Ping An Insurance - No short-term capital needs for SDB acquisition

Ping An will finance the acquisition of SDB using internal capital. As the Group has about Rmb30b excess capital, we do not see a need for them to raise capital in the short term. Maintain BUY.

1. The share subscription will be financed by Ping An Life using non-PAR policyholder funds. The 19.79% stake in Shenzhen Development Bank (SDB) held by Ping An Life will be classified as an AFS investment.

2. Following the acquisition of the 520m shares owned by Newbridge Asia by Ping An Group, Ping An Life will then sell a 3.94% stake in SDB on the open market so that Ping An’s total stake in SDB remains below 30%. At this stage, Ping An will treat SDB as an associated company using the equity-holding method.

Capital not a concern for Ping An in the short term. The initial share subscription will cost Ping An Life some Rmb10b. We estimate Ping An Life to have Rmb10b-20b excess capital, therefore, there will be short-term pressure for a capital injection from the group level. However, in the long term, should Ping An aspire for a complete takeover of SDB, there could be a need for additional capital even on the group level as we estimate Ping An needs Rmb30b of excess capital on the group level if it is to maintain a solvency margin of 200%.

Will Ping An shares be subject to share-sale overhang if Newbridge opts for share swap? As Newbridge is a private equity fund focused on generating investment returns, it is almost certain that it will look to sell its stake in Ping An following the expiry of the lockup period in 30-48 months time. However, given that the possible amount of H-shares that can be obtained by Newbridge is only 3.9% of Ping An’s enlarged capital, both dilution and sharesale overhang will be minimal.

The implied premium for Newbridge’s SDB stake may create some investor concern. We calculate the implied price as almost Rmb30 per SDB share based on a share price of HK$57.15 for Ping An. This is almost a 40% premium to SDB’s share price of Rmb22.00.

Given the relatively small financial impact of the deal, we continue to maintain our earnings estimates for 2009 and 2010. However, we now roll forward our target price to 2010, and based on 2.6x 2010 P/EV and 25x NBV, we arrive at a new target price of HK$68.80. We continue to maintain our BUY recommendation.

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