China Life Insurance Sector

Transcription

1 Research Sector Report Hong Kong China Undervalued; Maintain Positive on long-term outlook China has released a series of policies for the insurance sector following the third Plenum of China. Some policies include: Commercial retirement annuities with tax deferral to support the development of annuities, and encourage the development of critical illness insurance and other innovative products. We believe, while annuities with tax deferral will be a long-term growth driver, the short-term impacts from the policies are minimal. Rating: Rating Change: Top Pick Ping An Insurance (02318 HK) China Taiping (00966 HK) Positive Maintained Recent misunderstandings on China life insurance sector. Recently, markets are positive on China life insurance sector because of low life insurance depth and rising debt yield. We are cautious on the markets view and provided strong statistical evidence contrary to markets view. Stock Performance Ping An Insurance 15.0 % of return (5.0) (10.0) (15.0) But long-term potential of China life insurance sector is promising. We believe the long-term potential of China life insurance sector is promising based on: (1) China life insurance stocks are apparently undervalued; (2) Long-term growth potential will be driven by the development of pension products; (3) Innovation with distribution channel will improve the efficiency of life insurance players (while increasing competition). Maintain Positive rating for China life insurance sector. (20.0) (25.0) (30.0) (35.0) Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 HSI Index Ping An China Taiping 10.0 % of return (5.0) (10.0) (15.0) (20.0) (25.0) Top picks are Ping An (02318) and China Taiping (00966). Ping An Insurance (02318) has a strong focus on the internet distribution channel for insurance products. Its NBV grew by 14.2% YoY in 1H13 which outperformed peers. Maintain Buy for Ping An (02318) with TP of HK$90, representing approximately 3.0x 13PB or 2.5x 14PB. China Taiping s (00966) cumulative life premiums up 47.4% YoY in 1-11M13, fastest compared to major peers. Focusing on agency channel generating quality life insurance business, China Taiping targets to double its agency force to 120k by the end of 2013 and further increase the agency force to 150k by the end of Maintain Buy for China Taiping (00966 HK) with TP of HK$24.0, representing 2.6x 2013PB or 2.2x 2014PB. (30.0) (35.0) Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 (Source: Bloomberg) Analyst HSI Index China Taiping Felix Luo SFC CE Number:AQF573 Tel: (852) FelixLuo@gfgroup.com.hk GF Securities (Hong Kong) Brokerage Limited ( GF Securities (HK) ) 29-30/F, Li Po Chun Chambers, 189 Des Voeux Road Central, H.K. Company Name Code Price (HK$) 13EPS ( %) 14EPS ( %) 13 PER 14 PER China Life Ping An CPIC NCI China Taiping P/B 13P/B 13ROE (%) Source.. Company data, GF Securities (HK) Research

2 Brief review of policies from China s third Plenum China has released a series of policies for the insurance sector following the third Plenum of China. Some important policies include: 1. Commercial retirement annuities with tax deferral to support the development of annuities, commercial insurance as a supplement to the basic pension scheme. 2. Encourage the development of critical illness insurance and other innovative products. 3. The CIRC continues to promote development of catastrophe, agriculture, health insurance. 4. The CIRC continues to promote life insurance premium rate liberalization. Our comments: 1. The key policy, the tax-deferred enterprise annuity, would offer up to 4% deferred tax benefit of the average monthly salary of the employee or less than 300% of the monthly average salary in the city. As the total amount of tax benefit is small for an average worker, the incentive is not enough to boost short-term demand. In conclusion, overall short-term impacts are minimal. 2. In US, due to the implement of tax-deferred annuity scheme, the growth of annuity significantly outpaced the other life premiums since Therefore, we believe the policy of tax-deferred annuity will be the growth-driver of China life insurance sector in a long-term view. Annuity premiums outpaced other life premiums since 1985 in US US$ million Annuity outpaced other life premiums Other life premiums Annuity Source: ACLI, GF Securities (HK) Research Recent misunderstandings on China life insurance sector Recently, markets are positive on China life insurance sector because of low life insurance depth and rising debt yield. We will discuss these issues in details. Life insurance depth in China not really low. Investor normally thought China has a Low life insurance depth because it was 1.8% in China in 2012, lower than 3.5% in US and 4.4% in India. However, when taking into account GDP per capita, it appears to be different. According to the global S-curve (Sigma, 2010) below, a sustainable life insurance depth for China should be less than the current value (GDP per capita in China in 2012 is approximately US$8,358 based on current exchange rate). Therefore, the current life insurance depth in China is not really low as markets thought. In short, a higher GDP per capita in China (as a result of economic growth) is necessary to make current life insurance depth sustainable. Page 2 of 6

3 The global S-shape relationship between GDP per capita and insurance depth China s life insurance depth is higher than the S-curve suggested Source: Sigma, GF Securities (HK) Research Rising debt yield does not guarantee good stock performance of an insurance player. Bond yield has been rising in recent months. In theory, rising bond yield will lead to higher net investment incomes for the income statement and stronger position for the balance sheet of a life insurance company. However, it does not necessarily imply better stock performance of insurance players. For example, share price of China Life (02628) significantly dropped during Aug Sep. 2011, when bond yield appeared significantly higher. Therefore, we have cautious view facing the recent rising debt yield. Share price of China Life (02628) actually dropped when bond yield appeared higher Share price of China Life (02628) dropped when bond yield apparently higher, inconsistent with investors view. Source: Capital IQ, GF Securities (HK) Research Note: the Blue line is performance of China government 10Y bond yield; the Yellow line is share price performance of China Life (02628) Positive long-term outlook of China life insurance sector China life insurance stocks are apparently undervalued; positive long-term upside potential. A peer comparison of PB valuation is presented below. The figure clearly shows that the valuation of China life insurance players is at their historical low (even lower than at Oct. 2008). We believe, in a long-term view, China life insurance stocks are significantly undervalued. Page 3 of 6

4 Peer comparison of PB valuation China Taiping 966 China Life 2628 Ping An 2318 China Pacific 2601 New China Life 1336 Source: Capital IQ, GF Securities (HK) Research. Long-term growth potential is promising, driven by the development of pension products. The CIRC is encouraging commercial insurance players to play a role in the development of pension sector in China. Shanghai has initiated the test of tax-deferred private pension plan while Shenzhen is also aiming to join the plan. By the US historical experience, the tax-deferred private pension plan (401K) has been growing fast in the last decade. Therefore, we believe long-term growth potential (driven by the development of tax-deferred pension products) of China life insurance sector is promising. Figure: Total assets under U.S. 401K plans Figure: Annual contribution under U.S. 401K plans Source: US Department of Labor, GF Securities (HK) Research Source: US Department of Labor, GF Securities (HK) Research In a long-term view, the life insurance sector will be transformed by innovation with distribution channel. With the growth of the internet and mobile technology, it will greatly reduce the asymmetric information problem consumers traditionally face when dealing with a financial advisor alone. Simple products, such as term insurance, will increasingly be purchased online. Life insurers as well as competitors outside of the industry will take advantage of the opportunity to develop new, simplified and standardized products that are online compatible and will likely gain market share at the expense of more traditional models. The established insurers are certainly aware of the trend, and are adjusting their sales and distribution strategies accordingly. Cooperation between life insurance players and e-commerce platform China Life Ping An CPIC NCI Taikang PICC Life Cooperation Sina Tencent,etc. Sina Ctrip JD,etc. Sina Source: the Company, GF Securities (HK) Research Page 4 of 6

5 Top Pick As discussed, we are positive on the long-term potential of China life insurance stocks, and our top pick is Ping An Insurance (02318) and China Taiping (00966): Ping An Insurance (02318) 1. Ping An Insurance has always been an innovative player focusing on aggressive development. It has a strong intention to develop the internet distribution channel for life insurance products. 2. Ping An Insurance s operating results beat expectations. Its NBV grew by 14.2% YoY in 1H13, which outperformed many peers. 3. Favorable policies from China s 3rd Plenum in a long term view. 4. Maintain Buy for Ping An (02318) with TP of HK$90, representing approximately 3.0x 13PB or 2.5x 14PB. China Taiping (00966) 1. Its cumulative life premium up 47.4% YoY in 1-11M13, fastest compared to major peers. 2. The growth at Taiping Life Insurance is skewed towards the agency channel generating more quality business, as the Company targets to double its agency force to 120k by the end of 2013 and further increase the agency force to 150k by the end of Favorable policies from China s 3rd Plenum in a long term view. 4. Maintain Buy for China Taiping (00966 HK) with TP of HK$24.0, representing 2.6x 2013PB or 2.2x 2014PB. 1YrNBV of life insurance business (RMB) 1YrNBV per share of life insurance business 2011A 2012A 2013F 2014F China Life Ping An CPIC NCI China Taiping HK$0.66 HK$0.67 HK$0.85 HK$0.97 Source: the Company, GF Securities (HK) Research EV per share of life insurance players (RMB) EV per share of life insurance players 2011A 2012A 2013F 2014F China Life Ping An CPIC NCI China Taiping (Life segment) HK$6.30 HK$8.55 HK$10.64 HK$ Source: the Company, GF Securities (HK) Research Page 5 of 6

6 Company Rating Definition The Benchmark: Hong Kong Hang Seng Index Time Horizon: 12 months Rating Definition Buy Relative Performance >15%; or the fundamental outlook of the company or sector is favorable. Accumulate Relative Performance is 5% to 15%; or the fundamental outlook of the company or sector is favorable. Hold Relative Performance is -5% to 5%; or the fundamental outlook of the company or sector is neutral. Underperform Relative Performance <-5%; or the fundamental outlook of the company or sector is unfavorable. Sector Rating Definition The Benchmark: Hong Kong Hang Seng Index Time Horizon: 12 months Rating Definition Positive Sector outperforms the Hang Seng Index by 10% or more; or the fundamental outlook of the sector is positive. Neutral Sector outperforms or underperforms the Hang Seng Index by -10% to 10%; or the fundamental outlook of the sector is stable. Cautious Sector underperforms the Hang Seng Index by 10% or more; or the fundamental outlook of the sector is negative. Analyst Certification The research analyst(s) is primarily responsible for the content of this research report, in whole or in part, certifies that with respect to the Company or relevant securities that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views on the Company or relevant securities mentioned herein; and (2) no part of his or her remuneration was, is, or will be, directly or indirectly, in connection with his or her specific recommendations or views expressed in the research report. DISCLOSURE OF INTERESTS (1) Proprietary trading division of GF Securities (Hong Kong) and/or its affiliated or associated companies do not hold any shares of the securities mentioned in this research report. (2) GF Securities (Hong Kong) and/or its affiliated or associated companies do not have any investment banking relationship with the companies mentioned in this research report in the past 12 months. (3) All the views expressed in this research report accurately reflect independent views of the analyst(s). Neither the analyst(s) preparing this report nor his/her associate(s) serves as an officer of the company mentioned in this report and has any financial interests or hold any shares of the securities mentioned in this report. DISCLAIMER This report is prepared by GF Securities (Hong Kong) Brokerage Limited ( GF Securities (Hong Kong). It is published solely for information purpose and does not constitute an offer to buy or sell any securities or a solicitation of an offer to buy, or recommendation for investment in, any securities. The research report is intended solely for use of the clients of GF Securities (Hong Kong). The securities mentioned in the research report may not be allowed to be sold in certain jurisdictions. No action has been taken to permit the distribution of the research reports to any person in any jurisdiction that the circulation or distribution of such research report is unlawful. The information contained in the research report has been complied or arrived at from publically available sources believed to be reliable in good faith, no representation or warranty, either express or implied, is made by GF Securities (Hong Kong) as to their accuracy and completeness. GF Securities (Hong Kong) accepts no liability for all loss arising from the use of the materials presented in the research report, unless is excluded by applicable laws or regulations. Please be aware of the fact that investments involve risks and the price of securities may be fluctuated and therefore return may be varied, past results do not guarantee future performance. Any recommendation contained in the research report does not have regard to the specific investment objectives, financial situation and the particular needs of any individuals. The report is not to be taken in substitution for the exercise of judgment by respective recipients of the report, where necessary, recipients should obtain professional advice before making investment decisions. GF Securities (Hong Kong) may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in the research report. The points of view, opinions and analytical methods adopted in the research report are solely expressed by the analysts but not that of GF Securities (Hong Kong) or its subsidiaries. The information, opinions and forecasts presented in the research report are the current opinions of the analysts as of the date appearing on this material only which may subject to change at any time without notice. The salesperson, dealer or other professionals of GF Securities (Hong Kong) may deliver opposite points of view to their clients and the proprietary trading division with respect to market commentary or dealing strategy either in writing or verbally. The proprietary trading division of GF Securities (Hong Kong) may have different investment decision which may be contrary to the opinions expressed in the research report. GF Securities (Hong Kong) or its affiliates or respective directors, officers, analysts and employees may have rights and interests in securities mentioned in the research report. Recipients should be aware of relevant disclosure of interest (if any) when reading the report. Copyright GF Securities (Hong Kong) Brokerage Limited Without the prior written consent obtained from the GF Securities (Hong Kong) Brokerage Limited, any part of the materials contained herein should not (i) in any forms being copied or reproduced or (ii) being re-disseminated. GF Securities (Hong Kong) Brokerage Limited. All Rights Reserved /F., Li Po Chun Chambers, 189 Des Voeux Road Central, Hong Kong Tel.: (852) Fax: (852) Website: Page 6 of 6