Aging Japanese Demographics And Low Yields Will Strain Profitability

Key Takeaways

• Shrinking domestic market and unfavorable demographics are set to constrain long-term growth while exposing T&D Holdings to persistent economic risks.
  
• Ongoing low interest rates and legacy liabilities will worsen profitability, with rising competition further pressuring market share and revenue stability.
  
• Strong customer demand, improved investment income, and business diversification are positioning the company for sustained earnings growth and resilience despite short-term market volatility.

Catalysts

Through its subsidiaries, provides insurance products and services primarily in Japan.

• The continued demographic decline and aging population in Japan are expected to shrink the domestic customer base for insurance and savings products, leading to diminished demand for T&D Holdings' core offerings and restricting growth in sales and premium revenue over the long term.
  
• Persistently low or negative interest rates, particularly within Japan, will likely continue to depress investment returns on T&D Holdings' securities portfolio, pressuring spreads and net margins and further threatening medium
• to long-term profitability.
  
• Heavy reliance on the domestic Japanese market leaves T&D Holdings especially vulnerable to sluggish economic conditions and population headwinds, limiting potential for revenue diversification and heightening exposure to local downturns.
  
• Legacy product liabilities, including policies sold during prior years with persistently high guaranteed yields, are set to weigh on future earnings as low interest rates will make it more expensive for T&D to fulfill these obligations, reducing net income.
  
• Heightened competition from new fintech entrants and foreign insurers, enabled by digital disruption and increasing market openness, is poised to erode T&D Holdings' market share, aggravating topline revenue stagnation and threatening long-term customer acquisition.

T&D Holdings Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on T&D Holdings compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming T&D Holdings's revenue will grow by 8.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 5.2% today to 4.7% in 3 years time.
• The bearish analysts expect earnings to reach ¥146.7 billion (and earnings per share of ¥321.6) by about September 2028, up from ¥129.6 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 8.4x on those 2028 earnings, down from 15.3x today. This future PE is lower than the current PE for the JP Insurance industry at 13.2x.
• Analysts expect the number of shares outstanding to decline by 3.47% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.72%, as per the Simply Wall St company report.

T&D Holdings Future Earnings Per Share Growth

Risks

• The company is experiencing solid year-over-year growth in new policy sales, increased policies in force, and a declining lapse and surrender rate across its main life insurance subsidiaries, indicating strong and sustained customer demand that could boost both future revenues and premium income.
  
• Rising interest income from increased holdings of yen-denominated bonds, higher yields, and growing dividends from Japanese equities point to improving investment returns, supporting the potential for higher earnings and wider net margins in upcoming periods.
  
• T&D Holdings is actively reducing equity risk by lowering the proportion of strategic shareholdings and consolidating asset management functions, which is expected to enhance capital efficiency, improve returns, and strengthen group-wide investment talent, contributing positively to earnings growth over the long term.
  
• The group's expansion into asset management, overseas insurance markets, and insurtech adoption reflects a diversification of revenue streams and improved operational efficiency, positioning T&D Holdings to offset potential headwinds from its mature domestic market and support consolidated net income resilience.
  
• Despite short-term profit fluctuations from factors like foreign bond reductions and alternative asset performance, management maintained full year profit guidance, highlighted upside factors such as strong alternative asset and dividend returns, and noted that surrender risks from certain bancassurance and pandemic-related policies have already materialized, signaling steadier profitability ahead.

Valuation

• The assumed bearish price target for T&D Holdings is ¥2386.82, which represents two standard deviations below the consensus price target of ¥3940.0. This valuation is based on what can be assumed as the expectations of T&D Holdings's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ¥4770.0, and the most bearish reporting a price target of just ¥2100.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ¥3138.2 billion, earnings will come to ¥146.7 billion, and it would be trading on a PE ratio of 8.4x, assuming you use a discount rate of 4.7%.
• Given the current share price of ¥3988.0, the bearish analyst price target of ¥2386.82 is 67.1% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.