The insurer announced the issuance of US$3.5bn convertible bonds (CB) to offshore professional investors outside the US on 15 Jul 2024, at 0.0875% par per annum due in Jul 2029. The proposed principal amount is within the range of an estimated US2bn-5bn, according to the Bloomberg news (link). Against the closing price on 15 Jul of HK$36.05, the initial conversion price of HK$43.71 implies a premium rate of 21.2% (Fig.1). Upon full conversion of the bonds, 625.2mn new H- shares will be issued, representing 8.39% of existing listed H-shares (7.45bn) and 3.43% of current share capital (18.21bn, Fig.2). We reckon the CBs' dilutive impact to be limited at roughly 3.43%, and the stock price fluctuation shall be short-term only, given 1) relatively low financing costs of raising the US$3.45bn net proceeds; 2) increased listed H-shares underpinning offshore liquidity; and 3) potential use of proceeds for capital injection into the Group's core business, such as Ping An Life, which is likely to boost the pro-forma life core solvency ratio in 1Q24 by 6.4pct to 125% (CMBI est.) assuming all capital injected and the minimum capital unchanged.

Increased H-share proportion + improved offshore liquidity. The CB scheme is convertible to 625.2mn new H-shares based on the initial conversion price at HK$43.71. Assuming full conversion of the bonds and no further share issuance, the total number of H-shares will increase to 8.07bn, accounting for 42.9% of the enlarged share capital of 18.84bn (vs now: 40.9%, Fig.2). On 16 Jul, the insurer announced the proposal of cancellation on 102.6mn A-shares repurchased from 27 Aug 2021 to 26 Aug 2022, partially offsetting the dilutive effect of future shares conversion and raising the H-share proportion to 43.1% (Fig.2, CMBI est). We reckon the dilutive equity impact of CB sales to be 3.43%.

Potential use of proceeds to boost the core solvency of Ping An Life. Under CROSS-II, the issuance of capital supplementary bonds can only boost tier-1 supplementary capital, transferring to a pick-up in comprehensive solvency ratio yet leaving the core solvency intact. In 1Q24, Ping An Life's core solvency ratio was 118.8%, slightly beating industry average of 113.5% and ranking the second lowest among listed life peers (Fig.7). We believe the potential capital injection from the Group to Life and/or P&C subsidiaries is possible, given the fact that the Group's increasing stakes in subsidiaries can be counted into core capital, and thus enhance the entity's core solvency ratio. We estimate the pro-forma 1Q24 life core solvency ratio to rise by 6.4pct to 125.2%, assuming all proceeds are injected and the minimum capital remains unchanged at RMB389.4mn (Fig.4).

Valuation: The stock is trading at FY24E 0.48x P/EV and 0.70x P/B, implying a dividend yield of 8.0% and FY24E ROE at 13.2%. The stock price dipped 5.41% on 16 Jul after the CB announcement. We expect the fluctuation to be short-term, given limited equity dilutive impact and potential use of proceeds for capital injection to core subsidiaries, i.e. Ping An Life, with relatively low financing costs. We maintain BUY with TP unchanged at HK$52.0, implying FY24E 1.0x P/EV.