HONG KONG: Ping An Insurance (Group) Co, which lost $3.3 billion on an investment in Fortis, is paying a "fair price" for its controlling stake in Shenzhen Development Bank Co, its president Louis Cheung said.

Ping An shares dropped 5.1 percent, its biggest decline in seven weeks, to close at HK$54.25 in Hong Kong yesterday as some investors questioned the value of the deal, announced at the weekend.

China's second-largest insurer agreed June 12 to pay $3.2 billion to boost its stake in Shenzhen Development to almost 30 percent from 4.68 percent, gaining 300 bank branches in 18 cities as it aims to earn two-thirds of revenue from non-insurance services.

"The market consensus is that it's expensive," said Danny Yan, a portfolio manager at Taifook Asset Management Ltd. "To me this premium is acceptable. Ping An has only minimum exposure to banking and it must pay a premium to get an exposure."

The acquisition is Ping An's biggest since the 1.81 billion euro ($2.5 billion) 2007 purchase of a stake in Belgium's Fortis, the insurer bailed out by three European governments after succumbing to the global financial crisis. The price values Shenzhen Development at 19.4 times forecast earnings per share this year, more than the 16 times average for China's 14 publicly traded banks, according to Citigroup Inc estimates and data compiled by Bloomberg.

"I believe we are paying a fair price in terms of the value that we can continue to extract," Cheung said in an interview on Bloomberg Television yesterday. "It's a very sound proposition."

The Shenzhen-based insurer agreed to buy as many as 585 million new shares from Shenzhen Development for 10.7 billion yuan ($1.6 billion), or 18.26 yuan apiece. Ping An will also buy 520.4 million shares from Newbridge Capital LLC, the Asian unit of TPG Inc, for about 11.45 billion yuan.

The purchase valued Shenzhen Development's shares at 2.6 times the bank's forecast book value in 2009, according to Citigroup Inc, which cut Ping An to "hold" from "buy" on the acquisition. The bank currently trades at 4.17 times its book value, the most expensive by that measure among Chinese lenders, according to Bloomberg data.

"Ping An believes the national banking license it gets is worth the premium it paid," said Olive Xia, a Shanghai-based analyst at Core Pacific-Yamaichi International. "Ping An can't extract much value out of the deal as it won't be able to integrate its own banking unit with Shenzhen Development Bank and achieve some real synergies that investors hope for."

The network of Shenzhen Development will allow Ping An to better serve its clients whose average age is below 40 and will mostly see their assets grow in the coming two decades, Cheung said June 14.

Ping An will hold five seats on Shenzhen Development's expanded board of 18 members.

"This is a sensible deal strategically and the stock is likely to factor in future incremental value for cross-selling," Morgan Stanley analysts led by Liu Minyan wrote in a note yesterday. They raised their stock price estimate for Ping An's Hong Kong-listed shares 8.5 percent to HK$56.29.

"The deal will enable us to gain access to a national bank with very good quality of business," Cheung said in the television interview.

Bloomberg News

(HK Edition 06/17/2009 page4)