Cathay Life Insurance Co’s (國泰人壽) announcement last week that it would divest itself of some real-estate holdings is a potentially positive move to enhance the insurer’s investment yield, Credit Suisse Securities said.
However, the proposed adjustments may only have an effect on its parent company’s share price in the short term, compared with the prospect of rising yields in long-term government bonds, Credit Suisse analysts Chung Hsu (許忠維) and Michelle Chou (周盈秀) said in a research note on Friday.
“We do not expect these property adjustments to have meaningful impact on Cathay Financial’s valuation as unrealized property gains were already captured in the [insurance unit’s] embedded value,” Hsu and Chou wrote.
Embedded value refers to adjusted net asset value and the value of a company’s future profits.
That is different from appraisal value, which is based on a projection of future cash flow from the company’s assets, as well as from its current and future operations.
The biggest driver for Cathay Financial’s share price is still in bond yields, the analysts said, adding that bond yields already marked up significantly last year.
Shares of Cathay Financial Holding Co (國泰金控), the nation’s largest financial service provider by assets, closed at NT$45.80 on Friday in Taipei trading.
They have declined 5.08 percent since the beginning of the year, against the broader market’s 1.14 percent fall over the same period, Taiwan Stock Exchange data showed.
On Wednesday, Cathay Life’s board approved a plan to divest some of its property investments to enhance the efficiency of asset allocation, Cathay Financial said in a stock exchange filing.
The announcement came after Cathay Financial chairman Tsai Hong-tu (蔡宏圖) said last month that the company’s life insurance unit would selectively dispose of its real-estate holdings in Taiwan since the firm had completed a number of urban renewal projects, converting old office buildings into hotels and selling fractional land lots to improve the company’s return on investments.
With rental yields for office buildings already falling below 2 percent in Taipei, Credit Suisse said it should be no surprise to see Cathay Life’s decision to sell some of its holdings, especially with an internal view that bond yields will likely rise further in the second half of the year.
Cathay Life is the largest landowner in the nation, with 210 buildings worth NT$260 billion (US$8.57 billion) and an unrealized gain of NT$115 billion in its real-estate portfolio, according to Credit Suisse’s estimate.
UBS Securities places the size of the firm’s unrealized gains at about NT$190 billion, the biggest among its local peers.
“Selective disposal of the property portfolio would unlock value and better shield the company against any weakness of the property market upon a less benign liquidity environment,” UBS Securities analyst Kelvin Chu (朱曉暐) said in an earlier note.
Although the firm has not yet offered any details about its divestment plan, the announcement has raised mixed reactions from the market.
Some investors welcome the move to smooth the company’s earnings volatility and enhance its overall asset yield, while others worry about the local property market outlook.
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