PICC Group (1339 HK)

Transcription

1 Equity Research Financials PICC Group (1339 HK) Accumulate (Maintained) Target price: HK$4.40 Company undervalued; maintain Accumulate Positive signs for both the P&C sector in China and PICC P&C We see positive signs for both the P&C sector in China and PICC P&C: 1) the combined ratio of some P&C insurance companies, such as Ping An P&C, stabilized in 1H14; 2) both Ping An and PICC saw improvements in their motor vehicle insurance loss ratios in 1H14; 3) given the cyclical nature of the P&C insurance industry, we think combined ratios across the industry are likely to stabilize in 2H14 after a period of deterioration. Minimal NBV growth PICC s individual regular FYP rose significantly by 52% YoY in 1H14, in sharp contrast with slow NBV growth of 7%. This also indicates that the company s new business margin declined significantly in 1H14. Felix Luo SFC CE No. AQF573 felixluo@gfgroup.com.hk GF Securities (Hong Kong) Brokerage Limited 29-30/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong Life & health premium growth might turn negative in 2015 On the back of a special sales campaign in 1Q14, PICC s life and health insurance segments saw strong top-line premium growth during the quarter which was mostly attributable to low-margin singlepremium bancassurance products. However, life and health premium growth returned to normal levels in 3Q14 after the CIRC tightened bancassurance regulation in Apr. In addition, premium growth in these two segments might turn negative in 2015 due to the high base in We also expect life NBV growth to remain low in Company undervalued We believe the company is significantly undervalued, and we value it at HK$4.40 per share using a prudent SOTP approach. This valuation does not include NBV goodwill or any possible EV increases after 1H14. Maintain Accumulate, TP HK$4.40 We maintain an Accumulate rating for the company given: 1) positive signs for both the P&C sector in China and PICC P&C, and 2) the fact that the company is undervalued. Our TP of HK$4.40 represents 11.2x 2015E P/E and 1.6x 2015E P/B. Stock performance 15.0 % of return (5.0) (10.0) (15.0) (20.0) (25.0) Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 HSI Index PICC Group Source: Bloomberg Key data Oct 22 close (HK$) 3.20 Shares in issue (m) 42,424 Major shareholder MoF (70%) Market cap (HK$ bn) M avg. vol. (m) W high/low (HK$) 4.14/ 2.88 Source: Bloomberg Stock valuation Turnover (Rmb m) Net profit (Rmb m) (HK) Research EPS (Rmb) EPS YoY (%) P/E BPS (Rmb) ,216 6, n.a ,421 8, E 356,335 11, E 375,737 13, E 424,836 15, P/B ROE (%)

2 P&C Insurance Segment 1H14 results review 1) PICC P&C s (2328 HK) combined ratio rose further in 1H14 to 94.4%, compared with 93.6% in 1H13. 2) However, its expense ratio remained stable at 32.0% (1H13: 32.1%). 3) In addition, the loss ratio for its motor vehicle insurance business (its most important P&C business arm) improved, declining from 64.5% in 1H13 to 64.1% in 1H14. Figure 1: Aggregate combined ratios 1H10 1H11 1H12 1H13 1H14 PICC P&C 96.7% 92.5% 92.4% 93.6% 94.4% Ping An P&C 96.5% 92.9% 93.1% 95.5% 94.4% China Pacific P&C 94.5% 91.1% 94.2% 97.7% 100.0% China Taiping P&C 99.9% 98.4% 98.0% 99.5% 99.6% Figure 2: PICC P&C s loss ratio (1H14 vs 1H13) 61.5% Overall loss ratio 62.4% 64.5% Motor vehicle insurance loss ratio 64.1% 1H13 1H14 Non-motor insurance loss ratio 58.9% 46.4% 78.2% 67.6% 46.3% 44.7% 52.0% 52.5% 1H13 1H % 44.9% 40.3% 33.6% 1H13 1H14 Agriculture Accidental injury & health Commercial property Liability Cargo Others Positive signs for both the P&C sector in China and PICC P&C We see positive signs for both the P&C sector in China and PICC P&C: 1) the combined ratio of some P&C insurance companies, such as Ping An P&C, stabilized in 1H14; 2) both Ping An and PICC saw improvements in their motor vehicle insurance loss ratios in 1H14; 3) as the P&C insurance industry is typically cyclical (see European experience below), we think combined ratios across the industry are likely to stabilize in 2H14 after a period of deterioration. Cyclical pattern of the P&C insurance industry Changes in P&C insurance prices and the combined ratio typically follow a cyclical pattern driven by periods of destructive competition followed by cutbacks in supply. A typical motor insurance underwriting cycle lasts for approximately 5 years in the US and 5-7 years in the UK, according to some statistics. Page 2

3 Figure 3: Cyclical pattern in motor vehicle insurance combined ratio in Europe Sources: CEA Statistics N 38, GF Securities Note: The curve represents the average combined ratio for motor insurance of 21 European countries. Life and Health Insurance Segment Minimal NBV growth in 1H14 PICC s EV grew 15.4% HoH in 1H14 with the life insurance segment rising 11% HoH and health insurance up 83% HoH. However, the strong growth of health EV (and health net assets) was due to an Rmb1.6bn capital injection from the group. Individual regular FYP increased significantly by 52% YoY in 1H14, which was in sharp contrast with slow NBV growth of just 7%. This also indicates that its new business margin declined significantly in 1H14. Figure 4: Key 1H14 results comparison Growth 1H14/1H13 China Life Ping An *: Before actuarial assumption changes. **: Life insurance segment and Health insurance segment. China PICC Taiping CPIC NCI Life & Health** 2628 HK 2318 HK 966 HK 2601 HK 1336 HK 1339 HK Net profit 13.6% 19.2% 178.9% 25.3% 71.2% -10.8% Net assets (HoH) 9.2% 13.0% 12.3% 7.4% 10.1% 17.7% EV (HoH) 14.1% 10.5% 19.1% 6.6% 13.6% 15.4% Individual Regular FYP 12% 19% 33% 29% 39% 52% Total new business value 7% 14% 44% 23%* 18% 7% Premium growth normalized in 3Q14, might turn negative in 2015 On the back of a special sales campaign in 1Q14 PICC s life and health insurance segments saw strong top-line premium growth during the quarter which was mostly attributable to low-margin single-premium bancassurance products. However, life and health premium growth returned to normal levels in 3Q14 after the CIRC tightened bancassurance regulation in Apr. In addition, premium growth in these two segments might turn negative in 2015 due to the high base in Page 3

4 Figure 5: Growth in gross written premium (GWP) 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10, % 154% 131% 114% 69% 56% 43% 32% Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep % 200% 150% 100% 50% 0% Life & health premiums combined (Rmb m) YoY (RHS) Slow life NBV growth expected in % of PICC s total life NBV came from its bancassurance channel in 1H14, much higher than that of its HK-listed peers. The company might see slow life NBV growth in 2015 as it undergoes product-mix adjustments amid tightened bancassurance regulation and the CIRC s promotion of protection-type life insurance products. We expect health insurance to be a more important NBV growth driver in Valuation and Rating Company undervalued We believe the company is significantly undervalued, and we value it at HK$4.40 per share using a prudent SOTP approach. This valuation does not include NBV goodwill or any possible EV increases after 1H14. Figure 6: SOTP valuation (Rmb m) Valuation Comments P&C 150,462 Market value Life 37,592 1H14 life EV* Health 4,238 1H14 health EV* Others 11, x P/B Total 203,519 Attributable to shareholders 146,725 M.I. 56,793 Implied shareholders' valuation per share (HK$) 4.38 *: EV is adjusted for investment rate of return less 50bps. Maintain Accumulate, TP HK$4.40 We maintain an Accumulate rating for PICC Group (1339 HK) given: 1) positive signs for both the P&C sector in China and PICC P&C, and 2) the fact that the company is undervalued. Our TP of HK$4.40 represents 11.2x 2015E P/E and 1.6x 2015E P/B. Page 4

5 Rating definitions Benchmark: Hong Kong Hang Seng Index Time horizon: 12 months Company ratings Buy Stock expected to outperform benchmark by more than 15% Accumulate Stock expected to outperform benchmark by more than 5% but not more than 15% Hold Expected stock relative performance ranges between -5% and 5% Underperform Stock expected to underperform benchmark by more than 5% Sector ratings Positive Sector expected to outperform benchmark by more than 10% Neutral Expected sector relative performance ranges between -10% and 10% Cautious Sector expected to underperform benchmark by more than 10% Analyst Certification The research analyst(s) 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(s) 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 this research report. 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The recipients should be aware of relevant disclosures of interests (if any) when reading this report. Copyright GF Securities (Hong Kong) Brokerage Limited. Without the prior written consent obtained from GF Securities (Hong Kong) Brokerage Limited, any part of the materials contained herein should not (i) in any forms be copied or reproduced or (ii) be re-disseminated. GF Securities (Hong Kong) Brokerage Limited. All rights reserved /F, Li Po Chun Chambers, 189 Des Voeux Road Central, Hong Kong Tel: Fax: Website: Page 5