Ambitious Expansion Will Strain Resources Amid Global Risks

Key Takeaways

• Focus on high-risk insurance markets might overestimate growth potential due to market unpredictability and volatility.
  
• Aggressive global expansion amidst geopolitical and climate risks may strain financial resources and compress net margins.
  
• Strategic global expansion, investment gains, and focus on innovation and digitalization position China Re Group for stable growth and competitive advantage.

Catalysts

Operates as a reinsurance company in the People's Republic of China and internationally.

• China Re's increased focus on innovative and high-risk lines of insurance, such as emerging market sectors and catastrophe insurance, may lead to overestimating future growth potential in revenues, given the inherent unpredictability and volatility of these markets.
  
• The company’s aggressive expansion and investment in global markets, amidst geopolitical tensions and climate risks, could strain financial resources, potentially compressing net margins as underwriting costs and risk management expenses rise.
  
• A high dependency on investment income, driven by currently favorable market conditions, may not be sustainable; fluctuations in global financial markets could negatively impact future earnings, particularly if interest rates rise or economic conditions worsen.
  
• The ambitious digital transformation and technological development plans, while aiming to innovate and optimize operations, could incur substantial upfront costs and implementation challenges, potentially impacting earnings negatively if returns on these investments are delayed or not realized.
  
• Potential instability in dividend policies, impacted by new accounting standards and fluctuating profits from equity markets, could lead to investor uncertainty and pressure on China Re’s earnings outlook and market valuation.

China Reinsurance (Group) Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming China Reinsurance (Group)'s revenue will grow by 15.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 9.2% today to 4.6% in 3 years time.
• Analysts expect earnings to reach CN¥7.4 billion (and earnings per share of CN¥0.21) by about February 2028, down from CN¥9.4 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 5.4x on those 2028 earnings, up from 3.7x today. This future PE is lower than the current PE for the HK Insurance industry at 7.7x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.5%, as per the Simply Wall St company report.

China Reinsurance (Group) Future Earnings Per Share Growth

Risks

• China Re Group has experienced significant growth, with consolidated insurance revenue increasing by 6.8% and underwriting profit seeing a 30% year-on-year growth, suggesting stability and potential for continued earnings improvement.
  
• The company maintained strong solvency ratios and received stable financial strength ratings from S&P and AM Best, indicating financial stability which may support sustained profit growth.
  
• China Re Group's strategic focus on global expansion and innovation, including strong overseas operations, may drive revenue growth and enhance its competitive position, potentially preserving profit margins.
  
• Robust investment strategies have yielded significant gains, with total investment income growing considerably, suggesting that investment income could continue contributing to net profitability.
  
• The management's focus on digitalization, catastrophe risk management, and climate change adaption positions the company to capitalize on emerging market opportunities, potentially leading to revenue growth and improved margins.

Valuation

• The analysts have a consensus price target of HK$0.825 for China Reinsurance (Group) based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$0.98, and the most bearish reporting a price target of just HK$0.69.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CN¥159.3 billion, earnings will come to CN¥7.4 billion, and it would be trading on a PE ratio of 5.4x, assuming you use a discount rate of 6.5%.
  
• Given the current share price of HK$0.88, the analyst price target of HK$0.83 is 6.6% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.