Discovery's Chinese JV is an Opportunity

JSE-listed Discovery is a stock that has lagged the market quite badly in recent times. Its all-time high stock price was R190 in March 2018. Now it is trading at just over R100 a share. Urgh!

Group profits have been held back by expensive new business launches, especially the mobile-only, next generation Discovery Bank. I'm a customer there, and I use their Visa premium credit card as my primary means of paying for things at the point of sale, and it seems to work pretty well. They now have 78 000 bank clients, with R1.2 billion in retail deposits and R1 billion in credit granted.

As Bright mentioned recently when he wrote about Discovery's 6-month results, the VitalityLife unit in the UK was the one that let down the side. It incurred costs on interest rate hedges and broker commission payouts.

More than half of the group's profits come from the Discovery Life operation in South Africa. I'm a big client there too, so they really don't want me to die soon! That unit had some problems a year ago, but sorted them out in the last reporting period.



The traditional Discovery Health business is still doing well, although the South African Government's idiotic national health proposals are still hanging around, and those could threaten the entire existence of that operation. My sense currently is that banning private medical aids and imposing heavy new payroll taxes in their place would spark a revolution of the middle classes. The recent budget showed that even the ANC can see that South African taxpayers are in a foul mood and are not to be messed with.

The brightest new light in the group is coming from the joint venture with Chinese health insurer Ping An. Discovery launched this business in 2010, where 75% is held by the Ping An group, which is one the largest Chinese life insurers. Ping An Heath sells a top-up medical aid insurance product to cover out of pocket expenses and hospitalisation costs. This business made operating profits of R68 million, which was 467% higher than in the first half of 2018. Premiums written in 2019 rocketed to ¥10 billion (R21.5 billion). Their goal is to reach ¥100 billion in premiums in the years ahead.

Thankfully, the Chinese government decided recently to cover the costs of treating patients that contract the Coronavirus. Also, Ping An health did not yet have significant numbers of customers in Wuhan and the wider Hubei province.

Ping An looks really, really promising. They have over 16-million customers already and the Chinese population is so big that the sky is literally the limit. We are still accumulating Discovery shares in local portfolios.