CPIC seeking Greater China M&A target, eyes equity assets

Cash-rich China Pacific Insurance Company (CPIC) is looking to acquire an insurance-related business at home or in Greater China as it seeks to inorganically grow. It also wants to deploy more of its assets into A-shares and H-shares, according to chief investment officer Benjamin Deng.

“We had looked into several potential deals,” Deng told AsianInvestor. “We would like to stay patient, without rushing, to capture the right target."

Benjamin Deng, CPIC

Deng said CPIC will prioritise targets based in Hong Kong, Macau and mainland China, before venturing further afield to offshore. He added that the insurer is seeking a business that is “in line with the group’s strategy, such as insurers or insurance-related companies”. 

CPIC, which had Rmb2.3 trillion ($360 billion) of assets under management (AUM) at the end of June 2020, already has funds to help support an acquisition. It raised $1.96 billion through Global Depository Receipts (GDRs) in during June following its listing on the Shanghai, Hong Kong and London stock exchanges. 

According to a company filing in June 2020, CPIC planned to use 70% or more of the net proceeds to gradually develop the group’s businesses overseas, in the form of equity investments, partnerships and alliances, and mergers and acquisitions in both developed and emerging markets. 

The remainder (30%) was to be used to develop an overseas investment platform for innovative businesses, such as healthcare, elderly care, and technology. The proceeds have not yet been allocated to any particular investment or partnership, Deng told AsianInvestor.

H- AND A-SHARE INVESTMENT

In addition to casting its eyes outwards at potential acquisition targets, CPIC is seeking to invest more in H-shares and A-shares.

Deng says the valuation of H-shares is relatively low compared with A-shares and US stocks. He noted that more Chinese companies are choosing Hong Kong as a listing destination, which will help the city’s initial public offering market expand, and Hong Kong’s overall equity market enjoy strong capital inflows.

“Mainland investors have been pouring money into H-shares under the stock connect scheme and also international investors, which provided potential growth in H-shares,” he said.

Despite his optimism about Hong Kong’s market, CPIC has not yet substantially allocatef new funds to H-shares due to a government limit on investments that can be made via the Qualified Domestic Institutional Investors (QDII) scheme. Deng said CPIC is paying close attention to whether Beijing will grant a new quota for insurers but declined to provide details on the insurer's equity allocations.

A release of further quotas appears likely, given Beijing's rising desire to promote more capital flows. TheState Administration of Foreign Exchange (SAFE) has awarded $125.72 billion in QDII quotas to 171 domestic institutions since the scheme was introduced in 2006 until January 13, according to its website. It did so most recently on January 6, granting a $9.02 billion QDII quota to 21 fund managers, banks and securities firms.

Source: CPIC

Deng is also looking for A-share investment possibilities, noting the market also has strong growth drivers, such as developments seen in the Shanghai Stock Exchange Science and Technology Innovation Board, also known as the Star board, and the Nasdaq-styled Shenzhen ChiNext board. 

On January 22, Hong Kong Exchanges and Clearing announced the inclusion of eligible A-shares listed on the Star board into the Shanghai-Hong Kong stock connect scheme, effective from February 1. The expansion allows global investors to access more mainland shares, including some of its fast-growing tech companies. 

Deng's interest in H- and A-shares matches a gradual shift by CPIC into greater equity investments and a slight reduction away from fixed income. Between 2016 and the first half of 2020, its equity allocation rose from 12.3% to 15.5%, while its fixed income allocation fell from 82.3% to 79.5%.

The move is notable, given that Insurers typically hold more fixed-income assets to meet asset-liability matching requirements. The annualised net investment yield of CPIC's portfolio stood at about 4.4% as of June 2020.

CONSUMPTION UNDER PRESSURE

One reason for Deng's interest in China-related shares is the country's relatively robust economy. China’s GDP grew 2.3% last year, making it the only major economy to have reported growth in 2020. The US and EU have not yet released GDP numbers for last year, but the World Bank has estimated that both regions are likely to have contracted.

Despite this, however, he warned that there could be pressure on the recovery in terms of local consumption. "The Covid-19 pandemic still limits economic activities, such as the travel bans across the country during the upcoming Spring festival; we still have to see whether consumption is picking up in summer." he explained.

Given these concerns, Deng said he is prioritising investments into transportation and logistics companies, such as airlines and rail companies, which are likely to bounce post-pandemic.

On fixed income, Deng still favours Chinese government bonds. However, he warned investors to be aware of potential credit defaults risk in China this year. “We may see [corporate] defaults increase in 2021, and investors should be very prudent when investing.”

CPIC will continuously focus on high-quality fixed income products, he added. The insurer told AsianInvestor in November 2020 that it was increasing its allocation to the asset class.

Deng noted that fixed-income assets provide long-duration return, adding that the group will adjust its equity asset allocation as well as private equity in the future when needed. He declined to elaborate.

On private equity assets, the insurer had previously mentioned that it preferred sectors such as healthcare, technology, pharmacy, and elderly care.

As of the end of the first half of 2020, CPIC's AUM had risen 12.9% from the end of 2019. In-house investment assets amounted to Rmb1.55 trillion, a growth of 9.4%, while the insurer had allocated Rmb753.4 billion to third-party fund managers, an increase of 20.8%.