series B round from Japanese fashion platform Istyle (TYO:3660) and East Ventures.

Foreign startups are also circling the Indonesian opportunity. For instance, Singapore-based ride hailing app Grab is acquiring Indonesia-based O2O payments startup Kudo in a deal that could be worth over US$ 100 million. Grab also launched a ‘Grab 4 Indonesia’ 2020 master plan aimed at supporting Indonesia’s goal of emerging as Southeast Asia’s largest digital economy by 2020. Under the plan, Grab will invest US$ 700 million in Indonesia over the next four years which includes opening an R&D centre in Jakarta and US$ 100 million to be invested in Indonesian startups in the mobile and financial services space.

On the investor side, funding is pouring in from local and foreign players and the investor enthusiasm appears robust; AT Kearney and Google in their “Indonesia Venture Capital Outlook 2017” report found that 57% of Indonesian investors and 80% of foreign investors plan to increase their investments in the country.

Notable venture capital firms from America’s Sequoia Capital, Singapore’s Monk’s Hill Ventures, Japan’s Rakuten Ventures (the investment arm of Japanese internet company Rakuten) (TYO:4755), and tech companies such as Alibaba (NYSE:BABA) and Expedia (NASDAQ:EXPE), have pumped billions into Indonesian startups.

Chinese tech giants, perhaps in their quest for global dominance have been the most aggressive investors lately; a report by consulting firm AT Kearney and Google states that in the first eight months of 2017, Chinese firms accounted for a staggering 94% of total startup funding by value in Indonesia, a massive leap from the previous year when Chinese firms accounted for about 2% of Indonesian startup funding by value.

Notable Chinese investments include Alibaba’s investment in online marketplace Tokopedia, Tencent’s  (HKG:0700) (OTCMKTS:TCEHY) (OTCMKTS:TCTZF) and JD.com’s (NASDAQ:JD) US$ 1.2 billion investment in motorbike-on-demand platform Go-Jek.

Singapore-based East Ventures known for backing notable Indonesian startup success stories such as Tokopedia and Traveloka has raised a sixth fund focused on Indonesia.

American VC firm Wavemaker Partners is closing a US$ 50 million Southeast Asia-focused fund, with Indonesia placed as a key market.

Local investors are also hungry for a share of the opportunity on home soil. Bank Mandiri (IDX:BMRI), one of Indonesia’s largest banks, launched its VC unit Mandiri Capital Indonesia (MCI) with 500 billion Indonesian rupiah of initial capital to invest in startups.

State-controlled Telekomunikasi Indonesia’s (IDX:TLKM) (NYSE:TLK) Metra Digital Innovation Ventures (MDI Ventures) led a pre-series A round SaaS firm Kofera in June this year, and led a B series funding round for Wavecell the same month. Last year, MDI Ventures announced its plans to invest US$ 100 million into global and domestic startups.

This year, Indonesia’s largest private bank Bank Central Asia (IDX:BBCA) (OTCMKTS:PBCRY) launched a VC unit called Central Capital Ventura to invest 200 billion Indonesian rupiah in fintech startups, joining the race to use fintech to reach Indonesia’s unbanked population.

In March this year, Bank Rakyat Indonesia (IDX:BBRI) hired an executive from state-owned Telekomunikasi Indonesia (also known as Telkom) Indonesia’s largest telco, Indra Nutoyo to help bolster the bank’s fintech plans and in July it was reported that the bank was in the process of acquiring a venture capital firm, the process of which will be concluded by the end of the year. Indra Nutoyo is likely to head the new VC unit.

In another sign of investor confidence, early this month, Indonesian e-commerce startup PT Kioson Komersial Indonesia Tbk (IDX:KIOS) raised 45 billion rupiah by selling 150 million shares, or 23.1% of the company’s total share base, at 300 rupiah each, in what was Indonesia’s first e-commerce IPO. Riding on a thriving startup landscape and voracious investor appetite, the offering was oversubscribed 10 times and could pave the way for more startups to take the IPO route as Kioson had done.

With Kioson’s stock price closing at 2,120 rupiah yesterday (October 16), Kioson investors have been handsomely rewarded with a massive 600% capital gain since the shares began trading less than two weeks ago on October 5th.

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ZhongAn, World’s First ‘Insurtech’ IPO Oversubscribed 400 Times By Retail Investors

Infographic - China insurance industry in 2016, at a glance.

Opportunities in China’s fast-growing insurance market coupled with exciting insurtech future prospects entice investors

China’s largest online insurer and China’s first internet-only insurer, ZhongAn Online Property and Casualty Insurance Co Ltd raised US$ 1.5 billion in a Hong Kong flotation which was oversubscribed by nearly 400 times by retail investors while the institutional order book was more than 10 times oversubscribed as eager investors looked to ride on what will be the world’s first ever ‘insurtech’ IPO, and Hong Kong’s second-largest IPO this year, following the US$ 2.2 billion flotation of Chinese brokerage firm Guotai Junan Securities (SHA:601211) in March.

The IPO was priced at the top of its range at HK$59.70 per share valuing ZhongAn at US$ 11 billion, a hefty price tag for a company that generated just CNY 3.4 billion (a little over US$ 500 million) in total insurance premiums and CNY 9.3 million (about US$ 1.4 million) last year. That revenue however, grew 49.28% year-on-year, with a CAGR of 107.16% between 2014 and last year. In the first half of the year, ZhongAn’s insurance premium revenue reached approximately CNY 2.6 billion and the annual revenue is expected to be reach CNY 6.5 billion.

The company is backed by some of China’s most prominent firms including e-commerce giant Alibaba (NYSE:BABA), social media behemoth Tencent Holdings (HKG:0700) (OTCMKTS:TCEHY) (OTCMKTS:TCTZF) and one of China’s largest insurance firms Ping An Insurance (HKG:2318) (SHA:601318). Japan’s Softbank (TYO:9984) (OTCMKTS:SFTBF) (SFTBY) is a cornerstone investor in ZhongAn’s IPO (committing to hold its shares for a minimum number of months) having confirmed its purchase of a 5% stake in the company. Alibaba affiliate Ant Financial is the largest shareholder in ZhongAn with a 16% stake.

Since its inception in 2013 when the company started off selling “shipping return insurance” at Alibaba’s online marketplaces Taobao and Tmall, the company now offers a variety of insurance products classified into five segments: travel, consumer finance, health, auto and lifestyle consumption.  “Shipping return insurance” which insures the cost of returning goods purchased online (mostly on Alibaba’s Taobao and Tmall platforms), still remains as ZhongAn’s biggest business, having accounted for about one-third of the company’s total gross written premiums last year. Shipping return insurance is classified as a “lifestyle consumption” product.

Bar chart showing ZhongAn Insurance's gross written premium (GWP) during the financial year 2016, by segment, namely “Lifestyle Consumption”, Travel”, Consumer Finance”, “Health”, “Others” and “Auto”. At 47.6%, the “Lifestyle Consumption” segment accounted for bulk of ZhongAn’s GWP. “Travel” accounted for 31.7%, “Consumer Finance” accounted for 9.3%, “Health” accounted for 6.9%, “Others” accounted for 4.4% and “Auto” accounted for 0.1%. Data taken from ZhongAn’s prospectus.

ZhongAn plans to use proceeds from the IPO to strengthen its capital base to accelerate its growth plans which includes adding life insurance and healthcare products to its range of policies. Both of these insurance segments have considerable growth potential in China.

 

China’s fast-growing insurance market still has room to expand

China is the world’s third largest insurance market accounting for a 9.85% share of total world premiums written in 2016 according to data from SwissRe.

Pie chart showing the top 10 countries in the world by share of total world premiums written in 2016. The United States was the largest accounting for 25.58% of total world premiums written. Japan was second with 9.96% and China third with 9.85%. United Kingdom (6.43%), France (5.02%), Germany (4.54%), South Korea (3.61%), Italy (3.43%), Canada (2.42%) and Taiwan (2.14%) rounded out the top 10.

China’s insurance market has been growing at a rapid clip, with insurance companies benefiting handsomely in the process; over the past two years premium revenue has ballooned 88% and total assets have grown 49%.

According to data from German insurance giant Allianze, global insurance premiums (excluding health insurance) grew 4.4% in 2016, with nearly half of that growth driven by China alone; without China, the global insurance industry would have seen a growth rate of just 2.7%.

 

Life insurance drives China’s insurance industry

Much of China’s insurance industry growth was driven by the life insurance segment which soared 30% last year, the highest rate of growth since 2008.

China’s booming life insurance market accounted for half of the world’s life insurance market growth of 4.7% in 2016; without the Middle Kingdom the global life insurance industry would have notched a growth rate of just 2.3% in 2016.

Yet, there is still ample room for growth; according to data from Allianze, China’s per capita spending on insurance products is just about 170 euros, leaving a long road ahead for the Middle Kingdom before it catches up with the average for developed countries, or even with neighboring Hong Kong and Taiwan, both of which have are within the top 10 countries with the highest per capita gross written premiums.

Bar chart showing the top 10 countries in the world by per capita gross written premium (GWP) in 2016 (in euros). Hong Kong was ranked number one with 6,410 euros of gross written premiums per capita, Switzerland was ranked number two with 5,200 euros of GWP per capita and Denmark was third with 4,470 euros of GWP per capita. Singapore (3,930 euros), Taiwan (3,560 euros), United Kingdom (3,560 euros), Norway (3,560 euros), United States (3,470 euros), Japan (3,160 euros), Ireland (3,120 euros), Sweden (3,080 euros) and France (3,060 euros) rounded out the top 10.

Multiple forces to drive health insurance market in China

The vast majority of China’s citizens are covered under a public insurance system. However, a number of forces are expected to drive the country’s private healthcare insurance sector going forward.

First, as Chinese citizens get increasingly wealthier, a growing number of Chinese are succumbing to “diseases of affluence” such as diabetes and cancer. Second, China’s population is ageing. According to data from the World Bank, as of 2016, about 10% of China’s population was aged 65 and older (compared to about 6% in India) and this percentage has been on an upward trend; in 1960 the 65-and-over population as a percentage of the total population stood at around 3% of the population in both countries, but by 2016, the proportion of this age group in China was double that of India.

Line graph showing the 65-and-above population as a proportion of the total population (%) in China and India between 1961 and 2016. In 1961, 3.7% of China’s population was aged 65 and above while in India the proportion was 3.1%. By 2016, 10.1% of China’s population was aged 65 and above while in India 5.8% of the population was aged 65 and above. Data from the World Bank.

Third, the Chinese government is encouraging private sector health insurance, through supportive government policies, (such as tax breaks for individuals who purchase private insurance), in an effort to alleviate the burden on state finances and the state healthcare system. Finally, China is witnessing a growing proportion of middle class and affluent citizens who are increasingly placing great value on health and well-being, which in turn is encouraging them to seek better quality care than that provided by public hospitals.

Consequently, private health insurance penetration is rising and still has potential to continue growing; according to Boston Consulting Group, in Australia, one in two people have private health insurance while in China, the figure is just one in 20.

China’s fast-growing insurance market has attracted an increasing number of entrants keen to grab a slice of the growing pie. China’s No.1 life insurance player, China Life Insurance, has seen its market share cut by more than half to 20%, from 45% a decade ago. China Life’s president noted that three years ago, China’s seven largest insurers commanded 80% of the market, but now they control less than 60%.

The growth story is not over yet. MunichRe forecasts China’s insurance industry to grow at twice the growth rate of the overall Chinese economy between 2017 and 2020.

Bar chart showing the average inflation-adjusted annual growth rate of China’s GDP, China’s insurance sector overall growth, China’s life insurance overall growth and China’s non-life insurance overall growth between 2012-2016 and 2017(e)-2020(e) according to data from MunichRe. During 2012-2016 China’s GDP grew 7.3%, China’s overall insurance sector grew 14.3%, China’s life insurance segment grew 12.7% and non-life segment grew 16.5%. During 2017 and 2020, it is forecasted that China’s GDP will grow 5.9%, China’s overall insurance sector will grow 11.8%, China’s life insurance segment will grow 13.2% and non-life segment will grow 9.7%.

 

Insurtech is being touted as the future of growth in the insurance industry

A report released by London-based international law firm Clyde & Co found that 94% of insurers expect digital initiatives to have the greatest impact on their distribution channels such as through the achievement of cost efficiencies and the development of new insurance products. Optimism in this area of insurance helped insurtech startups worldwide attract US$ 1.7 billion of investments in 2016.

And growth has been accelerating. A new report by PwC states that global investment in insurtech in the second quarter of 2017, surpassed that in the previous three quarters combined.

For ZhongAn investors, the opportunity lies in China, ZhongAn’s home base. China is expected to ride the global insurtech wave; consulting firm Oliver Wyman expects China’s insurtech market to expand from CNY 250 billion in 2015, to over CNY 1 trillion by 2020.

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China’s Live Video Streaming Market Is Thriving, Lucrative And Has Tremendous Growth Potential

Infographic on China's live video streaming market in 2016 - Copyright LD Investments

China’s live video streaming market grew 180% last year, with the market valued at an estimated RMB 20.8 billion (around US$ 3 billion) according to data from iResearch.

The trend has been a boon not just for dedicated live streaming platforms such as YY (NASDAQ:YY), but also for Chinese tech giants who have swiftly jumped into the arena either by integrating live streaming functionality into their ecosystem of services (similar to Facebook’s (NASDAQ:FB) integration of its live streaming service Facebook Live), or by acquiring live streaming platforms (similar to Twitter’s (NYSE:TWTR) acquisition of Periscope); Chinese e-commerce behemoth Alibaba (NYSE:BABA) has integrated live streaming functionality into its Taobao platform (Taobao Live), Chinese social media goliath Tencent (HKG:0700) (OTCMKTS:TCEHY) has integrated live streaming functionality into its messaging app WeChat, Chinese e-commerce company JD.com (NASDAQ:JD) has integrated the functionality into its online shopping platform (JD Live) and other tech players such as Weibo (NASDAQ:WB), Momo (NASDAQ:MOMO) and Inke to name a few all offer live streaming services.

Bar and line graph showing China's live streaming video market total revenue (RMB billions) and growth rate (%) between 2014 - 2019 (E)

A report by Goldman Sachs says live streaming generated the highest revenue per hour in 2016 in China, at U$ 0.54 per hour, more than double that of PC games which generated US$ 0.21 per hour.

Bar graph showing the estimated revenue per hour generated in China from live streaming, PC games, mobile games, TV, online video and online music in 2016. Live streaming generated the highest revenue at US$ 0.54 per hour.

Live streaming in China offers a plethora of live content such as live concerts, live sports, and live streaming content generated by users etc. These different areas of live streaming have different revenue drivers. For instance, live sports streaming generates revenue from subscriptions, premium access and advertising while gameplay generates revenue from advertising, game publishing and virtual gifts. However, the majority of China’s live streaming revenues are derived from user-generated content where virtual items and virtual gifts are gifted to live streaming content creators from their viewers.

Needless to say, it is this area of China’s live streaming market that has got the most attention. User-generated live streaming has witnessed explosive growth in China over the past few years as broadcasters (who are usually ordinary people broadcasting themselves eating, chatting, singing, dancing or performing stunts, pranks etc), amass huge followings and receive virtual gifts from adoring fans propelling these ‘average Joes’ to internet stardom and money, with some earning thousands of dollars a month.

These virtual gifts (such as virtual flowers which could cost less than RMB 1 each, or virtual yachts and Lamborghini cars which may cost about RMB 100 or more each)  can be converted to hard cash. The more successful broadcasters have an additional gravy train; product endorsements from top brands. Maybelline for instance sold 10,000 lipsticks in two hours after a live streaming campaign last year with Chinese celebrity Angelababy on the streaming platform Meipai.

However, the industry’s rapid ascent may decelerate in the near future with the Chinese government clamping down on unsavory live streaming content such as provocative dancing and other suggestive movements, revealing clothing, obscene language and so on. Seductive eating of a banana for instance, is now banned. With over 60% of live streaming hosts being female and over 60% of viewers being male, a number of those hosts end up making use of their sex appeal to boost views and revenues as well. While such seductive teasers may have appealed to their male-dominated viewers, it certainly didn’t appeal to the Chinese government.

In July, China’s culture ministry announced that it had shut down 4,313 online show rooms, and fired or punished more than 18,000 anchors. 12 platforms, including major players such as Panda TV, 6.CN and Douyu, were punished and ordered to make changes after offering illicit content that “promotes obscenity, violence, abets crime and damages social morality”.

While the government’s moves may impede short term growth rates, predictions of doom and gloom may be exaggerated, and the crackdown may actually help promote a healthier and more sustainable expansion of the industry in the longer term.

 

Evolving and ample potential for growth

According to data from China Internet Network Information Center (CNNIC), by the end of 2016, 344 million people in China have used a live streaming service, a number greater than the entire population of the United States. Yet there’s still room for growth; at 344 million, just 47% of China’s internet population have used a live streaming service.

Furthermore, as the industry matures, other live streaming content types are increasingly gaining popularity. Virtual gifts from user-generated content was still the biggest money-generator for China’s live streaming market, however in terms of users, gameplay and live sports streaming had a greater share of users than user generated content in 2016. Gameplay enjoyed a notable increase in users which allowed it to surpass user generated content’s share of users. Live concerts also grew, closing the gap with user generated content.

Bar graph showing the percentage share of users by content type (namely concerts, user-generated content, gameplay, sports and others) in China's live streaming video market in 2016.

This in turn may be a contributing factor towards a gradual demographic alteration of live streaming viewers; according to a study by Tencent, last year the share of female viewers increased while the share of male viewers decreased.

Bar graph showing the gender ratio of China's live video streaming audience in January 2016 and December 2016. Male viewers made up 69.5% while female viewers made up 30.5% of China' live streaming audience in January 2016. In December 2016, male viewers were 63.4% while female viewers were 35.6% of China's live video streaming audience in December 2016.

Goldman Sachs forecasts China’s live streaming market to grow from US$ 2 billion in 2015 to US$ 15 billion by 2020.

The rapid rise of the industry (which barely existed three years ago), coupled with the ample potential for future growth has fueled a rush of investments.

Early this month, Chinese marketing agency Shunya International purchased a 50% stake in Chinese live streaming app Inke, in a deal worth just under RMB 3 billion (US$ 460 million).

Taking a broader view, China’s live streaming platforms raised more than RMB 10 billion (US$ 1.5 billion) in the first half of this year with the largest players capturing bulk of the funding according to a report by 21st Century Business Herald..

Live.me which is owned by China’s Cheetah Mobile (NYSE:CMCM) and Huya.com which is games-based broadcasting platform owned by YY Inc (NASDAQ:YY) raised US$ 60 million and US$ 75 million respectively in their Series A financing rounds.

Huajiao.com which is backed by Qihoo 360 Technology Co Ltd (NYSE:QIHU) raised RMB one billion in its Series B financing.

PandaTV which is owned by Wang Sicong (the son of Chinese property mogul Wang Jianlin who was China’s richest man a few months ago) also raised RMB one billion in its Series B funding round.

Competition in the industry is intense with over 200 apps in China catering to different markets and audiences such as gamers and fashion. However, with bulk of the funding being channeled towards the largest players, the number of live streaming platforms dropped by 60% year on year, as the weaker players were squeezed out of the market according to the report by 21st Century Business Herald. Moreover, a report by TrustData found that 97.5% of total user engagement was captured by the top 10 platforms.