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Play it Safe with These 4 China Insurance Stocks
Insurance stocks have rallied strongly but analysts see more upside as China’s bond yields move higher.
China’s insurance stocks could make the perfect rainy day investment for your portfolio.
Shares in the country’s big four insurance companies have soared 25% on average this year, but investors should bank on further upside. That rally has been propelled by tighter monetary policy in the world’s second-biggest economy since the end of last year and supported by belt-tightening efforts across big life insurers.
Higher interest rates are great news for insurance companies. The money that they collect off customers as policy payments is re-invested into the markets – normally in less risky investments like bonds. Higher bond yields mean insurers get more return on their investment, which goes straight to their bottom line.
What’s more, China’s insurance stocks look fairly cheap at current valuations compared to trading multiples over the last few years, reckons Nomura analyst Shengbo Tang.
Barron’s Asia takes a closer look at the prospects for China’s blue chip insurance stocks.
Ping An Insurance
Ping An Insurance Group (2318.HK) isn’t just China’s biggest listed life insurer, it is also the biggest non-government owned business. The shares have risen more than 60% over the past year as the company rides tailwinds such as rising interest rates, which are good for insurers’ earnings.
However, investors need to keep in mind that Ping An isn’t just an insurance company. Its subsidiary Ping An Bank (000001.CN) has suffered from rising provision charges against non-performing loans, which have dragged on the group. There is also uncertainty about Lufax, a peer-to-peer lender owned by Ping An that’s valued at USD18 billion, whose proposed IPO has seen delays. Credit Suisse reckons Ping An could unlock at least HKD4.20 a share should Lufax and Ping An Good Doctor list on valuations from the latest round of financing. Ping An is hosting its fintech day today (July 14).
Ping An is among the pricier of China’s insurance picks. Insurance stocks are valued using a yardstick called price-to-embedded value (P/EV), which looks at future profits and overall asset value. On this benchmark, Ping An trades at about 1.1, or more than its major competitors. Brokers think Ping An’s shares could rise another 10% or more. Credit Suisse this week lifted its price target to HKD68 a share from HKD63 a share.
China Life Insurance
China Life Insurance (2628.HK) is the country’s second-biggest listed life insurer with a market cap of more than HKD820 billion.
The stock is also Goldman Sachs’ top pick for the sector. Analyst Mancy Sun highlights China Life’s turnaround in profitability in the early part of 2017, with earnings up 17% year-on-year in the first quarter. They had plunged 45% in the 2016 financial year. She puts the profit rebound down to a steep recovery in yields on China’s 10-year sovereign bonds, which increases China Life’s investment returns.
The company’s restructuring efforts should also bear fruit. China Life has increased its number of agents who sell premiums, while also raising their productivity. The firm’s also lowered guaranteed return rates on some of its products, which should also support earnings.
Goldman rates China Life a Buy with a target price of HKD30.20 per share, or more than 25% upside. Based on the price-to embedded value multiple, China Life is cheaper than Ping An.
China Pacific Insurance
China Pacific Insurance (2601.HK) rounds out the trio of the country’s big life insurers.
Credit Suisse analyst Charles Zhou likes the stock as a pure insurance play, but also because it could start paying out more to shareholders. Unlike peers like Ping An, China Pacific doesn’t have any exposure to banking assets or any other unrelated businesses. The company also has the highest payout ratio out of China’s big life insurers, at more than 50%. At the current stock price China Pacific yields about a 2.5% annual dividend. “China Pacific has a generous dividend payout historically,” Zhou says.
China Pacific also looks like another inexpensive play on the country’s life insurance market, trading at 0.9 times price-to-embedded value. Credit Suisse rates the stock Outperform with potential upside of 30%.
New China Life Insurance
New China Life Insurance (1336.HK) is smaller than most of its peers with a market cap of HKD175 billion. One analyst who’s bullish on the stock is SWS Research analyst Yi Zhang, who thinks the shares could be undervalued by more than 30%.
Yi points out that New China Life generates a higher portion of its profits than its competitors from equity investments, which means that its earnings are correlated to stock market returns. Every 10% rise in its equity holdings translates to an 8% rise in New China Life’s net profits. Like other insurers, New China Life benefits from a recent steepening in China’s yield curve. SWS’s Yi expects net profit to grow at an average of 16% over each of the next few years.
The analyst also argues that the shares currently look cheap. At about 0.8 times price-to-embedded valuation, the stock is a thriftier pick than bigger competitors like Ping An and China Life.
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