Ping An Insurance Group: Undervalued Insurance Titan with Huge Growth Potential

Ping An Insurance Group is one of the leading players in an underpenetrated China insurance industry with huge growth potential.

China is seeing strong demand for insurance products, both life and P&C, propelled by favourable demographic trends such as an aging population and expanding middle class.

Having delivered impressive operating performance over the last few years, we are positive that Ping An will benefit from the high growth potential in the insurance market and rising interest rate environment in China.

The integration of technological innovation into its core businesses has strengthened Ping An’s competitiveness and insurance distribution capabilities.

We see Ping An as an undervalued Fintech giant with great underlying growth prospects. We value Ping An Insurance Group at HKD 99.80 with a potential upside of 41.7%.

One of the Leading Players in China's Insurance Industry

Ping An Insurance Group (HKEX.2318) is China’s second largest life insurer in terms of total written premiums. It is also the second largest property and casualty (P&C) insurer in the country. Founded 30 years ago, the traditional insurance company has since evolved into a sprawling digital financial platform, offering a wide variety of financial products and services such as loans, wealth management, insurance, cars, property and healthcare.

Unlike other major insurers who are pure-plays in either life or non-life insurance, Ping An operates in both segments. Ping An’s revenue is derived from five major segments: Life Insurance, P&C Insurance, Banking, Asset Management, and Other Financial Services (Chart 1), with 75% of revenue from its insurance business. Ping An leads the Chinese insurance industry by revenue and profitability. Its total market capitalisation, at USD 157.5 billion, is 80% larger than China’s old standard, China Life Insurance (HKEX.2628).

Chart 1: Ping An Derived Majority of 2017 Revenue from Its Insurance Segments

1. Ample Room For Growth In China’s Insurance Industry

The demand for insurance (both life and non-life) in China has been ascending rapidly in recent years. China’s insurance premiums grew at a CAGR of 20.1% in the last ten years to a total of RMB 3.1 trillion in 2016 (Chart 2). Accounting for about 10% of world’s total premium, China is the second largest insurance market in the world. However, despite its size, the percentage of policyholders in the Chinese populace remains low. .

Chart 2: China’s Rising Insurance Market and Insurance Penetration from 2000-2016

Thanks to its underpenetrated insurance market, China has ample room for growth. As of 2016, China’s total insurance penetration rate (defined as premiums as percentage of GDP) of 4.1% is still well below the global developed markets’ average of 8% (Chart 3). This means that, the insurance industry in the world’s most populous nation has the potential to double in size, as its penetration rate converges to that of the developed markets’ average. Thus, we are positive that the immense growth potential of China’s insurance market will provide lucrative opportunities for insurers like Ping An.

Chart 3: China’s Insurance Industry is Underpenetrated Compared to Various Markets in 2016

2. Strong Demographic Trends Driving Insurance Demand

This positive outlook for China’s insurance industry is also reinforced by strong demographic trends such an ageing population and growing disposable income.

Firstly, the fast ageing Chinese population is creating strong demand for retirement-related insurance products. Coupled with falling birth rates (a result of rapid urbanisation and higher living costs), China has seen its dependency ratio (percentage of senior population against country’s labour force) accelerating in the last 5 years. While the recent demographic trends are a growing cause for concern, insurance companies will benefit as the troubling statistics will prompt many to plan ahead for their retirement years, driving up demand for health policies and annuities.

Chart 4: China’s Aging Population and Rapidly Accelerating Elderly Dependency Ratio

Secondly, China’s increasingly wealthy population and expanding middle class are also driving greater demand for insurance products. China’s per-capita disposable income expanded by a CAGR of 10% over the past 10 years. Over the same period, insurance premiums grew at a much faster CAGR of 20% (Chart 5). As Chinese families become wealthier, demand for wealth management products for capital preservation will grow rapidly.

The rising affluence is also fuelling higher consumer spending in automobiles, tourism, home purchases, which in turn will ramp up demand and sales of auto, travel and home insurance. With the Chinese middle class expected to almost double from the current 430 million to 780 million by mid-2020s, there is going to be more wealth to protect and even more demand for P&C coverage.

Chart 5: China’s Insurance Premiums per Capita Rising Alongside Disposable Income Per Capita

3. Favourable Operating Conditions for Ping An

Faced with mounting government debt and the ascending elderly dependency ratio, China’s pension shortfall is also emerging as a next big challenge for the government. As state support for the ageing population gradually erodes, we expect the Chinese government to increasingly turn towards insurers to help fill the gap in public provision. This will likely benefit larger and more reputable insurers like Ping An.

At the same time, the rising interest rate environment in China continue to bode well for China’s insurers. With increased efforts by the China government to deleverage its economy through a series of interest rate hikes, bond yields has been rising in China in the past two years. Since insurers derive investment income from the interest generated by their bond portfolios, the rising interest rates will effectively translate into higher investment income for China’s insurers, whose share prices historically move in tandem with interest rates. (Chart 6).

While China’s 10-year bond yields has declined slightly in recent months, we are positive that the Chinese government remains committed to improving the health of its economy through deleveraging and tightening policies.

Chart 6: Ping An Share Price Mirror Closely to Movements of China 10-Year Bond Yield

4. Digital Distribution A Future Growth Driver

As a first-mover in insurance e-commerce (or Insurtech), Ping An’s intuitive digital platform has increased the ease of access for customers who wish to purchase their life and non-life (mainly auto) insurance online at their own comfort. Its digital outreach has proved successful, having acquired more than 18 million new customers from its internet portals alone just last year – accounting for 40% of new customers in 2017. Online insurance also enables Ping An to process claims submitted digitally, reducing the hassle of physical paperwork typically required on both users and company.

Moving forward, digital distribution of insurance, especially health, is becoming all the more important. According to Oliver Wyman, the size of health-related online insurance is expected to grow to RMB 198 billion by 2021, representing a CAGR of 45.9% (Chart 7). The percentage of the overall health insurance market that is addressable by online distribution is expected to increase from 7% in 2016 to 22% in 2021. More than just health, other insurance categories like travel and auto are also experiencing similar trends, projected to grow at CAGR of 27.1% and 51.1% respectively.

As Chinese consumers purchase more insurance online, we are positive that Ping An’s rapidly expanding online insurance sales will increasingly contribute to a greater portion of the company’s top line, given its prominent digital presence.

Chart 7: Explosive Growth of China Online Insurance Industry in the Next Few Years

5. Strategic Investments in Financial and Health Technology Starting To Bear Fruit

Ping An’s strategic technological investments in financial technology (Fintech) and health technology (Healthtech) are fast becoming the group’s next important profit generator. This segment brought in RMB 14.6 billion for the group in 2017, contributing to 16% of net profits. We believe Ping An’s series of technological entities will provide greater diversification of its revenue stream, as well as bringing it closer to its vision of creating an integrated ecosystem for personal financial services.

Ping An has two exciting Fintech and Healthtech investments worth highlighting:

Lufax is China’s largest online wealth management and Peer-to-Peer (P2P) lending platform. With China’s P2P loans standing at RMB 1.2 trillion last year, growing at a CAGR of 128% in 2014-17, we think Lufax is well-positioned to benefit from this huge growth potential. It is also worth noting that Lufax recognised profit for the first time last year. The potential IPO of Lufax would provide the Group with huge one-off gain potential.

Ping An Good Doctor (HKEX.1833) is one of China’s largest online medical platform. The market-leading platform provides a wide range of services, including preliminary inquities, hospital registrations and drug purchases. The mobile application currently boasts 180 million registered user and 5 million daily active users – five times larger than its closest competitors (WeDoctor and HaoDaifu). With China’s aging population and ever-growing middle class, the huge demand for medical services is set to outpace supply. We are positive PAGD will thrive through its dominant position in China’s rapid growing internet healthcare industry.

Investment Risks

A. Reversal In The Interest Rate Upcycle

Since a portion of revenue (11%) from Ping An’s insurance business is derived from investment income, a sudden decline in bond yields will lead to a fall in revenue from the segment. Its banking operations will also be negatively impacted by the falling net interest margins. However, we believe that the likelihood of this scenario is rather low, considering that the China government has repeatedly expressed conviction on reducing financial risks in its economy.

B. Slower-Than-Expected Economic Growth

A slowdown in the Chinese economy will result in a softer demand for insurance products, which translates to a drop-off in new business value created, all of which will negatively impact both the top-line and bottom-line of Ping An insurance business. However, we are positive that the growth in the world’s second largest economy remains robust and any potential slowdown in the growth of Chinese economy is likely to be minimal.

Fair Valuations

Using a Sum-Of-The-Parts (SOTP) approach, we value Ping An Insurance Group at HKD 99.80 per share. Based on its closing price of HKD 70.40 (as of 11-July-18), this implies an upside potential of 41.7%. The calculations for the SOTP valuation are tabulated in Table 1 below.

Table 1: Sum-Of-The-Parts Valuation of Ping An Insurance Group

Our assumptions include:

Total outstanding shares assumed is 18.28 billion and the exchange rate used is HKD 1.20 per RMB.

Life Insurance: The price-embedded value (P/EV) ratio of 2X is in line with its 5-years historical average P/EV. The implied 2018E P/E ratio of 15.1X is inline with peers average of 15.6X, which comprises China Life (HKEX.2628), China Pacific (HKEX.2601), etc.

Non-Life Insurance: The price-book ratio (P/B) ratio of 2.3X is in line with its two closest peers specialising in P&C insurance, which are PICC P&C (HKEX.2328) and ZhongAn Online P&C (HKEX.6060).

Banking: The price-book ratio of 0.65X is in line with peers in the China banking clusters which includes Bank of China (HKEX.3988), China Construction Bank (HKEX.939), etc.

Securities: The price-earnings ratio of 7.5X is the average among its Securities peers which includes Haitong Securities (HKEX.6837), GF Securities (HKEX.1776), etc.

Other Businesses: Includes its asset management business, as well as its investment in associates, such as OneConnect and Ping An Healthcare Technology.

Good Doctor: Valued by multiplying its average market capitalisation of RMB 40 billion with Ping An’s 46% ownership of it.

Table 2: Peers Comparison - Ping An Has Highest Return on Equity

Ping An: Undervalued Insurance Titan with Strong Growth Potential

Ping An’s emphasis on technology to drive growth has synergised with its traditional financial business, boosting its value and competitiveness to differentiate itself from other financial service companies. In the face of a booming insurance industry, we believe that Ping An is well-positioned to thrive and expand strongly in the next 3-5 years.

Overall, we see Ping An Insurance Group as a solid choice for exposure to the Chinese insurance industry.

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Declaration:

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.

The Research Team is part of iFAST Financial Pte Ltd.