peace (OTCPK: PNGAY), a major Chinese financial conglomerate with stakes in life insurance, property and casualty insurance, banking and securities, released a mixed set of results for the third quarter of 2022. On the one hand, operating profit growth at Ping An Life and Ping An Bank was strong, but this was more than that. Offset by negative investment headwinds in property and casualty insurance and asset management. New business value (NBV) trends were also weaker than expected following repeated coronavirus lockdowns this quarter and broader consumption weakness.
That said, progress on Ping An’s life insurance reforms has been positive, and while the near-term gains from that reform effort may outweigh future macro headwinds, insurers are likely to see sustained NBV growth through FY23. We remain in a position to drive recovery. In terms of valuations, H-shares currently trade at around the undemanding P/E of 5 on futures, while A-shares trade at around P/7 on futures, suggesting most of the downside is likely priced in. is showing.
Investment losses cloud quarterly results
Ping An’s reported operating profit for the third quarter was RMB 37.9 billion (+3%) mainly due to strong growth in Ping An Life (+16% YoY) and Ping An Bank (+26% YoY) YoY) was solid. More than offset year-over-year declines elsewhere. However, these declines were primarily due to equity market weakness in the quarter (due to weaker operating results) as volatility in investments in the property and casualty business is reflected in reported operating income numbers. is. Similarly, net income was weighed down by equity investment losses. This is because the company has had to match many of its equity investments in real estate to market prices.
Ping An’s exposure to the real estate sector has long been a major concern for investors, but recognition of the majority of investment losses and efforts to de-risk the company’s balance sheet should go a long way. According to management, his current total real estate exposure amounts to RMB 206.6 billion, or 4.8% of his total investment assets. This represents a significant decline from his previous exposure of RMB222.8 billion, or his 5.2% exposure in the second quarter. On another positive note, the company said there were no impairments on its fixed income investments at this time. So while higher investment losses and the payment of the interim dividend led to a consecutive decline in book value of about 1% in the quarter, the decline in the kitchen in the third quarter is a good indication of the year-over-year improvement in the coming quarters. It should pave the way.
Life insurance business still under pressure, but signs of recovery are beginning to appear
Year-to-date new business activity continues to slow in the life insurance segment. The value of new business (VNB) decreased by about 27% year-on-year, and significantly decreased by -20% year-on-year in the third quarter. However, after adjusting for the impact of the change in assumptions, his VNB decline over the nine months to date was still a staggering -19% YoY. As a result, the streamlining of Seikatsu agents continued, with Ping An’s agent headcount dropping by up to 6% for the first consecutive quarter (in line with the industry). Short-term sales are also promising amid ongoing COVID-led quarantine measures and weak consumption across China. Recruitment challenges are a concern, but I believe this is a temporary trend rather than a structural one. In Ping An, sales should ease over time as quarantine measures are finally eased as the pandemic subsides and economic activity picks up (helped by China’s PBoC easing).
Meanwhile, Ping An has been promoting a three-year life business reform and has reached the pilot stage of the third and fourth batches. So far, the reform efforts have yielded positive results. His VNB per agent has increased by up to 22% year-on-year over the last nine months, even though overall VNB has been declining at his double-digit rate. From 2023 onwards, further reform progress is expected to facilitate a gradual recovery of VNB. A further uptick could come from Ping An’s 2023 “jumpstart” pre-sale campaign later this month. In my view, assuming his VNB margins for ‘jumpstart’ products remain stable year-over-year, his continued focus on savings should also give him a strong quarterly sales contribution. is.
Surprise to rise in capital adequacy ratio
It’s worth noting that management has done an excellent job of addressing two key concerns for performance: the health of the balance sheet and the sustainability of the dividend. Bears would point to a large gap between operating profit and net profit this time around, but most of the delta was due to temporary things like investment income. Alongside the capital ratio, we will focus on the progress of Ping An Life and P&C insurance business, where the core solvency ratio has improved continuously.
The main reason for the improvement in the third quarter was management’s efforts to lower the minimum capital requirement, which made C-ROSS II’s solvency ratio stronger. Given that the latest numbers also incorporate the impact of counter-cyclical factors, the company appears well-capitalized and should have little trouble sustaining its dividend. Therefore, with current H-share and A-share dividend yields in the mid to high single digits, Ping An is an attractive strategy for income investors. Investors who bet on earnings recovery can also be relieved from the downside of a strong capital base and limited return on capital, as they can be rewarded for waiting for the recovery of pending earnings.
close to the bottom
Ping An has been underperforming in recent years amid concerns over the quality of its investment book and major life insurance business challenges. The ongoing COVID lockdown and macro/consumer weakness in China have also not solved the problem, although they may recover sooner or later. -Balance sheet risk has also been significantly reduced following the quarter’s strong solvency levels under ROSS 2.
With dividend concerns largely gone, I suspect the major downside is priced into the current 5x H-share forward P/E (7x A-share forward P/E). Dividend reconfirmation and sustained life recovery are expected to support the re-rating of valuations.