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BUY OR SELL-Ping An: recovery in time after bank buy bruising

Reuters - Friday, June 19

* Shenzhen Bank stake may be overpriced

* Ping An faces short-term headwinds in combination

* To forge financial conglomerate in long-run

By Michael Wei and Kirby Chien

BEIJING, June 18 - A recent 14 percent drop in the Hong Kong-listed shares of Ping An Insurance <2318.HK> has underscored concerns over the short term risks associated with its purchase of a stake in Shenzhen Development Bank <000001.SZ>.

But others reckon the deal will benefit Ping An <601318.SS>, the world's second-largest insurer by market value, in the longer run.

INSURANCE PREMIUM

Shenzhen-based Ping An has said it will buy out Newbridge Capital's stake in SDB for around $1.7 billion, and pay almost the same again for SDB shares in a private placement, leaving it with a stake of as much as 30 percent. [ID:nLC811874]

Some analysts reckon Ping An is paying too much, but note that SDB, one of the few nationwide banks able to take on a major outside investor, has the negotiating power to demand a premium.

The 3.3 times price-to-book ratio paid by Ping An is believed to be higher than the market price, said JPMorgan analyst Michael Chan in Hong Kong. "If you buy just 30 percent, not the whole bank, I believe you have to pay a premium," he said.

JPMorgan cut its Ping An target price to HK$50.40 from HK$59.05 after the deal, but kept its "neutral" rating.

Chan also queried whether taking just a 30 percent stake would deliver the synergy benefits touted by Ping An. Past buys have shaken investor confidence in Ping An, which took a $3.3 billion hit last year on a stake in Dutch-Belgian Fortis <FOR.AS> <FOR.BR>.

PING AN CLOUT NOT IN DOUBT

Ping An moved into banking in 2007, transforming the Shenzhen Commercial Bank into Ping An Bank but, as a regional bank, Ping An Bank only operates in seven cities across China.

SDB's well-established network could boost Ping An Bank, which aspires to being an all-in-one financial services group with balanced growth in insurance, banking and asset management.

"The deal will help Ping An complete its layout in the three strategic segments," said CITIC Securities analyst Huang Huamin, who said he is "modestly bullish" on the deal.

"From a long-term perspective, the deal benefits Ping An as it will help it form a financial conglomerate by offering cross-selling opportunities," said Xiao Chaohu, an analyst with Everbright Securities in Shanghai.

Founded in 1987, mid-sized Shenzhen Development Bank become the first listed commercial bank in China in 1988. It now has roughly 300 branches in 18 cities in China. (Additional reporting by Samuel Shen in SHANGHAI; Editing by Doug Young and Ian Geoghegan)

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