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 10.0 5.0 0.0 (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 0.0 (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 2014. Maintain Buy for China Taiping (00966 HK) with TP of HK$24.0, representing 2.6x 2013PB or 2.2x 2014PB. (30.0) (35.0) Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 (Source: Bloomberg) Analyst HSI Index China Taiping Felix Luo SFC CE Number:AQF573 Tel: (852)37191048 FelixLuo@gfgroup.com.hk GF Securities (Hong Kong) Brokerage Limited ( GF Securities (HK) ) 29-30/F, Li Po Chun Chambers, 189 Des Voeux Road Central, H.K. Company Name Code Price (HK$) 13EPS ( %) 14EPS ( %) 13 PER 14 PER China Life 02628 22.45 161.5 5.9 17.3 16.3 2.3 2.1 12.5 Ping An 02318 67.70 44.7 22.1 14.5 11.9 2.6 2.2 16.6 CPIC 02601 28.15 108.9 11.1 18.9 17.0 2.1 1.9 10.7 NCI 01336 24.65 74.5 14.6 11.8 10.3 1.7 1.5 13.4 China Taiping 00966 14.16 34.4 37.2 19.4 14.2 1.8 1.5 8.5 12P/B 13P/B 13ROE (%) Source.. Company data, GF Securities (HK) Research
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 1985. 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
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. 2010 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
Peer comparison of PB valuation 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 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
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 2014. 3. 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 02628 0.71 0.74 0.73 0.75 Ping An 02318 2.13 2.01 2.29 2.43 CPIC 02601 0.78 0.78 0.80 0.83 NCI 01336 1.40 1.34 1.28 1.34 China Taiping 00966 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 02628 10.36 11.94 13.59 15.09 Ping An 02318 29.77 36.11 42.65 49.71 CPIC 02601 13.21 14.93 16.35 17.93 NCI 01336 15.72 18.23 20.67 23.15 China Taiping (Life segment) HK$6.30 HK$8.55 HK$10.64 HK$13.10 00966 Source: the Company, GF Securities (HK) Research Page 5 of 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. 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GF Securities (Hong Kong) Brokerage Limited. All Rights Reserved. 29-30/F., Li Po Chun Chambers, 189 Des Voeux Road Central, Hong Kong Tel.: (852) 3719-1111 Fax: (852) 2907-6176 Website: www.gfgroup.com.hk Page 6 of 6