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Ping An Insurance: A Buying Opportunity (OTCMKTS:PNGAY)

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Make no mistake, the long-term growth story behind Ping An Insurance (OTCPK:PNGAY) remains intact, and I am going to show how it provides investors with an opportunity for outsized returns.

Ping An’s Business at a Glance

Ping An Insurance is a diverse conglomerate with various segments

  • Life and health insurance business

  • Property and casualty insurance business

  • Banking business

  • Trust business

  • Securities business

  • Other asset management business

  • Technology business

Ping An Business SegmentsSource: Author’s compilation from Ping An Annual Reports FY 2019

Ping An has largely gained an edge over its peers in the Chinese financial services sector using technology. It is continually seeking to transform its business under the “finance + technology” and “finance + ecosystem” strategies.

Additionally, blockchain, AI, and cloud computing are emerging areas that Ping An is devoting increasing attention to. New ventures cover a broad array of operating activities, from urban development (Smart City Business) to healthcare (HealthKonnect, Good Doctor) to automotive (Autohome) to wealth management and finance (Lufax, OneConnect (OCFT)) to name but a few.

A snapshot of some of the company’s key figures bears this diversification out.

Financial Snapshot

Net Profits grew at a compounded annual growth rate of 27% over the past 7 years with increasing Return on Equity.

Ping An Net Profit and Return on EquitySource: Author’s compilation from Ping An Annual Reports FY 2015-2019

As the graph below shows, various segments are growing in addition to the company’s main insurance business.

Ping An 5 Year Business Segment SnapshotSource: Author’s compilation from Ping An Annual Reports FY 2015-2019

It’s dividend has also been rising and payout ratios have increased to around 25-30% range.

5 Year Financial SnapshotSource: Author’s compilation from Ping An Annual Reports FY 2015-2019

China’s Growing Middle Class

China’s middle class has been growing rapidly, from only 19% back in 1980 to 58% by 2017.

A study by consulting firm McKinsey & Company projects that up to 76% of China’s urban population will enter the middle class income bracket by 2022. Their study defined middle class household earnings at US$9,000 to US$34,000 a year.

China Middle Class of Urban HouseholdsSource: McKinsey & Company

As a general rule, as disposable income per capita increases, the amount spent on insurance premiums generally follows suit.

Insurance premiums to disposable income in ChinaGiven this fact, I believe that China’s growing middle class will spur demand for insurance, particularly long-term insurance products that will protect and help plan for their future wealth needs – the exact kind which Ping An provides.

In absolute terms, China has the largest insurance gap in the world. It’s insurance gap reached some USD76.4 billion in 2018.

Global Under-insuranceSource: A World At Risk: Closing The Insurance Gap

In addition, average life expectancy has increased from 67 to 76 years, based on World Bank Data.

The demand for insurance has exploded, as people prepare for their golden years, as well as take on protection needed for unexpected deaths, medical and property expenses, yet coverage is still falling short of what is required.

With an insurance penetration rate of around 4% (as compared to the global average rate estimated at 6%), China’s insurance market, though the world’s second largest, is still in its nascent stage, offering a long runway for future growth.

Measuring by life premiums per capita, the insurance density of China stands at only USD 250, almost ten-folds smaller than the average insurance density of its peers at approximately USD 2,000.

From 2006 to 2018, annual premium income (personal and property) in China increased from RMB564.1 billion to RMB3.8 trillion, representing a rapid growth rate of 17.4% per year. This significantly exceeds the 6.8% annual growth rate for broader Asia.

This enormous protection gap and low insurance penetration in China clearly signals a significant amount of unmet demand for insurance. Therefore, there is huge potential for increased market share for Ping An.

Aging Population in China

The aging population in China represents a major opportunity as well. The number of Chinese above the age of 65 has reached 166.6 million in 2018, which represents 11.9% of the total population. The proportion of elderly has been increasing steadily for the last decade and this figure is expected to continue its growth in the next few decades, highlighting two main concerns – having enough savings after retirement and having long-term care for their medical expenses in the future.

Increasing Aging Population in ChinaHousehold savings and public insurance coverage may help to cover a portion of an elderly’s health care expenses, but significant out-of-pocket payments are still required. This, in turn, suggests that cash from savings and public insurance coverage may not be the appropriate long-term solution.

That being said, the aging population is still very reliant on government and family support for their expenses across developed countries, while insurance continues to be overlooked as a solution, accounting for only 5% of total expenses. In China, insurance accounts for a mere 2% when it comes to elderly care.

China ageing wallet breakdownWith the lingering effects of the one-child policy exacerbating the problem of an aging population, I believe this will place further economic strains on families with elderly members. In fact, the ratio of the number of working adults to each person over 65 was at 7.7 in 2015, but this figure is expected to fall to just 3.4 over the next two decades.

Besides, people are also living longer, and this increases the potential for more years of poor health and higher medical expenses. In light of these challenges, insurance can potentially take on a bigger role in retirement planning, and this clearly represents a great opportunity for insurers to grow their market share.

Using Technology as an Edge

Ping An has used technology to impressive effects. One example would be the property & casualty insurance (P&C) segment, which deals with products such as auto and travel insurance.

A simple method to gauge the underwriting performance of an insurer is by looking at a metric known as the “combined ratio”. If the ratio is below 100%, that means the insurer is making underwriting profit and vice versa. The lower the combined ratio, the better it is.

Ping An P&C’s combined ratio in 2019 was 96.4% whereas PICC Property & Casualty Co. (OTCPK:PPCCF) was 99.2% for comparison.

For the life & health (L&H) insurance segment, while it’s difficult to gauge the underwriting profitability since the products are very long term (30-50 years) and are heavily dependent on the insurers’ own assumptions (mortality, morbidity, and discount rate), one can look at their reported “value of new business” (VNB), which is basically the present value of all future profits from the new products sold by the insurer in one particular year.

Based on this metric, a comparison of insurers’ VNB growth to see who’s outperforming shows that from 2017 to 2019, Ping An L&H’s VNB grew by 6% per annum, which is the highest amongst its peers (China Life (OTCPK:CILJF): -1%, New China Life (OTCPK:NWWCF): -10%, PICC L&H: 5%, China Taiping (OTC:CINSF) L&H: -12%).

Potential Competition – New Entrants

Despite being the second largest insurer in China, tech giants such as Tencent (OTCPK:TCEHY) and Alibaba (BABA) are seen jumping into the insurance market to take a share of the pie.

Tencent, via their platform (WeSure) as well as Weimin Insurance Agency in which Tencent holds a 60% stake, has access to WeChat and QQ’s 900 mn user base. Weimin’s product range will presumably be incorporated into WeChat Pay and its broader ecosystem.

WeChat’s dominance in China will also provide the opportunity to mine WeChat user behavior and translation data. Alibaba, through Ant Financial, has acquired a controlling 51% stake in Taiwan’s Cathay Century Insurance Co., Cathay prioritizes technology as a key business driver, effectively competing head-on against other bigger players too.

Valuation

The best metric to value Ping An by would be the Price-to-Book Ratio (P/B) as its other business segments are still relatively small. Although a stellar performer over the last five years, Ping An’s stock hasn’t been able to repeat its performance in 2020.

With the coronavirus outbreak being perhaps the principal factor, the Hang Seng index is lower as COVID-19 caused an economic contraction in China in the first quarter.

Due to its share price decline in 2020, Ping An trades at an attractive valuation relative to its potential. With a current price-to-book (P/B) ratio of 1.92, slightly below its five-year average PB ratio of 2.14. The conglomerate’s forward price-to-earnings (P/E) ratio of 10.99, is also below many of its peers.

ChartData by YCharts

The Takeaway

Ping An is a bargain at its current price, overall it is a well structured company that has consistently performed well over the long-term. Management is also executing well and positioning the company for sustained growth over the years ahead.

Because of this, any short-term pullback in its share price should be considered a buying opportunity to own a quality business with good fundamentals over the long-term.

Disclosure: I am/we are long PNGAY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.