Ping Insurance Stays True to Its Roots Amid Troubles (PIAIF) (PNGAY)

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Since my first article on Ping An Insurance in August 2020, the stock (OTCPK:PNGAY) has fallen more than 40%. Here I examine whether this is related to the business, where other external factors are examined for severity and continuity.

Ping An’s story is China-centric. So is this. But it doesn’t take away from the company’s unique qualities that make it stand out even in the most difficult situations. McKinsey calls integrated insurers such as Ping An “environmental leaders” who derive additional value from customer relationships through insurance-related services. Using its large size to its advantage, Ping An continues to expand its business; at the same time, the team has been reducing the complexity by using unparalleled digital technology. Despite the poor performance for Ping An since the second half of last year (which turned some of the headline indicators into red), there are plenty of reasons to expect a long-term comeback.

First, the external environment

COVID-19 DISEASE

At first it was thought that China would be the first to stop the epidemic, while the government’s unwavering zero-covid policy means that things are not looking good.

Crazy testing and blocking has become a constant in life, which may remain in the foreseeable future (if new updates come out). And while manufacturing output has otherwise held up, consumer confidence has been severely shaken.

Insurance has fallen out of favor with nervous Chinese. Ping An’s earnings for 2021 fell for the first time in a decade, down 2.7%. Most of the losses came from Life & Health Insurance whose new market value (the present value of future benefits from new premiums written during the year) fell by 24%, with long-term insurance the most active.

Market problems

Ping An’s business is based on approx domestic market, so they naturally reflect the local economic situation. Declaring consumer spending was not the only problem. Although GDP grew by a solid 8.1% in 2021, the year was marked by financial crisis and political interference in technology. The negative feedback that came with it also affected Ping An’s performance.

The property sector crisis, which was caused by the construction loan law, was one that Ping An was directly affected by. As part of the consortium, it became a many shareholders in the struggle The Initiating Team. Hong Kong’s share price (HKEX:2318) fell 20% on the news. The general consensus was that Ping An was forced into the deal and this would not be the last time. Good to explain it may be that the acquisition was justified because of the consolidation in the main lines of operation.

However, most of Ping An’s investment in real estate was wasted. In 2021, the 29% drop in profit attributable to owners to 101.6bn yuan was blamed mainly on a struggling producer. China Fortune Land Development in which Ping An has a 25% stake: the write-up and damage to its name totaled 24.3bn yuan.

Financial policy

Ping An latest quarterly report for the period ending on March 31 he said there was “an economic imbalance between China and the United States”. Nothing makes this more apparent than the stark difference in interest rate movements. Concerned about the economic slowdown, the People’s Bank of China has cut interest rates twice since the early days of the pandemic. December 2021 and then in May 2022while central banks in some major economies have started to tighten interest rates to reduce inflation.

China’s GDP growth 4.8% in the first three months of 2022 but the second phase may bring a 1.5% decrease, according to recent polls. The soon-to-be-expired COVID-19 restrictions, a slowdown in the housing sector and weak sales are three factors that are slowing the economy. Ping An, as the country’s largest insurance company whose interests are spread far and wide, cannot go out without risk. In Q1, the difference between Life & Health’s actual investment returns and assumed long-term returns reduced the group’s net profit by 19.7bn yuan; Net profit for shareholders fell 24% year-on-year to 20.7bn yuan.

Change the weather

Ping An, like other major insurers around the world, is facing increasingly frequent and costly weather events. Climate change is exacerbating this environmental threat. In China, 2021 was marked by the Henan Flood that caused the economy to collapse faster than 114 billion ($18bn). The cost of insurance for the goals reached 11 billion yuan ($1.7b); Ping An Property & Casualty paid more than 3.1bn yuan. The stock fell about 10% in the week after the flood. Climate damage will continue to rise as more and more disasters are predicted.

And the company?

After being taken over by Hong Kong’s AIA (OTCPK:AAGIY), Ping An is now number two. the largest of the life insurance companies worldwide with a market value of approximately $115bn. It is still the largest company in the Chinese insurance market, followed by China Life Insurance (LFC). As a group, it offers integrated services in financial (insurance, banking, asset management) and healthcare. Technology, in all of this, is a communication system that provides unity to Ping An’s products that are spread through 22 organizations to be able to sell and sell.

As it stands today, the group has fallen behind its record on many financial indicators. But as has been shown, Ping An’s misfortunes are not self-inflicted, and the business model remains strong.

PNGAY

More than 12 months

Average of 5 years

Net income limit

7.6%

10.1%

Bring it back to the common economy

11.8%

19.8%

Bring all the goods

0.9%

1.4%

Group productivity

5.9%

3.5%

Source: Seeking Alpha

In a challenging environment, the team has been doing what it does best – seeking excellence through innovation. More than ever, the group is focused on creating a unified ecosystem of products and services that work across multiple industries. And whatever the team has achieved through synergistic results so far will be amplified in the future.

Ping An’s high debt (2.09tn yuan in Q1’22) is offset by high cash flow (2.04tn yuan) which results in a steady cash flow, ensuring the group’s safety in the event of a downturn. In addition, this also means that management is able to fulfill its commitment to pay dividends that have been rising since mid-2016, reaching a growth rate of 27% per share.

One important change that is under constant review is the restructuring of Ping An’s army of insurance: reducing the numbers by half over the past few years (another reason why the income has decreased in 2021) but raising the quality bars and other offers. , especially AI-driven strategies.

Other performance metrics have remained unchanged throughout. Ping An continues to grow its retail customers (+ 4.1% in 2021 and 0.7% in Q1’22) – a good part of which comes from Internet users – and contracts per customer (+ 1.8% and +1.0 % respectively).

The ability to sell on a large scale – distributed under the strategy of “one customer, multiple products and one-stop service” – has been a great help to Ping An’s agents. In 2021, about 33 million customer migrations occurred among financial services companies that sell insurance, health care and wealth management. The company’s revenue generated from the sale of various products grew by 7.3% every year and the revenue of the new company by 26.9%. Up to one-fifth of Ping An’s new financial clients come from its medical institutions.

% of retail customers (mn) with multiple contracts in different organizations

% of retail customers (mn) with multiple contracts in different organizations

Ping An

Technology businesses

Unlike traditional financial groups outside of China, Ping An has been at the forefront of change by incorporating insurtech and finding a way to leverage its technology. It is Ping An’s technical investment that has the potential to further develop the team. To be sure, it’s early days for Lufax (LU), OneConnect (OCFT), Ping An Health (HKEX: 01833) and Autohome (ATHM), but all four are already leading China in their respective sectors. . Technology increased its operating profit by 91% (compared to the entire group of 5%) in 2020, 19.5% (compared to 6%) in 2021 and 18% (10%) in Q1’22.

Ping An tech support

Ping An

Calculate the cost

Shares of Ping An traded on the Shanghai Stock Exchange (601318.SS) closed at 42.91 yuan on July 24. The Street target is 69.08 yuan according to Refinitiv Eikon. The stock is currently trading at a discount to its peer group: The Price/Book ratio is 0.9 compared to an average of 1.3 for Insurance and 1.0 for Financials. The group’s P/B ratio fell below 1 for the first time in the last decade and has averaged 2.0 in the last five years.

The end

After the external changes that have affected the company, Ping An has not changed much, as far as I can see. Growth in mature non-tech businesses will eventually recover. Under his leadership, management plans to improve profitability and reduce costs while also pushing for innovation and technology. Most importantly, however, a big bet on technological research and innovation should pay off and raise the value of the whole group. If and when that happens will depend on the mix of economics and politics.