• Ping An Insurance (HKEX:2318) is a unique company in the insurance space due to its ecosystem-based business model.
• Over the years, Ping An has built a digital ecosystem that encompasses a variety of essential services, such as autos, housing, healthcare, and smart cities. By establishing an ecosystem of related services, Ping An can boost the demand and stickiness of its existing financial products.
• Technology lays the foundation of Ping An and it has brought many benefits to the Group, such as lowering costs, improving agent productivity, increasing cross-selling opportunities and additional revenue streams.
• Thanks to the COVID-19 sell-off, we believe it has created a rare window of opportunity for investors who wish to take part in the growth of this giant.
• Using a sum-of-the-parts (SOTP) valuation methodology, we value Ping An Insurance at HKD 105.0, which translates to a massive upside potential of 37.7% as of 9 April 2020.
Unlike old school insurers, Ping An Insurance is more than just an insurance company. Constant innovation has enabled Ping An to build up a full ecosystem made up of financial services, health care, auto services, real estate services, and smart city services. Ping An has accumulated 515 million Internet users over the last five years and their ability to apply new technologies to traditional businesses is exactly what makes them stand out.
We believe the Ping An ecosystem will be the real value driver for the Group in the coming years. Using the sum-of-the-parts model, we arrived at a target price of HKD 105.0, which translates to a massive upside potential of 37.7% as of the last traded price on 9 April 2020.
The Ping An ecosystem business model
Ping An is one of the few companies in China with a complete set of financial service licenses, which includes insurance, banking, securities and others. Ping An’s insurance business consists of both life & health (L&H) and property & casualty (P&C) segments, both of which contribute the main bulk of its total earnings at about 77.0% (Chart 1). Its banking business takes up the next largest portion of its total earnings at 17.2%, followed by technology (2.8%), securities (1.4%) and trust and others (1.6%).
Driven by a rapidly ageing population and a rising middle-class population in China, and coupled with the existing large health protection gap, we believe Ping An’s insurance arm will benefit from the surging demand for insurance in the next decade.
Chart 1: Breakdown of Ping An’s profit
But unlike traditional insurers, Ping An has been building a digital ecosystem over the years that encompasses a variety of essential services. It has expanded into broader sectors, such as autos, housing, healthcare, and smart cities in order to integrate itself into the everyday lives of consumers. By establishing an ecosystem of related services, Ping An can boost the demand and stickiness of its existing financial products.
Ecosystem strategy enables cross-selling opportunities
Ping An’s ecosystem strategy creates value for consumers by offering them an interconnected set of services in one integrated experience. Not only will this strategy improve customer retention, it also lowers customer acquisition cost and enables cross-selling opportunities for Ping An.
Here’s an example of how Ping An benefits from cross-selling opportunities by moving into other sectors.
Ping An has chosen to expand into healthcare due to the sector’s tremendous growth potential and its importance in our everyday lives. It has a comprehensive healthcare ecosystem in Ping An Good Doctor (HKEX:1833), which is an online healthcare platform that provides online medical consultations with doctors. It also offers one-hour online medicine dispensing and delivery services across China.
The healthcare ecosystem is made up of “patients-providers-payers” (Table 1), covering all stakeholders in the healthcare space.
Through Ping An Good Doctor, patients can conduct online consultation with doctors at any time of the day, and if necessary, they can then use the offline follow-up treatment option to arrange for a visit to a specialist. Patients can also buy their prescribed drugs online to avoid long waiting times.
The platform essentially helps to connect medical service providers (doctors, offline hospitals, clinics and pharmacies) and patients across the nation, creating a vast network that competing start-ups struggle to replicate.
Table 1: A detailed explanation of Ping An’s “patient-provider-payer” ecosystem
| Description | |
| Patient | · Refers to users of the Ping An Good Doctor platform. · From the patient’s perspective, the platform is a one-stop portal to access extensive healthcare resources in a
cost-effective and convenient manner. |
| Providers | · Refers to doctors, hospitals, clinics, pharmacies, and retailers. · Increases the efficiency of medical
resources. · Providers can benefit from the high
volume of traffic from the platform. · Lowers customer acquisition costs for
providers. |
| Payers | · Refers to organisations that pay for the medical services – usually the
employer, insurance companies and the government. · Collaborate with insurance companies
to provide policyholders with value-added healthcare services that are complementary to the insurance products to reduce costs. · Using their technologies to help the
government reimburse and administer claims, increasing efficiency and reducing costs. · Collaborate with insurance companies
to provide policyholders with value-added healthcare services that are
complementary to the insurance products to reduce costs. |
Source:
Ping An Good Doctor’s prospectus, iFAST compilations Data as of April 2020 |
|
The platform is also linked to payers, referring to private health insurance providers, such as Ping An’s own insurance arm and the Chinese government, which ultimately bears the costs of the treatment. Through their tech-powered healthcare platform (Ping An HealthKonnect), Ping An can service the payers in terms of efficient claims reimbursement and cost reduction.
By leveraging its cloud computing technology, Ping An HealthKonnect is also able to link useful information on the patient, medical treatment, health insurance and the pharmaceutical industry to achieve synergies within the healthcare ecosystem (Chart 2).
Chart 2: The healthcare ecosystem
More importantly, patients can use the Ping An Good Doctor platform to purchase insurance products offered by Ping An’s insurance arm, while existing insurance customers are referred to Ping An Good Doctor’s vast network of healthcare providers.
Besides catering to sick patients, Ping An Good Doctor also allows healthy consumers to purchase health-related products such as protein supplements or participate in a reward programme to lower their health insurance premiums.
From the example of Ping An Good Doctor, you can see that Ping An has created a successful healthcare ecosystem within which they will first develop a relationship with the customers and subsequently promote the cross-selling of its insurance products.
Therefore, by creating ecosystems centred around financial services, healthcare, autos, housing, and smart cities, Ping An can gain rapid access to new pools of customers through cross-selling initiatives, which will in turn drive faster business growth and higher profitability in their core business.
In fact, we observed that Ping An has reported an increasing proportion of customers holding multiple contracts across different subsidiaries over the last few years (Chart 3), suggesting that their cross-selling efforts are materialising.
Chart 3: Cross-selling efforts materialising
Technology has brought in many tangible benefits for Ping An
Throughout the years, Ping An has also created several shared digital platforms to enhance their capabilities. Their entire ecosystem generally shares the same data and technology capabilities to create synergies. Today, technology has become the foundation of Ping An and their commitment to investing in technology has been a very important driver of their expansion. Ping An has poured in USD 7 billion into technology in the past decade, and have guided for another USD 15 billion over the next decade.
Here’s an example on how technology investments have improved Ping An core businesses: imagine getting into a car accident in the middle of the road – this usually means hours of waiting at the workshop, on top of the time wasted while waiting for claims to be collected. Thanks to Ping An’s technology capabilities, however, policyholders no longer need to go through such a tedious process. All they need to do is to snap photos of their damaged vehicle and submit them through a smartphone app. Ping An will then respond with a repair estimate in three minutes or less, and if accepted, funds will be transferred immediately.
Not only does this help to save on costs (reduces false claims and human error), but such technology advancements can also improve users’ experience significantly, which in turn increases the demand and stickiness of their products and services. In fact, we have started to see these technology investments translating into tangible benefits.
Higher agent productivity: Across its listed insurance peers, you can see that Ping An has the highest agent productivity (Chart 4). To develop a more productive sales agent team, Ping An has proactively applied their big data and cloud computing technologies to agent recruitment and training, ensuring its agent team is well-equipped with technologies to better serve the customers. Coupled with its strong product offering, this also explains why Ping An has managed to deliver faster new business value growth compared to its peers.
Chart 4: Ping An has the highest agent productivity amongst listed peers
Complement its cross-selling efforts: With an empire built on data, Ping An’s can also tap on its big data analytics to analyse its users’ behaviour and redirect traffic from one platform to the other – boosting cross-selling across its different business lines. For instance, one of the key initiatives of Ping An Bank is to leverage on the Group’s insurance salesforce and vast client base to drive the bank’s retail expansion.
Additional revenue streams: Ping An's tech products can also bring in additional revenue streams when sold to third parties as ‘technology solutions’. As reported by one of Ping An’s associates in the technology business segment (OneConnect (NYSE:OCFT)), there has been an increasing adoption of Ping An’s technology solutions by financial institutions as demand for digital transformation across financial institutions continues to grow. The COVID-19 situation has further highlighted the importance of developing online tools so as to ensure minimal business interruptions. Therefore, coupled with the inevitable trend of digitalisation for financial institutions, we see strong potential earnings growth from Ping An’s ‘technology solutions’ business segment.
COVID-19 outbreak to affect new business value growth, but a rebound is expected
There is no doubt that the current COVID-19 situation has caused massive business interruptions around the globe. Given the nature of the insurance industry, companies may have to deal with increasing business interruption, hospitalisation and death claims under such circumstances.
While it is natural for investors to be wary of Ping An Insurance, we would like to highlight Ping An Insurance’s strong solvency ratio, which suggests that it is well-capitalised to weather any sudden massive claim payments arising from this pandemic. On top of that, the increase in claims will probably be limited as the central government will be covering the expenses for infected individuals and suspected cases.
That being said, as Ping An generates most of its sales via the agency channel, sales will still be dampened in the next few months given rising concerns over human-to-human transmission. However, Ping An expects business to bounce back after things return to normal and health insurance is likely to see significant growth since this outbreak has highlighted the importance of health protection.
Moreover, the COVID-19 situation has led to a dramatic surge in new Internet users for Ping An’s online health services (Ping An Good Doctor), as many have turned to Internet-based options for diagnosis and treatment during this outbreak. With online healthcare shaping up as a credible alternative for clinical services, we see increasing adoption of Ping An Good Doctor in China, and this will lead to greater cross-selling opportunities for Ping An.
Key investment risks
Similar to China Life (HKEX:2628), one of the key risks for Ping An life insurance’s business segment is the shift in long-term interest rates given their direct impact on its profitability.
Firstly, against the backdrop of a dovish interest rate environment, this may reduce the spread between the investment income earned and their insurance obligations to policyholders. As interest rates fall, Ping An Insurance will also have to set aside additional reserves to ensure their capability of fulfilling future insurance obligations. With more reserves required, expenses will increase in tandem and this will have a direct impact on the insurer’s bottom line. A cut in interest rate will also lower the net interest margin (NIM) of Ping An’s banking segment.
While keeping these challenges in mind, we observed that Ping An has consistently generated a positive investment spread for the last 4 years, which means that Ping An has managed to achieve an investment yield higher than its average guaranteed rate of return.
For its banking segment, we believe the cooperation with its parent, Ping An Insurance, may help to negate the effects of a falling interest rate: Ping An Insurance will help to channel the inflow of corporate deposits to Ping An Bank, while Ping An Bank will continue to focus on its retail banking business.
Given how the cost of corporate deposits are generally lower than retail deposits, and how retail loans yield higher than corporate loans, we believe Ping An Bank NIM may be able to narrow at a slower pace as guided by its management.
Finally, while it is great news that the number of newly reported cases in China has fallen dramatically, a re-escalation of the COVID-19 outbreak will cause insurance demand to be affected for an even longer period of time.
Once in a lifetime opportunity to scoop up Ping An Insurance at such cheap valuations
Given its comprehensive suite of services, we have adopted the sum-of-the-parts (SOTP) valuation methodology for Ping An Insurance (HKEX:2318).
Table 2: SOTP valuation for Ping An Insurance
| Business segment | Shareholding | Valuation | Valuation methodology | Multiple | Weighted valuation |
| Life & Health | 99.5% | 334,487 | P/B | 3.0 | 1,008,207 |
| P&C | 99.5% | 93,539 | P/B | 2.0 | 182,433 |
| Banking | 58% | 252,277 | Market cap | 1.0 | 146,270 |
| Fintech & Health-tech | Disclosed | 192,458 | Disclosed Valuation | - | 192,458 |
| Securities | 97% | 30,431 | Peers P/B | 2.0 | 60,862 |
| Ping An Trust | 100% | 4,000 | Peers P/E | 15.0 | 60,000 |
| Others | 100% | 63,050 | Book value | 1.0 | 63,050 |
| Total | 1,713,280 | ||||
| # of shares | 18,280 | ||||
| End 2020 target price (RMB) | 93.7 | ||||
| End 2020 target price (HKD) | 105.0 | ||||
| Current share price (HKD) | 76.3 | ||||
| Upside potential | 37.7% | ||||
Source:
Bloomberg Finance L.P., Ping An annual reports, iFAST estimation Data as of April 2020 |
|||||
Our assumptions:
• Life & Health: Given its higher-than-average agent productivity and its cross-selling opportunities across all business segments, Ping An has managed to generate a superior ROE for the past 5 years as compared to the traditional life insurers. Hence, we assigned a 3.0X PB ratio for this segment.
• Property & Casualty: As compared to PICC P&C and Zhong An Online P&C, Ping An P&C segment has consistently achieved better profitability as determined by its combined ratio for the last 5 years. We assigned a PB ratio of 2.0X given its superior ROE and profitability in this segment.
• Bank: We assigned a value based on Ping An Bank’s market cap.
• Technology: Valuations are based on the market valuations of Autohome, Ping An Good Doctor, Lufax, OneConnect, Ping An HealthKonnect and ZhongAn Online P&C, and Ping An’s stake in each unit as disclosed by Ping An in its annual report.
• Securities and trust: Values are based on their peers’ PB and PE valuation.
Table 3: Peer comparison
China Life |
Ping An Insurance |
China Pacific |
New China Life |
|
| Fundamentals | ||||
| FY2018 Gross written premiums (RMB billion) | 568.4 | 493.9 | 202.414 | 138.1 |
| Number of agents | 1.573 million | 1.286 million | 796,000 | 386,000 |
| Agent productivity (NBV per agent) | 29,770 | 48,789 | 28,988 | 31,689 |
| Valuations | ||||
| P/Embedded Value | 0.5 | 1.1 | 0.5 | 0.4 |
| P/B ratio | 1.1 | 1.6 | 1.1 | 0.9 |
| P/E ratio | 7.4 | 8.3 | 8.0 | 6.3 |
| Profitability | ||||
| Dividend yield | 4.1% | 3.4% | 5.9% | 4.6% |
| 2020E ROE | 15.1% | 20.9% | 13.1% | 13.0% |
Source: Bloomberg Financial L.P, iFAST estimations Data as of April 2020 |
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We arrived at a target price of HKD 105.0 for Ping An Insurance, and based on its last traded price of 76.2 on 9 April 2020, this translates to a massive upside potential of 37.7%! Overall, we believe that the market sell-off over the past few weeks has created a rare window of opportunity for investors who wish to take part in the growth of this giant.
With the ongoing shift in the global insurance business to China and the inevitable trend of digitalisation for financial institutions, we believe Ping An Insurance (HKEX:2318) is a solid choice for investors.
Chart 5: Ping An share price vs. EPS
Declaration:
For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) hold a NIL position in the abovementioned securities. The analyst who produced this report has a position in Ping An Insurance.
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