Description

Overview

Ping An Insurance Group is China’s largest insurance company and one of the few large insurers in China that operates without state ownership. Ping An is run for shareholders and has a long track record of superior performance. Ping An returns 25% of profits to shareholders through dividends (current yield of 3.6%) and retains the rest to support organic growth. Ping An has compounded EPS by 24.6% CAGR since their IPO in 2004, 20.9% CAGR over the last 10 years, and 19.1% CAGR over the last 5 years.

We invested in Ping An through the H shares in Hong Kong, but Ping An also has a sponsored ADR in the US with ~$6m/day in trading volume. Ping An trades at 6.4x NTM EPS. We think with conservative growth estimates and with a revaluation to historical multiples (11.6x), Ping An will generate an IRR of 48% over the next 3.5 years (a total return of 270%).

Business Overview

Ping An owns a life and health insurance business, a P&C insurance company, 50% of Ping An Bank (publicly listed), a trust business, a securities business, an asset management business, and stakes in four public technology companies plus several other early-stage unlisted technology companies.

Ping An’s life and health insurance business is the group’s crown jewel. The life and health insurance business generates 66% of the group’s attributable operating profits and has earned average ROE of 38.6% over the last five years. Life and health insurance in Asia differs from developed markets such as the US. Developed markets have more developed health insurance systems and government social safety nets. Asia and China do not have these programs and the life and health insurance industry exists to fill these gaps. Ping An provides mostly protection products to its customers rather than the often complicated and low return savings products that are more common in developed markets.

Initially the nearly 40% ROE for a “life insurance business” seems too good to be true. Life insurance is typically a poor business, and the US life insurers struggle to hit 10% ROE. First, this is a combination of life and health type products. Comparing with US life insurers is not a complete picture. US Health insurers have fantastic returns. Anthem generates ~200% returns on tangible equity and UnitedHealth has infinite returns on tangible equity. Second, because these protection products not savings products, customers care less about pricing and investment returns and care more about convenience and the quality of the product. Third, the whole industry does not generate 40% returns. Ping An has best in class returns due to having the best and highest productivity agency sales force in China. Large SOE life peers generate low teens ROEs.

The life and health business has grown book value at 25% CAGR over the last five years and has a very long runway for growth. Insurance penetration (GWP/GDP) in China is low and the government wants life insurance penetration to double over the next five years. In addition, the addressable market continues to grow with GDP growth.

Ping An is also a leading player in the P&C market. Ping An had 21% market share in the overall P&C market in 2020 and 23.8% market share in the auto insurance market. Overall, the P&C business is a good business with good growth rates (13.3% CAGR premium growth since 2016) and good profitability (~20% ROE since 2016). The P&C business contributes 11.5% of operating profits.

The remaining ~20% of earnings come from a variety of businesses (banking, securities, trust, asset management, etc.). These businesses are lower quality (lower ROE) and slower growth. Overall, these businesses dilute the consolidated ROE down to the low 20s. Over time, as the life insurance business continues to outgrow the other divisions, the life business will become a higher percentage of the earnings and value of Ping An Insurance Group. This has already been happening. Over the last 5 years, the life and health division has grown its earnings contribution about 10ppts to 66%. We expect this will continue to increase which will drive higher consolidated ROE and higher consolidated growth due to mix shift alone and should result in a higher multiple for Ping An Insurance Group.

Valuation

Modeling Ping An is very simple, we model Ping An growing EPS at 17% CAGR from 2020 through 2025 and paying a 25% payout ratio along the way. We assume Ping An re-rates from 6.4x NTM EPS to 11.6x at the end of 2024. If this happens, Ping An will generate a 48% IRR (or 270% total return) over 3.5 years. We used 11.6x at the exit as this was the 10-year average P/E NTM that Ping An has historically traded at. The current multiple of 6.4x is the cheapest Ping An has traded in the last 10 years. Fundamentally, we think Ping An deserves a multiple well in excess of 11.6x based on the quality of the business and growth outlook.

Why is it Cheap

We think the opportunity to invest at Ping An at record low valuations exists because Ping An is labeled a Chinese financial. Ping An can’t escape the negative share price pressure associated with being part of this group. Ping An’s P/E multiple has contracted 32% over the last 3 years and Ping An’s P/B has contracted by 35% over the last 3 years. This is despite stellar underlying performance with forward earnings expectations growing 15.7% CAGR. In fact, Ping An’s stellar performance and premium business quality has led to one of the lowest multiple contraction amongst the group. Across 8 large banks and life insurers, the average peer has had its P/E and P/B contract by 46% and 40%.

Two other headlines affecting Ping An more recently are its participation in the restructuring of Founder Group and its exposure to China Fortune Land.

On April 30th, Ping An announced that it was leading the restructuring of Founder Group. Ping An announced it will acquire 51% to 70% of Founder Group for 37B to 50B RMB. While at most representing 4.8% of the current market value of Ping An, the transaction does deviate from its historical norm of focusing on organic growth. Additionally, the target is going through bankruptcy due to too much leverage and is complex with many different assets (hospitals, a securities business, a university, etc.). Additionally, the restructuring process constrained what Ping An could say as the restructuring was not complete and needed creditor and regulatory approval. The lack of information and complexity of Founder Group has raised some unanswered questions from investors. Our ability to assess the situation is no different. This transaction raises questions on capital allocation and whether this transaction makes financial sense. Neither of which we can answer. Ping An has expressed that the core assets they want are the healthcare assets of Founder Group (hospital assets, health information systems, etc.) and that they may fix and then divest other assets over time. If this transaction is a total loss, it is manageable for Ping An and represents one quarter of net income. In the end, it is impossible to independently evaluate this transaction with the current information. Ping An insists this is an economic transaction that is for the benefit of shareholders.

The second issue is Ping An’s exposure to China Fortune Land. Ping An had 54B RMB of exposure to the debt and equity of China Fortune Land. China Fortune Land defaulted on its USD bonds and they now trade at ~37c. Ping An reserved an 18B RMB provision in Q1.  Ping An stated that China Fortune Land’s cash flow problems were driven by slow payments from the government. China Fortune Land has decent asset coverage and would require marking down its assets by 70% for the bonds to only be worth 37c. Additionally, the equity markets are still valuing the company at $3B or 50% of book value. Even if this ends up being a zero for Ping An, we believe this is manageable for Ping An and only represents 1.4% of the investment portfolio or one quarter of net income.

We believe the vast majority of the share price pressure comes from being a Chinese financial and not the two company specific issues. We do not think any of the three issues fundamentally changes the outlook for Ping An and we do not believe the record low multiple is warranted. Ping An has a great long term track record, trades at record low valuations, and seems pretty forward thinking and has a great reputation. Ping An has incubated several technology companies and spun them off creating significant value for shareholders (Good Doctor, Autohome, Lufax, and OneConnect). Frankly, we see a massive disconnect between the valuation and the value of the business and are interested in learning more about any bearish views on Ping An.

Catalyst

No catalyst needed. With no multiple change, Ping An should return 25% CAGR with earnings growth + the dividend.