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Why Investors Shouldn’t Compare Ping An Insurance to AIA Group

Ping An Insurance Group Co of China Ltd (SEHK: 2318) and AIA Group Ltd (SEHK: 1299) have long been considered the two hottest Hong Kong insurance stocks in Asia.

Many (probably too many in my opinion) comparisons have been made between the two. But if you are a fundamental investor, you actually SHOULDN’T compare them!

For example, would you ever compare Goldman Sachs to Agricultural Bank of China (SEHK: 1288)? That might be a bit of an exaggeration, but you get my point.

It simply doesn’t tell you much if, say, you compare Uber to WeWork even though both of them are trying get an increasing piece of the overall sharing economy.

That’s because their business models are influenced by totally different risk factors. This makes any comparison meaningless unless we are merely comparing their valuations.

So, let’s take a look at the business models of Ping An and AIA then.

Ping An Insurance

Ping An is an insurance group in China. The keyword here is “group”, which means it is a holding company that owns and holds different businesses under the group holding structure.

Based on its disclosures, Ping An owns and holds businesses such as property & casualty (P&C) insurance, life & health (L&H) insurance, banking, asset management, tech, and others.

Its insurance businesses are by far the largest, contributing around 80% of its total revenue. As such, people generally think of Ping An as an insurance company. That’s a generalisation which isn’t exactly wrong (albeit not right either).

Obviously, there are many more risk factors, in addition to those just confined to the insurance sector, that can impact Ping An’s fundamentals.

But even within insurance, risk factors of P&C insurance (such as new car sales, drivers’ behaviour, and culture, etc.) are entirely different from the risk factors of L&H insurance (mainly mortality and morbidity rates).

AIA Group

AIA, on the other hand, is a “pure-play” life insurance company in Asia. It is only engaged in the life insurance business but in multiple countries across Asia.

Based on its disclosures, it only had around 15% of its revenue in 2019 from mainland China. The rest came from Hong Kong and other Southeast Asian countries. Now, you can probably see why my Goldman Sachs/Agricultural Bank of China example isn’t that outlandish.

Although both are in the banking business, one derives most of its revenue from investment banking and trading in various countries other than China, while the other is more of a commercial bank that does the traditional corporate lending in China.

By comparing the two, it’s simply just not an apples-to-apples comparison, and so any meaningful analysis will be futile.

The only feasible comparison to be had is to compare AIA China with Ping An L&H. But that doesn’t mean much either.  Would you buy or sell a stock based on just 15% of its overall business?

Different business models lead to different narratives

As such, from the standpoint of the fundamentals, we should look at Ping An and AIA separately.

If you are bullish on the overall Chinese insurance sector (both P&C and L&H), you’re better off betting on Ping An. It has leading and all-round insurance platform in China, coupled with its synergistic tech investments.

However, if you are bullish on the life insurance sector in Asia overall, then AIA is the stock you should go with. No stock can give you better exposure to the countries that are now seen as the growth engine of the global life insurance sector, namely China and Southeast Asia.

China’s insurance market potential is clear. Perhaps Southeast Asia is lesso. But the region has robust population and economic, while the majority of people are still young (the median age of many Southeast Asian countries is still around 30 years old).

Therefore, it is only a matter of time before these people will age and drive up the demand for life insurance products.

Foolish conclusion

The insurance sector is a long-term play that all investors should seriously consider. It doesn’t sound half as sexy as many tech companies because of its uniqueness.

Yet it isn’t as difficult as one might think, either. Once you get hold of its fundamental factors, it tends to work like charm. That’s because it’s long term, stable, and always in demand.

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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 Alec Tseung doesn't own shares in any companies mentioned.