23 April 2019
Greentown China Holdings will pay a hefty premium for an 11.55 percent stake in Aeon Life Insurance. Photo: HKEJ
Greentown China Holdings will pay a hefty premium for an 11.55 percent stake in Aeon Life Insurance. Photo: HKEJ

Developer Greentown’s odd move to buy an insurer

Soon after Chinese developer Greentown China Holdings (03900.HK) announced its plan to spend 2.72 billion yuan (US$393.98 million) to acquire an 11.55 percent stake in Aeon Life Insurance, investors voted with their feet and Greentown shares took a plunge. 

While Greentown China didn’t disclose the seller, Chinese conglomerate Dalian Wanda Group is the only shareholder that holds an 11.55 percent stake in Aeon Life. It’s estimated that Wanda paid around 1.1 billion yuan for the stake amassed between 2014 and 2015. As such, the transaction price to be paid by Greentown represents a hefty premium. 

The deal would value Aeon Life at 23.7 billion yuan, which represents a P/E multiple of 68 times and P/B ratio of 4.6 times. The valuation is way above that of sector leaders, which trade at around 10 times P/E and 1-2 times P/B. 

Aeon Life’s financials are also weak, compared with those of peers. As of September, its core solvency ratio stood at 91.19 percent, far below the nation’s average level of 235 percent. And the gauge has dropped for eight straight quarters. 

Naturally, it’s difficult to convince Greentown shareholders why the company had to buy into the insurance firm at such a high price.  

In its filing with the stock exchange, Greentown explained that Aeon Life “will bring synergy to the Group with the potential of cross-selling as the main clientele of the Company, namely property purchasers, may overlap with the Target Company’s clientele for conservative insurance”. 

Given the tight funding environment in the real estate sector, such flimsy cross-selling benefit is by no means enough to justify the huge cash layout for an investment that could, at best, take many years to pay back. 

Not to mention that Aeon Life is far from outstanding among the 200-plus insurers in China. 

Greentown definitely owes investors a better explanation.  

When I saw the deal, I can’t help but wonder to myself if it had something to do with the newly appointed chief executive Zhang Yadong. 

In 2015, the state-owned China Communications Construction Group (Limited) (CCCG) acquired a 29 percent stake in Greentown from three Greentown shareholders, including founder Song Weiping. 

The deal has made CCCG the largest shareholder of Greentown. In August CCCG appointed Zhang Yadong CEO of Greentown. 

Zhang was the vice mayor of Dalian between 2013 and 2016. Seller Wanda is based in Dalian and, guess what, Aeon Life’s headquarters is also in Dalian. What a coincidence. 

This article appeared in the Hong Kong Economic Journal on Dec 21 

Translation by Julie Zhu 

[Chinese version 中文版

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Hong Kong Economic Journal columnist

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