Ping An Insurance: A fast-growing titan that still has an upside potential of almost 40%

We believe the outlook for Ping An Insurance (HKEX:2318) is positive as China recovers from the pandemic and is on track to be the only major economy to grow this year. Ping An’s current valuations also seem to suggest that its long-term earnings power is underappreciated.

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  • Published on 19 Nov 2020

Ping An Insurance: A fast-growing titan that still has an upside potential of almost 40%  | Open a FREE FSM account and manage all your investments conveniently in ONE place
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Given China’s favourable demographic trends and Ping An’s dominant position in China’s insurance industry, it is bound to benefit from the growing demand for insurance.

Current valuations seem to suggest that Ping An’s (HKEX:2318) long-term earnings power is underappreciated, but we believe things are getting better for the company going forward. 

Gross written premium is showing signs of a rebound. The coronavirus outbreak has also brought about a huge awareness of health insurance and this should support new business value (NBV) growth in its life insurance business. 

We also see certain bright spots in the P&C insurance business segment, such as property, auto, and travel insurance, as China’s economy recovers.

Using the sum-of-the-parts model, we arrived at our 2022E target price of HKD 124.5, which translates to an upside potential of almost 40%.

As a result of the coronavirus outbreak, Ping An has registered a fall in its 9M20 net profit and new business value (present value of new insurance premium sold in a certain period) by -20.5% and -27.1% year-on-year (YOY) respectively. However, as China recovers from the pandemic, we believe Ping An will be able to thrive under the prevailing macro backdrop, with China on track to be the only major economy to grow this year. 

Given the country’s demographic trends and Ping An’s dominant position in China’s insurance industry, its current valuation also seems to suggest that its long-term earnings power is underappreciated. Using the sum-of-the-parts model, we arrived at a 2022E target price of HKD 124.5, which translates to a massive upside potential of 39.5% based on its last traded price of HKD 89.3 (as at 18 November 2020). Investors should take a closer look at this stock and scoop up some of its shares while its valuation remains cheap. 


In the following sections, we will discuss why we like Ping An and how it will benefit from China’s recovery story.

Start of a recovery in life insurance premiums


Before a probable vaccine was announced by Pfizer Inc and BioNTech SE on 9 November 2020, China has experienced great success in dealing with the pandemic this year, being the first country to lift its COVID-19 lockdown. Containment measures imposed have proven to be effective as new COVID-19 infections remain low, prompting policymakers to ease measures and reopen the economy. Since then, China’s key economic indicators have largely been better than most countries.

That said, the damage caused by the pandemic has hindered Ping An’s life insurance sales in 1Q20, as interactions between agents and clients have been limited by social distancing. While it has yet to fully recover from the coronavirus, Ping An’s gross written premium is showing signs of a rebound, registering a positive growth since 2Q20 (Chart 1). 

Chart 1: Insurance sales growth showing signs of a rebound

On a brighter note, the COVID-19 outbreak has also brought about a huge awareness of health insurance. Consumers have become more receptive to insurance products as they begin to understand the importance and benefits of having adequate protection against any illnesses, hospitalisation, or death. 

Therefore, we expect to see improvements in Ping An’s 4Q sales as it kick-starts its 2021 “New-Year’s opening sales” campaign (开门红) this month. Ping An’s early investment in technology will also ensure that its agents have the necessary online tools to continue business with minimal interruptions, all of which could drive new business value going forward, as we ease into the post-COVID world. 

Non-life insurance premium should track the country’s economic growth trajectory 


We also see bright spots in the P&C insurance business segment as China’s economy recovers. Demand for property in China has rebounded strongly since the sudden crash in 1Q20. As denoted by the red bar in Chart 2, you can see that the cumulative 2020 property sales have lagged behind pre-COVID level in the first six months but as of July’s data, it has already surpassed prior year’s records. 

Chart 2: Ping An P&C arm should benefit from the rebound of property sales 
 
China’s travel industry has also been recovering progressively, driven by a pick-up in domestic travel demand as the government eased movement restrictions within the country. Finally, while the Chinese auto market has yet to recover to its pre-COVID levels, car sales have also registered strong growth since its February low.


Therefore, we expect to see a recovery in demand for property, auto, and travel insurance, a trend that will certainly benefit Ping An’s P&C insurance segment.

Ping An continues to reap the benefits of its ecosystem strategy  


Ping An’s ecosystem strategy creates value for consumers by offering them an interconnected set of services in one integrated experience.

Through data integration across its subsidiaries, Ping An is able to gain rapid access to new clients at lower traffic acquisition costs, which will in turn drive faster business growth and higher profitability in its core insurance business.

For example, through its subsidiary Ping An Good Doctor (HKEX:1833), Ping An will first develop a relationship with consumers through its online healthcare platform, which aims to simplify medical care, driving convenience and interaction between consumers and healthcare professionals. Ping An will subsequently promote the cross-selling of its insurance products once the relationship is well-established.


Its unique business model has proven to be fruitful thus far, with Ping An continuing to report an increasing proportion of customers having relationships with Ping An’s different subsidiaries, even during the pandemic this year, suggesting that its cross-selling efforts are indeed materialising (Chart 3). 

Chart 3: An increasing proportion of customers holding multiple contracts with different subsidiaries
 

Attractive upside potential remains for Ping An


With the ongoing shift in the global insurance business to China and the inevitable trend of digitalisation for financial institutions, Ping An Insurance (HKEX:2318) is a solid choice for investors who want exposure to the Chinese insurance industry. We have adopted the sum-of-the-parts (SOTP) valuation methodology for Ping An Insurance given its comprehensive suite of services (Table 1).

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 1: SOTP valuation for Ping An Insurance
Business segment Shareholding Valuation Valuation methodology Multiple Weighted valuation
Life & Health 99.5% 380,795 P/B 3.0 1,142,384
P&C 99.5% 117,582 P/B 2.0 232,363
Banking 58.0% 358,233 Market cap 1.0 207,632
Fintech & Health-tech Disclosed 226,483 Disclosed Valuation - 226,483
Securities 97% 32,463 Peers P/B 2.0 64,926
Trust 100% 4,000 Peers P/E 15.0 60,000
Others 100% 45,380 Book value 1.0 45,380
Total 1,979,168
# of shares 18,280
End 2022 target price (RMB) 108.3
End 2022 target price (HKD) 124.5
Current share price (HKD) 89.3
Upside potential 39.5%
Source: Bloomberg Finance L.P., Ping An annual reports, iFAST estimations
Data as of 18 November 2020

Based on our assumptions, we arrived at our 2022E target price of HKD 124.5 and this translates to an upside potential of almost 40%!

At this point, we would like to reiterate that Ping An is more than just an insurance company. Its ecosystem business model is the real value driver for the Group, and will remain so in the coming years as Ping An continues to monetise its ecosystem through cross-selling. Investors who wish to take part in Ping An’s growth story should wait no further. 

Chart 4: 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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