Discovery billion-rand Chinese powerhouse

Discovery’s early investment in Chinese health insurance giant, Ping An, is beginning to pay off as the investment contributed R1.1 billion to the South African company’s operating profit in the past financial year. 

This was revealed in Discovery’s annual results for the financial year to the end of June, released last week. 

While much focus was placed on the group’s South African businesses, which generate most of its revenue, few bothered to look at the strong performance of its global offerings. 

Discovery has been on a long and difficult journey with Ping An, first investing in the Chinese giant in 2009 when it acquired a 24.99% of the company. 

CEO Adrian Gore told Daily Investor that the company was lucky to get this investment in Ping An due to Chinese regulations and that it is not looking to expand further into the market. 

When Discovery invested in 2009, Ping An was the second-largest insurer in China and had a market cap of only R319 billion. 

The company’s market cap is now over R1 trillion as the company has undergone tremendous growth in recent years. 

“The Chinese private health insurance market, while in its infancy, presents a unique opportunity for growth and scale,” Discovery told shareholders in 2009. 

The inadequate coverage of the Chinese Social Health Insurance system and greater individual wealth in China created a demand for private medical insurance. Discovery saw this gap and took it. 

Luckily for Discovery, at the same time, the Chinese government recognised the shortcomings of its state system and began encouraging private health insurance through its reforms. 

Ping An was a natural option for Gore. It is the leading health insurance provider in China and the first company to be founded solely on insurance in the country. 

“Ping An Health provides an established, scalable entry point into the Chinese private health insurance market,” the 2009 SENS announcement read. 

“Ping An already has an established presence in the Chinese health insurance market through its insurance businesses and specialist health insurer, Ping An Health – into which Discovery will be investing.” 

In hindsight, this investment seems easy and fairly obvious. However, at the time, it was unclear whether the Chinese economy would emerge from the Global Financial Crisis unscathed and whether its new middle class would have needs and behaviours similar to those of Westerners. 

As much as this was a bet on private health insurance, it was a bet on the Chinese economy. Fifteen years later, Discovery is being proven right. 

In its latest set of results, Discovery reaped handsome rewards from the investment made in 2009, with Ping An Health contributing R1.1 billion in operating profit to the company. 

The Chinese company achieved a key milestone for the period by paying its first dividend to shareholders. Discovery received R255 million after withholding tax. 

Encouragingly, new business in China continued to boom – increasing by 14% to R2.49 billion for the period. Total written premiums soared by 15%. 

Gore told Daily Investor that this was not always the case, with the journey to this point being long and difficult. 

“It has been a long process to get Ping An to where it is today. We have been there a long time, and it has done amazingly well,” Gore said. 

“You know, as I was trying to show in my investor presentation, there is nothing magical that took place within the business. It was just block and tackle and hard yards.” 

“It is a brilliant business. It covers 27 million people and has R50 billion worth of investment. I mean, it is a massive, massive business that is being run very well.”

Gore said the company is not looking to invest further in China or Asia. It has made its play with Ping An and will work hard to grow that business. 

Discovery is also not allowed to buy more of it due to Chinese regulations, with Gore saying the company was even lucky to get the initial 25% in 2009. 

Some of Discovery’s competitors, such as Sanlam and Santam, have looked to India for growth in Asia as it appears to be the next large, global growth engine. 

Similarly to when Discovery invested in Ping An, the investments from those companies are as much a bet on insurance growth as economic growth in Asia. 

Gore explained that most of Discovery’s international expansion will come through its Vitality Network business, which he said has plenty of blue sky ahead of it. 

Through this business, Discovery effectively licences out its Vitality shared-value model to other insurers in markets in which it does not operate. 

The graphic below shows Ping An Health’s tremendous growth in the past financial year.