Steep descent expected for China's biggest property insurer

Shares in China’s largest property insurer have started their descent back to Earth and according to analysts, it could be a prolonged and rocky journey.

People’s Insurance Co. (Group) of China Ltd.’s mainland-traded stock rocketed more than 100% over 10 trading days starting Feb. 22. The steep rise prompted a rare sell recommendation from Citic Securities Co, the nation’s largest brokerage. The downgrade triggered a sell-off in the A-share market Friday as traders took it as a sign that the government wants to slow down the rally of the Chinese stock market.

Although the Shanghai-listed stock has come off almost 20% since — PICC fell as much as 10% Monday — Beijing-based hedge fund China Vision Capital Management Co. said the company remains expensive with a valuation more than twice its peers.

“PICC needs to fall more than 50% before entering a reasonable range of valuation,” China Vision Capital’s Deputy General Manager Zhang Qingyun said. “It’s hard to say how long that will take — maybe half a year, a year — because deviation from value is commonplace in China’s stock market.”

Competitive pressures

Citic isn’t the only brokerage to turn bearish. Goldman Sachs Group Inc. placed a sell rating on PICC’s mainland-traded shares in December, while JPMorgan Chase & Co. has an underweight recommendation.

The firm’s core property & casualty insurance business is facing increasing competitive pressures from other domestic players and premium growth is likely to slow, according to Bloomberg Intelligence insurance analyst Steven Lam. Its life business, meanwhile, is still small and will take time to catch up to bigger rivals like China Life Insurance Co. and New China Life Insurance Co.

PICC said last week there hasn’t been any change to its operations. Net income for the first three quarters of 2018 fell 16% to 12.1 billion yuan ($1.8 billion).

PICC’s slim free float makes it a target for speculators because the shares are easier to pump higher in a rising market. The stock trades at a more than 300% premium to its Hong Kong-listed shares, a gap that deserves to narrow, Lam said.

High valuation

The valuation of PICC’s mainland shares is “definitely out of sync with fundamentals,” Lam said. “Although its profit outlook should trend better in 2019, the recovery is not that much higher than peers.”

PICC’s Shanghai stock is trading at almost 31 times estimated earnings, more than double the industry average of 12.8 times, data compiled by Bloomberg show. The group’s forecast 2019 price-estimated embedded value — a gauge used to evaluate insurers’ valuations — is 2.5 times versus the 0.95 average of mainland-listed peers, according to Citic Securities.

Even PICC itself had warned investors of risks following steep increases in its share prices this month. In a stock exchange filing last Thursday, PICC urged caution among investors as it pointed out that its stocks were already trading at 28 times historical earnings, above an average 20 times for seven Chinese listed insurers.

A reasonable price for the stock would be between 4.71 yuan and 5.38 yuan, Citic Securities analysts led by Tong Chengdun wrote in the brokerage’s March 7 report. Those levels would better reflect 13 to 15 times per-share earnings and a 10% conglomerate discount.

While economies of scale will help PICC’s main property & casualty unit, which contributed almost 90% of group profit in the first half of 2018, intensifying competition from foreign insurers and online platforms still threatens to erode profitability, Tong wrote. As well, PICC’s life arm still needs to trim its low-value business.

PICC’s stock was last at 10.41 yuan. Analysts’ consensus one-year price target for the company is 3.91 yuan, Bloomberg-compiled data show.

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