Founder of Antler Capital

Stanley Tsai, CFA

Equity Bottom-Up

AIA <a href="https://www.smartkarma.com/entities/aia-group-ltd" target="_blank" data-smartkarma-citation="entities:14895:1" rel="noopener">(1299 HK)</a> 
AIA's proposed USD1.86bn minority investment in China Post Life marks a notable deviation from its long-held belief in maintaining control over its key operations. The transaction is touted as a barbell strategy that will give AIA's shareholders access to high-net worth clients on the one hand and the mass market on the other. In our view, the economics to China Post Life are clear, but the benefits to AIA may be more subtle (Exhibit 1).
The deal is fairly immaterial to AIA financially. At 1.34x historical P/B, the investment represents less than 0.6% of AIA's assets and 0.3% its IFRS capital. Valuation is in line with New China Life-A's <a href="https://www.smartkarma.com/entities/new-china-life-insurance-co-ltd" target="_blank" data-smartkarma-citation="entities:43:1" rel="noopener">(601336 CH)</a>, but we don't believe AIA is in it to turn a quick profit.
China Post Life stands to benefit almost immediately. The cash injection will boost the insurer's core solvency ratio from 110% to above 200%. But much more important is the promise of product ramp-ups, service upgrades, and sales training. On these fronts, China Post Life will be learning from the best.
The benefits AIA derives from the deal may be somewhat less tangible, but no less significant. The investment places the Hong Kong-based insurer front and center in the country's drive to widen the mass market's financial access. The unique position of the China Postal Group may open other doors down the road.
We are naturally skeptical of all insurance M&amp;As and joint ventures as so few of them have worked globally. That said, financial and executive risks seem to be well contained with the China Post Life transaction. While it may be an overstatement to call this transaction politically motivated, the potential regulatory and policy tailwinds it promises must be the envy of many of AIA's competitors.
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<td style="width: 100%;">Exhibit 1: AIA's China Footprint</td>
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<td style="width: 100%;">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/216/534/original/image_81757729821625228313721.png?1625228314" class="editor-image img-responsive" data-smartkarma-image-id="216534"></figure>
Source: China Banking and Insurance Regulatory Commission (CBIRC), National Bureau of Statistics, Company disclosures, Our analysis
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</tr>
</tbody>
</table>
Related Insight
<ul>
<li>
<a href="https://www.smartkarma.com/insights/china-financials-silver-linings-playbook" target="_blank" data-smartkarma-citation="insights:53013" rel="noopener">China Financials: Silver Linings Playbook</a> </li>
</ul>

AIA (1299 HK) 
AIA's proposed USD1.86bn minority investment in China Post Life marks a notable deviation from its long-held belief in maintaining control over its key operations. The transaction is touted as a barbell strategy that will give AIA's shareholders access to high-net worth clients on the one hand and the mass market on the other. In our view, the economics to China Post Life are clear, but the benefits to AIA may be more subtle (Exhibit 1).
The deal is fairly immaterial to AIA financially. At 1.34x historical P/B, the investment represents less than 0.6% of AIA's assets and 0.3% its IFRS capital. Valuation is in line with New China Life-A's (601336 CH), but we don't believe AIA is in it to turn a quick profit.
China Post Life stands to benefit almost immediately. The cash injection will boost the insurer's core solvency ratio from 110% to above 200%. But much more important is the promise of product ramp-ups, service upgrades, and sales training. On these fronts, China Post Life will be learning from the best.
The benefits AIA derives from the deal may be somewhat less tangible, but no less significant. The investment places the Hong Kong-based insurer front and center in the country's drive to widen the mass market's financial access. The unique position of the China Postal Group may open other doors down the road.
We are naturally skeptical of all insurance M&amp;As and joint ventures as so few of them have worked globally. That said, financial and executive risks seem to be well contained with the China Post Life transaction. While it may be an overstatement to call this transaction politically motivated, the potential regulatory and policy tailwinds it promises must be the envy of many of AIA's competitors.



Exhibit 1: AIA's China Footprint




Source: China Banking and Insurance Regulatory Commission (CBIRC), National Bureau of Statistics, Company disclosures, Our analysis




Related Insight


China Financials: Silver Linings Playbook 


AIA / China Post Life Deal: A Worthwhile Excursion

Silver Point

Thomas J. Monaco

Independent Insight Provider

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

*New IPO Disappoints Right Out Of Gate: Waterdrop (WDH.US) [Waterdrop] provides an online insurance marketplace and related medical crowdfunding platform in mainland China. Waterdrop  reported its first set of earnings results since its IPO, coming in at a negative CNY 370.2 bn for 1Q21, declining CNY 249.4 (206.6%) YOY largely given its higher costs from a channel (third party traffic) and product mix shift to long-term insurance. Both factors have caused operating costs to increase CNY 579.1 bn (75.7%) YOY  - far outpacing revenue growth of CNY 229.6 bn (35.1%) over the period; and  *All Is Not Lost…Yet: First year premium (FYP) did increase 42.7% YOY – led by costly third party FYP which increased 51.6%. Long-term critical illness insurance grew 132% off of a low base, but still well exceeding industry average. Anecdotally, management believes that competitive pressures appear to be abating and that increases in customer acquisition costs is now decelerating. In addition, Waterdrop continues to make progress with: Waterdrop Health; Waterdrop Medicine; and with outpatient services.

*New IPO Disappoints Right Out Of Gate: Waterdrop (WDH.US) [Waterdrop] provides an online insurance marketplace and related medical crowdfunding platform in mainland China. Waterdrop  reported its first set of earnings results since its IPO, coming in at a negative CNY 370.2 bn for 1Q21, declining CNY 249.4 (206.6%) YOY largely given its higher costs from a channel (third party traffic) and product mix shift to long-term insurance. Both factors have caused operating costs to increase CNY 579.1 bn (75.7%) YOY  - far outpacing revenue growth of CNY 229.6 bn (35.1%) over the period; and  *All Is Not Lost…Yet: First year premium (FYP) did increase 42.7% YOY – led by costly third party FYP which increased 51.6%. Long-term critical illness insurance grew 132% off of a low base, but still well exceeding industry average. Anecdotally, management believes that competitive pressures appear to be abating and that increases in customer acquisition costs is now decelerating. In addition, Waterdrop continues to make progress with: Waterdrop Health; Waterdrop Medicine; and with outpatient services.

Thematic (Sector/Industry)

In the spirit of the long-awaited UEFA Euro 2020, we present our inaugural "China Financials: Silver Linings Playbook", which summarizes our views on the names that are best positioned to navigate an environment of progressively slower credit growth, tighter liquidity and rising defaults. 
Our screen consists of 100+ stocks in the A/H share universe, as well as a select number of international / non-traditional names that have significant exposures to China's financial system. We have a preference for larger-cap and liquid names, which are then filtered by our opinions on their fundamentals, value, momentum and recent trading volumes. We also try to make our selections versatile and less vulnerable to single-factor movements.
Each player's position on the pitch and the team formation itself convey incremental information about our thoughts on the sector's performance over a three to six-month horizon. To the extent possible, we intend to update our ideas on a periodic basis. This provides a feedback loop with our other ongoing research on the industry.
However, our team selections are not investment recommendations. Instead, they are meant to give structure to our analysis. The playbook allows us to articulate our views on the sector in a timely, concise manner. Our objective is to ensure we don't throw the baby out with the bathwater as sentiments on the sector remain bleak.
With that out of the way, the following is our starting XI. We will dive deeper into our rationale for our selections in the remainder of this insight (Exhibit 1).
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<td style="width: 726.047px;">Exhibit 1: China Financials | Silver Linings Playbook</td>
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<td style="width: 726.047px;">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/213/768/original/image_768460236451623962508577.png?1623962508" class="editor-image img-responsive" data-smartkarma-image-id="213768"></figure>

Source: Our analysis
</td>
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</tbody>
</table>
Related Insights
<a href="https://www.smartkarma.com/insights/china-macro-consumers-remain-on-the-sidelines-as-their-home-equity-grows" target="_blank" data-smartkarma-citation="insights:53210" rel="noopener">China Macro: Consumers Remain on the Sidelines, as Their Home Equity Grows</a> 
<a href="https://www.smartkarma.com/insights/glut-and-famine-we-might-see-snow-in-china-this-summer" target="_blank" data-smartkarma-citation="insights:52840" rel="noopener">Glut and Famine: We Might See Snow in China This Summer</a> 
<a href="https://www.smartkarma.com/insights/china-macro-ppi-peaks-while-cpi-eases-tightening-fears" target="_blank" data-smartkarma-citation="insights:52778" rel="noopener">China Macro: PPI Peaks, while CPI Eases Tightening Fears</a> 
<a href="https://www.smartkarma.com/insights/china-macro-exports-disappoint-but-it-s-still-early-in-the-game" target="_blank" data-smartkarma-citation="insights:52728" rel="noopener">China Macro: Exports Disappoint, but It's Still Early in the Game</a> 
<a href="https://www.smartkarma.com/insights/glut-and-famine-china-s-monetary-conditions-a-notch-tighter-in-may" target="_blank" data-smartkarma-citation="insights:51799" rel="noopener">Glut and Famine: China's Monetary Conditions a Notch Tighter in May</a> 
<a href="https://www.smartkarma.com/insights/icbc-the-bond-identity-a-zero-growth-dividend-discount-story" target="_blank" data-smartkarma-citation="insights:51463" rel="noopener">ICBC: The Bond Identity | A Zero-Growth Dividend Discount Story</a> 
<a href="https://www.smartkarma.com/insights/boc-aviation-2588-hk-the-stars-don-t-look-bigger-but-they-do-look-brighter" target="_blank" data-smartkarma-citation="insights:52283" rel="noopener">BOC Aviation (2588 HK): The Stars Don't Look Bigger, but They Do Look Brighter</a>

In the spirit of the long-awaited UEFA Euro 2020, we present our inaugural "China Financials: Silver Linings Playbook", which summarizes our views on the names that are best positioned to navigate an environment of progressively slower credit growth, tighter liquidity and rising defaults. 
Our screen consists of 100+ stocks in the A/H share universe, as well as a select number of international / non-traditional names that have significant exposures to China's financial system. We have a preference for larger-cap and liquid names, which are then filtered by our opinions on their fundamentals, value, momentum and recent trading volumes. We also try to make our selections versatile and less vulnerable to single-factor movements.
Each player's position on the pitch and the team formation itself convey incremental information about our thoughts on the sector's performance over a three to six-month horizon. To the extent possible, we intend to update our ideas on a periodic basis. This provides a feedback loop with our other ongoing research on the industry.
However, our team selections are not investment recommendations. Instead, they are meant to give structure to our analysis. The playbook allows us to articulate our views on the sector in a timely, concise manner. Our objective is to ensure we don't throw the baby out with the bathwater as sentiments on the sector remain bleak.
With that out of the way, the following is our starting XI. We will dive deeper into our rationale for our selections in the remainder of this insight (Exhibit 1).



Exhibit 1: China Financials | Silver Linings Playbook





Source: Our analysis




Related Insights
China Macro: Consumers Remain on the Sidelines, as Their Home Equity Grows 
Glut and Famine: We Might See Snow in China This Summer 
China Macro: PPI Peaks, while CPI Eases Tightening Fears 
China Macro: Exports Disappoint, but It's Still Early in the Game 
Glut and Famine: China's Monetary Conditions a Notch Tighter in May 
ICBC: The Bond Identity | A Zero-Growth Dividend Discount Story 
BOC Aviation (2588 HK): The Stars Don't Look Bigger, but They Do Look Brighter

China Financials: Silver Linings Playbook

*Asian Business Doing Well:Total APE in 1Q21 for Asia and Africa amounted to USD 1.2 bn, increasing USD 177 mn (17.4%) YOY. New business value for Asia and Africa improved USD 102 mn (20.3%) YOY. VONB margins for Asia and Africa improve 3% YOY to 52% at 1Q21. Mainland China delivered solid growth during the quarter, driven by an improved sales campaign and low comparative results in 1Q20; and  *No Action On Jackson: The key disappointment comes from the delay of its Jackson National Life (JNL), US subsidiary, demerger which has now been pushed out until sometime in 2H21 (from 1H21) – even then we don’t have confidence this deal will get done. Management did mention that regulatory approval from Michigan and New York has been obtained, however, a review of the updated Form 10 is ongoing.

*Asian Business Doing Well:Total APE in 1Q21 for Asia and Africa amounted to USD 1.2 bn, increasing USD 177 mn (17.4%) YOY. New business value for Asia and Africa improved USD 102 mn (20.3%) YOY. VONB margins for Asia and Africa improve 3% YOY to 52% at 1Q21. Mainland China delivered solid growth during the quarter, driven by an improved sales campaign and low comparative results in 1Q20; and  *No Action On Jackson: The key disappointment comes from the delay of its Jackson National Life (JNL), US subsidiary, demerger which has now been pushed out until sometime in 2H21 (from 1H21) – even then we don’t have confidence this deal will get done. Management did mention that regulatory approval from Michigan and New York has been obtained, however, a review of the updated Form 10 is ongoing. 

Head of Research, IPOs & Placements, Aequitas Research

Sumeet Singh

Head of Research, IPOs & Placements

IPOs and Placements coverage across Asia Pacific

Aequitas Research

We cover all listing across the Asia Pacific along with follow-up placements. As of Dec 2020, our team had covered 539 IPOs with a hit rate of 73.5% and 685 placements with a hit rate of 66.8%.

We combine fundamental bottom-up views with our proprietary quantitative framework to provide a holistic coverage across new listings and placements. Our coverage includes pre-IPO notes before the deal is launched, follow-up analysis once the deal is live and post-listing trading analysis as well.

Equity Capital Markets

New China Life Insurance / Equity Capital Markets

<a href="https://www.smartkarma.com/entities/swiss-re-ag-1f83dcbc-730e-46fa-82f2-bfe7e8e361a1" target="_blank" data-smartkarma-citation="entities:27914:1" rel="noopener">Swiss Re AG (SREN SW)</a> plans to raise around US$290m via selling all of its remaining stake in <a href="https://www.smartkarma.com/entities/new-china-life-insurance-c-h" target="_blank" data-smartkarma-citation="entities:377:1" rel="noopener">New China Life Insurance (1336 HK)</a>. This is not the first selldown by the company. It last sold a similar sized stake in Oct 2017, which we covered in our note, <a href="https://www.smartkarma.com/insights/new-china-life-placement-picked-the-bottom-for-buying-hopefully-not-the-top-for-selling" target="_blank" rel="noopener">New China Life Placement - Picked the Bottom for Buying, Hopefully Not the Top for Selling</a>.That deal ended up doing well.

Swiss Re AG (SREN SW) plans to raise around US$290m via selling all of its remaining stake in New China Life Insurance (1336 HK). This is not the first selldown by the company. It last sold a similar sized stake in Oct 2017, which we covered in our note, New China Life Placement - Picked the Bottom for Buying, Hopefully Not the Top for Selling.That deal ended up doing well.

New China Life Placement - Clean-Up Helps, past Deal Did Well

China

New China Life Insurance Company Limited provides life insurance in local and foreign currencies, acts as an insurance agent, provides checks, claims and insurance consulting. The Company's main products include life insurance, accident insurance, health insurance products and services.

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New China Life Insurance (601336 CH)

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Swiss Re AG plans to raise around US$290m via selling all of its remaining stake in New China Life Insurance (1336 HK). This is not the first...

Sumeet Singh

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