Here’s My Favorite Chinese Stock to Buy in September (and It’s Not a BAT)

This 30-year-old insurer is one of the most innovative companies in the world.

| More on:
Where to Invest?

Image source: Getty Images

These days, there’s considerable fear around Chinese stocks thanks to the looming U.S.- China trade war. Nevertheless, some of the best-performing companies of late have been Chinese tech companies such as Meituan Dianping and Alibaba, which both posted terrific recent earnings reports. While the industrial and manufacturing companies in China are being hit by U.S. tariffs, the above examples show that at least some consumer-driven Chinese tech companies are doing just fine.

Yet my current favorite Chinese stock isn’t known as a technology company…though it really is.

Ping An’s towering presence in Shenzhen. Image source: Getty Images.

A tech company masquerading as an insurer

Ping An (OTC: PNGAY) is typically known as a 30-year-old insurance company with a small bank and financial services company on the side. It’s also valued as such in the market. And yet, Ping An could also be mentioned in the same breath as more well-known internet giants like Alibaba and Tencent.

That’s because Ping An was one of the first large companies in China to realize the power of technology, especially big data, artificial intelligence, and cloud computing. Ping An’s mature yet highly profitable insurance operations have afforded it the chance to devote 1% of its revenue to innovative technologies under a “finance+technology” and “finance+ecosystem” strategy. Over the past decade, Ping An has developed or purchased several new tech businesses that are not only valuable in their own right but have also improved the company’s core operations in insurance underwriting and lending.

These include:

  • Autohome (NYSE: ATHM), its own public company and the largest online auto-buying platform in China for dealers and used car sellers.
  • Good Doctor (officially known as Ping An Healthcare and Technology, an AI-enabled virtual consultant to doctors, which helps diagnose patients over the internet.
  • HealthKonnect, an information software platform for insurers and medical service providers that matches patient data and insurance records.
  • OneConnect, a financial cloud technology platform, which Ping An sells to other financial and insurance companies. According to Fortune magazine, financial firms prefer its AI-driven models for risk management, which are being used by over 200 banks. All in all, OneConnect counts over 3,700 financial institutions as clients.
  • Lufax, China’s largest peer-to-peer lending platform and also a financial asset marketplace; however, it appears Lufax will now be adapting to a more institutional platform model, as the peer-to-peer element has been shuttered due to heightened government regulations.

Network effects

All of these tech innovations are not only valuable in their own right, collectively valued at around $70 billion, but they also generate more precise and current data on consumer buying patterns, which feeds back into the company’s AI models, thus improving Ping An’s traditional businesses in a virtuous circle.

Additionally, having built out businesses across financial products, healthcare, automobiles, real estate, and smart cities, Ping An can use data to cross-sell customers. For instance, it can offer auto insurance to a customer of Autohome, or market its life insurance products to customers of Lufax or Ping An’s internal bank. In the first half of 2018, the average contracts per customer increased over last year to 2.58.

Tech has also enabled features that increase customer satisfaction. The company’s “Superfast Onsite Investigation” app allows customers to submit a claim with a few pictures over a smartphone, after which Ping An’s AI-powered computer can settle the claim in a matter of minutes, all without having to send an inspector. Features like this improve customer retention while saving Ping An a huge amount in overhead costs.

Putting up the numbers

The extreme efficiency has led to some downright impressive financial metrics. Ping An just reported its first-half results, in which it grew operating income a whopping 23.8%, and operating return on equity expanded to 12.3% — however, keep in mind this is an un-annualized figure. If you compound the operating ROE to get an annualized figure, it shoots up above 26%!

And if you think the high-flying tech companies under Ping An’s umbrella are doing this heavy lifting, you’re wrong. The core life and health insurance businesses, which make up 60% of operating profits, grew profits 36.3%, with a half-year (un-annualized) operating ROE of 21.9% (annualizes to 48.6%).

A company growing over 20% with 20% returns on equity would normally be valued like a high-flying internet platform, but Ping An actually trades at a rather pedestrian 13.5 P/E ratio, a multiple normally reserved for mature banks and insurance companies.

The path ahead

Ping An’s technology ecosystems only accounted for about 4% of its operating profits in the first half of 2019, but management has said it hopes to one day garner up to half of its profits from its tech businesses.

That would pretty much mean management hopes to grow an entire “new” Ping An inside the “existing” Ping An over the next decade, and it’s putting its money where its mouth is; management has pledged to at least double its tech investments over the next decade relative to the last one.

With the Chinese consumer holding up amid uncertainty, Ping An’s excellent recent results, deepening moat, and bargain valuation all add up to why it’s my favorite Chinese stock today.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Billy Duberstein owns shares of Alibaba Group Holding Ltd. and PING AN INS CO OF CHINA. His clients may own shares of the companies mentioned. The Motley Fool owns shares of and recommends Tencent Holdings. The Motley Fool has a disclosure policy.

More on Tech Stocks

tsx today
Tech Stocks

TSX Today: What to Watch for in Stocks on Thursday, September 21

Overnight declines in commodity prices and fears of elevated interest rates for longer could drive TSX stocks downward at the…

Read more »

a person watches a downward arrow crash through the floor
Tech Stocks

What to Make Out of Nuvei Stock’s 45% Dip in August 2023

Nuvei stock fell 45% after its second-quarter earnings. Are investors overreacting, or is it a sign of long-term weakness? Let’s…

Read more »

Happy shoppers look at a cellphone.
Tech Stocks

Millennial Investors: You and Shopify Stock Are Made for Each Other

Shopify (TSX:SHOP) stock won't stay depressed for too long, especially as it introduces new AI innovations for merchants.

Read more »

Shopping and e-commerce
Tech Stocks

Shopify Stock Is a Screaming Buy on the Dip

These key fundamental factors make SHOP stock a screaming buy after its recent declines.

Read more »

value for money
Tech Stocks

2 Cheaper Growth Stocks I’d Definitely Buy Over Shopify Right Now

Shopify is an overvalued tech stock that trades at a hefty premium. Here are two cheaper growth stocks for investors…

Read more »

Businessman holding AI cloud
Tech Stocks

Tech Gold Rush: Investing in Artificial Intelligence Stocks

I'm not a fan of the current AI hype, but here's how I would invest if I had to.

Read more »

A worker uses a double monitor computer screen in an office.
Tech Stocks

Better Buy: Constellation Software Stock or Open Text?

Constellation Software gives better peace of mind, as Open Text trades at a low valuation for a reason.

Read more »

tsx today
Tech Stocks

TSX Today: Why Canadian Stocks Could Fall on Wednesday, September 20

Weakening commodity prices and Canada’s hot consumer inflation data could keep TSX stocks under pressure at the open today, as…

Read more »