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Another example of insurance funds raising stakes! On August 13, Ruizhong Life Insurance announced that it raised stakes in China Duty Free Group's H shares. This is the 11th time that insurance funds have raised stakes in listed companies this year. Since the beginning of this year, insurance funds have frequently "bought" A-share and H-share listed companies, which has attracted much attention from the market.

In this round of bidding, the targets of insurance funds are mainly concentrated in the fields of public utilities, transportation, etc. Insurance funds mainly focus on high-dividend value stocks and sectors with relatively reasonable valuations. From the analysis of the motivation, the secondary market is currently at a low level. The reason why insurance funds frequently bid is to ensure that the cost requirements of the liability side can be met in the context of asset shortage with the downward trend of the central interest rate.

Low-level placard

With the continuous favorable policies for entering the market, insurance funds have seen a significant rebound in their stakes. Before Ruizhong Life Insurance made its move, there had been 10 cases of insurance funds raising stakes this year. Great Wall Life Insurance is the institution that has raised stakes the most this year, with 6 times this year. Ruizhong Life Insurance and "Taibao Group" companies have raised stakes twice each. Another stake was raised by Zijin Property & Casualty Insurance, which raised stakes in Huaguang Environmental Energy at the beginning of the year.

Such a high frequency indicates a new round of bidding by insurance funds. Looking back, around 2015, some small and medium-sized insurance companies launched the first round of bidding in the insurance industry. At that time, the real estate industry was in a boom cycle, and its long-term stable cash flow was in line with the needs of insurance funds. The second round of bidding occurred around 2020, and the main bidders were the leading insurance companies, which paid more attention to the growth potential of the bidders.

Judging from the timing of the stake raising, the goal of this round of insurance funds to "buy at the bottom" is clear. Taking the China Duty Free Group H shares held by Ruizhong Life Insurance as an example, its share price has been falling from the highest point of HK$280 per share in January 2023. Since the beginning of the year, China Duty Free Group H shares have fallen by 31.69%. Ruizhong Life Insurance increased its holdings of China Duty Free Group H shares on August 7, and the closing price on that day was HK$55.45 per share.

From the perspective of the industries in which the companies are held, they involve sectors such as transportation, public utilities, consumption, and banking, and the companies held as a whole show high dividend characteristics. Among them, Great Wall Life Insurance prefers utilities and transportation stocks the most when holding shares. When holding shares in Ganyue Expressway, Great Wall Life Insurance once stated that the low-interest rate market environment and highly volatile stock market in the past two years have brought considerable pressure on the long-term allocation of insurance funds. The company is committed to conducting in-depth research on safe assets invested in infrastructure, people's livelihood, and energy, actively deploying listed companies in ports, highways, energy, water, and environmental protection, and taking ESG and new quality productivity as key investment directions.

Insurance funds are concentrated in the equity market to "bottom-fish" and look for high-quality targets, reflecting the challenges and tests that insurance companies are facing in the current use of funds. Yue Xiangyu, associate professor of the School of Economics at Shanghai University of Finance and Economics, told Beijing Business Daily that in the context of falling interest rates, insurance companies are seeking higher-yield investment channels to alleviate the asset shortage problem and reduce the risk of interest rate spread losses. In a low-interest environment, the yields of traditional fixed-income assets have declined, and insurance companies can seek potential high returns from equity investments by holding shares in listed companies.

Accelerating the layout of Hong Kong stocks

Another obvious feature of this round of insurance capital acquisitions is the recent acceleration of investment in Hong Kong stocks. A Beijing Business Daily reporter found that five H-share listed companies have received insurance capital acquisitions in the past month.

In addition to Ruizhong Life Insurance's stake in Longyuan Power H shares and China Duty Free Group H shares, the "Tai Ping Insurance Group" bought Huadian Power International and Huaneng International through the Hong Kong Stock Connect. At the beginning of the month, Great Wall Life Insurance raised its stake in Green Power H shares.

In terms of increasing holdings, the "Ping An Group" has increased its holdings of ICBC H shares several times in the past two months. For example, on August 5, according to data from the Hong Kong Stock Exchange, Ping An Asset Management recently increased its holdings of ICBC H shares by 10 million shares, at a price of HK$4.3378 per share, with a total amount of approximately HK$43.378 million; the number of shares held after the increase is approximately 13.024 billion shares, accounting for approximately 15% of ICBC H shares.

Regarding the investment preferences of insurance funds, Yue Xiangyu analyzed that both A-shares and H-shares have investment value, but for cross-market stocks, the main consideration is their discount or premium. The valuation of some listed companies' H-shares is more reasonable than that of A-shares, and insurance companies will choose their H-shares for investment. Wang Peng, an associate researcher at the Beijing Academy of Social Sciences, also said that compared with the A-share market, the valuation of some companies in the current Hong Kong stock market is more attractive, providing insurance funds with lower-cost investment opportunities.

Future stock addition logic

Insurance funds prefer to allocate high-dividend assets not only to meet the demand for income, but also to smooth the impact of stock price fluctuations on the current net profit of insurance companies under the influence of the new accounting standards. Huachuang Securities Research Report pointed out that because more equity assets are recorded in FVTPL (financial assets measured at fair value and whose changes are included in current profit and loss) under the new accounting standards, equity market fluctuations directly affect the stability of net profit. In order to smooth the fluctuations in the financial statements, insurance companies have the demand and trend to increase FVOCI (measured at fair value and whose changes are included in other comprehensive income) assets. The fair value fluctuations of FVOCI assets are included in other comprehensive income, but dividends can be included in the income statement.

Insurance funds that pursue long-term stable returns have always actively invested in the bottom valuation range of the equity market. Recently, both Hong Kong stocks and A-shares are in a period of adjustment, which means that the pace of subsequent insurance funds investing in the equity market is expected to accelerate.

When talking about the future insurance fund increase position ideas, Wang Peng said that there are three categories worth paying attention to: low valuation, high dividend blue chip stocks, such stocks usually have stable cash flow and dividend ability, which meet the insurance fund's demand for long-term returns and cash flow stability. Growth industry leading stocks, in new energy, technology, high-end manufacturing and other industries that are in line with the national strategic development direction, industry leading stocks with growth potential are expected to become the target of insurance funds to increase their positions. High-quality companies with high ROE and high dividends, companies with high return on equity (ROE) and stable dividends can improve the overall ROE level of insurance funds and reduce investment risks, so they are also expected to continue to be favored by insurance funds.

Just on August 14, the China Insurance Asset Management Association announced the results of an investor confidence survey on the insurance asset management industry in the second half of 2024, showing that in the second half of the year, insurance institutions are more optimistic about the CSI 300 related stocks, paying attention to public utilities, electronics, non-ferrous metals, banking, petroleum and petrochemicals, communications and coal and other fields. They believe that consumption, real estate recovery and corporate profit growth rate are the main factors affecting the A-share market in the second half of the year.

Beijing Business Daily reporter Li Xiumei