Ping An Insurance (OTCPK:PNGAY) may not be seen as an investor’s first choice, particularly in the midst of the coronavirus panic, but there are several good reasons to consider this Chinese financial titan as a prospective investment. To do so, a bottom-up perspective is needed.
From a top-down perspective, concern about the epidemic’s impact on the Chinese economy and on global growth in general has been manifest. While the overall economic impact of the coronavirus outbreak is still impossible to determine, preliminary estimates forecast a 2% drop in growth rate this quarter, which means a $62 billion loss. In the context of weaker recent growth, rising debt, and the trade dispute with the U.S., a loss of this kind is far from positive for China.
The coronavirus epidemic is adversely affecting the Chinese economy. Image provided by North Country Public Radio.
However, a company in China is not necessarily the Chinese government, and consequently the issues which the Chinese government faces are not those that a specific company faces. And Ping An Insurance, I believe, is just such a company. This Chinese finance firm has a number of strengths that position it as an investment which merits serious consideration.
For starters, Ping An Insurance is one of the five biggest insurance firms operating in China. It provides its 201 million retail customers a diversified range of services, dividing its operations into insurance, banking, investment, and technology. This last segment is the one that provides Ping An with an edge over its peers in the Chinese financial services sector – it is a technology company as well as a financial services company.
Specifically, blockchain, AI, and cloud computing are areas that Ping An is devoting focused attention to. Programs cover a wide array of areas, from urban development (Smart City Business) to healthcare (HealthKonnect, Good Doctor) to automotive (Autohome) to wealth management and finance (Lufax, OneConnect), and this expertise accounts for how consistently profitable Ping An Insurance has been over the past five years.
|Year||Revenue (HK$)||Revenue ($)||Net Income (HK$)||Net Income ($)|
|2014||669.31 billion||86.21 billion||49.43 billion||6.37 billion|
|2015||849.42 billion||109.4 billion||66.86 billion||8.61 billion|
|2016||849.3 billion||109.39 billion||72.9 billion||9.39 billion|
|2017||1.1 trillion||140 billion||102.73 billion||13.23 billion|
|2018||1.27 trillion||160 billion||127.22 billion||16.39 billion|
Figures collated from annual reports available on Ping An’s investor relations page.
Note that the figures for both revenue and net income consistently rose year on year, and the quarterly results for the present financial year suggest that this profitable trend will continue, as does the free cash flow of HK$202.67 billion ($26.1 billion) reported for Q3 2019.
|2019 Quarter||Revenue (HK$)||Revenue ($)||Net Income (HK$)||Net Income ($)|
|Q1||431.15 billion||55.53 billion||52.94 billion||6.82 billion|
|Q2||286.61 billion||36.91 billion||59.92 billion||7.72 billion|
|Q3||274.66 billion||35.38 billion||35.59 billion||4.58 billion|
|Total||992.42 billion||127.82 billion||148.45 billion||19.12 billion|
Figures collated from quarterly reports available on Ping An’s investor relations page.
This profitability, based on the diversified financial services and technology segments, should ensure that the seven-year streak of consecutively rising dividends which Ping An Insurance has rewarded shareholders with should continue, particularly with a payout ratio of 43.55%. Indeed, the return on equity (trailing twelve months) of 26.95% – an improvement on the 2018 figure of 20.86% – testifies to a shareholder-friendly firm.
Ping An Insurance has enjoyed rising revenue and net income figures over the years. Image provided by Live Trading News.
The balance sheet reinforces the likelihood of the dividend payments continuing, and also shows how fiscally prudent Ping An Insurance is. Long-term debt of HK$619.76 billion ($79.82 billion) is offset by a net worth of HK$870 billion ($112.05 billion), cash-on-hand worth HK$829.72 billion ($106.87 billion), and total investments worth HK$6.72 trillion ($870 billion).
So, we have in Ping An Insurance a top-tier financial services firm with consistently rising profits, a consistently rising and sustainable dividend, strong competitive advantages in the diversity of its services and its technology investments, a customer base of 201 million retail customers, and a strong balance sheet. The quality of the business seems indisputable – can the same be said of the value of the stock?
Currently, Ping An Insurance is trading on the Pink Sheets at a share price of $22.67 with a price-to-earnings ratio of 8.91 and a dividend yield of 2.39%. The ADR is sponsored, and one ADR represents two ordinary shares that trade on the Hong Kong Stock Exchange. The current P/E is lower than the five-year average P/E of 11.97, and the current dividend yield is higher than the five-year average dividend yield of 1.75%. This suggests that Ping An Insurance is trading below fair value, which necessitates finding out what fair value for Ping An Insurance is.
To determine fair value for Ping An Insurance, I will first divide the current P/E by the historical market average to get a valuation ratio of 0.59 (8.91/15 = 0.59) and divide the current share price by this valuation ratio to get a first estimate for fair value of $38.42 (22.67/0.59 = 38.42). Then I divide the current P/E by the five-year average P/E to get a valuation ratio of 0.74 (8.91/11.97 = 0.74) and divide the current share price by this valuation ratio to get a second estimate for fair value of $30.64 (22.67/0.74 = 30.64).
Next, I will divide the five-year average dividend yield by the current dividend yield to get a valuation ratio of 0.73 (1.75/2.39 = 0.73) and divide the current share price by this valuation ratio to get a third estimate for fair value of $31.06 (22.67/0.73 = 31.06). Finally, I will average out these three estimates to get a final estimate for fair value of $33.37 (38.42+30.64+31.06/3 = 33.37). On the basis of this estimate, the stock for Ping An Insurance is undervalued by 47%.
Bearishness around the Chinese economy in general is understandable in light of the coronavirus panic, and consequently, staying away from Ping An Insurance is equally understandable. However, sometimes it pays to be “greedy when others are fearful,” and in light of the quality of Ping An Insurance, and the fact that it trades at a 47% discount to fair value, this may be one of those times.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.