Table 1: IPO Summary. Placing: (95%) 6,553.3 mn shares

Transcription

1 PICC Group (1339 HK) Core Pacific - Yamaichi 26/11/12 Offer price: HK$ China / Insurance / Company IPO Brief Emerging full-line insurance giant Second largest insurers in terms of combined TWP from P&C and life insurance Largest P&C insurer with market share of 36.3% in 2011 Strong growth in life and health insurance SUBSCRIBE 26 November 2012 Olive Xia, CFA 夏平 Tel: olive.xia@cpy.com.hk Forecast revision (%) Year to 31 Dec 12F 13F 14F Revenue change Net profit change EPS change Key Financials Year to 31 Dec Revenue (RMB mn) 141, , ,348 Growth (%) Net profit (RMB mn) 3,987 5,185 3,987 Growth (%) and Core Pacific Yamaichi O Investment positives Second largest insurers in terms of combined total written premiums (TWP) from P&C and life insurance Largest P&C insurer with market share of 36.3% in 2011 Emerging full-line business structure Synergies in cross-selling and operation efficiency Strong growth in life and health insurance Government policy to develop nationwide medical insurance Investment risks Intense competition in P&C insurance market Challenges in bancassurance sales Aggressive actuarial assumptions for life and health businesses Strict regulation on solvency margin ratio Our View At the offer price range of HK$ /share, the Company is valued at x FY11 P/E. Based on our estimates of P/EV for PICC Life and PICC Health, the offer price represents x P/EV as of 30Jun2012. We believe the valuation is reasonable on the back of its leading position in P&C insurance and strong growth in life and health insurance. Table 1: IPO Summary Offering 6,898 mn shares Placing: (95%) 6,553.3 mn shares IPO: (5%) mn shares Clawback 7.5% (15x-<50x); 10% (50x-<100x); 20% (>100x) Over-allotment Option 15% IPO subscribe period 26 November November 2012 noon Allotment 6 December 2012 Listing date 7 December 2012 Board lot 1,000 Bookrunner CICC, Credit Suisse, Goldman Sachs, HSBC Major shareholders Ministry of Finance (73.93%) Market capitalization HK$ bn (excluding Over-allotment Option) 2011 PER x (excluding Over-allotment Option) Source: company data and Core Pacific-Yamaichi Disclaimer: This report is for information only and is not to be construed as an offer to buy or sell securities. While the report is compiled using sources believed to be reliable, Core Pacific - Yamaichi International (H.K.) Limited ( CPYI ) does not guarantee its accuracy or completeness. CPYI may update or change any information contained in this report without any notice. Neither CPYI nor any of the companies of Core Pacific Group nor any individuals connected with the Group shall accept any legal responsibility arising from the use of or reliance upon the report. The copyright of this report belongs to CPYI and no person may reproduce or publish any part of this report for any purpose without CPYI s written consent. The authors of this report are Licensed Representative of Securities and Futures Commission and they guarantee that all the views expressed in this report accurately reflect their personal views. CPYI, any of the companies of Core Pacific Group, its directors and/or its employees may have positions in, and may effect transactions in securities mentioned herein which may be opposite to the position you take. 1

2 Second largest insurer in terms of total premiums Second largest insurer in China. PICC Group is the first nation-wide insurance company in PRC (established in 1949). The Company operates P&C insurance in mainland China through PICC P&C (2328 HK) and in Hong Kong through PICC Hong Kong. It also engaged in life insurance, health insurance, and asset management businesses in China. Moreover, it holds non-insurance financial businesses in banking and trust. PICC Group is the second largest insurer in China in terms of combined total written premiums (TWP) in life and P&C insurance. TWP from P&C, life, and health insurance reached RMB248.3bn/RMB148.9bn for 2011/1H12 respectively. PICC P&C (2328 HK) is the largest P&C insurer in China with TWP of RMB173.4bn/RMB100.9bn and market share of 36.3%/36.0% in 2011/1H12 respectively. The Company has leveraged on its well-known brand, extensive distribution network, and underwriting/claim management expertise to maintain its leadership in P&C market. PICC Life is the 5th largest life insurer in terms of TWP in 2011/1H12. TWP of PICC Life reached RMB70.4bn/RMB42.7bn for 2011/1H12, representing market share of 7.6%/7.5% respectively. PICC Health recorded TWP of RMB4.6bn/RMB5.3bn for 2011/1H12 and market share of 0.9%/1.2% respectively. Table 1: PICC Group: history Year/Month Milestone 1949 The People s Insurance Company of China (PICC) established in Beijing 1996 Restructured to PICC Group and set up three subsidiaries in P&C, life, and reinsurance 1998 Further restructured as PICC Holdings 2003/7 PICC Asset Management Co (PICC AMC) established 2003/11 PICC P&C (2328 HK) listed in HKEx (PICC Group's interest: 68.98%) 2005/3 PICC Health established 2005/11 PICC Life established 2007/5 Renamed as PICC Group 2007/8 PICC Investment established 2008/3 PICC Capital established 2009/9 Changed to a shareholding company and was wholly owned by MOF 2011/6 National Social Security Fund invested RMB10bn or 11.25% interest in PICC Group Table 2: PICC Group: subsidiaries/associates Subsidiaries: PICC P&C (2328 HK) 68.98% PICC Hong Kong 75% PICC Life PICC Health PICC AMC 81% PICC Investment 100% PICC Capital Zhongsheng Int l Insurance Brokers 82.54% CIB PIB Associates: China Credit Trust 32.92% Industrial Bank ( CH) PICC Group s interest 80% (direct and indirect) 90.98% (direct and indirect) 100% (indirect) 55.01% (indirect) 52.5% (indirect) Approximately 10.87% after proposed subscription expected in 1Q13 2

3 Table 3: P&C insurance market share Company Market share in 2011 Market share in 1H12 PICC P&C 36.3% 36.0% Ping An 17.4% 17.4% CPIC 12.9% 12.5% China United Property Insurance 4.4% 4.8% China Life P&C 3.4% 4.0% China Continent P&C 3.4% 3.2% Sunshine P&C 2.8% 2.5% China Export & Credit Insurance 2.1% 1.8% Others 17.3% 17.8% Table 4: Life insurance market share Company Market share in 2011 Market share in 1H12 China Life 29.6% 28.9% Ping An 16.4% 16.8% NCI 8.8% 8.5% CPIC 8.7% 8.6% PICC Life 7.6% 7.5% Taikang Life 7.5% 6.8% Taiping Life 2.9% 2.9% Sino Life 2.2% 2.4% Others 16.3% 17.6% (incl. PICC Health) 0.9% 1.2% Emerging full-line insurance group. Historically, PICC Group was mainly engaged in P&C insurance since its restructured businesses into three independent companies in P&C, life, and reinsurance in In an attempt to build a full-line insurance group, PICC established PICC Life and PICC Health in While P&C premiums still accounted for 67.9% of total gross written premiums in 1H12, life and health insurance represented 28.6% and 3.6% of total GWP during the period. Looking forward, we expect that the Company will further develop life and health businesses to capitalize on huge market potential and favorable policy tailwinds. Table 5: PICC Group: segment financial data (RMB mn) FY09 FY10 FY11 1H11 1H12 Gross written premiums (GWP) 168, , , , ,224 --P&C 119, , ,092 91, ,260 --Life 46,567 72,127 70,361 43,697 42,667 --Health 2,070 2,863 4,596 2,989 5,303 NP before MI 1,751 5,487 7,897 6,010 7,144 --P&C 1,983 5,342 8,065 5,327 6,576 --Life Health (482) (186) (297) --Asset Management Others and eliminations (556) (995) (1,881) (854) (894) 3

4 P&C insurance: improving combined ratio Improving combined ratio in P&C insurance. Due to stiff price competition, P&C insurers suffered from high combined ratio. As CIRC tightened regulation on unbridled competition and solvency margin, underwriting profitability in P&C insurance improved over the past years. In 1H12, the Company posted a record low combined ratio of 92.4% in 1H12 compared with 94.0%/97.7% in FY11/FY10 respectively. We expect the Company to maintain above-average profitability given its leading market position, experienced management team, and improving operation efficiency. Table 6: PICC: combined ratio (%) FY09 FY10 FY11 1H11 1H12 PICC Loss ratio Expense ratio Combined ratio Ping An Loss ratio Expense ratio Combined ratio CPIC Loss ratio Expense ratio Combined ratio

5 Strong growth in life and health insurance Strong growth in life and health insurance. The Company expanded life and health insurance at compound premium growth rates of 22.9% and 49.0% p.a. for FY It also relied on bancassurance sales to drive premium growth. Given current consumer preference and market condition, it mainly developed single premium participating products, which also contributed strong top-line premium growth over the past three years. On the other hand, due to the high proportion of single payment products (87.1% of life insurance TWP in 1H12), solvency margin for life and health insurance remained low at 136% and 101% as at 30Jun2012 respectively. Table 7: PICC Group: life and health premium income by channel (RMB mn) FY09 FY10 FY11 1H12 TWP 58,620 92,144 94,271 57,228 --Bancassurance 46,807 70,704 65,448 34,255 --Individual agent 5,622 10,639 16,392 10,125 --Group 6,191 10,801 12,431 12,848 % of total --Bancassurance 79.8% 76.7% 69.4% 59.9% --Individual agent 9.6% 11.5% 17.4% 17.7% --Group 10.6% 11.7% 13.2% 22.5% Table 8: Major life insurers premium income by product type (1H12) (RMB mn) PICC Life China Life Ping An Life CPIC Life NCI TWP 49, , ,837 55,229 55,950 Participating 42, ,728 59,715 44,180 51,883 Universal 4,896-37, ST A&H 1,027 8,623 4,593 2, LT Health - - 5,972-3,115 Traditional 1,535 20,087 4,249 8, Others - - 2, % of total Participating 84.9% 83.7% 52.0% 80.0% 92.7% Universal 9.9% % 0.1% 0.03% ST A&H 2.1% 4.9% 4.0% 4.9% 1.0% LT Health % - 5.6% Traditional 3.1% 11.4% 3.7% 15.0% 0.7% Others % - - and Core Pacific Yamaichi estimates Table 9:Solvency margin ratio (as of 30Jun2012) (RMB mn) PICC China Life Ping An CPIC NCI Group Actual capital 52, ,348 - Required capital 33, ,823 - Solvency margin ratio 156% - 177% 271% - Life insurance Actual capital 13, ,222 62,039 36,144 27,307 Required capital 10,034 71,226 37,080 19,709 17,199 Solvency margin ratio 136% 231% 167% 183% 159% P&C insurance Actual capital 41,553-19,625 15,638 - Required capital 22,579-11,935 8,063 - Solvency margin ratio 184% - 165% 194% - Health insurance Actual capital 1, Required capital 1, Solvency margin ratio 101%

6 Reasonable valuation Reasonable valuation. At the offer price range of HK$ /share, the Company is valued at x FY11 P/E. Based on our estimates of P/EV for PICC Life and PICC Health, the offer price represents x P/EV as of 30Jun2012. The implied new business multiple will be 2.5x at the high end of the IPO offer price range, given the strong new business growth in life and health insurance divisions. We believe the valuation is reasonable on the back of its leading position in P&C insurance and strong growth in life and health insurance. Table 10: Insurance sector valuation Price Mkt Cap P/EV P/E (x) P/B (x) Yield (%) Company Code (HK$) (HK$mn) 11 12F 11 12F 13F 11 12F 13F 12F 13F China Life 2628 HK , Ping An 2318 HK , CPIC 2601 HK , PICC P&C 2328 HK , NCI 1336 HK , CTIH 966 HK , AIA 1299 HK , Prudential 2378 HK , MANULIFE 945 HK , Source: Bloomberg and Core Pacific - Yamaichi 6

7 Table 11: PICC Group: P/EV estimates based on offer price PICC Group Notes (HK$ mn) Low-end Middle-end High-end 1 Offer Price (HK$/share) IPO share offering (mn) 6,898 6,898 6,898 3 Total shares after IPO (mn) 41,398 41,398 41,398 4 Closing price of PICC P&C (2328 HK) (HK$) Total outstanding shares of PICC P&C (mn) 12,256 12,256 12,256 A 1*2 Fund raised from IPO 23,591 25,695 27,799 B 1*3 MktCap post offer price 141, , ,834 C 4*5 MktCap of PICC P&C (2328 HK$10.1/share 123, , ,786 D C*68.98% PICC Group's 68.98% interest 85,388 85,388 85,388 E B-D MktCap of the rest of PICC Group post IPO money 56,194 68,820 81,446 F E-A MktCap of the rest of PICC Group pre IPO money 32,602 43,125 53,647 (RMB mn) F1 F* MktCap of the rest of PICC Group pre IPO money (in RMB mn) 26,196 34,651 43,106 G 30-Jun-12 BV of PICC AMC, PICC Investment, ZSIB, and PICC HK (as per CPY estimates) 7,315 7,315 7,315 H F1-G MktCap of PICC Life (71.8%) & PICC Health (88.44%) 18,882 27,336 35,791 I 30-Jun-12 EV of PICC Life 28,631 28,631 28,631 J 30-Jun-12 EV of PICC Health 3,378 3,378 3,378 K I*71.8% EV of PICC Life at 71.8% direct interest 20,557 20,557 20,557 L J*88.44% EV of PICC Health at 88.44% interest 2,988 2,988 2,988 M K+J EV of PICC Life (71.8%) + PICC Health (88.44%) 23,545 23,545 23,545 H/M P/EV (x) N 30-Jun-12 VNB of PICC Life 4,118 4,118 4,118 O 30-Jun-12 VNB of PICC Health P N*71.8% VNB of PICC Life at 71.8% direct interest 2,957 2,957 2,957 Q O*88.44% VNB of PICC Health at 88.44% interest R P+Q VNB of PICC Life (71.8%) + PICC Health (88.44%) 4,842 4,842 4,842 S H-M Implied franchise value (4,663) 3,792 12,247 S/R Implied VNB multiple (x) and Core Pacific - Yamaichi Table 12: P/EV comparison of major life insurers (RMB mn) China Life Ping An CPIC NCI Price (HK$) Total outstanding shares (mn) 28,265 7,916 9,062 3,120 MktCap (HK$ mn) 645, , ,816 75,504 MktCap (RMB mn) 518, , ,853 60,667 EV (30Jun2012) 334, , , P/EV (x) VNB (30Jun2012) 20,199 15,962 6,771 4,302 Implied franchise value 184, ,809 62,020 4,517 Implied VNB multiple (x) and Core Pacific - Yamaichi. 7

8 Profit & loss (Consolidated) (RMB mn) Year to 31 Dec FY09 FY10 FY11 1H11 1H12 GWP 168, , , , ,224 --P&C 119, , ,092 91, ,260 --Life 46,567 72,127 70,361 43,697 42,667 --Health 2,070 2,863 4,596 2,989 5,303 Net premiums 141, , , , ,253 Reinsurance income 3,490 5,579 13,304 6,472 5,608 Investment income 9,899 14,205 13,799 7,601 10,258 Other income 2,621 2,991 2,840 1,418 1,036 Total revenue 157, , , , ,155 Claims & benefits (110,935) (155,606) (160,287) (86,844) (90,783) Handling charges (14,494) (17,268) (18,109) (9,498) (10,701) Finance costs (2,330) (3,288) (4,665) (2,036) (2,629) FX gains/losses (12) (410) (424) (258) 32 Other expenses (28,107) (36,497) (43,424) (20,562) (22,758) Total benefits, claims, (155,878) (213,069) (226,909) (119,198) (126,839) and expenses Profits of associates PBT 2,215 7,528 10,210 7,748 9,579 Income tax (464) (1,681) (2,313) (1,738) (2,435) Minority interests (643) (1,860) (2,712) (1,971) (2,221) NPAT 1,108 3,987 5,185 4,039 4,923 Embedded value Year to 31 Dec (RMB mn) FY11 1H11 PICC Life ANW 11,172 14,519 VIF before CoC 12,494 15,737 CoC (980) (1,625) VIF 11,513 14,112 EV 22,685 28,631 VNB 3,713 4,118 PICC Health ANW VIF before CoC 2,323 2,654 CoC (123) (171) VIF 2,200 2,483 EV 2,907 3,378 VNB Balance sheet (Consolidated) (RMB mn) Year to 31 Dec FY09 FY10 FY11 1H11 Cash 36,116 40,498 55,333 69,887 Debt securities 130, , , ,273 Equity securities 35,429 51,184 71,050 85,267 Insurance receivables 17,466 10,320 23,437 34,653 Reinsurance assets 14,687 15,844 25,223 27,068 Term deposits 14,253 44,262 94, ,291 Statuary deposits 3,912 4,589 7,635 7,922 Investment in associates 6,486 8,043 2,951 3,063 Investment properties 2,673 4,390 7,529 8,040 PPE 13,753 18,366 19,060 19,317 Intangible assets 5,828 5,559 3,933 4,043 Deferred tax assets 498 2,271 2,826 1,931 Other assets 25,075 30,600 42,854 61,988 Disposal assets ,609 0 Total assets 306, , , ,743 Securities sold under 11,360 29,713 54,080 66,850 repo Income tax payable Due to banks/fi 2,580 3, Sub-debts 20,755 29,474 34,670 34,761 Insurance contract liabilities 157, , , ,743 Investment contract liabilities 31,663 41,253 49,156 48,013 Policyholder dividends payable 177 1,083 3,125 4,340 Pension benefit obligation 3,187 3,086 3,056 3,195 Deferred tax liabilities 1,263 1, Other liabilities 43,862 41,046 57,187 53,620 Disposal liabilities 0 0 8,822 0 Total liabilities 272, , , ,933 Shareholder equity 22,007 23,235 31,344 39,735 Minorities 12,274 13,478 16,591 17,075 Total equity 34,281 36,713 47,935 56,810 Total liability and equity 306, , , ,743 I, Olive, Xia, the author of this research report and the license holder of Type 4 Regulated Activity registered with Hong Kong Securities and Futures Commission ( SFC ), hereby declare that all the views expressed in this research report accurately reflect my personal views and that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. Besides, I confirm that (a) neither I nor my associates serve as an officer of any of the Hong Kong listed companies covered in this research report; and (b) neither I nor my associates have any financial interests in the stock(s) covered in this research report. 8