Shin Kong shares could drop: analyst

The property-rich Shin Kong Financial Holding Co (新光金控), owner of the nation's No. 2 life insurer, yesterday reported a less-than-expected unrealized gain of real estate assets, which an analyst said could bring down the company's share price in the short run.

Flagship Shin Kong Life Insurance (新光人壽) yesterday reported its embedded value -- an indicator used to gauge the present value of an insurance firm -- which rose 30.5 percent year-on-year to NT$115.2 billion (US$3.46 billion) at the end of last year.

Appraisal value after taking into account the value of new policies for the next two decades, which indicates future profits, increased to NT$170.4 billion, or NT$36.26 per share of the value of the parent group, up 19.2 percent from NT$143 billion, or NT$35.1 per share, one year ago.

However, the unrealized gains of the company's property assets estimated at NT$28 billion after revaluation at the end of last year marked a rise of about only 7 percent from two years ago, falling behind market expectations for appreciation worth some NT$40 billion and a 20 percent markup in housing market last year.

Shin Kong Financial owns NT$111.1 billion in market value worth of real estate after taking the unrealized gain into account.

"The minimal increase is because 70 percent of our properties are commercial buildings and retail complexes whose price hikes cannot not match the pace in the housing sector and we also have to exclude NT$4.9 billion of realized gains from real estate securitization last year," Shin Kong Financial's chief financial officer, Winston Jung (榮覺生), told an investors' conference yesterday.

However, the unexpected result could pose a short-term negative impact on the company's share price, which has benefited from a property boom, said Chu Yu-chun (朱玉君), an analyst at SinoPac Securities Corp (永豐金證券).

In comparison, larger rival Cathay Financial Holding Co (國泰金控), which posted a 75 percent rise in property value in 2001, or markup of about NT$60 billion, said last week it would undertake revaluation at the end of this year, which sparked market optimism for the company's rising investment value.

For the first three months of this year, profits of Shin Kong Financial edged up by 3 percent from a year ago to NT$7.36 billion, or NT$1.56 per share, with more than 92 percent coming from its lucrative life insurance business.

Banking arm Shin Kong Bank (新光銀行) returned to the black with earnings of NT$93 million, compared with a whopping loss of NT$977 million a year ago because of largely reduced provision costs.

The bank could become profitable this year, Jung said.

However, the anticipated passage of the personal bankruptcy bill by lawmakers could boost the estimated loss ratio of restructured loans to 50 percent from its current estimated 30 percent, Jung said.

Shin Kong Financial is expected to earn NT$10 billion, up from NT$5.3 billion last year.

"The insurance-centric financial group remains a stable, defensive investment target," said Chu, who gave a buy rating for the company with a target price of NT$35.

Looking ahead, Shin Kong Financial said it expects to obtain a green light from the Chinese insurance authority next quarter to form a joint venture with strategic partner Hainan Airlines (海南航空) to make inroads into the rising life insurance market there.

The venture can start operations in the second quarter next year by setting up its first foothold in Beijing, company spokesman Victor Hsu (許澎) said.

The company could take a measured pace in bank expansion as Hsu said life insurance business could remain the driving force powering the company over the next five years.

Shin Kong Financial shares closed down 0.3 percent at NT$32.8 on the Taiwan Stock Exchange yesterday.