Ping An of China: Solid business fundamentals, medical pension releases "ratchet effect"

On the evening of April 23, Ping An released its performance report for the first quarter of 2024.

According to the financial report, in the first quarter, the company's operating profit attributable to shareholders of the parent company was 38.709 billion yuan, down 3.0% year-on-year, and the net profit attributable to shareholders of the parent company was 36.709 billion yuan, down 4.3% year-on-year. Among them, the three core businesses of life and health insurance, property insurance and banking resumed growth, and the total operating profit attributable to shareholders of the parent company was 39.816 billion yuan, a year-on-year increase of 0.3%.

It is not difficult to see that with the improvement of macro fundamentals and the company's continuous deepening of operations, Ping An is gradually delivering on performance and value growth. Benefiting from this, on April 24, Ping An's A-share share price rose nearly 2%, and H-share stock price rose nearly 3%.

From the perspective of in-depth digging of this quarterly report, Ping An has presented many bright spots, among which the company's recent business strategy and development plan adjustment have attracted much attention from the outside world.

So, what does this mean?

1. The operation is stable, and the operating profit of the core business has returned to the positive growth channel

In the first quarter of 2024, Ping An achieved a premium income of RMB264.422 billion from original insurance contracts, a year-on-year increase of 1.6%.

At the same time, in the first quarter of this year, five listed insurance companies, including Ping An, Chinese Life, Chinese Insurance, China Pacific Insurance and Xinhua Insurance, achieved a total premium income of 1,066.423 billion yuan, an increase of 0.96% over the same period last year, lower than Ping An's premium growth rate. Specifically, the premium growth rate of the five listed insurance companies "three rises and two decreases", and Ping An's premium growth rate ranked second, second only to Chinese Life.

Overall, this achievement exceeded market expectations and reflected Ping An's solid background as a leading insurance company.

More importantly, the operating profit of the core business has improved significantly. In the first quarter, Ping An's life and health insurance, property insurance, and banking businesses together achieved positive growth in operating profit attributable to shareholders of the parent company.

It is worth mentioning that Ping An's management said at the 2023 annual results conference that "the decline in operating profit is a one-time factor", and the operating profit in the first quarter returned to a positive growth channel, which preliminarily verified this judgment.

At the business level, life insurance, as the core of Ping An, also performed well this time.

In the first quarter of 2024, the new business value of life and health insurance business reached RMB12.890 billion, a year-on-year increase of 20.7% on a comparable basis. As one of the core indicators of life insurance business, Ping An's new business value continued its high growth trend in 2023 and laid a solid foundation for full-year performance growth this year.

This is naturally inseparable from Ping An's in-depth reform of channels and products in the past few years.

The reform of the agent channel has been the most significant. At the end of the first quarter, the number of agents of the company was 333,000, a decrease of 4 percentage points from the beginning of the year, and the overall scale tended to be stable.

More importantly, the proportion of high-quality, highly educated and highly professional elite agents continues to increase, and the proportion of "excellent +" in the new manpower has increased by 11.0 percentage points year-on-year, which has driven the continuous optimization of the operation quality of the entire agent channel, and in the first quarter of 2024, the per capita new business value of the agent channel increased by 56.4% year-on-year, and the new business value rate reached 22.8%, a year-on-year increase of 6.5 percentage points on a comparable basis.

Continuous innovation in products is also an important reason for Ping An's continuous growth.

In response to the diversified needs of customers, Ping An has created three product service lines: "Insurance + Health Management", "Insurance + High-end Pension" and "Insurance + Home Care", building a differentiated competitive advantage.

In terms of medical and health care, as of the end of the first quarter of 2024, Ping An Life's health management has served more than 10 million customers, in terms of home care for the elderly, Ping An has covered 54 cities across the country, with a total of nearly 100,000 people qualified for home care services, and in terms of high-end elderly care, Ping An's high-end elderly care brand "Zhen Ageing" has been established in Shenzhen, Shanghai, Hangzhou, Foshan and other places.

2. How to understand Ping An's upgraded version of the 'Wells Fargo + United Health' model?

When Ping An released its 2023 annual report, the company's strategic wording was changed, from "integrated finance + medical health" to "comprehensive finance + medical pension".

Judging from the first quarterly report, Ping An has spent a large chapter on Ping An's creation of a new engine of value growth through medical care and elderly care. According to the management's previous introduction at the annual results meeting, the "integrated finance + medical pension" strategy is Ping An's core competitiveness in response to the current economic environment, and it is an upgraded version of the "Wells Fargo + United Health" model. Through technology empowerment and organizational coordination, synergies have been further demonstrated, driving Ping An's value to continue to improve.

Wells Fargo is one of the largest banks in the world, with a diversified range of financial services, including retail banking, commercial banking, investment banking, and wealth management. Wells Fargo's business model is actually quite similar to Ping An's integrated financial model, both of which focus on providing one-stop financial services and realizing the close linkage of business lines and product lines, so as to create cross-selling opportunities, continuously improve customer stickiness, and tap customer potential.

In the first quarterly report, Ping An mentioned that it is committed to building a warm financial service brand and providing one-stop comprehensive financial solutions that are "worry-free, time-saving, and money-saving". From the data perspective, Ping An's customer potential and synergies are also being released. As of the end of March 2024, Ping An had nearly 234 million individual customers, an increase of 1.0% from the beginning of the year, and the average number of customer contracts reached 2.94. Since the end of 2019, Ping An has seen a 17.9% increase in the number of customers and a 10.1% increase in the number of contracts per customer.

Similarly, United Health, as the world's largest health insurance company, once became the target of bidding and imitation by domestic insurance and medical-related companies. From the perspective of its business model, the core is to aggregate multiple chains such as payment, service, and medical care through the model of "insurance + medical and health services", run through the whole process from prevention, chronic disease management, treatment to payment, and recovery, fully integrate medical ecological resources, and empower insurance business collaboration. The medical and elderly care ecosystem built by Ping An is now constantly synergizing with its comprehensive financial business and continuing to open up value growth points.

In this regard, the quarterly report also specifically mentioned that Ping An's medical and elderly care ecosystem has not only created independent direct value, but also created huge indirect value, and empowered the main financial business through differentiated "products + services".

At the data level, as of the end of March 2024, more than 63% of Ping An's nearly 234 million individual customers have used the services provided by the medical and elderly care ecosystem at the same time, with an average of about 3.37 contracts and an average AUM of 57,600 yuan, which are 1.6 times and 3.6 times that of individual customers who do not use the services of the medical and elderly care ecosystem, respectively.

From the user's point of view, Ping An's layout actually fits the "ratchet effect".

For consumers, once the consumption habit is formed, it is often irreversible, that is, it is easy to adjust upwards and difficult to adjust downwards. For example, people who are now accustomed to scanning the code to pay, and then use cash to pay often feel inconvenient, accustomed to the one-stop service experience, and then change back to "running legs" for each business alone will also be more irritable.

Now, with the support of Ping An's complete "integrated finance + medical pension" ecosystem, the release of this effect will also bring about an exponential increase in user stickiness and user value potential.

3. Analysis of the future market opportunities of the insurance sector, waiting for the revaluation of Ping An's value

From the perspective of the capital market, the cost performance of the insurance industry is gradually emerging in the context of the continuous increase in the expectation of repair at both ends of the asset and liability market.

The first is the asset side.

In recent years, the regulator's determination to cultivate a good capital market ecology has become more and more prominent, especially the recent launch of the "New National Nine Measures", which has strengthened investors' confidence in the high-quality development of the capital market in the future. Referring to the trend of the A-share market after the release of the past two "National Nine Measures", many investors have increased their expectations for the follow-up market to come out of the slow bull.

In this context, the foundation for medium and long-term capital entry represented by insurance capital has been consolidated, and the improvement of the market environment and the warming atmosphere will also directly affect the return on investment of insurance companies, which is conducive to the asset recovery of insurance companies.

Then there is the liability side.

In the short term, despite the predetermined interest rate switching from 3.5% to 3%, the interest protection products that insurance companies can provide 3% income are still very attractive in the context of the bank deposit rate falling to 2.75% and the 10-year treasury bond interest rate falling to 2.24%.

In addition, for Ping An, although the guaranteed interest rate of its participating insurance is only 2.5%, the settlement interest rate of Ping An has been above 4% in the past 10 years, and its competitiveness is self-evident.

In the long run, the development space of the mainland's insurance industry is still very broad. Whether it is insurance density or insurance depth, the mainland not only has a considerable gap with developed countries, but has not even exceeded the world average, under the effect of the aging population trend, it is necessary to accelerate the increase in insurance penetration.

However, in this process, the differentiation of the insurance industry will also be staged simultaneously, and only insurance companies that truly play differentiated advantages can reap most of the market dividends under the effect of the "Matthew effect", and Ping An will inevitably be one of them through the two-wheel drive strategy of "integrated finance + medical and health ecosystem" to build a towering moat. At the same time, based on this model, the company also has the possibility of value revaluation.

In addition, the continuous growth in performance has also brought stable and predictable dividends to Ping An's investors, which is particularly rare in the current high volatility of the capital market.

Ping An's full-year dividend for 2023 was RMB2.43 per share, up 0.4% year-on-year, and the cash dividend ratio based on operating profit attributable to shareholders of the parent company was 37.3%, marking the 12th consecutive year of growth. At the same time, according to the previously released shareholder return planning announcement, if the annual distributable profit in the next three years is positive, the annual dividend amount will be 20%-50% of the audited net profit attributable to shareholders of the parent company in the previous year.

4. Conclusion

On the whole, the report card handed over by Ping An is remarkable, and the strategic layout signal revealed to the outside world is even clearer. Compared with the models of Wells Fargo and UnitedHealth, Ping An's resource control, strategic depth, and technology leadership will actually make it transcendent. At present, by continuing to promote life insurance reform and deepening the "integrated finance + healthcare" strategy, Ping An has laid a solid foundation for long-term development while continuously optimizing its business structure.

After the release of the first quarterly report, Ping An has also won the optimism of a number of institutions, including CICC and Soochow, most of which said in the research report that the company's performance exceeded expectations.

Among them, China Merchants Non-Bank Research Report pointed out that in the context of the booming supply and demand of savings insurance, Ping An's life insurance business will get off to a "good start" in 2024 as scheduled, and the steady development trend of property insurance business is improving. Looking forward to the full year, the high prosperity on the liability side is worry-free, and the marginal improvement on the asset side is expected to bring a significant recovery in profits and stock prices.

Soochow Securities said that in the first quarter, Ping An's performance and value growth slightly exceeded expectations, mainly due to the proper control of comprehensive debt costs under intensive cultivation. The company's new business value (NBV) continued to recover from a high base, and the operating profit attributable to the parent company (OPAT) of life insurance increased year-on-year. Maintain the company's "buy" rating.

CICC's research report reiterates the recommendation rating, and it expects that the base of the investment side will be reduced from 2Q24, and the pricing interest rate of the liability side may be further lowered in the near future, and Ping An's current profit and follow-up trend are expected to further improve. In addition, it is recommended to pay attention to the follow-up situation of the asset management sector, if the company's impairment pressure continues to improve in the subsequent reporting period, it is expected to further open up the company's valuation repair space.