2023-11-11 08:05:23 ET
Summary
- The key potential short-term risk factors for PNGAY relate to management transition and potential national service "obligations."
- Ping An aims to generate double-digit percentage operating income growth in the long term, which I deem to be achievable after reviewing key industry figures and assessing the company's strategy.
- I rate PNGAY as a Hold, after considering the stock's risk factors for the near term and the company's growth outlook for the long run.
Elevator Pitch
I award a Hold investment rating to Ping An Insurance (Group) Company of China, Ltd. ( PNGAY ) (2318:HK).
Ping An Insurance isn't worthy of a Buy rating, taking into account short-term issues relating to national service risks and management transition. But a Sell rating for the stock will be way too harsh, as Ping An Insurance has reasonably good long-term growth potential. As such, a Hold rating for Ping An Insurance is fair.
Ping An Insurance's shares are traded on both the OTC (Over-The-Counter) market and the Hong Kong Stock Exchange. The three-month mean daily trading values for Ping An Insurance's Hong Kong-listed and OTC shares were approximately $150 million and $2 million, respectively as per data obtained from S&P Capital IQ . Readers who have an interest in dealing in Ping An Insurance's relatively more liquid Hong Kong shares can engage the services of US brokerages with trading access for international markets like Interactive Brokers.
Company Description
Chinese insurer Ping An Insurance refers to itself as "one of the largest financial services companies in the world" on the company's corporate website , and its claim is supported by the fact that it has close to 230 million individual clients.
PNGAY's three key businesses, Life & Health Insurance, Property & Casualty Insurance, and Banking, accounted for the bulk of the company's operating profit after tax for the first nine months of 2023 as indicated in the chart presented below.
Ping An Insurance's Operating Profit After Tax Mix By Business
PNGAY also highlighted that the company's three major business arms are the leading players for their respective markets in Mainland China.
Ping An Insurance's Key Businesses Are Market Leaders
In the subsequent sections of this article, I touch on the short-term risk factors and long-term growth prospects for Ping An Insurance.
Short-Term Risks For PNGAY
In the past one month, PNGAY's share price fell by -16.4% as compared to the S&P 500's +1.3% in the same time frame. I am of the opinion that Ping An Insurance's recent stock price weakness is attributable to two key near-term risk factors for the company that are in the spotlight now.
The first risk factor relates to potential national service risks.
On November 8, 2023, Ping An Insurance released an announcement noting that "the news report published by Reuters that the Company has been asked by the relevant governmental authorities/agencies to take over Country Garden Holdings Company Limited ( CTRYF ) ( CTRYY )" is "completely untrue." Reuters reported earlier on the same day that "Chinese authorities have asked Ping An Insurance Group to take a controlling stake in embattled Country Garden, the nation's biggest private property developer" based on its sources.
It is worth noting that Ping An Insurance's OTC shares with the PNGAY ticker symbol declined by -4.4% and -3.5% on November 8 and November 9, respectively. The Hong Kong-listed shares of Ping An Insurance with 2318:HK ticker symbol also decreased by -8.7% from HK$40.70 at the end of the November 7 trading day to HK$37.15 as of November 10, 2023. Notwithstanding Ping An Insurance's clarification, it is apparent that investors are taking potential national service risks for the company very seriously, and they are worried that PNGAY might be potentially "compelled" to bail out other troubled businesses in China like Country Garden.
Shenzhen Investment Holdings Co., Ltd. is a shareholder of Ping An Insurance with an equity stake in excess of 5% . According to Fitch Ratings' research , Shenzhen Investment is "wholly owned by Shenzhen municipality". It is reasonable for investors to be concerned about the possibility of a potential conflict between the nation's interests and its shareholders' interests for Ping An Insurance going forward.
The second risk factor relates to management transition.
Earlier in late September, Ping An Insurance revealed "the resignation of Ms. Tan Sin Yin as a Co-Chief Executive Officer and Executive Vice President of the Company due to her personal and family reasons" with Ms. Tan formally stepping down at the end of this year. The company has decided that its Chief Human Resources Officer, Mr. Guo Xiaotao, will succeed Ms. Tan and become the new co-CEO in 2024.
In my view, Ms. Tan Sin Yin, otherwise known as Jessica Tan, has been a very important member of Ping An Insurance's management team, and I think that Jessica's departure is a significant loss for the company. Jessica Tan has been with Ping An Insurance for more than a decade , and she has been co-CEO starting in 2018. Notably, management consulting firm McKinsey referred to Jessica Tan as the "key architect of Ping An's digital-ecosystem-based business model" and credited her for the company's "early investments in digital technologies."
It remains to be seen whether Ping An Insurance's strategic direction and execution capabilities will change in a meaningful way under the leadership of a new co-CEO next year after Jessica Tan leaves the company.
I take a look at Ping An Insurance's growth potential for the long run based on takeaways from the company's recent Investor Day in the next section.
Ping An Insurance's Long-Term Potential
In the earlier part of this month, Ping An Insurance organized the company's 2023 Investor Day , which has relevant read-throughs from the company's outlook in the long term
In its 2023 Investor Day presentation slides , Ping An Insurance outlined its goal of achieving "long-term double-digit retail OPAT (Operating Profit After Tax) growth." I take the view that the company's financial target for the long run is achievable, taking into account industry metrics and the company's strategy.
Ping An operates in a market with strong growth potential. The Mainland Chinese insurance industry is underpenetrated and the wealth management sector in China still has a long growth runway. Based on third-party research cited in the company's 2023 Investor Day presentation, the penetration rate of insurance services in Mainland China was 3.9% last year, which is way lower than the global worldwide mean penetration rate of 6.6%. Separately, independent research as highlighted by Ping An Insurance in its Investor Day presentation suggests that the aggregate financial assets for Chinese individuals could potentially grow from RMB243 trillion in 2022 to RMB571 trillion for 2032. As one of the leading players in China's insurance and banking markets, Ping An is well-positioned for robust growth in the future thanks to favorable industry dynamics.
Ping An Insurance's Integrated Finance Model
Ping An Insurance is also poised to gain market share at the expense of its competitors thanks to its differentiated "integrated finance" business model as detailed in the chart presented above. Pure-play insurance companies in China will find it tough to compete with Ping An which offers "one-stop" services and products in the areas of insurance, banking, and asset management.
Final Thoughts
My rating for Ping An Insurance is a Hold. The company's recent share price weakness is justified based on factors like potential national service risks and the departure of one of its co-CEOs. On the other hand, Ping An Insurance's long-term prospects are healthy based on an evaluation of key industry metrics and the company's "integrated finance" model.
For further details see:
Ping An Insurance: Consider Both Short-Term Risks And Long-Term Potential