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9 January 2019
China Insurance SectorFocus charts and tables
Figure 2: Premium outlook tough, as demands of
saving type products softened …
Figure 3: … but protection sales (i.e., health)
remained solid and likely to accelerate further
36%35%
33%
41%40%
44%
51%
24%
30%
36%
42%
48%
54%
60%220
440
660
880
1100
1320
1Q111Q121Q131Q141Q151Q161Q171Q181Q19E
Gro
ss
Wr
itte
n P
rem
ium
in
Rm
b b
n
China life sector 1Q
GWP (LHS)As % of full-year GWP
(RHS)
A tough 1Q19
ahead
+2.7x
-20%
0%
20%
40%
60%
80%500
1,000
1,500
2,000
2,500
201120122013201420152016201711M18
Gro
ss
pre
miu
m i
n R
mb
bn
Life (excl. health)Health
Life premium growth (YoY)Health premium growth (YoY)
Source: CBIRC, Credit Suisse researchSource: CBIRC, Credit Suisse research
Figure 4: The sector (H-share) is trading at 0.69x
P/EV close to historical trough of 0.65x…
Figure 5: …and decent upsides even under bear
case of 4.0% L/T EV investment returns (base 4.5%)
0.6x
0.8x
1.0x
1.2x
1.4x
1.6x
Dec-12Dec-13Dec-14Dec-15Dec-16Dec-17Dec-18
Pric
e to
Em
bed
ded
Va
lue
(X
)
3yr average
1yraverage
5yr average
Valuation stress analysis Base case4.5%Bear case4.0%
CompanyTickerLast closeTPUp/dnFVUp/dn
China Life (H)
2628.HK16.5822.536%21.024%
Ping An (H)
2318.HK66.5587.031%82.023%
CPIC (H)
2601.HK24.6534.038%31.026%
NCI (H)
1336.HK27.6043.056%40.045%
China Taiping
0966.HK19.1628.046%26.036%
Source: Reuters, Credit Suisse research, price as of 08 Jan 2019Source: Company data, Credit Suisse estimates, price as of 08 Jan 2019
Figure 6: China insurance valuation comp
CompanyTickerCSTP (%)Up/dnMkt capADTP/BV(x)ROE(%)P/EV(x)Adj P/EV(x)*Adj P/EV(x)**
RatingLocalTargetChg(%)US$mnUS$mn5%/11%4.5%/11%
last close
Ping An (H)2318.HKOPFM66.5587.00-9%31%151,3943351.8x23.1%0.90x0.90x0.95x
China Taiping0966.HKOPFM19.1628.00-18%46%8,785190.9x11.3%0.43x0.43x0.45x
New China Life (H)1336.HKOPFM27.6043.00-4%56%15,604231.0x13.7%0.37x0.37x0.40x
China Pacific (H)2601.HKOPFM24.6534.00-11%38%34,328301.3x12.2%0.53x0.53x0.58x
China Life (H)2628.HKOPFM16.5822.500%36%76,452561.2x9.2%0.45x0.47x0.51x
PICC Group1339.HKOPFM3.013.90-15%30%3,351110.7x10.3%0.56x0.56x0.67x
PICC P&C2328.HKOPFM8.0610.00-5%24%22,872211.0x11.8%n.a.n.a.n.a.
China Life (A)601628.SSUPFM19.9919.000%-5%76,452161.6x9.2%0.62x0.62x0.71x
Ping An (A)601318.SSOPFM55.8073.50-10%32%151,3945651.7x23.1%0.86x0.86x0.91x
China Pacific (A)601601.SSNTRL27.9229.00-11%4%34,328731.6x12.2%0.69x0.69x0.75x
New China Life (A)601336.SSUPFM39.3336.00-5%-8%15,604741.7x13.7%0.61x0.60x0.65x
12-month forward
Price
Note: Price as of 08 Jan 2019. P/EV* adjusted for 5% investment return and 11% RDR; P/EV** adjusted for 4.5% investment return and 11% RDR Source: Reuters, Company data, Credit Suisse research.
9 January 2019
China Insurance SectorChallenges already priced in
A key year of quality improvement
New business (NB) sales continue to be tough. Headwinds, such as domestic economy’s
slowdown, evolving customer appetite, and difficult agency expansion, are likely to persist
in the near term and weigh on growth, particular on saving type products. Protection sales,
however, are more resilient and should achieve better momentum. Facing above changes,
some played down ‘jumpstart’ sales, and adjusted strategy with greater protection focus.
In the near term, growth is difficult, but shift towards protection should lift margin—VNB trend
should be better than FYP. In the medium term, quarterly FYP/VNB distribution would be
more balanced with less seasonality effect. An in-depth protection shift also benefits insurers
with steady earning streams and stable cash flow, paving way for sustainable value growth.
We remain positive about L/T growth prospects at mid-teens level, on the back of low
insurance penetration, demographic profile, and prudent regulatory oversight.
Depressed bond yield already priced in
We share investors’ concern over falling rates, and further decline would continue to dampen
sector sentiment and weigh on share price in the near term. However, our analysis indicates
that depressed bond yield has already been priced in: current prices of insurers (H) imply 3%
L/T investment returns under EV (or CGB 10-year yield under 2.5%), far below the 4.0%
investment assumptions in our bear case. Further, we do not expect a replay of 2016, during
which sector’s P/EV multiple was de-rated by 30% on falling rates, rising liability costs and
fierce competition with ‘platform’ insurers. Unlike 2016, we see positive changes, such as
better liability duration management. We maintain our
base case
assumptions (i.e., 4.5% EV
investment return), as: (1) new money yield stands at ~4.5% (CGB 10-yr yield ~3.2%) and
(2) recurring return is less volatile and provides some buffer to the total investment yield.
Even under the
bear case
of prolonged low rate environment, where a4.0% EV investment
assumption (CGB 10-year at 2.7%) is applied, we derive insurers’ new fair values that still
present decent upsides of 23-45% to current stock prices.
On A-share, CS strategist expects CSI 300 target of 3,600 in 2019E, or 18% upside under
the base case (a 65% likelihood). Stock market volatility under trade war overhang, however,
is likely to be a wild card and could weigh on sector’s stock performance in the near term, as
investors tend to trade insurers as market proxies (correlation of 0.85 and R-square of 0.83
since Jan 2018). Our analysis suggests that impact from A-share market weakness should
be manageable. Assuming a 10% decline in equity price (or a 15% equity return deviation
from EV assumptions), the negative EV/NAV impact would be 4-6%/3-8% and sensitivity
reduces to 3-5%/2-7%, if the risk-sharing effect of participating policy is considered.
P&C S/T overhang, but L/T fundamentals intact
P&C premium growth remains subdued, against a backdrop of macro downtrend. On
combined ratio, we expect a slight increase, given the pressure from prevailing motor
commission rates, while tax burden could possibly be alleviated with the hope of tax rule
relaxation. We see overhangs (i.e., motor slowdown, rising commission) in near term, but
L/T positive is intact, given China’s under-penetration and policy support (i.e., agro lines).
Retain OVERWEIGHT; double-digit RoEV, 0.69x P/EV
Retain OVERWEIGHT sector view, on undemanding valuation, resilient return on EV
(RoEV) and L/T growth prospect, despite lack of catalysts in the near term. Risk-reward is
attractive in the medium term, and deep value has emerged, on: (1) mid-teen 2019E
RoEV, (2) improving quality and (3) 0.69x P/group EV valuation (a 0.46x P/group EV,
excluding Ping An), close to the historical trough of 0.65x. Ping An remains a long-term
core holding, given its sector leading RoEV and tech-powered profitability, despite 1Q19
FYP challenge. Underweight NCI (A) due to significant valuation premium to (H). Should
the 10-year CGB stay at above 3%, we also see trading opportunity for China Life (H),
given: (1) 1Q19 turnaround (double-digit VNB growth), (2) greater emphasis on market
value management (i.e., improving info disclosure) under the new chairman, and (3) an
undemanding valuation of 0.45x P/EV with low institutional investor position.
NB sales tough in near-
term, but protection
shift should lift margin.
Remain positive on L/T
growth prospects
Falling rates weigh on
near-term sector
performance, but