Ping An Insurance (2318:HK) has not done well ever since it hit a high of HK$103 in February 2021.
As one of the largest companies in China, its fate is closely intertwined with China’s progress. It has been hit by issues such as the widespread tech sector regulatory crackdown and the China property sector credit crisis.
When Ping An announced the acquisition of a significant stake in Founder Group for RMB 50 billion yuan, the company was also seen as having to play its part in the bailing out of failing companies in the property sector. This increased the company’s exposure to this segment significantly and added to investors’ displeasure. This was on top of stakes in companies like Country Garden (2007:HK), China Jinmao (0817:HK) and Landsea Group that Ping An entered into in the recent years.
The company also acquired stakes in six Raffles City properties in China from Capitaland for RMB 33 billion in June 2021 which on hindsight has left investors questioning the timeliness of the deal.
Ping An Insurance’s financial results
| P&L in RMB’m | FY21 | FY20 | FY19 | FY18 | Variance (%) | Variance (%) |
| EPS in RMB’$ | FY21 vs FY20 | FY21 vs FY19 | ||||
| Total Revenue | 1,287,675 | 1,321,418 | 1,273,091 | 1,082,146 | -2.6% | 1.1% |
| Total operating profit | 147,961 | 139,470 | 132,955 | 112,573 | 6.1% | 11.3% |
| Basic operating EPS | 8.40 | 7.89 | 7.48 | 6.31 | 6.5% | 12.3% |
| Net profit attributable to shareholders | 101,618 | 143,099 | 149,407 | 107,404 | -29.0% | -32.0% |
| Dividend per share | 2.38 | 2.20 | 2.05 | 1.72 | 8.2% | 16.1% |
| Key Metrics: | ||||||
| New business value of LIfe and Health insurance Business | 37,898 | 49,575 | 75,945 | 72,294 | -23.6% | -50.1% |
| Embedded Value of Life and Health Insurance Business | 876,490 | 824,574 | 757,490 | 613,223 | 6.3% | 15.7% |
| Operating ROE (%) | 18.9 | 19.5 | 21.7 | 21.9 |
Ping An delivered strong overall FY21 results despite the headwinds. This was mainly due to the strength of the Chinese economy in 1H21 as growth slowed in 2H21 due to the issues mentioned above.
On a full year basis, Total Revenue declined by 2.6% while operating profit increase 6.1%. The lower revenues was mainly due to lower written and earned insurance premiums. Investment income also saw a sharp decline due to the challenging climate in 2H21.
Basic operating EPS increased by 6.5% and this meant that Ping An was able to increase the final dividend from RMB1.4 in 2020 to RMB1.5 in 2021, representing a 7.1% increase. The total dividend per share for FY21 increased from RMB 2.20 to RMB 2.38, which is a 8.2% increase.
Net profit was 29.0% lower mainly due to the impairment of its investment of China Fortune Land amounting to RMB43.2 billion, including RMB15.9 billion for equity investments and RMB27.3 billion for debt investments. Note that the impact to net profit after tax amounted to RMB31.6 billion.
2022 guidance
The statement from Ping An’s Board of Directors states that in 2022, Ping An will implement the policy of “focusing on financial services, advancing reform and innovation, boosting revenues, cutting costs, and ensuring compliance”, steadfastly promote the philosophy of high-quality development under a customer-oriented philosophy to improve the quality and efficiency of serving the real economy.
Ping An strives to increase cash dividends on the basis of the solid growth in operating profits to reward shareholders, and create sustainable value for various stakeholders, including society, shareholders and clients.
3 Positive takeaways
1) Operating profits and cash dividends continue to increase
As stated in its guidance, the company attaches importance to shareholder returns as it strives to increase cash dividends should there be strong growth in operating profits.
At a current share price of HK$55.30, the full year dividend of RMB 2.38 translates to approximately HK$2.93 and indicates a current dividend yield of 5.3%.
2) Most Key metrics continue to point to growth.
As expected, with Ping An being one of the largest companies in China, as long as China continues to growth, it is very likely that Ping An would follow suit. Ping An’s total assets and new business value in its insurance business continue to grow.
In addition, it continues to grow its customer base, recording higher number of internet users and retail customers. Cross selling of products also increased as the number of contracts held per customer increased. This resulted in higher operating profit per customer.
3) Strong performance in its banking business
Ping An Bank recorded not only higher profits but was also able to reduce its cost to income ratio and non performing loan ratio. This points to strong cost management and a broad recovery in its loan portfolio. Net interest margin declined slightly as China cut its benchmark loan rate in 2021.
2 Negative Takeaways
1) Uncertain outlook
The Chinese government through the Financial Stability and Development Committee meeting led by Vice Premier Liu He has provided several positive affirmations in regard to the government’s intention to shore up its economy with substantial measures as headwinds grow.
Not only that, the China Banking and Insurance Regulatory Commission said that it would help financial companies to stabilize capital markets and support insurance companies to invest in domestic securities.
The Financial Stability and Development Committee also reiterated that continuing economic development is the first priority of the Chinese Communist party.
While these are all positive news, one must be reminded that the Chinese government is doing all these because it believes that it will be challenging to attain the 5.5% GDP growth target for FY22 which is significantly lower than FY21’s actual GDP growth of 8.1%. With a slowing GDP growth, it is uncertain if Ping An is able to deliver sufficient growth.
2) Risk of further “National Service”
In April 2021, Ping An announced its plan to buy a majority holding in New Founder Group with a stake of 70%, for RMB50 billion. Ping An said then that it would lead a consortium that will work actively in the reorganisation of Founder Group. Ping An received approval to restructure the company in January 2022.
This was on top of its exposure to the property sector via China Fortune Land and this bail out viewed by the market as providing “National Service” to the country.
As many Chinese property developers have still been in the news either for being late on their bond repayments or defaulting, there is a concern that Ping An might not only have to further support its existing portfolio of beleaguered property companies but may even have to rescue another company.
What’s ahead for Ping An, and should you invest now?
Ping An is trading at about 42% below the 52-week high with its share price falling by about 27% since July 2021 which was arguably where the issues surrounding the internet platform sector surfaced and accelerated. It was also then affected further when the China property sector fell into a credit crisis.
Ping An’s FY2021 results were mixed, while overall growth in 2021 was strong, it was clear that 2H21 slowed down due to the issues mentioned. Revenues and net profit declined while operating profits and dividend increased.
Ping An provided a positive 2022 guidance focusing on revenue growth, cost cutting measures and also continued creation of sustainable value to shareholders such as by higher cash dividends.
While it could be agreed that on an overall basis, the company has done well with increased operating profits and cash dividends and improved key metrics, there are continued concerns over the macroeconomic outlook for China in 2022 and the property sector’s credit crisis which may require further investments from Ping An.
Ping An has also continued to play its important role in the China economy well and also positioned itself for the future, this is shown from the company’s ability to continue garnering awards in categories ranging from brand, prestige to ESG.
The company likely did well considering the multiple headwinds in 2021 and given the current positive sentiments in the Chinese stock markets, the stock may see some further recovery. However, the stock is unlikely to recover to its 52-week high levels as this may require a lot more certainty in terms of the property sector stability and China’s GDP growth.
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Lufax reduced profits yoy? Inaccurate.
Hey Alf, you’re right, thanks for spotting that!