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China Taiping Insurance: A Closer Look for Investors

Under-covered stocks can offer hidden value. Because they don’t get the same coverage from analysts and the media as sector leaders do, the market sometimes undervalues them.

In terms of China’s insurance industry, China Taiping Insurance Holdings Company Limited (SEHK: 966) is definitely one of these under appreciated names. It isn’t as commonly written about as Ping An Insurance Group (SEHK: 2318) or China Life (SEHK: 2628). It isn’t as big as AIA Group (SEHK: 1299).

While China Taiping Insurance doesn’t get the same analyst coverage, the company benefits from the same secular trends as other Chinese insurance companies do. Many believe China’s low insurance penetration rate, rising incomes, and aging population will prove to be an enduring tailwind for decades to come.

With AI and big data, insurance companies have an opportunity to increase their operational and pricing efficiencies and thereby potentially increase their bottom lines as well.

Here, I’ll take closer look at China Taiping Insurance and why investors might want to consider it for their portfolios.

History and earnings

Founded in 1931, China Taiping Insurance underwrites direct life, property and casualty insurance. It also operates a reinsurance business. Like China Life, China Taiping is a state-owned enterprise (SOE).

In terms of operational performance over the last five years, its sales have risen nicely over time but its profits have fluctuated, mainly due to a sharp drop in earnings in 2016.

Earnings dropped in 2016 because the company realised less in gains from investments in equity securities due to the stock market bubble that burst in 2015. Due to three straight years of profit growth, however, China Taiping reported its highest earnings per share (EPS) in 2018 in five years.

China Taiping revenue and EPS – All data in HK$

2014 2015 2016 2017 2018
Revenue $84 billion $160.5 billion $167.4 billion $198 billion $213.6 billion
EPS $1.44 $1.78 $1.27 $1.63 $1.84

Source: https://asia.nikkei.com/Companies/China-Taiping-Insurance-Holdings-Co.-Ltd

For the first half of 2019, China Taiping reported even better results than it did for the first half of 2018. Basic EPS rose 30.2% year-on-year to HK$1.841 while the company’s embedded value per share attributable to owners rose 12.2%.

Stock price

Like its operational results, China Taiping’s stock price has fluctuated. After having initially risen with the overall Chinese market in the late 2014 and early 2015 bubble, shares fell along with the Chinese stock market in late 2015.

Due to optimism over the company’s future, shares rallied again to over HK$30 by the beginning of 2018 before declining considerably again to today.

While shares of China Taiping have fallen in 2018 and 2019 from their highs, the company’s fundamentals have steadily improved. Revenue and earnings have all increased.

At some point, one of two things will happen. Either China Taiping’s shares will go higher due to the improvement in fundamentals, or the company’s fundamentals will deteriorate. Given that there doesn’t seem to be a stock market bubble, a sharp decline in investment income like 2016 doesn’t look likely at the moment. China Taiping’s fundamentals look strong for its stock price.

Dividend history

Unlike its bigger insurance competitors, China Taiping isn’t a dividend stock. From 2008 to 2015, China Taiping didn’t pay any interim or final dividends.

From 2016 to 2018, the company paid a total normal dividend of only 10 HK cents per share. If it pays a normal dividend of 10 HK cents again this year, China Taiping’s dividend yield will be around 0.5%.

Valuation

The stock trades below its book value, with a price-to-book (PB) ratio of 0.86. China Taiping also trades at a discount to its five-year average PB of 1.45.

If the company has a good quarter or if the stock market rises considerably, China Taiping could trade closer to its book value, and offer investors substantial medium-term upside in addition to the long term tailwinds that all Chinese insurance companies benefit from.

It should be emphasised that China Taiping is an SOE. As an SOE, China Taiping might not always put its shareholders’ interests first, and its profitability and growth might suffer as a result.

Foolish conclusion

Although it doesn’t pay much in terms of dividends and is state-owned, China Taiping is an interesting stock. It trades below its book value, its earnings have increased for each of the last three years, and the company has medium-term upside if China’s economy improves.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Jay Yao doesn’t own shares in any companies mentioned.