Emile Farsoun

Equity Bottom-Up

China Taiping Insurance Hldgs / Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/china-taiping-insurance-hldgs-co-ltd" target="_blank" data-smartkarma-citation="entities:489:1" rel="noopener">China Taiping Insurance Hldgs (966 HK)</a> is perceived by the market as a lower quality Chinese Insurer, relative to <a href="https://www.smartkarma.com/entities/china-pacific-insurance-group-co-ltd" target="_blank" data-smartkarma-citation="entities:6177:1" rel="noopener">China Pacific Insurance (Group) Co., (2601 HK)</a> and <a href="https://www.smartkarma.com/entities/ping-an-insurance-grp-co-of-china-ltd" target="_blank" data-smartkarma-citation="entities:12880:1" rel="noopener">Ping An Insurance (H) (2318 HK)</a>, with its primary focus on growth, while other metrics such as the type of policy sold, profitability of the policy and agent productivity fall behind by comparison.However, the stock is down c. 10% year-to-date, relative to the two Peers (Ping An and CPIC), which are up 30%+. Taiping is trading at less than 1x forward Price to book value and  less than 10x 2019 earnings. The question we ask ourselves, do the quality concerns matter, when Taiping is expected to grow strongly this year and the valuation is as cheap as it is?We think the key issue is capital; Taiping does not generate enough capital to sustain its growth. Historically, the company had several capital increases and a reinsurance transaction to release capital. This is a symptom of the savings products it sells, which have high capital strain. In addition, Taiping has the lowest shareholder returns with a dividend payout of 5%, the lowest among peers.Our conclusion is that in this case quality does matter, as capital is in question. We do not see possible a quick and material improvement in the quality of the business, as this is difficult to do. Although, it may seem that the current valuation discounts much of these concerns, it is difficult to see sufficient margin of safety. Hence, an investment in Taiping would depend on the type of investor and the tolerance for risk.

China Taiping Insurance Hldgs (966 HK) is perceived by the market as a lower quality Chinese Insurer, relative to China Pacific Insurance (Group) Co., (2601 HK) and Ping An Insurance (H) (2318 HK), with its primary focus on growth, while other metrics such as the type of policy sold, profitability of the policy and agent productivity fall behind by comparison.However, the stock is down c. 10% year-to-date, relative to the two Peers (Ping An and CPIC), which are up 30%+. Taiping is trading at less than 1x forward Price to book value and  less than 10x 2019 earnings. The question we ask ourselves, do the quality concerns matter, when Taiping is expected to grow strongly this year and the valuation is as cheap as it is?We think the key issue is capital; Taiping does not generate enough capital to sustain its growth. Historically, the company had several capital increases and a reinsurance transaction to release capital. This is a symptom of the savings products it sells, which have high capital strain. In addition, Taiping has the lowest shareholder returns with a dividend payout of 5%, the lowest among peers.Our conclusion is that in this case quality does matter, as capital is in question. We do not see possible a quick and material improvement in the quality of the business, as this is difficult to do. Although, it may seem that the current valuation discounts much of these concerns, it is difficult to see sufficient margin of safety. Hence, an investment in Taiping would depend on the type of investor and the tolerance for risk.

Taiping (966 HK): Looks Cheap For The Growth, But Do The Quality Concerns Matter?