SFL Corp.: Excellent Performance From This High-Yielding Ship Company – SFL Corporation Ltd. (NYSE:SFL)


On Tuesday, February 18, 2020, ship leasing firm SFL Corporation (SFL) announced its fourth quarter 2019 earnings results. At first glance, these results appeared to be very disappointing as the company failed to meet the expectations of its analysts on either top-line revenues or bottom-line earnings. A closer look at the actual earnings report, though, does tell something of a different story as there were certainly a few things that investors should appreciate here such as the company adding to its backlog in spite of some of the fears that have been plaguing the industry. Admittedly, though, SFL Corporation has always been somewhat insulated from near-term industry problems. This should also help the company weather the problems that the coronavirus has caused for the industry so far this year. Overall then, investors should be reasonably satisfied with these results and have a lot of reasons to continue to be optimistic in the company.

As my long-time readers are no doubt well aware, it is my usual practice to share the highlights from a company’s earnings report before delving into an analysis of its results. This is because these highlights provide a background for the remainder of the article as well as serve as a framework for the resultant analysis. Therefore, here are the highlights from SFL Corporation’s fourth quarter 2019 earnings results:

  • SFL Corporation brought in total operating revenues of $119.877 million in the fourth quarter. This represents a 7.49% increase over the $111.527 million that the company brought in during the third quarter.
  • The company reported an operating income of $20.216 million in the most recent quarter. This compares favorably to the $20.181 million that the company reported in the previous quarter.
  • SFL Corporation added $224 million to its charter backlog due to receiving new vessels during the quarter.
  • The company sold $100 million worth of stock that it owned of oil tanker operator Frontline Ltd. (FRO).
  • SFL Corporation reported a net income of $23.642 million in the fourth quarter of 2019. This represents a substantial 518.58% increase over the $3.822 million that the company reported in the third quarter of 2019.

It seems essentially certain that the first thing anyone reviewing these highlights is likely to notice is that every measure of financial performance showed an improvement over the third quarter. With that said, though, at least in terms of revenues, the improvement was relatively small. This was not really unexpected, though, as the primary reason for this is that the company took delivery of two ships that were immediately chartered out to Hunter Group ASA under a five-year contract. I stated that this would be happening in my last report on the company. This does show that at least thus far, shipping companies continue to take delivery of vessels and honor their contracts in spite of the trade tensions between the United States and China. The coronavirus, however, was a non-factor during the fourth quarter, but it might have an impact later this year.

Unfortunately, though, some of the continued difficulties in the offshore drilling industry that we have been discussing in past articles had a negative impact on the company during the quarter. We see this in the fact that the company took a non-cash impairment charge related to five offshore support vessels. This is something that is required by accounting rules whenever a company determines that an asset is actually worth less than what it says on the balance sheet. As the value of a vessel is largely determined by its future earning potential, deterioration of economic fundamentals or dayrates in a sector can cause the value of a ship to decline. In this case, the value of the five offshore support ships went down by $34.1 million compared to the prior-year quarter so the company took a writedown of this size. It is important to note, though, that this was a non-cash charge and the company did not actually see $34.1 million leave its bank account so we can safely ignore the charge. If we do this, then the company’s increase in net income would have been even larger than what we saw.

One thing that is characteristic of SFL and some other companies that either are or once were associated with shipping tycoon John Fredrikssen is that they own stock in other companies. This benefited the company during the quarter as the strength in the market pushed up the value of these securities by $27.9 million. As was the case with the writedown on its ships, accounting rules require that the company record a mark-to-market gain on its income statement. While this does not necessarily represent new cash coming into the firm, it still has the effect of offsetting some of the impairment charge, which is one of the reasons why the company’s net income was not as low as it could have been considering the size of the writedown. With that said though, the company did sell some of these shares during the quarter and realized $13.7 million from this sale. This $13.7 million does represent money coming into the company’s accounts, unlike what the impairment charge represented.

One of the most important things for a company is to be able to maintain its income. This is of course also true for SFL Corporation. The company is fortunately decently well-positioned to accomplish exactly this. We can see this in the company’s charter backlog:

Source: SFL Corporation

The company’s contracted backlog is the total amount of revenue that it will bring in from its fleet going forward based on the contracts that it already has in place with its customers. As this revenue is backed by contracts, it is as close as we can get to guaranteed money in this industry. As we can see above, SFL currently has approximately $3.6 billion in revenue backlog, which represents thirty quarters at the fourth-quarter rate. Thus, the company can operate for roughly this long even if it fails to secure any more business for a while. This is the kind of thing that we like to see from a company that we are invested in.

Naturally though, this backlog will still run out eventually. That is why it was nice to see that SFL added to it during the quarter. I noted this in the highlights. As I stated there, SFL took delivery of two ships during the period and added $224 million to this figure. That is because these ships were already chartered to Hunter Group before it took delivery of the vessels. This is the core of the company’s business model. Basically, it purchases ships and then leases them to shipping companies under long-term contracts. As such, it operates almost like a bank to the shipping industry as opposed to an actual operator like Frontline or Golden Ocean Group (GOGL). This model gives the company an ability to weather problems in the industry that is far superior to other shipping firms. When we consider the problems that the Chinese coronavirus breakout has been causing for other companies, this will likely be appealing.

The company has certainly enjoyed success at executing this business model. As we can see here, the average remaining charter length on the company’s 88-ship fleet well surpasses five years:

Source: SFL Corporation

This positions it well to continue to deliver steady results for a while, despite the struggles in the industry. Thus, it can continue to be a source of income for us.

As is always the case though, we want to ensure that the company can actually afford the dividend that it pays out. This is because we do not want to suffer a dividend cut and the stock price decline that typically accompanies it. The best way to do this is by looking at a company’s free cash flow, which is the money left over from a company’s basic operations after it pays all of its bills and makes any necessary capital expenditures. It is usually calculated by subtracting capital expenditures from operating cash flow. In the fourth quarter, SFL Corporation had an operating cash flow of $58.396 million and had total capital expenditures of $10.287 million, which gives the company a free cash flow of $48.109 million. The company’s dividend only costs the firm $37.669 million based on the current rate and share count though. Thus, SFL Corporation appears to be generating more than enough cash to afford its dividend at present, although it is paying out a sizable portion of its money, which is frequently the case with this company.

In conclusion, this was a reasonably solid quarter for SFL Corporation and shows us the ability of the company to weather any problems in the shipping industry. These problems have unfortunately manifested themselves in a major way with the outbreak of the coronavirus in China that has caused the country to close off its ports and many of its businesses. This will only be a short-term thing, but it is still uncertain when it will end. In the meantime, SFL appears to be a way for investors in the sector to ride out these problems.

At Energy Profits in Dividends, we seek to generate a 7%+ income yield by investing in a portfolio of energy stocks while minimizing our risk of principal loss. By subscribing, you will get access to our best ideas earlier than they are released to the general public (and many of them are not released at all) as well as far more in-depth research than we make available to everybody. We are currently offering a two-week free trial for the service, so check us out!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





Original source link

Ping An Insurance (Group) Company of China, Ltd. (PNGAY) CEO Lu Min on Q4 2019 Results – Earnings Call Transcript


Ping An Insurance (Group) Company of China, Ltd. (OTCPK:PNGAY) Q4 2019 Earnings Conference Call February 21, 2020 7:00 PM ET

Company Participants

Sheng Ruisheng – Joint Company Secretary

Jason Yao – EVP & CFO

Lu Min – Chairman & CEO, Autohome, Inc.

Xie Yonglin – Co-CEO & President

Jessica Tan – Co-CEO, EVP & COO

Ma Mingzhe – Founder, Chairman & CEO

Conference Call Participants

Charles Zhou – Crédit Suisse

Kailesh Mistry – HSBC

Sheng Ruisheng

Okay. We will get started. Good morning. Dear investors, welcome to the Ping An 2019 Annual Results Announcement Meeting. I’m the moderator, board secretary, my name is Sheng Ruisheng. We know we are affected by the disease, and we will have this meeting in video conferencing and telepresence and conference calls. And we have Mr. Ma, the Chairman and CEO of the company; President and co-CEO, Xie Yonglin; and Jessica Tan, co-CEO; and Jason Yao, CFO; and Chief Investment Officer, Mr. Timothy Chan; and also the new — Mr. Lu Min, Chief Insurance Business Officer. And we will start with Mr. Jason Yao to introduce the performance in 2019. And then Mr. Lu, Mr. Xie, and Ms. Tan will go through the different business units, and we will answer the questions afterwards. And I’ll invite Jason Yao.

Jason Yao

Ladies and gentlemen, good morning. Welcome to the Ping An 2019 Annual Results Announcement Meeting. Thank you for your support and trust in Ping An. In 2019, we know it’s the starting year for the second 30th year of Ping An. And the global economy has been slowing down, and China has also transformed from rapid growth to solid growth. And Ping An has the new strategy of finance and technology and finance and ecosystems. So we want to take advantage of those strengths, and we also have enjoyed the solid growth in revenues, profits and many other things and laid a solid foundation for the next step for the group.

And in Page 5, we have seen this before, I believe. That’s our strategy. Next one,is the 2004, since our IPO, this is our strong and consistent track record. Earnings per share, CAGR has been growing by more than 25%. And total ROE average growth has been growing by 17%. Especially for the past 5 years, it’s more than 20%.

Now let’s look at 2019 performance. In 2019, we have been dealing with the complicated environment. So we have enjoyed solid growth. Operating profit growing by 18%, and net profit growing by 39%, dividend per share growing by 19% and operating ROE is close to 22%. On this page, let’s see the customer contribution. And retail accounted for more than 92% of the operating profit. And for retail and corporate and other operating profits, including the offsetting, the corporate growing solidly, and other operating profit has been declining a little bit.

Now let’s look at operating profit in different units. The group operating profit is the most important because it’s related to the dividend payout. In 2019, we have been growing by 18% because we have strong growth in life and health, property and casualty. And technology has been declining in terms of the operating profit because we are investing heavily into technologies. Group ROE is almost 22% in 2019. Under IFRS 9, it’s more than 24%. For life and health, the operating ROE is more than 40%.

Now let’s look at the adjustment process from net profit to operating profit because we have excluded the volatile items which can reflect the performance and also the trend going into the future. In 2019, the net profit is CNY164 billion, operating profit is CNY147 billion. There are three differences. First is we have CNY19.4 billion increase in the investment revenue because of higher — five assumptions. And the other one is deducted for the impact of the discount rate. And in last May, we have commissioned new policies and tax policies. That’s why in 2019, the income tax has been reduced. But in 2019, we believe this is a one-off, in fact. It’s CNY14.5 billion. It’s excluded from the operating revenue. And in 2019, the life and health has been growing by 25%. Because the residual margin has been growing, the release is 74%, accounting — inside the operating profit. And we also have seen some discount rate of CNY910 billion, so that’s contributing to the residual margin.

From this slide, you see, in 2019, the residual margin release 73% are from long-term protection life products. And the release in the opening has been declining to 9.5% because of the new business growing — has been slowing down, and the in-force percentage is growing.

Now let’s look at the dividend and capital situation. For the past 5 years, the dividend is growing. CAGR has been more than 40%. And in 2019, we have a very solid capital adequacy and dividend per share is growing by 19%, is RMB 0.0205, but based on the operating profit, the dividend payout ratio is 28.1%. And in 2019, the general meeting has approved the CNY5 billion to CNY10 billion buyback scheme, and the CNY5 billion has been realized. The rest of the quota will still be effected by the April 28 this year. This is the dividend. And we have used the cash flow to buy back share. And we have also realized the convertible bond and the free cash flow is still very healthy. The adequacy and solvency level of the group, you can look at the group, including subsidiaries, the adequacy is very high and is still growing.

Next slide. So every quarter, we have stress test to make sure we can deal with any challenges with healthy solvency. So in 2 situation. One is the declining of the 30% in fair value of equities asset. The other one is declining of 50 basis points in interest rate. You can still see the solvency level is more than 220%.

Next one is the investment portfolio of insurance funds. In general, the portfolio has been growing. By the end of 2019, it’s CNY3.2 trillion. Nonstandard debt has been declining from 15.8% to 13.4%. And we also have used the IFRS 9 accounting rules. You can see 18.3% of the investment are actually under the category of the fair value of the equity product that’s affecting the volatility in the P&L. That is why we focus very much on operating profit because it’s based on the 5% of assumption of the yield for insurance product found in the investment portfolio.

So in 2019, the ROE is 5.2%, the total return is 6.9%. And in the corporate bond investment and it’s declining from 5.4% and 99% of the rating are AA in Page 26. And for the nonstandard debt asset in Page 27, we are trying to stay away from the high risky industries and make sure we are trying to improve the yield of the total portfolio. The maturity rate of the remaining portfolio is 3.68 years, and we haven’t seen any of the NPLs.

Now sustainability and honors in Page 29. We use the international ESG standard to make sure we are sustainable in our development. We have been focusing on ESG at the group trying to use that rules into our strategy. In 2019, we are the first Chinese company to be affiliated to the principles for responsible investment of UN. That’s the first China company. And we’re also the first DJSI selected insurance company in China. We are also included in Hang Seng CEI ESG Index. Page 30, that’s the honors and the awards. The brand value has been rising, ranking 29th of Fortune 500 and number seven in Forbes Global 2000. These are all the financial performances.

Now let’s invite Lu Min, Chief Insurance Business Officer, to introduce about the retail integrated finance and insurance business.

Sheng Ruisheng

Thank you, Mr. Yao.

Lu Min

Good morning. My name is Lu Min. To just introduce the 2019 retail integrated finance and insurance business performance. To start with the retail integrated finance. Page 33. In 2019, retail operating profit growing by 26% because of the retail customer — operating profit per customer has been growing. And retail customer growing by 11%. Operating profit per customer growing by 13%. Basically, contracts per customer is 2.64. And we had new customers of 36 million, including 14.9 million converted from the five ecosystems of the group. So we provide online service to them and try to sell financial product to them, so we can convert them from users to customers.

In Page 34, that is the increased customers and cross-selling performance. Currently, we have more than 200 million individual customers and more than 500 million Internet users. And 340 million of them haven’t bought any product from Ping An. So that is a huge potential for us to convert them. And we will continue to convert those users. And cross-selling has been enjoying great resource and results. In 2019, the cross-sell penetration ratio has been increasing from 19% to 36%. That is a very important KPI for cross-selling. We know the total customer base has been growing by more than 83%. And at the beginning, they are only buying 1 contract from 1 subsidiary. So this is a great achievement despite all the challenges. Now moving on to the insurance business, Page 36. Life and health in the — with the reform happening in the background, the embedded value growing by 24% CAGR. It’s a very strong growth for the past 5 years.

Next page. In 2019, life and health operating ROEV was 25%. We know our new business is slowing down, but the scale is still big compared to the in-force product and with very high ROEV, we also use the conservative discount of 11%. The embedded value expected return is rather high.

In Page 38. Now please go to Page 38, and it is a new BV by distribution channel. Our life and health insurance NBV rose 5.1% in 2019, aided by the steady growth in agent channel and a strong performance in our bancassurance. Our high protection business accounted for 83% of the agent channel NBV, largely stable on a yearly basis.

Next Page 39. And we are proactively following the regulatory requirement on protection-oriented transformation and accelerated the playbook of the high-value protection business, which was the reason of slight decline of FYP by 3%. Our NBV margin is now 47.3%, up 3.6 pps Y-o-Y, driving up overall NBV growth.

Please go to Page 40. And now let’s take a look at the agent channel, the biggest NBV contributor that accounted for nearly 90% of last year. The agent channel delivered 5.9% of the NBV growth last year, driven by 16% rise in NBV per agent, which was offset by a 9% decline in average number of agents.

Please go to Page 41. And this is about agent productibility. We have proactively conducted business reform to promote the agent productibility growth. Agent income average RMB 6,309 in 2019, slightly improved on a yearly basis. Average new insurance policies per agent per month were 1.38. Agent income from life products remain stable.

Please go to Page 42. That is how technology can empower the life insurance industry. In terms of the data-driven marketing, AI has been used for the interview, and it is 100% interview were AI aided. Ping An Life conducted over 6 million AI-based interviews, which can help us to save 680,000 hours. And we can also use AI to build the agent profiling to provide them the tailor-made training and our smart engine, which has been developed in-house and the AskBob has been used as a smart personal assistant to our agent to help our agents improve our sales conversion ratio, which has already been used to serve 340 million people. Where in terms of the data-driven customer service and — our smart customer service has already reached 50 million times last year and it can shorten their service time to less than 1 minute. And currently, we have already served 18 million policyholders and 96% of the clients have the fast service. At the same time, in terms of the data-driven operations, we also support the anticipated trend, make timely decisions and taking actions ahead of the others.

Please go to Page 43, let’s take a look at the P&C business. In 2019, P&C business is performing very well. Its net profit rose by 86%. The operating ROE was 24.6%, and the three year average ROE reached 20.4%.

And now I would like to draw your attention to Page 44 on the P&C insurance premium income. In 2019, P&C insurance premium income rose 9.5% Y-o-Y, evenly distribution on all channels. The non-auto insurance premium income was up by 17%, and which is improving its ratio and contribution in the total premium. And now please go to Page 45. That is the quality of the P&C product. And in 2019, you can see that our service and combined ratio was up by 0.4%, still better than the industrial average.

And now please go to Page 46. And we are still building technology to empower the P&C insurance business. In terms of the auto insurance, we use AI image to help to provide over 90 million registered users, about 49 million of whom are auto insurance customers of the Ping An Property. And at the same time, it only takes 3 minutes to take care of the — and without the — no back-end menu operation needed. At the same time, you can see that our monthly active user in December is already more than 25 million. While in terms of the P&C insurance, we provide the corporate client with the Know Your Risk service.

And next, I would like to welcome our Co-CEO Xie Yonglin to work you through the corporate financial services and the banking business.

Xie Yonglin

Thanks. Thanks to Mr. Lu. And now please allow me to take a look — work you through the corporate integrated finance. Page 49, we show you the corporate business growth and its performance in 2019. From this page, you will see that we are working on customer building and also works on the technological support in order to provide our service, in terms of the customer service, and we started to build the customer into the big clients and SMEs.

While in terms of the collaboration, we also did some organizational reform. And we also have to — also rebuild our mechanism and organizational structure to support our customer. On one side, we worked on the smart business, where in terms of the data, we also help to improve the information collection from our corporate clients and in order to build more database for our corporate clients to build the customer label and tag to make sure that we can digitalize the whole process of matching the corresponding surveys to our clients.

I also would like to specifically emphasize on our corporate financial service committee. We have 20 members of this committee. According to the nature of their business, we have already built them into the different principles on 4 models, including the simple business, sophisticated investment and financing business, transaction business and embedded business. We hope that by leveraging the vast resources and — we can collaborate over the resources and the synergy. And even from one way to the auto, we can work with each other to form the synergy. After almost the 6 months of operation, the efficiency has been greatly improved.

At the same time, you can see the corporate business is growing sharply, and jointly speaking, that corporate integrated finance premium size was up by 24%, 116% for the corporate channel and 140% for the size of the integrated financing. And these are all the result from the explosive business growth model brought about by the corporate finance service committee.

Where at the same time, on Page 51, you can see with the support from the group, we are consolidating our business of locating the premier investment and assets for the corporate business and the retail business. And at the same time, for the whole year, also underlying asset invested by the insurance fund sourced from the corporate business rose by 101.3%.

Let’s now go to the Page 53. And you can see, we see a growing profitability and 13.6% Y-o-Y increase in the net profit. And the noninterest rate income. And we see that our earnings is on the proper trend. At the same time, it can help us to further consolidate the retail business. And currently, its net profit is already 69%. And it’s also been greatly improved. At the same time, I would like to emphasize the retail business was growing fast, where at the same time, our corporate business and interbanking business are all gaining great momentum for development. That’s why we call it a structural optimization. And our business structure is now more evenly distributed.

Now please go to Page 54 and 55. You can see that for the past 3 years and now we’re going back to the healthy track of development, but we always keep the prudent attitude of the risk control and all the risk-related metrics are in the process of optimization. By following the overdue 69-day — 60 days standard, our overdue loan ratio, the loan coverage ratio are all on the good momentum. And in 2019, you can see the over — decreased the percentage of the loan 90 days overdue. And the loan duration of the overdue 90 days has already been decreased dramatically, which only accounted for 1.58%.

And the overdue deviation rate of the loans 60 days is already below 1, where at the same time, we were also improving the provision. And in the Q4 last year, it was up by 30% and reached 34% Y-o-Y business. That’s why our risk withstand capacity has been greatly improved. And now please go to Page 55 and you can see from the Page 56. And Ping An has already completed conversion of RMB 26 billion worth of the convertible bonds in September 2019, establishing multiple market first. And now currently, our tier 1 capital adequacy ratio and the core tier 1 capital adequacy ratio reached 9.11% and 10.54%, respectively, where at the same time, in the near future, our supplements of the capitals would get into a very healthy track.

Please also go to Page 57. And in order to work for the new development, we’d like to work on the ecos bank, digital bank and the platform bank as three name cards. Our retail, corporate and interbanking, the three business lines are also adopting the 3 + 2 + 1 operation strategies, promoting the bank’s development to a new track.

And now please go to Page 57. We have already divided the development path for each of the business lines based on the established strategy and the new positions. We would like to stick to our principle, especially the 12-character principle. Where at the same time, we would like to define the new positioning during the transformation stage in combination with group’s finance and ecosystem strategy. And we also — each of the business line developed its own 3 + 2 + 1 strategy in accordance with the strategic direction and the new positionings.

And I would like to draw your attention to Page 58. You can see, we have three business lines grow on the clear strategies. And it’s because of the maintaining the edge in the basic retail banking team, especially our retail business, our consumer finance and the private banking, the 3 business are growing momentum. From the basic retail business, the AUM was up by 40%, and the number of the customer was up by 16%, likely to exceed 100 million. Where in terms of the consumer finance, our credit card in circulation is more than 60 million and private banking is also a shining point of us for last year. Our wealth customer number rose 32%. The private banking AUM was up by 60%. Many peers communicate with us. We found out we have 3 advantages: technological driving, professionalism and integrated finance advantages.

And now please go to Page 59. For the past few years, especially in the past three years under the great leadership, we have already supported to build a whole set of the digital transformation platform and system. With these statistics, the operating revenue per capital was increasing by 80%. And the operating revenue per outlet was up by 31%. And in terms of the operating cost, we continue to improve the number of AI customer services, and now it’s already accounted for 90% and it can help us to reduce the handling cost of the credit card and debit card by 30% and 50%, respectively, saving CNY100 million in terms of the size of the outlets and contributing to the net profit by 0.4%. And this disease currently happening, we have been affected a little bit. But because we’ve strong digital and online capabilities, and we — the key business has been recovered by 60%. AUM has been recovered by more than 110%.

Page 60 about the bank and the synergy with the group. The result of the bank is because of we have a group in the background. On one hand, group is redirecting high-quality traffic to the banks and the group customers are of higher quality. And on the other hand, banks are also selling insurance products and contributing more to the group. And last year, the revenue growth has been 13.2%, selling insurance product through our bank channels. And so we have enjoyed higher revenue for the bank, but also contributed to the insurance business of the group.

In addition to the digital achievements, we also took advantage of the accounts, data, customers and products. We have this four channel and one platform engine projects. Got — account, data, product and equities are all connected and creating a unified customer service marketing platform. And for Page 61, for the corporate business is also improving because of higher capital adequacy level. And deposit balance grown by 11%, loan grown by 15%. And also, we have the asset- and capital-light strategies. And corporate noninterest income has been improving. And the strategy is also reducing the risks of the corporate loan, and it’s very sustainable in our business development.

And in Page 62. The bank has been the engine for our 1 + N strategy. And bank sold insurance grew by 327%. And the investment financing project scale has been improving by 138%. In addition to those data, we have also made a lot of progress in terms of business model innovation. We had commercial bank, investment bank and investment tactics to serve our big clients with very good results and which can be replicated in the future. It is not only the driver for corporate business but also for the new business model of the group 1 + N engine strategy.

In Page 63, the interbank business has also been growing very strongly. We have introduced a transaction access from the Wall Street and developed our in-house transaction system. And the transaction business has been grown by 152%, the bond transaction growing by 178%, ranking number three in China in terms of — as the core transaction — traders and interest rate swap ranking number three, standard bond future ranking number one in Q3. And also, the interbank sales team is also gaining ground and growing at 124% in terms of interbank sales business and the Ping An Bank. The net value product scale improved by 152%. And the subsidiary of wealth management has been approved, and we have used the shortest time from submission to approval.

In Page 64, the technology. 11 AI mid-platforms have been in production, including sales enablement, product, service, management and risk control and lay a solid foundation for our digital operation. In addition to the group technology, the bank itself is also focusing on investing into technology capabilities. Now we have more than 7,500 engineers in the Ping An Bank, growing by 34%, leading the industry. So technology innovation is a very key strategy for us. It’s also important for us to improve the efficiency and the efficacy.

That concludes my presentation on corporate finance and banking. Now let’s welcome Jessica Tan, the co-CEO, to introduce the technology business.

Jessica Tan

Thank you, Ms. Xie. Let’s briefly talk about the technology. In Page 66, you can see in 2019, the 11 technology subsidiaries,have been developing in the — at different stages. Lufax, Autohome, in the Phase 4, the profit has been improving. Good Doctor is in the Phase 3. You can see the revenue explosion. And it’s — we are reducing the loss. And OneConnect is also in Phase 2, still investing. So we are investing into new products. 32% of investment has been improved to 41%. In general, the revenue of technology, the revenue represents the sustainability and also the ecosystem enablement. It’s — the revenue reached to CNY82.1 billion, growing by 27%.

In Page 67, it’s about our innovation in technology. So technology is not for the sake of the technology because we are investing into the core applications. So we have 57 labs, 8 institutions, 110,000 engineers and 35,000 R&D employees. So last year — by the end of the last year, we have 21,000 patents, including 96% of them invention patents. And in terms of the fintech and medicine technology, we’re ranked number one and number two, respectively, in the world.

So now next one is about the fundamental technology in Page 68. Last year we have won 47 championships in technologies. Two of them are semantic understanding. So that means we need to read 150,000 articles and answering 50,000 questions, not just the average articles, but also medical, very complicated articles. So we can understand what’s happening in those articles, we have got some championship in the world.

So the value here is at Page 69. The first value is to enable our main business. Like Mr. Lu Min, Mr. Xie have shared with us already, how we use technology to enable insurance and banking business of the group. And last year, we are focusing on 3 things: improving efficiency, reduce cost and reduce the risks. So a few examples to share with you. In terms of the efficiency, the agents for the past 2 years, we can cover 100% of them using AI interview. So it’s mostly happening online and supported by off-line efforts. We interviewed more than 6 million agents, so we can easily identify the high-caliber people and talents.

In terms of cost reduction, last 2 years, we are using cloud robot — bots. So the bots had 850 million contacts with the customers online, reducing the cost by RMB 1.1 billion. In terms of the risk reduction in the bank and inclusive financing, 0 and 1 reminder are using AI bots and manual reminders. The quality is better and 97% reduction in customer compliance.

In Page 70, now let’s look at the performance of all the different sectors in technology. First, starting with the Lufax Holding. Last year, Lufax under the reform, we can still enjoy healthy growth. In terms of customer indicators, we have 44 million customers, growing by 9% year-on-year. And in terms of the business indicators, AUM is not growing. It’s actually declining by 6.1%, but the structure is healthier. For instance, 51% of the AUM are standard products and more than 20% are from our ecosystems and 30% of them are retail.

In terms of the loans, we are constantly improving. The balance is more than CNY460 billion, growing by 23%. And the quality is also improving as we speak. 2 years ago, we disclosed that the overdue of 30-day is — the ratio is 2.3%. But last year, it’s only 1.9% because we are continuing to improve compared with the competitors. It’s normally 5% to 11 — 13%.

Page 71. It’s OneConnect, and we went IPO in December, last December in the U.S. There are 3 improvements. First is customer. The strategy is not only providing service to the 600 banks in China, 99% of the city commercial banks and 52% of the insurers in China, we are also focusing on high-quality customers and growing by 114% to 473 high-quality customers. They have higher quality and high stickiness, and the revenue are sustainable and — 74% of them. And the revenue of OneConnect grew by 65% to CNY2.3 billion. And we are supporting a huge scale in this plague that’s happening. We are investing heavily from 32% to 41%. So we’re still investing heavily. But we have seen some results during this recent period. And in 2 weeks, we are supporting our players in the industry to recover their business and for 21 banks, we can provide online marketing and sign-off process and 19% of — 19 banks have one’s life. And at Ping An Group, we have 1.4 million employees and agents. In the February 3, we can have online office activities. We are still the leader.

And next page is the Doctor — is medicine, Page 72, talking about Ping An Good Doctor. Last year, Good Doctor has been growing strongly, especially during this epidemic. Now we have more than 315 million registered users and DAU 730,000. During the epidemics, the new registration and online consultation has been growing by five, sometimes 10x. And financially, we are also exploding in terms of the financial revenues because it’s in Phase 3. Last year, we grew by 52% in terms of revenue, it’s CNY5 billion — more than CNY5 billion. Thirdly, Good Doctor are constantly working with partners to provide online services and create synergy with offline services. We are working with more than 3,000 hospitals and more than 100 tertiary hospitals. We are working with more than 90,000 drugstores. So patients can enjoy online, offline service at the same time. Last year, our colleagues at Good Doctor has been very busy. And we are working in 56 premises or cities. So sometimes, the — it’s — the patients, it’s not easy to go to the hospitals at these days, and we can provide online consultation. And we’re trying to continue to improve that online, offline consultation services.

Page 73 about Autohome. Last year, we know the auto market has been declining by 8.4% in general, but we have enjoyed great growth. In terms of customers, DAU on our app has been high quality from — improving from 29 million to 36 million. In terms of financials, the revenue has been consistently growing. It’s now CNY8.4 billion, growing by 16.4% and — among which, 18% of the business are actually new business created for the past 3 years, including advertisements, lead. We also have data enablement, transaction enablement and the financing enablement services. So we are covering 90 — more than 90 OEMs. We have 36 data products to help the OEMs to improve their operation. We are working with 27,000 dealers. 17,000 of them are using our data cloud products. We also facilitated CNY24 billion financial — financing services.

Last but not least, and please turn to Page 74, the Smart City business. It’s a company that has been newly established for the past two years. We are now serving 115 cities, including 500,000 companies and 50 million citizens. And let me give you some example of supporting governmental service, promoting business development and improving people’s livelihood.

In terms of the supporting government services, we supported the government of managing the administrative business. And we also help the customers — the government managing the cost, improving the ROI, especially on some key infrastructure business and projects. And we would then suggest government of leveraging the vast resources of investing the money in the most needed area. And in terms of promoting business development, we’ve now served 500,000 companies to optimize our business environment. We’re working with the government of providing enterprises with planning service and regulation to improve the business environment for enterprises.

You can see in Guangdong province, this year on we started to raise Guangdong municipality of providing a service plus financing platform to serve 110,000 companies, especially SMEs in the microeconomic situation, so that they can be served by the banks with feasible financing solution. Well, I also would like to talk about improving people’s livelihood, house, culture and convenience. During the epidemic outbreak stage, we are working with the House Commission of China of providing 15 province epidemic reporting and 8 daily updates. And every day, we have 1 million citizens using our AskBob services and also using our medical consultation to trying to understand the situation of epidemic outbreak. And we say that around 10% of the Chinese doctors are also using the AI-assisted diagnosis provided by Ping An to help to do the quick diagnosis during the epidemic outbreak.

You can say that China is also launching new treatment pathways on a daily basis. So by having those numbers and those information to our doctors, they would work more effectively on the front line. Where yesterday in order to support the epidemic control, Ping An, the Smart City also launched our AI image. By having a CT scan, we can support the image rating to the doctors. Actually, the image rating and the diagnosis is not easy. For the lungs, 1 image takes around 300 different images and nodes, where yesterday were studied by leveraging the AI-based image rating support, and only within 15 seconds it can help to support the image rating for any of the AI-needed area. So that’s what Ping An would like to support the control of the epidemic outbreak in China.

And thank you very much. That’s all for my introduction about the technology business. Where in the appendix, we also provided you the profit table for all business lines, and for your reference if you have any questions and now it’s the QA time. Thank you.

Question-and-Answer Session

A – Sheng Ruisheng

Thank you. Thanks for the management team. And now it’s time for QA. [Operator Instructions].

Unidentified Analyst

Thanks for the management team of providing me the chance for the first question. I have two questions regarding life insurance. As we can see, by the end of last year, you started the life insurance reform committee or task force. Would you like to work us through their work plan? What the priority of their work? And how long it’s going to take to reform the life insurance business of Ping An Group? And the second point is on the revenue and profitability. And you can see the revenue from the life insurance per capital was growing last year, but it’s lower than 6.4%. I’d like to ask the management team what is the fundamental reason? What kind of countermeasures you’re going to take in order to improve agent income for the life insurance business? That’s the 2 questions I have.

Lu Min

Thank you. Let me answer your question. The first question is regarding the goal of the life insurance reform. Why should we do the reform? Let me just give you some explanation in this regard. For Ping An Life Insurance, our reform started from the mid of 2018 in order to respond to the new regulations and we elected to do more protection product in the business. Where now the reforms being done for 1.5 year, in this process, we also helped to identify that in order to transform the product, the whole system and the whole mechanism also need to go through the reform accordingly, where you can see the outbreak of the epidemic also shows us how urgent we need to do the reform of the life insurance. So I think in 2020, we’re going to take this whole year to enhance our reform over the life insurance business to make sure in the following years, we’re going to have a robust yet steady and healthy growth of the life insurance in the near future.

In terms of the goal of the reform, first of all, our NBV would be growing more robust in the following years. And the second goal, the income and the productivity of our agent needed to grow continuously. If we can hit these 2 targets, then we call our reform successful. And that’s the 2 targets we have in our mind, where in the near future, for sure, we’re going to do multiple policies in order to secure the success of the reform.

And for Ping An Life Insurance, we have 3 channels: agent channel, and the bancassurance as well as the on-site insurance. And by leveraging the reform on three channels, we would like to further enhance our momentum for future development, so that we can lay a solid foundation for the future business growth. Well, in terms of the product, we’re going to surely take the customers’ need in our mind and follow what is customer needed. We’d like to leverage the integrated finance advantage of our service. We would like to also work on a systematic product structure optimization so that we can launch more product that really is needed by the customer. Well, in terms of the sales model, I won’t elaborate too much on this question. And that’s my interpretation of the reform. Where I also have saying that is done by Jessica. Where besides of our agent, another reform we’d like to focus on is on leveraging technology. You can say from last year on, we emphasized on online to offline integration, and we also would like to have the outside yet remote service integration. And thirdly is about the data-driven and AI-driven solutions.

So the matter for the smart recruitment I mentioned just now, assisted by AI, the online policy handling and the digital marketing as well as the digital and smart-driven business management, we are going to leverage the cutting-edge technology in order to improve the productivity of our agent. Let me give you two examples. First one on training, where attach is greater importance for the onboarding training for the new agent, especially to provide the customer right training for each of the agent and also agent with different personalities and characters and scheduling would also be provided with tailor-made training. And each week on each day, based upon their study pace, they can help to collect [indiscernible] in order to receive the training more flexibly.

And the second example is on business management and the digital marketing and many of the event management truly depends on the visit of the customer. And the epidemic outbreak is also a good opportunity for us to change our way of visiting the customer and we’d like to leverage the digital marketing of launching more offline yet online integrated customer visit. By leveraging technology, we support our 1 million agents of talking and communicating with the customer online and off-line. For example, we have 30 different categories of the information from updates to education. According to the appetite and the preference of the client, we can then send the corresponding information to the customer, which will make the marketing more emotional and more friendly. So these can truly help to improve the dynamics from the customer acquisition to customer communication, and that’s how we’re going to leverage technology to do that.

Jason Yao

The second question, and you were also asking about the income of the agent for the life insurance business. For sure, last year, we see a growth of agent income of the life insurance business as an analyst has mentioned. The agent income for the life insurance was up by 1.8%. Our NBV was increasing 5.9%, but why the life insurance agent income was only up by 1.8%. And let me explain the reason to you because actually the income of our life insurance agent are included with the first year premium commissions and the persistent policy commissions. It’s being taken as a whole and it’s not only directly related to the first year commission. That’s why you see the numbers are not as high as NBV growth rate.

And another reason is also because last year, the size of the agent team is also being decreased. So that’s why we have last agent income increase for last year and last year for the first year commission fees for the agent. We also launched some long-term protection product and a long-term protection product, it’s first year commission also being adjusted. And that’s why they have some impact over the life insurance agent income. But jointly speaking and the life insurance agent income is still on the uptrend, attaches greater importance to our life insurance agent. They are our front-line workers, and they need to seek for the sustainable and healthy development. Income is a key metric for them. So that’s why, as Mr. Lu mentioned, in the near future, we’re going to optimize the training to our agent. At the same time, we also would like to build the best product mix and the portfolio to take care of the cost and the needs to help to improve the quality, income and the productivity of our life insurance agent.

Operator

Next question, Mr. Zhou from Crédit Suisse.

Charles Zhou

Ladies and gentlemen, my name is Zhou Chen from Crédit Suisse. My first question goes to Mr. Xie Yonglin. And in Q3 and you started to work as a CEO of the group, so is it possible for you to share your prospect of Ping An Group in the next 3 to 5 years, especially you used to work in collaborating of different units and you are responsible for the corporate finance service committee. So could you help us to identify any opportunities and the big prospects in the near future?

And my second question is also regarding the life insurance reform committee. Is it possible for Chairman Ma to share with us whether you’re happy with the life insurance reform work here in this moment of the time? And when can we say that the agent team could be stabilized and their income could be up by a double-digit number?

And another question goes to Jason Yao. And you mentioned 80% of the increase are being driven by P&C insurance business. And I find out for the life insurance, its operating profit before tax is only a single-digit number growth. And so Jason Yao, can I just confirm with you whether my interpretation is right or not? And if you are under pressure, does it mean that in the near future, the profit — the operating profit growth would be kind of slowed down. And is it going to also impact our dividends in the near future?

Sheng Ruisheng

To remind you, for the fairness, no more than two questions, please, in the following questions.

Xie Yonglin

To answer your first question, I think you have addressed the first question to me. The strategy of the group has never changed to become the global leading integrated service — financial service and the life service provider for the retail world. But it has been improved. In recent years, we’ve been focusing on finance technology, technology ecosystem. So we use technology to enable finance service.

So the efficiency of the main business, the quality of the main business in our finance practice will be better to make sure we are sustainable in our development as a global leader. And in recent years, we’ve been using technology to enable ecosystem, trying to build new ecosystem business models. And we also take advantage of ecosystem to contribute back to the traditional finance business. That’s something we’ve been sticking to for the past few years, and it’s not going to change because I am in the office now, and we are continuing to deliver on that. Like Jessica said, technology enablement for life insurance, for instance.

In terms of the recruitment, training of the agents, marketing management and it’s been playing a very important role. Technology is also helping the banking business, especially during this epidemic. You’ve seen that the online digital capabilities we’ve built for the past few years have of gaining grants during the pandemic. Their service is not suspended. It has not stopped their productivity, can be recovered very rapidly. And in addition to that, Ping An Group has been focusing on 1+N service to the customers. One customer, multiple products offerings, one account and one stop service. For retail business, that’s what we are doing.

It also true for the corporate business. Because the tactic might be different between B2B and B2C business, but the vision is the same, technology enablement is the same. We use technology for 2B and 2C business to build our ecosystem. So in the retail financial service committee, we will connect account equity products to establish a consolidated product to serve this platform. We also need to connect to the data. So the corporate committee. It’s also the same thing. We have achieved a few things. And you talked about the corporate finance committee. Last year, if you see the data, the data growth has been very rewarding for us.

In addition to fundamental database, we have customer base, business case — base, we have a product base. We use technology to build effective marketing and sales methodologies. So we analyze the companies in the corporate finance to identify products. For instance, insurance, P&C, auto insurance, welfare, protection scheme, leasing, SME loans. The underwriting approval have been controlled centrally. So the approver, reviewer, we will look at the penetration for 1 customer across different domains to improve efficiency because we can do that with the enablement of technology. We can consolidate the information and profile of 1 customer now. And in the future, at the group level, I think we’ll continue to focus on technology plus finance, technology plus ecosystem and the ecosystem will contribute back to the business. So that’s — nothing going to change there.

And then the second point, we will continue to deepen the 1+N for corporate and retail business to supply, in a way, in our technology. And I also shared something about the corporate finance service committee. I believe we were surprised to do it this year again.

Ma Mingzhe

Let me respond to the second question. I shouldn’t be here speaking because we know we have a very good team here. So since you are trying to understand the reform that’s happening, let’s share with you something. For the life insurance reform, first is why. Ping An Life started in 2004. We’ve been developing for the past 16 years with great achievements. Since last year or maybe 2 years ago, we discovered that the life insurance market has changed fundamentally. The macros has changed. The environment’s changed. The demand or requirements of the consumers have changed.

The traditional way of doing business is hard to meet the requirement of the new world. The dividend of population has gone away. And you see the industries have been developing in a different way. The logistics, for instance, the salary of the logistic industry is higher than before. We know Ping An agent, they have maybe 100% more in their salary compared with the average in the industry, but we don’t think it’s enough for the next 3 to 5 years. The compensation for our agents need to be improved. So for the past 2 to 3 years, we’ve been trying to discuss how to reform our life insurance. That is the why after development of 26 years.

So we need new methodology of doing business. And then the objective of reform because we want to be the leading life insurance company in the world, not in terms — not just in terms of scale but also become a benchmark of the industry, a new business model for life insurer. We want to be the global leader. We are not satisfied with what we have achieved so far. Because to deal with the future challenges, I think we need to think ahead. And we believe the traditional way of life insurance for the past more than 100 years need to be disrupted. There should be a new iteration of the business model for life insurance. That is our objective.

And then how. We are focusing on 2 things in the reform. First is the channels. Mr. Lu clearly indicated that. He has — Mr. Lu has 20 years experience in life insurance. He knows inside out, and he’s been with the company. He worked in the life insurance. He was the Director of the Corporate Strategy Center. And then he also worked at Autohome with very good accomplishments during his time. And he has a vision, he has experience, and he has leadership and he has business acumen. And we know life insurance reform is not done by 1 person, it’s actually done by a much bigger team. And like I said, we are focusing on the channels, agent channel, focusing on quality development, focusing on improving the compensation for agents. From — this is the transition we are trying to make from scale to quality and compensation for the people.

And the other focus is the online Internet insurance. Now we have 30 million offline policies. We are going to use new methodology to reactivate those offline policies. So we can sell them the integrated financial service and use that to boost our online performance because the life insurance awareness is different than 20 years ago. With the Z generation coming up, they need life insurance. Life insurance is now a lifestyle. It’s just a part of their daily consumption. So we can use online as an opportunity. Of course, it’s going to take time. We need to educate the market. It’s not going to happen overnight, but we still need to invest heavily.

And then bancassurance is also important. We believe in value orientation. We don’t want to sell short-term product. We don’t want to sell wealth management bancassurance product. The tactics and methodologies have changed in the new financial world. We need to reform ourselves. And the other point is about the products. In the past, we’ve been trying to sell the product from the corporate perspective — from the Ping An perspective instead of the consumers’ perspective. So we need to reform our product offerings based on the requirements of the consumers, but not only for life insurance, life insurance plus service plus and the scenario-based or contextual-based life insurance products. So based on — they might differ across cities, across agents and across different target groups. So based on the consumer requirements, but not only for life insurance but also integrated finance products. So one customer, one account, one-stop service, multiple contracts to continue to boost our integrated financial offerings.

Like Jessica said earlier, the reform need to take advantage of our technology capabilities, so technology will be immensely important to the reform including our digital recruitment system, online training system, digital marketing tools, data-driven customer service, for instance, and data-driven activity management, smart customer service. So we have seen some result, and the reform is underway. And we believe these reforms are very much leading the way around the world because we have the technology capabilities [indiscernible].

The fourth point is why we will be successful. Because in our road map, we call it 1 plus four road map. One means the first half of the year will be heavily impacted. The traditional life insurance policies are sold face-to-face. And the agent will not make much money recently because they cannot sell face-to-face and many things are happening online. But of course, there are restrictions for your online efforts, but it is actually an opportunity because we have seen very good result recently from Ping An Technology. So Q1, Q2 this year, will be heavily impacted for all the industries, not just us. And for the second half of the year, we believe it will recover soon. And we believe in 2021, we will go back to normal, a sustainable healthy growth, solid growth and based on the reform. That’s the one.

And then let me talk about the four. First of all, we see that we have more than 25 years most experienced management team at Ping An Group, and they have a market experience of more than 25 years with a very good track record and most of the experience. And my second point that we have the best quality agent in the market. Their productivity for the past 2 decades were always — applies above the industrial average. And then thirdly, we also have a very robust and strong integrated finance system to support our agent, to support them to improve their income, to help them to broaden their horizon. We are also to help them with a better career planning. Because for a company, if you really want to recruit the best quality agent to work for you, if you truly want to improve the quality of the agent team, you have to have a robust integrated financial product.

And my fourth point, we also have a strong technology to support us. So that’s why I say that for the life insurance reform, I’m also deeply involved in the reform process. I didn’t involve so deeply on the daily basis work because — but when there’s any resources, a coordination needed, then I will stand up to help to do the coordination work. And I’d say this is not led by me and this is being done by a big team. Lu Min is the chief leader who is taking care of the life insurance reform. The whole group is supporting him. And we have every confidence that the good result from the reform will be shown in H2 of 2020. And in next year, you will see we’re going to go back to a sustainable yet healthy business track.

Operator

[Operator Instructions]. The next question comes from Kailesh with HSBC.

Kailesh Mistry

I’ve got two questions. One on new business value and agency and the other one on the corporate segment. I think on the new business value, can you just provide some color on new business value and agency development in 2020? Specifically, should we expect another year where we see rising new business value per agent, increasing contracts per agent, despite the fall in the number of agents? And is there going to be any shape to that during the year?

The second question is on the corporate segment. I appreciate it’s just short of 10% of group operating profit. But there’s a new section in the customer development chapter, which is quite interesting. Are you increasing your focus on this segment as a source of — another source of growth? Do you have any targets on what contribution to group operating profit that could become in, let’s say, 3 years’ time? And also with respect to the bank, how should we interpret this for net interest income and also normalized credit costs going forward?

Jason Yao

Thank you very much. Because many of the investors are online and speak Mandarin,, then I shall answer in Mandarin. First of all, let’s talk about the growth of the new business value, and I see many people attaches great importance to it. And especially, the previous few questions were all talking about the life insurance reform, the robust yet healthy reform. The healthy growth of the business is highly relevant too in the reform. And I see that Chairman Ma and Mr. Lu and Jessica, they have already provided you many explanation, the clarifications on the life insurance reform, the goals, the targets and time line we made for ourselves for the life insurance reform of the group. I won’t repeat what is being said by them.

Where, in terms of the NBV growth guidance, I say that generally speaking, we don’t provide it to the market. But due to the epidemic outbreak, and Chairman Ma and Mr. Lu have already clarified that the epidemic outbreak in China where I see going to impact the revenue and the sales of our agent because of face-to-face communication and the contract and the customer acquisition would be negatively impacted by the epidemic outbreak and I hope that the epidemic could be well controlled in Q1 and in H1. And then we’re going to see a rebound of the sales of the life insurance product in H2 of this year. And for the healthy and sustainable growth, we hope that we’re going to see it in 2021. And that’s my answer regarding the NBV.

Xie Yonglin

Thank you. Thanks for the second question regarding the corporate finance service committee, I have to say that by 2019, last year, our corporate finance service committee was performing well, but I have one concern in my mind. Majority of you concerned about the corporate finance service committee. [Indiscernible] said, we are of the track of our strategic environment of the group, for Ping An Group, still we would like to become a global leading retail business and financial service solution provider in the world. But this positioning of the group won’t hurt our corporate financial services committee business. And you can see that majority of the bond has been issued by the enterprises in the market.

And the P&C funds were being [indiscernible] into the world economy. So still corporate business is a key part of our business. And on one side, we provide premium quality to the insurance business and the retail business, while at the same time, corporate business is a key for us to build our ecosystem. But for Ping An, our strategy and our way of doing the business, won’t like the traditional financial institution. Majority of the profits are coming from corporate business. That’s not Ping An is going to do. So for Ping An, our way of doing business for corporate finance are having 4 models. As I mentioned in my presentation, the first one is a so-called simple business. For example, P&C insurance, protection business, leasing and micro loans. These are being called as a simple business, where for credit loans and it’s actually easy to perform very well. And it’s — and the leasing service too, it can actually have the light assets yet the light strategy, where the second business I mentioned is a sophisticated investment and financing business.

For China, we have some big SOEs, like the Merchants Groups and the China Electronics. And those big companies they have the financing model, integrating the direct financing to indirect financing or even sometimes, they have to reduce the leverage. So we have to have the investment bank plus commercial bank plus investment strategy to serve those SOE clients. Sometimes — and they even need our private bank to support them for investment. And we think such a request, it won’t be able for us to support a client with single service, we need it as an integrated solution. And also, the financial notes from those SOEs would also become the prime assets for us.

And Ping An would like to build 5 ecosystems including health care, government affairs and auto and financial institutions. We think that 5 ecosystem, B2C business is definitely not enough. We have to have a B2B and a B2C service models at the same time, so that we can build a platform with a good threshold. Where last year in sophisticated investment and financing business, as I mentioned to you, our financing size was up by 153% and you can also clearly see by having commercial bank plus investment bank plus investment model and strategy, we have a dual light model and we have less capital needed, where at the same time, we can work for the client more comprehensively which truly anchors the need of the corporate finance where at the same time, we also have the interbank business.

And at our company, we have many bond traders. We have our [indiscernible] trade, [indiscernible] team working for us for the bond trading and around 70% of our life insurance products, they have a good experience of the bond trading, high-frequency bond trading and allocation bond trading and many of them are truly good at bond trading. So we have to integrate dual capacity together in order to seek for a good, no matter it is for annuities or the interbanking or the bonds or funds, all those capacities need to be shared systematically within the group, even the strategies and the research over each of those business needs to be shared within the group.

Well, in terms of the corporate business, if you really want to make it big in size and high in quality, sometimes you won’t be able to see it from the balance sheet. The key that you have to have a prudent risk appetite. You have to choose the right verticals and the industries to invest in. So we have the vertical-specific, region-specific and product-specific strategy. We would like to leverage technologies to reduce operating cost. We have to be prudent in selecting the verticals and the product to control the costs. And then through the research, we can also well manage the risk so that we can develop the corporate business in a more healthy and robust approach. And that’s my comment over the corporate finance business. And I’d say this year, our corporate business is going to have a good scorecard again.

Sheng Ruisheng

Due to the time reason, we’d like to allow the opportunity for the final one.

Operator

The final question comes from [indiscernible].

Unidentified Analyst

My name is [indiscernible] from Merchant Securities. I have two questions. The first question is about the epidemic outbreak. So all the management members, how are you going to assess the impact of the coronavirus outbreak to company’s operation? For example, when should our agent come back to work? Whether it’s going to impact our new recruitment. And is there going to be any short-term strategies to stabilize our income and our employment during the coronavirus outbreak? Are there any kind of adjustment and countermeasures from the corporate end to hedge the risks? And the second part is about this operating reliance and you can see what are the reason why the surrender rate was upgoing? So what’s your future plan? And what the reason?

Lu Min

Let me answer the first question, please? Well, in terms of the epidemic outbreak, Chairman Ma mentioned, it’s surely going to have some impact over the life insurance business, and the impact won’t be small because we are not allowed to work as a group, we can’t provide a face-to-face training, our agent won’t be able to have the face-to-face visit to the client. They also can’t sign the contract with the client face-to-face. So for sure, the epidemic outbreak will impact our life insurance business.

So what kind of countermeasures did Ping An take? We have a lot of fiscal supporting policies in order to stabilize our agent team to retain them. And a lot of measures are there in that countermeasure package. I won’t to elaborate on each of them. Just to say a few of them. You can see we take care of the special policy in Hubei, the epidemic striking area, and we also have some support over our agent nationwide. And some of the KPI over on their daily work are being loosen in order to stabilize our team during this special duration of the epidemic outbreak.

Second point, as shared by Jessica already, it’s technology empowerment. So going back to office, as you asked, we actually have started office activities online already. But of course, off-line, we have to obey the government policies. For online office and because we have Ping An technology expertise, we currently — the entire process can be done online including operation and business development. For instance, the meeting — all the morning meetings are happening online, 100% of them, using our own system, OA system. So the agents can work from home. And some agents called me today, they’re saying they’re getting busier working at home now having meetings in the morning and trainings. It’s busier than before. So morning meeting online and then training is also 100% online. The training attendance is very high.

And thirdly, the recruitment, we call mini recruit meeting, 100% online as well. And we have seen many attendees on those meetings recently. And fourthly, we — the explanation to the customers are also happening online because we have again the technology. So all the business activities can happen online. And the activity is even busier than before. And then our products can be signed online as well. All the products we sell can be signed online instead of doing it physically. So that is why we stand out from the other providers. And then like I said, we have financial support and we have technology empowerment. And among all the insurers in the world, I believe we are pretty much the most complete online service provider as a life insurer.

Like Mr. Ma said, life insurance product is sophisticated. You still sometimes need to rely on face-to-face, but I told my team online, you have to be diligent, because now you cannot see your customer in person, you have to be diligent online. And eventually, we will still enjoy great results and rewards. Like Ma said, we hope that we can go back to normal in the second half of the year. And then we will continue to reform our system and making sure everything is sustainable and healthy.

Jessica Tan

To add up a few things, [indiscernible] said — talked about the epidemic impact on life insurers. But in general, the financial industry is not that much impacted, but of course, there are impact. Like Mr. Lu said, the impact is mostly happening to life insurance. The other 2 things impacted are credit loans, that’s definitely true, because the reminder, repayment of reminder and defaults will happen especially with the SMEs. But in general, it’s still controllable. You’re seeing some — we have seen something in the first half of the year. And the second thing is the impact on investment, like Mr. Yao said, Jason Yao said, and mostly impacting the tertiary industry because our investment, 70% of the investment are fixed income. We are investing into medicine, health care infrastructures, which is — are not going to be very much impacted by the epidemic.

And then I want to talk about the opportunities for the mid to long term, especially for fintech, medical technology and smart cities. We believe there are huge opportunities. And in addition to health care, we’ve seen many education opportunities, and all the kids are attending class from home. And you also have a training or education for the grown-ups and K-12 trainings are happening online as we speak. And I think it’s improving by at least 50%. So that’s why I say there are opportunities for us for the mid to long term.

Jason Yao

For your second question of the operation variance. Previously, another analyst pointed it out and I want to elaborate on that a little bit. We know life insurance, health insurance, in general, we have seen the analyst — analyzing report, the residual margin release is stable, growing by 19.5%. One of the big variance you have noticed is the operation variance. In 2018, it’s CNY21.7 billion, and this year, it’s CNY10.4 billion. So there are a few reasons to that. Firstly, in 2019, the premium increase has slowed down. So the expense difference compared with previous years are shrinking. So last year, we also invested heavily in technology for our life insurance offerings. For instance, AI, recruitment, training and AI agent management. So that’s why the expenses has happened. And with the growing slowing down, the agent team, the performance, investment expenses are higher. So that’s why the expense difference has reduced.

And second point is the surrender rate. Yes, that’s true. Surrender ratio is a little higher compared with previous years. There are a few reasons to that as well. First is the product mix is being adjusted. In 2019, we sold more long-term protection products and plus saving combination products. And compared with the previous year, the short saving products, the long-PPP product and the 25-month ones, the persistence rate is lower because of the — for the short saving ones, will be only for three years, five years. Savings now product is 10 to 15 years. The persistence rate is going to be a little bit less than the short period product.

And second reason is that on the market, there are, we call it, value chain, some kind of a black market. They’re trying to hoax the customer to surrender the policy. We do see some organizations, especially some ones are targeting on us. So our monitoring team are trying to analyze it. We’re trying to stringent manage it in a better way in the future. Another reason for high surrender is last year, the agent team has been reduced. There are offline policy — the persistence ratio is lower normally. That is why surrender is higher than before. The positive impact is less now for operating variance, but we believe the trend will get better in the future because we have prepared for those situations. And in 2018, the operating variance is more than CNY20 billion. It’s very high in 2018. And in 2017, the operating variance is only CNY10 billion. So 2018 has been high for us. That is why we’ve seen a huge change in this year again.

And for operating variance, looking forward, I am still optimistic. By the end of last year, we had adjusted our assumptions, especially for the risk margin. For the surrender, we added risk margin pad. We added a pad in the future. The assumption is now more conservative. So the positive variance probability will be bigger in the future. So looking at in different ways, the life operating revenue is still based on the residual margin release. The release ratio will slow down because of the product in-force is big, but this growth will still be healthy and then we have new business coming back in the future. We believe we can still look forward to the life insurance profit in a healthy way. Thank you.

Sheng Ruisheng

I just want to thank all of you for attending this meeting. And I believe you have more questions, and our IR team will follow up on that. So we will try to answer your question in the future in different ways through conference call or through e-mail. That concludes today’s announcement meeting. Thank you very much.





Original source link

J.C. Penney: Declining Department Store Multiples Hamper Its Value – J. C. Penney Company, Inc. (NYSE:JCP)


I’ve been encountering some questions about my belief that J.C. Penney’s (JCP) common stock may only have an intrinsic value of around $1 even if it gets close to $1 billion EBITDA.

The reasons for this belief are that J.C. Penney’s debt burden is quite large and department stores in general have seen their EV/EBITDA valuation multiples decline significantly (around a 35% decline since 2014). Thus, in a 2014 environment, J.C. Penney could be given an enterprise value of $5.5 billion with $1 billion EBITDA, leaving around $5 to $6 in share value after subtracting $3.8 billion in net debt. Nowadays, $1 billion EBITDA may translate into only $4 billion in value for a department store, which leaves only a little bit of value for its common stock.

J.C. Penney’s common stock may have some speculative upside potential, but I am not investing in it since it has the tough bar of needing to get to near $1 billion in EBITDA to have long-term intrinsic value.

Notes On Enterprise Value

I’ve calculated enterprise value as simply net debt (at par) plus market capitalization. These calculations exclude operating lease liabilities from net debt, in order to keep the calculations consistent with 2014 since those were treated as off-balance sheet liabilities back then. J.C. Penney’s debt is trading at well under par at the moment, but if it does get to $1+ billion EBITDA, I’d expect its debt to be trading much closer to par. Such a scenario would likely allow J.C. Penney to refinance its upcoming debt maturities, but it may need to drive EBITDA above $1 billion before the intrinsic value of its common shares increases a lot.

While Macy’s (NYSE:M), Kohl’s (NYSE:KSS) and Nordstrom (NYSE:JWN) have market capitalization to EBITDA ratios that are much higher than J.C. Penney’s, this would not be the case with enterprise value (valuing debt at par). J.C. Penney’s net debt is currently over 6x its expected 2019 EBITDA, while those other companies have enterprise values that are less than 6x EBITDA.

A look at enterprise value would show why share buybacks probably wouldn’t do much for J.C. Penney in the long run even if J.C. Penney’s creditors were okay with it doing share buybacks. J.C. Penney’s total enterprise value is around $4 billion now (with its debt valued at par for simplicity), consisting of $3.8 billion in net debt and $200 million (rounded down) in market capitalization. Spending $100 million on share repurchases would increase its net debt to $3.9 billion, leaving $100 million for market cap since its enterprise value shouldn’t change. Thus, J.C. Penney’s share price should remain unchanged in the long run if it repurchases some shares, even if it spikes temporarily.

With J.C. Penney’s debt trading at a discount, it would make a lot more sense to use any spare cash to repurchase some debt anyway. J.C. Penney’s 2023 secured debt maturity is its major upcoming obstacle, and its 2023 first-lien notes are trading at around 88 cents on the dollar currently.

The 2014 Scenario

Back in 2014, I had looked at the EV/EBITDA multiples for various department stores. At that time, Macy’s was trading at around a 7.0x EV/EBITDA multiple. Nordstrom’s was at around a 7.8x EV/EBITDA multiple and Kohl’s was at around a 6.1x EV/EBITDA multiple.

At that time, J.C. Penney was generating negative EBITDA, and I argued that it should be valued at an EV/EBITDA multiple of around 5.0x to 5.6x once it started to generate a substantial amount of EBITDA again. The lower multiple was due to J.C. Penney’s weaker earnings and financial state (even after a recovery) compared to those other companies.

EV/EBITDA (Trailing Year)

April 2014

Nordstrom

7.8

Macy’s

7.0

Kohl’s

6.1

J.C. Penney

NA

Those EV/EBITDA multiples came at a time when sentiment around department stores was relatively positive. Nordstrom and Macy’s had delivered +2% to +3% comps in 2013. Nordstrom’s had an A- S&P credit rating, while Macy’s and Kohl’s both had a BBB+ credit rating.

The Current State Of Affairs

Department stores are now struggling to generate even modest comparable store sales growth and the current sentiment around department stores is considerably worse than in early 2014. Nordstrom has seen its S&P credit rating cut two notches to BBB, Kohl’s has seen its rating cut one notch to BBB, and Macy’s credit rating is now three notches lower at BB+.

This is also manifested in the lower EV/EBITDA multiples that department stores are garnering. Nordstrom is valued at an EV/EBITDA multiple of near 5.5x, while Macy’s and Kohl’s are closer to 4.0x.

The new multiples suggest a roughly 35% reduction in EV/EBITDA multiples since 2014.

Effect On J.C. Penney’s Stock

If this was 2014, a return to $1 billion EBITDA would be great for the intrinsic value of J.C. Penney’s stock. At a 5.5x EV/EBITDA multiple, $1 billion EBITDA would translate into an enterprise value of $5.5 billion. Less $3.8 billion in net debt, that would leave $5 to $6 value for J.C. Penney’s common stock. At a 6.0x multiple, J.C. Penney’s stock would be worth around $7.

However, in the 2020 environment, using a 4.0x multiple would give J.C. Penney an enterprise value of $4.0 billion, leaving less than $1 in value with $3.8 billion in net debt. If J.C. Penney’s results markedly improve, it can probably reduce its net debt, so it could create some additional value there even with a 4.0x multiple.

Realistically, J.C. Penney’s stock price would likely significantly increase if it reached $1 billion EBITDA, and it could trade for more than a 4.0x EV/EBITDA multiple in the hopes/belief that its resurgence continued. However, if its EBITDA improvement then slowed or stalled out, I would expect its valuation multiple to drift back to 4.0x over time.

Conclusion

The skepticism and negative sentiment towards the department store sector has sent their EV/EBITDA multiples down by around 35% since 2014. This presents a challenge for the intrinsic value of J.C. Penney’s common stock, as using a 4.0x multiple, its common stock would still have limited value at $1 billion EBITDA. J.C. Penney could temporarily fetch a higher multiple if it shows strong improvement in results, but I’d expect the multiple to then come in line with department store peers if its sales and EBITDA growth slowed or stopped.

Free Trial Offer

We are currently offering a free two-week trial to Distressed Value Investing. Join our community to receive exclusive research about various companies and other opportunities along with full access to my portfolio of historic research that now includes over 1,000 reports on over 100 companies.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





Original source link

ConocoPhillips: Looking Strong Heading Into 2020 – ConocoPhillips Company (NYSE:COP)


ConocoPhillips (NYSE:COP), the largest independent oil producer in terms of output, has shown yet again that it is better at turning crude oil into robust cash flows than its peers. The oil price environment, however, has gotten worse in the last few weeks. But I believe ConocoPhillips looks well prepared to handle this difficult period.

Image courtesy of Pixabay

Earnings Recap

ConocoPhillips has recently reported its fourth-quarter and full-year results. The company’s underlying production, after adjusting for assets sales and Libya volumes, increased by 1.9% to 1.289 million boe per day. The growth was led by higher production from the Big 3 shale plays in the US and major projects in Alaska, Europe, and the Asia Pacific. The company, however, witnessed lower levels of realized prices for crude oil, natural gas, and natural gas liquids. Its total realized price fell from $53 a barrel in Q4-2018 to $47 a barrel in Q4-2019. This weakness in prices pushed the company’s adjusted profits lower to $0.76 per share in Q4-2019 from $1.13 a year earlier.

ConocoPhillips, however, still generated robust levels of cash flows. The company generated $2.67 billion of cash flow from operations in Q4-2019 which was enough to cover the capital expenditures of $1.59 billion. As a result, the company ended the period with strong levels of free cash flows of $1.07 billion ($2.669 billion – 1.595 billion). These free cash flows helped fund dividends and buybacks of $1.2 billion.

For the full year, ConocoPhillips posted a 5% increase in underlying production, led by a 22% increase in output from the Big 3 shale plays (Permian Basin, Eagle Ford, and Bakken) in the Lower 48 states. Its adjusted profits fell from $5.33 billion to $4 billion, due to the dip in commodity prices, but the company still generated more than $5 billion of free cash flows. It used excess cash to reward shareholders by spending $1.5 billion on dividends and $3.5 billion on buybacks.

Looking Ahead

ConocoPhillips will likely continue growing production in 2020, which should have a positive impact on the company’s earnings and cash flows. The company is working on a long-term plan to grow its annual output at an average of more than 3% each year through 2029. The growth will be led by higher unconventional oil volumes from the Big 3 shale plays in the US and the liquids-rich Montney play in western Canada. In 2020, the company will benefit from growing levels of production from the Permian Basin where ConocoPhillips has accelerated drilling activity. This will help push the Big 3 production higher from 369,000 boe per day in 2019 to around 410,000 boe per day in 2020, as per the company’s forecast.

ConocoPhillips, however, is facing oil price risks. The recent plunge in oil prices, driven by the demand shock coming from the coronavirus fears in China, will likely push ConocoPhillips’s earnings and cash flows lower. The price of the US benchmark WTI crude has fallen from more than $60 a barrel at the start of 2020 to $52 at the time of this writing, while the international benchmark Brent crude tumbled from $68.91 to $57 in the same period. The current price levels for both WTI and Brent are substantially below last year’s average of $57.02 and $64.30, respectively.

Remember, unlike some of the shale drillers such as Pioneer Natural Resources (NYSE:PXD), ConocoPhillips doesn’t hedge its oil production. As a result, the company’s cash flows have greater exposure to oil price volatility than some of the other E&Ps who maintain a strong hedge book. A $5 to $10 per barrel change in WTI and Brent prices can move ConocoPhillips’s cash flows by around $225 million to $450 million and $700 million to $1.4 billion, respectively, on an annualized basis, as per my estimate based on the company’s guidance. Production growth can soften the blow coming from weak oil prices, but a modest increase in output can’t make up for the double-digit drop in prices seen recently. If oil fails to recover meaningfully, then ConocoPhillips’s earnings and cash flows will decline.

The good thing is that ConocoPhillips is well prepared to handle this tough situation. In fact, ConocoPhillips’s forecast was already based on a $50 a barrel oil price environment, which means the company likely won’t make any major changes to its plans even if prices stay low in the low-$50s a barrel range for an extended period. ConocoPhillips benefits from having a diverse and low-cost asset base that can generate strong returns even with weak commodity prices. The company holds a total of 15 billion boe resources (>40% of total resources) in the US and international markets, which have less than $30 per barrel of average cost of supplies. It needs oil prices of just $35 a barrel to break even in terms of cash flows, which means, at $50 oil, the company will deliver free cash flows. ConocoPhillips will focus on producing oil and gas from its low-cost assets during the ongoing downturn.

The company can, therefore, continue churning profits and free cash flows. ConocoPhillips will use that excess cash to fund dividends and buybacks. The company has recently lifted its buyback program by $10 billion to $25 billion and plans to repurchase $3 billion of shares this year.

ConocoPhillips’s high FCF yield could decline in 2020 if oil prices stay low. Note that ConocoPhillips ended last year with $5.047 billion of free cash flows which translates into a robust FCF yield of almost 8%. But, in 2020, the persistent weakness in oil prices might push the company’s operating cash flows and free cash flows lower. Note that the company’s capital expenditures will climb to $6.55 billion from $6.3 billion in 2019, but I think ConocoPhillips’s cost reduction efforts might completely offset the negative impact of higher CapEx. The company might generate lower levels of free cash flows in 2020 as compared to 2019 due to the drop in operating cash flows, but they will be enough to fund the CapEx and a large chunk of the shareholder returns. If, however, the coronavirus-related fears subside and the commodity prices recover, then ConocoPhillips could deliver strong levels of free cash flows.

ConocoPhillips is also in great financial health. The company has an underlevered balance sheet and solid liquidity, which bolsters its ability to withstand weak oil prices. At the end of last year, the company’s debt-to-equity ratio stood at 42.5%, below the large-cap peer median of 55%. The company had $8.4 billion of cash reserves, including restricted cash and short-term investments, which could help meet any short-term funding needs.

For these reasons, I believe ConocoPhillips is well prepared to face this challenging period. Although the company’s earnings and cash flows will likely decline if oil continues to hover near current levels for an extended period, the company might remain profitable and generate free cash flows. ConocoPhillips stock dropped by 9.8% this year but has fared better than other E&P companies (NYSEARCA:XOP) whose shares dropped by 21% in the same period. ConocoPhillips’ stock is now trading 5.42x on EV/EBITDA (fwd) basis, below sector median of 6.10x and its five-year average of 8.05x. For long-term oriented investors who can withstand oil price swings, this weakness could be a buying opportunity.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





Original source link

Who owns your company? NMC investors in London are finding out the hard way


Website of B.R. Shetty

Bavaguthu Raghuram Shetty meeting the U.K. ambassador to the U.A.E., Patrick Moody

The crisis unfolding at NMC Health, the Middle East’s largest hospital operator, has reignited the debate about the governance of overseas companies listing in London.

The mystery of NMC’s ownership structure deepened on Monday after founder and co-chairman Bavaguthu Raghuram Shetty quit the board of the FTSE 100-listed company over concerns that he misreported his stake.

Since Friday, four board directors have resigned, including chief investment officer Hani Buttikhi and non-executive director Abdulrahman Basaddiq, who joined under a relationship agreement between the company and principal shareholders Shetty, Saeed Al Qebaisi and Khaleefa Al Muhairi. As a result, NMC

NMC, +3.23%

said it did not consider Basaddiq to be independent.

“The saga at NMC Health continues and so does the suffering of its shareholders. The whole affair is turning into one of the worst stock market disaster stories of recent times,” said Russ Mould, investment director at stockbroker AJ Bell.

“It will raise serious questions about how corporate governance issues and overseas listings are handled by the regulators. After all, the private healthcare operator is not some pie-in-the-sky small cap. It is, for now at least, a FTSE 100 company. Sadly it is not acting like one,” Mould added.

Shares in NMC were up 1.42% at 13:00 GMT.

As the U.K. vies for scarce new company listings, the London Stock Exchange and listings regulators must not sell out their governance standards in the name of competitive advantage.

There was justifiable disquiet when the listing authority proposed watering down its rules in an effort to woo Saudi Arabia’s national oil company, Aramco. But regulators and investors should remember the lessons learned from losses of the past, when rules were weakened.

NMC joined the London Stock Exchange in 2012 and was promoted to the prestigious blue-chip FTSE 100 index in 2017, giving it access to a deep pool of investors and the respectability needed with western investors.

To be included in the FTSE 100, companies have to have a “premium listing” and are subject to stringent corporate governance rules, including giving minority shareholders extra voting power on issues such as independent directors.

Premium listed companies must also maintain a free float – the number of shares in public hands – of at least 25%. The size of the free float matters as if the majority of shares are held by a close-knit group of founding shareholders, they can exercise undue influence over the board.

The current rules were tightened in 2013 after two high-profile boardroom disputes at Kazakh miner ENRC and Indonesian miner then known as Bumi left investors nursing heavy losses. At the time, the U.K. Listing Authority, which is part of the Financial Conduct Authority, had waived the usual governance requirements for these companies, allowing them to list less than 25% of their shares.

Companies in which one shareholder owns more than 30% are now required to have a “relationship agreement” in place to ensure they can operate independently from that shareholder.

The problems raised by a dominant shareholder’s influence surfaced again in 2017 when the FCA proposed creating a new “premium listing” category for sovereign-controlled companies. The category would have allowed Aramco, which had planned to list 5% or less of its equity, to skirt the full range of premium listing requirements designed to protect minority investors.

In the end, Aramco canceled the London leg of its IPO roadshow, raising just over $25 billion on the local Tadawul bourse in December.

But the fiasco at NMC shows that regulators need to do more to ensure high standards of regulation and corporate governance are being adhered to, and the City’s reputation is not at risk.



Original source link