PICC IPO, Ping An Sale Bolster Insurance 中国人保、平安售股提振保险业
If I were a short-term investor, I would say that now looks like a good time to buy Chinese insurance shares following positive developments from newly listed PICC Group (HKEx: 2328) and Ping An (HKEx: 2318; Shanghai: 601318), 2 of China’s leading players. But from a longer-term perspective, this brief and relatively rare uptick is likely to be short-lived for an industry that faces a number of major problems despite the strong growth potential of China’s insurance market.
Let’s take a look at the latest headlines, starting with word that PICC’s shares are set for a potentially strong bounce in their trading debut as the company makes its $3.1 billion IPO, the biggest new listing for Hong Kong in 2 years. Media are reporting PICC’s Hong Kong shares were up by as much as 6.3 percent in gray market trading ahead of their official trading debut on Friday. (English article)
While that figure may look good, nearly all the other indications are far less positive as investors remain uncertain about the longer-term prospects for Chinese insurers. Most notably, PICC priced the offering near the bottom end of its indicated range, and had to secure big commitments from major institutional investors to make sure the offer was fully subscribed. One of those institutional buyers, US giant AIG (NYSE: AIG) could easily become a short-term investor if it and PICC don’t quickly form a Chinese insurance joint venture — a condition that was part of AIG’s agreement. (previous post)
Meantime, insurance shares have also received another boost following word that Thailand’s Charoen Pokphand Group would purchase the $9.4 billion stake in Ping An held by HSBC (HKEx: 5; London: HSBA). That deal helped to boost Ping An’s shares earlier this week by easing investor concerns about such a big amount of the company’s shares coming onto the market. But again, the Thai group’s purchase is surrounded by other less encouraging factors.
After the Ping An stake sale was announced, word on the street was that Charoen Pokphand’s purchase was at least partly political due to the company’s strong business presence in China and a close relationship between its head and Beijing. That kind of relationship-based investment is hardly encouraging for longer-term investors who would have preferred to see a more market-oriented buyer purchase the shares.
So, what does all this decidedly mixed news mean for the broader insurance sector? In my view, China-focused insurance companies will remain a problematic investment for at least the next year due to the many uncertainties facing China’s economy and financial markets. From a business perspective, the insurance companies are likely to see strong growth in their core business as more Chinese purchase life, health and property insurance in the underdeveloped market.
But insurance companies earn most of their profits by investing in financial markets, and there’s no indication that China’s battered markets are going to improve anytime soon. That reality previously led both Ping An and larger rival China Life (HKEx: 2628; Shanghai: 601628; NYSE: LFC) to raise new funds through debt and share sales as provisions against investment losses. (previous post)
All of these factors bring me to my final conclusion, which is that we may see some brief rallies in insurance shares following these 2 pieces of relatively good news by Ping An and PICC. But look for those rallies to be short-lived, lasting for a few days at most, before longer-term pessimism returns towards this sector facing a difficult year ahead.
Bottom line: Chinese insurance shares could rally over the next few days following positive news from Ping An and PICC, but the gains will be short lived due to the sector’s bigger problems.
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