Article by iFAST
Ferlyn Tan Published on 16 Jun 2021
Over the past few months, Ping An’s (HKEX:2318) share price has tumbled by almost -20%, wiping out most of the gains it has accumulated over the past year. This happened shortly after Ping An announced that it will be acquiring a majority stake in the newly-established Founder Group, a distressed company that has entered into a court-led debt restructuring program since early 2020. Is this an opportunistic acquisition by Ping An? Let’s find out.
• Ping An Insurance (HKEX:2318) will be acquiring a majority stake in the newly-established Founder Group, a state-owned conglomerate that was founded by the prestigious Peking University.
• Unfortunately, the market has reacted negatively to this piece of news, with Ping An’s share price tumbling by almost -20%, wiping out most of the gains it has accumulated over the past year.
• We believe the correction is largely sentiment-driven. In fact, we see the deal as an opportunistic acquisition led by Ping An Insurance, given the synergies and benefits it can gain from this deal.
• This acquisition will allow Ping An to grow its securities business to compete against the larger foreign players as China opens up its financial market. This acquisition can also provide Ping An with a shortcut to China’s fast-growing healthcare industry.
• Our stance on Ping An remains unchanged and using the sum-of-the-parts (SOTP) valuation methodology, we arrived at our 2023E target price of HKD 130 (Table 1). This translates to a whopping upside potential of more than 60%!
Since its March lows, the share price of Ping An Insurance has rebounded strongly, in line with the broader market recovery. However, over the past few months, Ping An’s share price has tumbled by almost -20%, wiping out most of the gains it has accumulated over the past year (Chart 1).
This happened shortly after Ping An announced that it will be acquiring a majority stake in the newly-established Founder Group, a state-owned conglomerate that was founded by the prestigious Peking University.
Chart 1: Recent correction in Ping An Insurance share price
What’s going on?
According to Bloomberg, Founder Group defaulted on USD 3 billion of dollar bonds and RMB 34.5 billion of onshore notes, and after more than a year, it was announced that Founder Group will undergo a debt restructuring plan, with Ping An Life Insurance arm investing 37.1 – 51.8 billion yuan for a 51.1-70.0% equity stake in the New Founder Group.
Unfortunately, the market has reacted negatively to this piece of news despite its healthy 1Q21 results. We believe this correction is largely driven by negative investor sentiment towards the deal, due to a couple of reasons:
- Investors are concerned that they might be under government pressure to rescue PKU Founder;
- Investors are worried that Ping An may have to bail out other companies in the future as tasked by the authorities;
- Investors are questioning how much Ping An can benefit from this deal.
Why is Ping An Insurance buying over Founder Group?
While there is no confirmation that Ping An was tasked by the government to save Founder Group, we believe that this acquisition may have been an opportunistic acquisition led by Ping An. The assets of bankrupt companies are typically sold at depressed prices. In the case of Founder Group, not only are its assets sold at depressed prices, but they are also deemed to be synergistic with Ping An’s existing businesses.
Here is an overview of the assets under the Founder Group:
Table 1: Overview of assets under Founder Group
|Finance||Founder Securities, PKU Founder Life||Businesses covering securities, futures, funds, insurance and other fields|
|Medical & Healthcare||PKU Healthcare Group, PKU Healthcare IT||Hospitals, pharmaceutical enterprise and healthcare information technology|
|Technology||Founder Technology||Business covering printed circuit boards (PCB)|
|Education||China Hi-Tech, PKU Founder Technology College||Education provider|
|Real Estate||PKU Resources||A part of their business is involved in real estate development and operation of commercial properties|
|Source: Ping An Insurance, iFAST compilations|
For instance, this acquisition can provide Ping An with a shortcut to China’s fast-growing healthcare industry. Ping An can gain immediate access to Founder Group’s hospital network, as well as its medical technology, all of which will be able to help Ping An further enhance the online-offline healthcare ecosystem (doctors, offline hospitals, clinics, and pharmacies) it is building through its subsidiaries such as Ping An Good Doctor (HKEX:1833) and Ping An HealthKonnect.
With a stronger healthcare ecosystem and a better understanding of the healthcare industry, Ping An is also able to create synergies with its core insurance business through better underwriting capabilities. This will help Ping An to acquire new customers, enhance customer stickiness, and increase the average lifetime value per customer.
Meanwhile, this acquisition can also build up Ping An’s securities business, allowing it to fight against the larger foreign players as China opens up its financial market. In our previous article, we have shared that the opening up of China’s financial market will result in intensifying competition within the securities space as bigger foreign players like JPMorgan and Goldman Sachs are moving in to take up more market share.
If Ping An were to combine Founder Group’s existing securities business with its own, the new consolidated entity will have total assets of RMB 245 billion, making it one of China’s top ten players in the securities business, according to data compiled by the Securities Association of China and Bloomberg. This move will put Ping An in a better place to compete against the larger foreign players, giving them a slice of the fast-growing wealth management market in China.
An opportunistic acquisition led by Ping An Insurance
Overall, we believe that this is an opportunistic acquisition led by Ping An Insurance (HKEX:2318), given the synergies and benefits it can gain from this deal. At this point, it remains difficult to quantify the potential impact given limited details provided on the New Founder Group. However, for investors who are concerned over the implications on Ping An’s balance sheet, they will be assured to know that this deal will only have a marginal impact on Ping An’s solvency capital.
Ping An Life remains very well-capitalised as of end-2020, with its comprehensive solvency ratio standing at 240%, which is way above the minimum ratio of 100%. This also means that Ping An Life has about RMB 1.8 trillion worth of capital, dwarfing the RMB 51.8 billion it intends to inject into the New Founder Group.
Finally, it is also worth noting that Ping An has a good track record of delivering returns to investors. In fact, it has delivered an annualised total shareholder return of more than 10% over the last decade.
Our stance on Ping An Insurance remains unchanged and using the sum-of-the-parts (SOTP) valuation methodology, we arrived at our 2023E target price of HKD 130 (Table 2). This translates to a whopping upside potential of more than 60%!
We continue to favour Ping An Insurance (HKEX:2318) for its ecosystem business model and we believe it will remain a fast-growing stock in the coming years. Investors who are currently holding on to Ping An Insurance shares need not sweat over this new deal, while those who wish to take part in Ping An’s growth story can consider this correction as a good opportunity to enter the market.