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China's Big Short Looks More Like a Big Squeeze to Investors

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  • Ping An short interest climbs to a record in Hong Kong
  • Bears see regulatory risk; bulls tout growth, low valuation

Traders who think they’ve found China’s next big short could be setting themselves up for a squeeze.

That’s the takeaway from top-ranked fund managers and analysts after short interest in Ping An Insurance Group Co., China’s largest non-state controlled financial firm, swelled to a record HK$54 billion ($6.9 billion) in June. It’s by far the biggest bearish wager on Hong Kong’s stock exchange, where most of China’s top companies have listings.

While pessimists argue that Ping An is vulnerable as Chinese regulators crack down on the nation’s financial industry, some of the most prescient stock pickers in Hong Kong disagree. They say the company’s low valuation, outsize growth and knack for avoiding the government spotlight could extend the stock’s 39 percent rally this year.

“I would not short it,” said Alex Wong, whose $110 million Leverage Partners Absolute Return Fund outperformed 99 percent of peers tracked by Bloomberg over the past five years. He cited Ping An’s push into China’s fast-growing Internet finance sector as a potential trigger for further gains.

Read more: A Bloomberg Intelligence Primer on Ping An

If Wong is right, it could get painful for bears. Short interest in Ping An climbed to 13.9 percent of the company’s Hong Kong shares outstanding as of June 23, up from an average of about 10 percent since the city’s securities regulator and Webb-site.com began compiling the data in 2012. That compares with the latest citywide average of about 1 percent.

Ping An shares rose 3.7 percent to close at HK$53.80 in Hong Kong on Wednesday, making it the biggest gainer in the Hang Seng Index.

Not all Ping An short positions reflect pessimistic views. Some are attributable to banks and brokerages, which often need to short the stock to facilitate derivatives sales or hedge other client-related transactions. Arbitrage trades may also be adding to the tally as speculators bet on the price gap between Ping An’s shares in Hong Kong and Shanghai.

Industry Proxy

Yet much of the recent jump in short interest appears tied to China’s financial clampdown. Not only have regulators targeted insurers -- sending shudders through the industry after the detention of Anbang Insurance Group Co.’s chairman in June -- they’ve also tightened curbs on banks and asset managers.

Ping An is a major player in all three industries, making the stock a tempting proxy for bears who want to bet against the country’s entire financial sector.

“Ping An faces the biggest regulatory risk compared with other insurance firms, given its multiple exposures to different aspects of China’s financial market, including insurance, banks, capital markets and even fin-tech,” said Dayton Wang, a Hong Kong-based analyst at Hua Tai Securities who has a hold rating on the shares.

Read more: A QuickTake Q&A on China’s regulatory clampdown

While even bulls concede that Ping An isn’t immune to this year’s crackdown, the company still managed to boost first-quarter earnings by 11 percent. That followed a 15 percent gain in net income last year, a period when industry-wide profits dropped almost 30 percent.

“Ping An has been working hard to raise its return on equity,” said Jerry Li, a Hong Kong-based analyst at China Merchants Securities who has a buy rating on the stock. His Ping An recommendations over the past year were tied for the most accurate among analysts tracked by Bloomberg.

Ping An’s online platforms have helped drive growth. New customers from the company’s Internet channel climbed 44 percent last year, accounting for 22 percent of the total, according to Bloomberg Intelligence analyst Steven Lam. Ping An, which counted one of every 10 people in China as a client at the end last year, added 11.8 million new customers in the first quarter, equivalent to twice Singapore’s population.

Relative Value

Investors have under-appreciated Ping An’s investment and success in technology, and its fintech businesses around the four key areas of finance, medicine, auto and housing, David Millhouse at Forsyth Barr Asia Ltd. wrote in a July 2 report.

Despite its rapid expansion, Ping An is still valued at a discount to global peers. The stock fetches just 12 times reported earnings, versus 15 for the MSCI World Insurance Index, according to data compiled by Bloomberg.

“Chinese insurers are still trading at lower multiples,” said Arthur Kwong, head of Asia Pacific equities at BNP Paribas Asset Management. “They are still affordable.”

Kwong, whose Parvest Equity Best Selection Asia ex-Japan fund has outperformed 88 percent of peers over the past three years, said China’s government is likely to encourage the insurance industry’s long-term expansion as an ageing population demands more coverage. Ping An was his fund’s biggest overweight position as of May 31.

The Shenzhen-based company is similarly upbeat about its prospects, saying in a response to questions from Bloomberg that it will enjoy “sustained and stable growth” as China’s insurance market expands and investments in technology bear fruit.

Unlike Anbang, Ping An’s life insurance unit gets the vast majority of its revenue from traditional, annual-premium policies. It has little exposure to the single-premium, savings-like products that supercharged Anbang’s growth and have recently been discouraged by regulators.

Read more: How Deal-Hungry Anbang Went From Waldorf to Woe

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Ping An’s life business, which accounts for about 70 percent of the company’s valuation, is the best of its kind in China, according to Grace Zhou, a Hong Kong-based analyst at ICBC International who has a buy rating on the shares.

Short sellers may want to take note.

— With assistance by Dingmin Zhang, Bei Hu, Kana Nishizawa, and Jeanny Yu

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