Great Eastern Hldgs GE SP BNP PARIBAS Frank Yuen, CFA 26 OCTOBER 2015 SINGAPORE / INSURANCE GREAT EASTERN HLDGS GE SP REDUCE FROM HOLD TARGET PRICE SGD17.10 CLOSE SGD20.76 UP/DOWNSIDE -17.6% PRIOR TP SGD25.20 CHANGE IN TP -32.14% HOW WE DIFFER FROM CONSENSUS MARKET RECS TARGET PRICE (%) (43.9) POSITIVE 2 EPS 2015 (%) (24.2) NEUTRAL 0 EPS 2016 (%) (17.0) NEGATIVE 0 Challenging life Headwinds are just getting stronger in 2016E In 2016, we expect competition in bancassurance to heat up from Manulife, which should hurt GE the most for its focus is in this area. We believe the NBEV growth in 3Q15 (+33% on CER) would only be a temporary boost due to new single premium product launch as we see the flattening yield structure would make underwriting of these saving-type endowments products hardly profitable. Competition, rate and product pricing are turning against GE Private insurers in SG promised not to raise pricing on Integrated Plans (IP) in coming 12m for the launch of MediShield in Nov. IPs accounts for 9.5% of SG new premiums sales which would limit upside on protection margin. The launch of Malaysia s GST has also reduced linked plan demand in short-term. Owing to this and adverse FX impact, we cut NBEV growth to 3-5% in FY16-17E (from 11-12%). Investment MTM and FX impact to further weigh on EV Both SG and MY government bond yields have retreated from mid- Sep peak that suggest limited upside on recurring yield in FY16E. We lower our FY16E EV forecast by 18% owing to stock market correction, FX loss in MYR and lower NBEV growth. Downgrade due to mounting operational headwinds We downgrade GE to REDUCE as we cut our appraisal value TP by 32% to SGD17.1 (0.92 P/EV x) due to lower EV and VONB forecast. Trading close to historical mean after GFC, we see further downside risks from operational headwinds, the strongest since 2013. We expect both volume and margin compression for NBEV in FY15-17E (%) TWP y-y NBEV margin NBEV growth 60 40 20 0 46.3 41.4 40.5 41.1 40.2 40.0 39.7 KEY STOCK DATA YE Dec (SGD m) 2014A 2015E 2016E 2017E Core earnings 879 740 751 800 Core EPS growth 30.4 (15.8) 1.5 6.5 Net profit 879 740 751 800 EPS (SGD) 1.86 1.56 1.59 1.69 Chg. In EPS est. (%) 2.9 (10.2) (15.3) (22.2) EV growth (%) 13.3 (9.6) (6.3) 7.0 VONB growth (%) (7.5) (4.1) 2.9 5.3 P/EV 0.9 1.0 1.1 1.0 RoEV (%) 16.1 (4.6) (1.1) 9.7 Dividend yield (%) 2.6 2.9 2.3 2.4 Oct-14 26 Jan-15 Apr-15 Jul-15 Oct-15 18 24 10 22 2 20 (6) 18 (14) (SGD) (%) Great Eastern Hldgs Rel to Straits Times Index Share price performance 1 Month 3 Month 12 Month Absolute (%) 0.6 (13.5) (12.3) Relative to country (%) (5.0) (4.3) (7.5) Next Results February 2016 Mkt cap (USD m) 7,047 3m avg daily turnover (USD m) 0.3 Free float (%) 13 Major shareholder OCBC (87%) 12m high/low (SGD) 25.89/18.87 3m historic vol. (%) 28.2 ADR ticker - ADR closing price (USD) - Issued shares (m) 473 Sources: FactSet estimates; BNP Paribas estimates (20) 2011 2012 2013 2014 2015E 2016E 2017E Sources: Great Eastern Hldgs; BNP Paribas estimate Frank Yuen, CFA frank.yuen@asia.bnpparibas.com +852 2825 1863 Our research is available on Thomson One, Bloomberg, TheMarkets.com, FactSet and on http://eqresearch.bnpparibas.com/index. Please contact your salesperson for authorisation. Please see the important notice on the back page. PREPARED AND PUBLISHED BY NON-US BROKER-DEALER(S): BNP PARIBAS SECURITIES (ASIA) LTD. THIS MATERIAL HAS BEEN APPROVED FOR U.S DISTRIBUTION. ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES CAN BE FOUND AT APPENDIX ON PAGE 14
Investment thesis Great Eastern has been seeing new business contraction for the past 18 months after the favourable impact of upward repricing of Integrated Plans (IPs) in 2H13. Followed by a 6% NBEV contraction in FY14, the insurer suffered another 7% NBEV contraction in 1H15. We attributed the subdued performance to both internal (bancassurance staff turnover, lack of product launch) and external (competition intensifying, banks lifting deposit rate, launch of GST in Malaysia) factors. We cut Great Eastern VONB growth drastically to factor in the expected mounting headwind in FY2016. We project 2016E VONB growth to slow down to 3% (from 11.4%) for the group due to slow down in Singapore NBEV growth of 3% (from 12.9%) and in Malaysia of 2% (from 8.9%). We downgrade the stock to reduce with a cut in our appraisal value based TP to SGD17.1. Catalyst We are expecting the stock would further de-rate as: 1) competition intensifies from Manulife DBS partnership, 2) the yield curve flattens, which is unfavourable for endowment product margin and 3) MediShield Life is launched in SG, which caps IPs pricing in coming 12 months. On top of these, we also see a heavy drag on EV and earnings from potential MYR depreciation and further stock market correction. Risk to our call Potential privatization offer from OCBC at a premium to current price Potential sharp recovery of stock market that offset MTM losses to EV. Company background Great Eastern is the oldest and most established life insurance group in Singapore and Malaysia. The insurer has three successful distribution channels - a tied agency force, bancassurance and a financial advisory firm, Great Eastern Financial Advisers. The company also operates in China, Indonesia, Vietnam, and Brunei. Great Eastern is rated AAby S&P, one of the highest among Asian life insurers. Great Eastern is a subsidary of OCBC Bank. Key assumptions (%) 2014 2015E 2016E 2017E Net investment yield 4.0 3.7 3.8 3.9 Gross investment yield 4.4 4.0 4.2 4.3 TWNS growth (8.9) 1.3 5.2 6.2 NBEV margin 41.1 39.0 38.1 37.8 NBEV growth (7.5) (4.1) 2.9 5.3 EV growth 13.3 (9.8) (6.1) 6.7 Total weighted premium sales (20145E) Others 3.8% Sources: Great Eastern Hldgs; BNP Paribas estimates Earnings sensitivity ------------ FY16E ------------ ------------ FY17E ------------ Base Bear Best Base Bear Best Malaysia 35.2% Singapore 61.0% TWP (y-y %) 5 2 8 6 3 9 VONB margin (%) 38 36 40 38 36 40 EVPS (x) 18.7 18.6 18.7 20.0 19.9 20.0 Target Price (SGD) 17.1 16.6 17.5 Change (%) (3) 2 Source: BNP Paribas estimates Key executives Age Joined Title Koh Beng Seng 64 2008 Chairman Khor Hock Seng 56 2015 CEO http://www.greateasternlife.com/sg/en/index.jsp We expect total weighed premium sales to grow by 5-6% in FY15 and FY16E. Under a bear case scenario of lower than expected TWP growth (-3ppt) and a contraction of VONB margin (-2ppt), our TP would be reduced by 3%, all else being equal. Under a best case scenario of higher than expected TWP growth (+3ppt) and expansion of VONB margin (+2ppt), our TP would be lifted by 3%, all else being equal. 2 BNP PARIBAS 26 OCTOBER 2015
New business boost in 3Q15 may be temporary Great Eastern has been seeing new business contraction for the past 18 months after the favourable impact of upward repricing of Integrated Plans (IPs) in 2H13. Followed by a 6% NBEV contraction in FY14, the insurer suffered another 7% NBEV contraction in 1H15. We attributed the subdued performance to both internal (bancassurance staff turnover, lack of product launch) and external (competition intensifying, banks lifting deposit rate, launch of GST in Malaysia) factors. In 3Q15, premium growth (+33% y-y at constant currency rate (CER) or 24% at actual exchange rate (AER)) was boosted by new products launched in Singapore. Malaysia premium growth remained stable at 5% y-y CER or -13% at AER. After NBEV contraction in past few quarters, 3Q15 new business value (NBEV) grew by 16% y-y at CER or 7.7% at AER due to higher sales, however 9M15 NBEV still contracted by 3% y-y on AER. New business margin contracted by 2ppt q-q to 38.2% due to lower margin in the new endowment product launched and continued downward impact from GST in Malaysia. 3Q15 operating profit fell by 13% y-y due to weakening of MYR, a few large death claims and higher medical claims in Singapore. GEH reported a non-operating loss of SGD78.7m due to widening credit spread, fall in equity prices and LT interest rates. Exhibit 1: 3Q15 financial highlights Challenging operating environment caused subdued performance in last 18 months Competition has intensified in the bancassurance space 3Q15 3Q14 Change 9M14 9M14 Change (SGD m) (SGD m) (%) (SGD m) (SGD m) (%) Total weighted new sales 266.2 199.6 33 663.8 621.2 7 New business embedded value 101.6 87.3 16 261.7 260 1 Operating profit from insurance profit 129.5 149 (13) 412.4 435.2 (5) Non-operating profit from insurance business (78.7) 14.1 n.m (46.4) 119.7 n.m. Profit from shareholders' Fund's investment 38.6 44.4 (13) 264.5 155.9 70 Net profit 68.4 194.6 (65) 566.6 670.8 (16) Source: Great Eastern Hldgs Aviva has been accelerating product sales through DBS network before the partnership expires by FY15. According to Aviva, products sold through DBS represented 20% of Aviva s Singapore VNB (c. 3% of Group VNB). After the partnership ended, however, Aviva could still retain the existing book of business, profits, and customer rights and relationships which drove the aggressive product push. Thanks to the strong sales, DBS now attained a 35% market share of bancassurance in1q15, overtaking OCBC market leader position since 3Q14 which has a market share of 29%. Apart from the effort from Aviva, the bank also ramped up its sales force in bancassurance from 650 in 2013 to 900 in 2014, compared to a sales force of 600 at OCBC. Multiple hits by slower products pipeline, turnover and higher rates Aggressive poaching of staff from competitors has caused high attrition rate in GE s bancassurance channels. In fact, the ex-ceo of Great Eastern, Christopher Wei, also stepped down in Jun 2014 to join Aviva as CEO of its Global Life Insurance and Chairman of Aviva Asia. Great Eastern has recently appointed Mr Khor Hock Seng as its new Group CEO, who recently was the CEO of Aviva Asia. On the product side, we see a rising interbank rate in Singapore (1M SIBOR climbed by 60bps YTD) would make endowment product less attractive. This, in our view, would pose a bigger hit to Great Eastern than its peers for its stronger focus on 3 BNP PARIBAS 26 OCTOBER 2015
Great Eastern Hldgs GE SP Frank Yuen, CFA saving product distributed throughh its bancassurance channel. The prudent asset and liability management of Great Eastern would also extend the time of product launch. Seeing further downside risks in 2H15 and 20166 Stepping into 2H15 and 2016, we are expecting potential downside pressures to mount on several fronts: 1) competition is likelyy to intensify from Manulife DBS partnership, 2) flattening yield curve is unfavourable for endowment product margin and 3) the launch of MediShield Life in SG that caps IPs pricing in coming 12 months. On top of these, we also see heavy drag on EV and earnings from potential MYR depreciation and stock market correction. Yield structure unfavourable for GE to underwrite appealing endowment productss We note that Great Eastern has launched new single premium products in 3Q15 such as SG50 Guaranteed Saver which is a 10-yr saving-type both bancassurance and product with 2% guaranteed rate. SG50 would be distributed through agency channel. The initial sales response was better than its expectation possibly due to the attractive yield to policyholders (2% guaranteed and 3% illustrative). However, the margin of this product is low given its very savings-oriented nature. Thee underwriting profit of this product would also largely dependent on the asset yield attained by the insurer. As the long-term bond yield softened from the peak in 2Q15, we expect Great Eastern would find it harder to underwrite endowment product with attractive guaranteed rate. Going into 2016, we see the yield structure may remain unfavourable to Great Eastern in underwriting endowment product short-term yield would pick up faster (due to weaker SGD appreciation) than long-term yield as shown in ex 3. This leads us to believe that there could be further compression on volume and margin on savings product sales in 2016E. Exhibit 2: SG50 Guaranteed Saver 10 year endowment with 2% guaranteed Note: For policyholders who buy premium size as large as SGD50,000 (Single Premium) or SGD3,000 (Annual Regularr Premium), they are entitled to SGD500 premium voucher whichh would send yieldd as high as 3%. The product acceptss single premium as low as SGD20,000. Source: Great Eastern Hldgs website 4 BNP PARIBAS 26 OCTOBER 2015
Exhibit 3: Unfavourable rate structure for GE to launch 5-10 years endowment type product (%) 1M SIBOR 10Y SG Gov bond 3.5 3.0 2.5 2.0 1.5 1.0 0.5 2% Guaranteed rate offered by SG50 0.0 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Source: Bloomberg Manulife DBS partnership would further intensify competition in 2016E Manulife is likely to start the new bancassurance partnership with DBS in 2016 that enables the insurer to distribute the bank s network in Singapore, HK, China and Indonesia. The insurer agreed to pay SGD1.6b (SGD106m p.a.) as an upfront fee for the 15-year regional distribution agreement that covers the four countries. We expect this partnership to intensify competition in bancassurance market; and the payment by Manulife implies a potential NBEV loss of SGD212m p.a. to existing bancassurance players. In addition, the strong product strength of Manulife life in retirement planning and wealth management would also make the competition landscape more challenging. Exhibit 4: Potential for SGD212m NBEV loss from intensified bancassurance competition (SGD m) 450 400 396 350 300 250 200 212 299 238 150 100 96 94 50 0 Manulife-DBS AIA Prudential GEH Manulife Aviva Sources: Company data; BNP Paribas estimate MediShield Life to launch in Nov 2015 MediShield is a basic health insurance plan, administered by Central Provident Fund (CPF) Board which help Singaporeans to pay large hospital bills and costly outpatient treatment, sized for subsidized treatment in Class B2/C ward of public hospitals. In end 2015, CPF will replace MediShield by MediShield Life which offers 1) better protection and higher payouts, 2) protection for all Singapore Citizens and permanent residents, including the very old and those with pre-existing illnesses and 3) expanding coverage period to whole life. 5 BNP PARIBAS 26 OCTOBER 2015
Great Eastern Hldgs GE SP Frank Yuen, CFA Exhibit 5: Composition of an Integrated Plans Source: MOH Exhibit 6: Coverage comparison: MediShield vs MediShield Life vs Integrated plans MediShield MediShieldd Life Impatientt Treatment/ Day Surgery Claim Limits Great Eastern Supreme Health Plan P Plus Daily Ward and Treatment Charges - Normal Ward SGD450 per day SGD700 per day - Intensive Care Unit Ward SGD450 per day SGD1,200 per day - Community Hospital SGD450 per day SGD350 per day - Psychiatric SGD450 per day SGD100 per day Surgical Procedures SGD150- SGD1,100 SGD200- SGD2,000 Implants SGD7,000 per treatment SGD7,000 per treatment t Radiosurgery SGD4,800 per procedure SGD4,800 per procedure p Treatment charges in ICU, Gamma Knife n.a. n.a. Outpatient Treatment Claim Limits Chemotherapy for Cancer SGD1,245 per 21/28-day cycle SGD3,000 per month Radiotherapy for Cancer SGD80 per session SGD160 per session SGD140 per session s SGD500 per session s - External or Superficial SGD80 per session SGD140 per session s - Brachytherapy SGD160 per session SGD500 per session s Kidney Dialysis SGD1,000 per month SGD1,000 per month Immunosuppressant for Organ Transplant SGD200 per month SGD200 per month Erythropoietin for Chronic Kidney Failure SGD200 per month SGD200 per month Maximumm Claim Limits Per Policy Year SGD70,000 S SGD100,000 SGD600,000 Lifetime SGD300,000 No limit No Limit Maximumm Coverage Age Age 92 Life time Life time Deductible payable by insured < = Age 80 > Age 81 Sources: Great Eastern Hldgs; MoH Class C ward or Day Surgery: SGD1,500 Class B2 ward: SGD2,000 Class C ward: SGD2,000 Class B2 ward or Day Surgery: SGD3,000 Class C: SGD1,500 Class B2: SGD2,000 Class B1: SGD2,500 Class A: SGD3,500 Private insurers promised not to reprice IPs in FY16E New premium sales from IPs plan now account for 9.6% of Singapore FYP as of FY14. About 60% of Singaporeans have private insurance plans in the form of Integrated Shield Plans (IPS). IPs comprised of 1) MediShield which is run by CPF and 2) additional private insurance coverage that cover Class A/B1 wards in public hospitals or private hospitals. Currently, there are only 5 qualified IPs providers whichh are AIA, Aviva, Prudential, Great Eastern and NTUC Income. IPs have been serving as an anchor product for these insurers to cross-sell other protection products. 6 BNP PARIBAS 26 OCTOBER 2015
With better coverage, MediShield Life premium is likely to increase. Take the example of the age group of 31 40, annual MediShield Life premium would increase from SGD105 to SGD233 (+122%) for low income group (with subsidy) or to SGD310 (+195%) for high income group (without subsidy) Despite the better coverage and higher premium of MediShield Life, we see a limited impact on the demand for Integrated plan as 1) the increment is small (SGD10- SGD16 per month), 2) paid directly through CPF, 3) MediShield Life still cover public hospital only while only IPs cover expense related to private hospital. However, private insurers committed not to raise rate in the coming 12 months (due to lower claims portion anticipated after the launch of MediShield Life), this would also limit the upside on Singapore margin expansion. Malaysia: GST would dent insurance demand in short-term Malaysia system FYPE dropped by 0.7% y-y to MYR2,024m in 1H15. However, in terms of insurance protection, gross sum assured increase by 8.1% to MYR45.2b which is driven by both investment linked plans (+9.6%) and traditional plans (+3.5% y-y). Saving products demand, however, hampered with a weaker economic sentiment and the launch of GST which increase potential spending amount. We expect the launch of GST in Malaysia (prescribed rate of 6% in Apr 15) would also dampen consumer spending power and thus reduce demand for investmentlinked and critical illness policy in the short-term. GST will be charged on premiums for critical illness, personal accident, and general insurance policies. The monthly cost of insurance (COI) for investment-linked policies and riders under the medical, critical illness and personal accidents categories will also be subject to GST at the prescribed rate. In fact, Great Eastern Malaysia topline has showed slowing sign in 2Q15 (-1% y-y) due to the launch of GST. Investment: Drag from FX and equities with limited upside on recurring yields Exhibit 7: Recurring yield of Great Eastern is still under pressure (%) 4.4 4.2 4.0 3.8 3.6 3.4 3.2 3.66 4.28 3.88 3.58 3.43 4.14 4.00 3.56 3.26 4.07 Exhibit 8: with no immediate upside in the near term (index) SG 20Y Gov bond MY 20Y Gov bond 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 3.0 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 1.5 Oct-10 Jun-11 Feb-12 Oct-12 Jun-13 Feb-14 Oct-14 Jun-15 Sources: Great Eastern Hldgs; BNP Paribas estimate Source: Bloomberg 7 BNP PARIBAS 26 OCTOBER 2015
Exhibit 9: Heavy equity market drag in 3Q15 in Singapore (column chart last 4 quarter) (%) SG (FSSTI) MY (KLCI) 5 0 2.7 2.4 3.9 Exhibit 10: and FX losses from Malaysia (line chart indicate the FX change there of MYR) (MYRSGD) 0.44 0.42 0.40 Depreiacted by 9.4% in 3Q15 alone (5) (10) (4.6) (3.8) (6.8) (5.0) 0.38 0.36 0.34 (15) (20) (15.9) 4Q14 1Q15 2Q15 3Q15 0.32 0.30 Jan 13 Mar 13 May 13 Jul 13 Sep 13 Nov 13 Jan 14 Mar 14 May 14 Jul 14 Sep 14 Nov 14 Jan 15 Mar 15 May 15 Jul 15 Sep 15 Source: Bloomberg Source: Bloomberg Cutting NBEV growth outlook to factor against mounting headwinds We cut Great Eastern NBEV growth drastically to factor in the expected headwind in FY2016. We project NBEV growth to slow down to 3.0% (from 11.4%) for the group due to slow down in Singapore NBEV growth of 3.0% (from 12.9%) and in Malaysia s of 2.0% (from 8.9%) in FY16E. Singapore Unfavourable yield structure that compressed margin in endowment product Bancassurance competition to get more intensive to hamper volume growth No repricing upside on IPs for SG next year Malaysia Launch of GST to reduce demand on investment-linked product and lower new business margin Translation impact of FX effect contract NBEV growth in S$ term Exhibit 11: We are expecting both volume and margin compression for NBEV in FY15-17E (%) TWP y-y NBEV margin NBEV growth 50 40 30 20 10 0 (10) 46.3 41.4 40.5 41.1 40.2 40.0 39.7 (20) 2011 2012 2013 2014 2015E 2016E 2017E Sources: BNP Paribas estimates; Great Eastern Hldgs 8 BNP PARIBAS 26 OCTOBER 2015
Factoring in FX impact from Malaysia and equity MTM impact in our EV forecast We have also cut FY16E EV forecast by 15% to SGD8.8b mainly to reflect adverse impact on 1) equities MTM loss 2) FX translation loss and, to a lower extent, 3) lower NBEV growth. Reflecting the 11% and 2% drop in Singapore and Malaysia market indices since 1H15, we have factored in 2% reduction in investment mix or 8% reduction on EV. Stripping out investment linked assets, equities accounted for 24% GE s investment asset (SG: 15%, MY: 9%). In addition, we also factor in 2.2% drop in EV due to the depreciation of MYR (11% since 3Q15) as Malaysia accounted for 24% of GE s Group EV. Exhibit 12: Embedded Value Forecast FY15-17E YE Dec (SGD m) 2011 2012 2013 2014 2015E 2016E 2017E EV @ Beg Bal. 7,075 7,465 8,605 9,214 10,436 9,413 8,835 Opening adj. 71 (24) (16) 0 (15) (15) (15) Expected value of IF 327 366 380 402 424 368 346 VoNB* (exclude Takaful) 352 340 406 380 368 377 395 Life fund non-investment variance 82 62 186 152 20 30 40 Non-Economic assumption changes 101 14 2 71 10 20 40 EV Operating profit 933 758 958 1,005 672 809 838 Life fund investment variance 39 211 40 60 (800) (750) (80) Economic assumption changes (126) (82) (150) 109 (200) (300) (50) Returns on SH fund and other business (44) 428 64 368 (150) 140 154 EV Profit 802 1,315 912 1,482 (478) (101) 861 Dividends paid (412) (175) (303) (260) (284) (225) (240) FX loss* (242) (271) Ending EV 7,465 8,605 9,214 10,436 9,432 8,835 9,456 * Excl. Great Eastern Takaful Sdn Bhd and other markets VONB (%) 5.5 15.3 7.1 13.3 (9.6) (6.3) 7.0 Note: Great Eastern restated EV at prevailing FX rate in 2014 Sources: Great Eastern Hldgs; BNP Paribas estimate 9 BNP PARIBAS 26 OCTOBER 2015
Valuation Exhibit 13: Key forecast changes NBEV growth --------------- FY15E --------------- --------------- FY16E --------------- New Old Change New Old Change (SGD m) (SGD m) (%) (SGD m) (SGD m) (%) Singapore (0.6) 13.8 (14.4) 2.9 12.9 (10.0) Malaysia (9.8) 8.6 (18.4) 2.3 8.9 (6.6) Group (4.1) 11.7 (15.8) 2.9 11.4 (8.5) Key earnings changes NEP 7,549 8,528 (11.5) 8,374 9,520 (12.0) Insurance profit 569 672 (15.3) 623 726 (14.2) Profit from investments in SH' funds 272 209 30.2 212 219 (3.3) Net profit 740 824 (10.2) 751 888 (15.3) Key ratios Net investment yield 3.68 4.66 (1.0) 3.82 4.75 (0.9) Gross investment yield 3.99 5.37 (1.4) 4.23 5.48 (1.3) Net profit growth (15.77) 8.43 (24.2) 1.53 6.91 (5.4) Source: BNP Paribas estimate Exhibit 14: Change of valuation ------------------------------------- FY16E ----------------------------------- New Old Change Appraisal method (SGD m) (SGD m) (%) Embedded value 8,835 10,741 (17.7) Goodwill 3,635 6,283 (42.1) Appraisal Value 12,470 17,024 (59.9) Liquidity Discount (%) 35 30 +5 TP 17.1 25.2 (32) Source: BNP Paribas estimate We value GE by appraisal value method comprising embedded value and goodwill. We forecast goodwill using DCF with 11% discount rate. We lower our goodwill forecast by 42% as we see sharp deterioration in both volume and margin outlook for NBEV. We also widened liquidity discount by 5ppt to 35% as 3M trading value of the stock fell by 5% and 26% respectively vs FY14 and FY13. This results in a TP of SGD17.1, suggesting 23% downside to CP. We downgrade the stock to REDUCE. Catalysts Further fattening of the yield curve structure Heated competition from Manulife DBS Higher interest rates in Singapore to lower demand for saving insurance Capital loss in equity market Upside risks: Potential privatization offer from OCBC at premium to trading price Potential sharp recovery of stock market offsetting MTM losses to EV 10 BNP PARIBAS 26 OCTOBER 2015
Exhibit 15: P/EV band Trading at around mean after GFC, potential for further derating on operational headwinds (x) 1.3 1.2 1.1 1.0 0.9 0.8 0.7 0.6 +2 S.D. +1 S.D. Mean -1 S.D. -2 S.D. 0.5 Oct 08 Oct 10 Oct 12 Oct 14 Sources: Great Eastern Hldgs; BNP Paribas 11 BNP PARIBAS 26 OCTOBER 2015
Financial statements Great Eastern Hldgs Profit and Loss (SGD m) Year Ending Dec 2013A 2014A 2015E 2016E 2017E Gross premium and fee 7,600 7,808 7,549 7,914 8,296 Reinsurance 17 19 19 20 20 Net premium earned 7,617 7,827 7,568 7,933 8,316 Claims and benefits (6,135) (5,309) (4,163) (4,443) (4,723) Policy acquisition cost (775) (754) (840) (881) (923) G&A cost (353) (358) (393) (433) (476) Other provisions (133) (10) (11) (12) (13) Underwriting profit (1,623) (1,383) (1,593) (1,808) (1,987) Interest and dividend income 1,791 1,863 1,936 2,122 2,299 Capital gains/(losses) 609 432 346 437 476 Dividend and interest to policyholders 0 0 0 0 0 Net investment income 2,400 2,295 2,282 2,559 2,775 Other income 320 374 458 417 452 Other operating costs (66) (99) (103) (109) (114) Operating profit 1,032 1,187 1,044 1,059 1,127 Recurring non operating income (14) (4) (3) (3) (3) Associates (14) (4) (3) (3) (3) Goodwill amortization 0 0 0 0 0 Non recurring items 0 0 0 0 0 Profit before tax 1,018 1,183 1,042 1,056 1,124 Tax (335) (295) (291) (293) (311) Profit after tax 683 888 750 763 813 Minority interests (9) (9) (10) (11) (13) Preferred dividends 0 0 0 0 0 Other items 0 0 0 0 0 Reported net profit 674 879 740 751 800 Non recurring items & goodwill (net) 0 0 0 0 0 Recurring net profit 674 879 740 751 800 Supplementary items Embedded value 9,214 10,436 9,432 8,835 9,456 One year's new business value 424 392 376 387 408 Per share (SGD) Recurring EPS * 1.42 1.86 1.56 1.59 1.69 Reported EPS 1.42 1.86 1.56 1.59 1.69 DPS 0.55 0.55 0.60 0.48 0.51 Growth Net premium earned (%) 21.5 2.8 (3.3) 4.8 4.8 Underwriting profit (%) n/m n/m n/m n/m n/m Operating profit (%) (37.1) 15.0 (12.0) 1.4 6.4 Reported net profit (%) (43.3) 30.4 (15.8) 1.5 6.5 Recurring EPS (%) (43.3) 30.4 (15.8) 1.5 6.5 Reported EPS (%) (43.3) 30.4 (15.8) 1.5 6.5 Income Breakdown Net premium earned (%) 73.7 74.6 73.4 72.7 72.0 Net investment income (%) 23.2 21.9 22.1 23.5 24.0 Other income (%) 3.1 3.6 4.4 3.8 3.9 Operating performance Underwriting margin (%) (21.3) (17.7) (21.0) (22.8) (23.9) Operating margin (%) 13.55 15.16 13.80 13.35 13.55 Investment yield (%) 5.28 4.39 3.99 4.23 4.32 Effective tax rate (%) 32.9 24.9 28.0 27.8 27.7 Dividend payout on recurring profit (%) 38.6 29.6 38.4 30.0 30.0 ROE (%) 13.7 16.1 12.1 11.4 11.2 ROA (%) 1.13 1.40 1.12 1.07 1.08 Cash & equivalents 3,727.1 3,254.3 5,418.5 6,448.0 7,168.6 Bank deposits 0.0 0.0 0.0 0.0 0.0 Debt securities 28,986.0 32,522.2 35,386.2 37,509.4 39,760.0 Equity securities 13,106.5 13,638.6 14,508.2 15,378.7 16,301.4 *Pre exceptional, pre goodwill and fully diluted Sources: Great Eastern Hldgs; BNP Paribas estimates 12 BNP PARIBAS 26 OCTOBER 2015
Financial statements Great Eastern Hldgs Balance Sheet (SGD m) Year Ending Dec 2013A 2014A 2015E 2016E 2017E Cash & equivalents 3,727 3,254 5,418 6,448 7,169 Bank deposits 0 0 0 0 0 Debt securities 28,986 32,522 35,386 37,509 39,760 Equity securities 13,107 13,639 14,508 15,379 16,301 Investment properties 1,561 1,632 1,795 1,975 2,172 Other financial assets 6,256 7,030 6,492 6,887 7,305 Total investments 53,636 58,077 63,600 68,198 72,708 Tangible fixed assets 712 637 740 760 760 Associates 153 90 98 113 130 Deferred acquisition cost 0 0 0 0 0 Goodwill 34 33 38 44 51 Other intangible assets 0 0 0 0 0 Other assets 6,376 6,841 7,525 8,278 9,105 Total assets 60,911 65,677 72,002 77,392 82,754 Insurance reserve 50,874 54,340 57,911 61,648 65,543 Policyholders' deposits 2,330 2,674 1,503 1,415 820 Unearned premium reserve 0 0 0 0 0 Other reserves 122 123 135 148 163 Total insurance liabilities 53,327 57,137 59,549 63,212 66,526 Hybrid capital 0 0 0 0 0 Other liabilities 2,457 2,609 2,830 3,073 3,340 Total liabilities 55,783 59,746 62,378 66,285 69,866 Share capital 153 153 153 153 153 Reserves 4,924 5,719 6,175 6,701 7,262 Total equity 5,077 5,872 6,328 6,854 7,414 Minority interests 50 60 73 86 99 Total liabilities & equity 60,911 65,677 68,779 73,225 77,379 Per Share(SGD) Book value per share 10.73 12.41 13.37 14.48 15.66 Tangible book value per share 10.66 12.34 13.29 14.39 15.56 Growth Total investments (%) 2.1 8.3 9.5 7.2 6.6 Total assets (%) 2.0 7.8 9.6 7.5 6.9 Total insurance liabilities (%) 1.3 7.1 4.2 6.2 5.2 Book value per share (%) 5.8 15.7 7.8 8.3 8.2 Leverage & capital measures Equity/assets (%) 8.3 8.9 8.8 8.9 9.0 Tangible equity/assets (%) 8.3 8.9 8.7 8.8 8.9 Solvency margin ratio (%) - - - - - Valuation Recurring P/E (x) * 14.6 11.2 13.3 13.1 12.3 Reported P/E (x) 14.6 11.2 13.3 13.1 12.3 Dividend yield (%) 2.6 2.6 2.9 2.3 2.4 Price/book (x) 1.9 1.7 1.6 1.4 1.3 Price/tangible book (x) 1.9 1.7 1.6 1.4 1.3 Price/tangible book @ target price (x) 1.6 1.4 1.3 1.2 1.1 Price/embedded value (x) 1.1 0.9 1.0 1.1 1.0 Price/embedded value @ target price (x) 0.9 0.8 0.9 0.9 0.9 * Pre exceptional & pre-goodwill and fully diluted Sources: Great Eastern Hldgs; BNP Paribas estimates 13 BNP PARIBAS 26 OCTOBER 2015
Disclaimers and Disclosures APPENDIX DISCLAIMERS AND DISCLOSURES APPLICABLE TO NON-US BROKER-DEALER(S): BNP PARIBAS SECURITIES (ASIA) LTD ANALYST(S) CERTIFICATION Frank Yuen, CFA, BNP Paribas Securities (Asia) Ltd, +852 2825 1863, frank.yuen@asia.bnpparibas.com The BNP Paribas Securities (Asia) Ltd Analysts mentioned in this disclaimer are employed by a non-us affiliate of BNP Paribas Securities Corp., and are not registered/ qualified pursuant to NYSE and/or FINRA regulations The individual(s) identified above certify(ies) that (i) all views expressed in this report accurately reflect the personal view of the analyst(s) with regard to any and all of the subject securities, companies or issuers mentioned in this report; and (ii) no part of the compensation of the analyst(s) was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed herein. IMPORTANT DISCLOSURES REQUIRED IN THE UNITED STATES BY FINRA RULES AND OTHER JURISDICTIONS "BNP Paribas is the marketing name for the global banking and markets business of BNP Paribas Group. No portion of this report was prepared by BNP Paribas Securities Corp (US) personnel, and it is considered Third-Party Affiliate research under NASD Rule 2711. The following disclosures relate to relationships between companies covered in this research report and the BNP entity identified on the cover of this report, BNP Securities Corp., and other entities within the BNP Paribas Group (collectively, "BNP Paribas"). The disclosure column in the following table lists the important disclosures applicable to each company that has been rated and/or recommended in this report: Company Ticker Disclosure (as applicable) N/A N/A N/A BNP Paribas represents that: 1. Within the past year, it has managed or co-managed a public offering for this company, for which it received fees. 2. It had an investment banking relationship with this company in the last 12 months. 3. It received compensation for investment banking services from this company in the last 12 months. 4. It expects to receive or intends to seek compensation for investment banking services from the subject company/ies in the next 3 months. 5. It beneficially owns 1% or more of any class of common equity securities of the subject company. 6. It makes a market in securities in respect of this company. 7. The analyst(s) or an individual who assisted in the preparation of this report (or a member of his/her household) has a financial interest position in securities issued by this company. The financial interest is in the common stock of the subject company, unless otherwise noted. 8. The analyst (or a member of his/her household) is an officer, director, or advisory board member of this company or has received compensation from the company. IMPORTANT DISCLOSURES REQUIRED IN KOREA The disclosure column in the following table lists the important disclosures applicable to each Korea listed company that has been rated and/or recommended in this report: Company Ticker Price (as of 22-Oct-2015 closing price) Interest N/A N/A N/A N/A 1. The performance of obligations of the Company is directly or indirectly guaranteed by BNP Paribas Securities Korea Co. Ltd ( BNPPSK ) by means of payment guarantees, endorsements, and provision of collaterals and/or taking over the obligations. 2. BNPPSK owns 1/100 or more of the total outstanding shares issued by the Company. 3. The Company is an affiliate of BNPPSK as prescribed by Item 3, Article 2 of the Monopoly Regulation and Fair Trade Act. 4. BNPPSK is the financial advisory agent of the Company for the Merger and Acquisition transaction or of the Target Company whereby the size of the transaction does not exceed 5/100 of the total asset of the Company or the total number of outstanding shares. 5. BNPPSK has taken financial advisory service regarding listing to the Company within the past 1 year. 6. With regards to the tender offer initiated by the Company based on Item 2, Article 133 of the Financial Investment Services and Capital Market Act, BNPPSK acts in the capacity of the agent for the tender offer designated either by the Company or by the target company, provided that this provision shall apply only where tender offer has not expired. 7. The listed company which issued the stocks in question in case where 40 days has not passed since the new shares were listed from the date of entering into arrangement for public offering or underwriting-related agreement for issuance of stocks 8. The Company that has signed a nominated advisor contract with BNPPSK as defined in Item 2 of Article 8 of the KONEX Market Listing Regulation. 9. The Company is recognized as having considerable interests with BNPPSK in relation to No.1 to No. 8. 10. The analyst or his/her spouse owns (including delivery claims of marketable securities based on legal regulations and trading and misc. contracts) the following securities or rights (hereinafter referred to as Securities, etc. in this Article) regardless of whose name is used in the trading. 1) Stocks, bond with stock certificate, and certificate of pre-emptive rights issued by the Company whose securities dealings are being solicited. 2) Stock options of the Company whose securities dealings are being solicited. 3) Individual stock future, stock option, and warrants that use the stocks specified in Item 1) as underlying. 14 BNP PARIBAS 26 OCTOBER 2015
History of change in investment rating and/or target price Great Eastern Hldgs (GE SP) Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 28 26 24 22 20 18 16 14 12 (SGD) Great Eastern Hldgs Target Price Date Rating Target price Date Rating Target price Date Rating Target price 19-Sep-13 Buy 22.60 07-Feb-14 Buy 24.30 18-Dec-14 Hold 25.20 Frank Yuen, CFA started covering this stock from 19 Sep 2013 Price and TP are in local currency Valuation and risks: The upside risk to our appraisal valued-based TP comes from two fronts: 1) privatisation offer from OCBC at premium to trading price and 2) sharp recovery of stock market that offests MTM losses too EV. Sources: FactSet; BNP Paribas GENERAL DISCLAIMER This report was produced by BNP Paribas Securities (Asia) Ltd, member company(ies) of the BNP Paribas Group. This report is for the use of intended recipients only and may not be reproduced (in whole or in part) or delivered or transmitted to any other person without our prior written consent. By accepting this report, the recipient agrees to be bound by the terms and limitations set forth herein. This report does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Customers are advised to use the information contained herein as just one of many inputs and considerations prior to engaging in any trading activity. This report does not constitute a prospectus or other offering document or an offer or solicitation to buy or sell any securities or other investments. This report is not intended to provide the sole basis of any evaluation of the subject securities and companies mentioned in this report. 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BNP Paribas Sydney Branch is licensed under the Banking Act 1959 and the holder of Australian Financial Services Licence no. 238043 and therefore subject to regulation by the Australian Securities & Investments Commission in relation to delivery of financial services. By accepting this document you agree to be bound by the foregoing limitations, and acknowledge that information and opinions in this document relate to financial products or financial services which are delivered solely to wholesale clients (in terms of the Corporations Act 2001, sections 761G and 761GA; Corporations Regulations 2001, division 2, reg. 7.1.18 & 7.1.19) and/or professional investors (as defined in section 9 of the Corporations Act 2001). 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To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the information contained herein or the merits of the securities described herein, and any representation to the contrary is an offence. Hong Kong: This report is prepared for professional investors and is being distributed in Hong Kong by BNP Paribas Securities (Asia) Limited to persons whose business involves the acquisition, disposal or holding of securities, whether as principal or agent. 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No. INH000000792) and as a stockbroker in the Equities and the Futures & Options segments of National Stock Exchange of India Ltd. and BSE Ltd. (SEBI Regn. Nos.: INB/INF/NSF231474835, INB/INF011474831; CIN: U74920MH2008FTC182807; Website: www.bnpparibas.co.in). No material disciplinary action has been taken against BNPPSIPL by any regulatory or government authority. Indonesia: This report is being distributed by PT BNP Paribas Securities Indonesia and is delivered by its licensed employee(s), including marketing/sales person, to its client. PT BNP Paribas Securities Indonesia, having its registered office at Menara BCA, 35th floor, Grand Indonesia, JL. M.H. Thamrin No.1, Jakarta 10310, Indonesia, is a subsidiary company of BNP Paribas SA and licensed under Capital Market Law no. 8 year 1995, a holder of broker-dealer and underwriter licenses issued by the Capital Market and Financial Institution Supervisory Agency (now Otoritas Jasa Keuangan/OJK). PT BNP Paribas Securities Indonesia is also a member of Indonesia Stock Exchange and supervised by Otoritas Jasa Keuangan (OJK). Neither this report nor any copy hereof may be distributed in Indonesia or to any Indonesian citizens except in compliance with applicable Indonesian capital market laws and regulations. This report is not 15 BNP PARIBAS 26 OCTOBER 2015
an offer of securities in Indonesia and may not be distributed within the territory of the Republic of Indonesia or to Indonesian citizens in circumstance which constitutes an offering within the meaning of Indonesian capital market laws and regulations. Japan: This report is being distributed to Japanese based firms by BNP Paribas Securities (Japan) Limited or by a subsidiary or affiliate of BNP Paribas not registered as a financial instruments firm in Japan, to certain financial institutions defined by article 17-3, item 1 of the Financial Instruments and Exchange Law Enforcement Order. BNP Paribas Securities (Japan) Limited is a financial instruments firm registered according to the Financial Instruments and Exchange Law of Japan and a member of the Japan Securities Dealers Association, the Financial Futures Association of Japan and the Type II Financial Instruments Firms Association. 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For Institutional and Accredited Investors in Singapore, please contact BNP Paribas Securities (Singapore) Ptd Ltd (company registration number: 199801966C; address: 10 Collyer Quay, 34/F Ocean Financial Centre, Singapore 049315; tel: (65) 6210 1288; fax: (65) 6210 1980) for all matters and queries relating to this report. South Africa: In South Africa, BNP Paribas Securities South Africa (Pty) Ltd is a licensed member of the Johannesburg Stock Exchange and an authorised Financial Services Providers and subject to regulation by the Financial Services Board. BNP Paribas Securities South Africa (Pty) Ltd does not expressly or by implication represent, recommend or propose that the financial products referred to in this report are appropriate to the particular investment objectives, financial situation or particular needs of the recipient. This document does not constitute advice as contemplated in the Financial Advisory and Intermediary Services Act, 2002. South Korea: BNP Paribas Securities Korea is registered as a Licensed Financial Investment Business Entity under the FINANCIAL INVESTMENT SERVICES AND CAPITAL MARKETS ACT and regulated by the Financial Supervisory Service and Financial Services Commission. This document does not constitute an offer to sell to or the solicitation of an offer to buy from any person any financial products where it is unlawful to make the offer or solicitation in South Korea. Switzerland: This report is intended solely for customers who are Qualified Investors as defined in article 10 paragraphs 3 and 4 of the Swiss Federal Act on Collective Investment Schemes of 23 June 2006 (CISA) and the relevant provisions of the Swiss Federal Ordinance on Collective Investment Schemes of 22 November 2006 (CISO). 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Registered Office: 2 place de Hollande, CH-1204 Geneva. Taiwan: Information on securities that trade in Taiwan is distributed by BNP Paribas Securities (Taiwan) Co., Ltd. Such information is for your reference only. The reader should independently evaluate the investment risks and is solely responsible for their investment decision. Information on securities that do not trade in Taiwan is for informational purposes only and is not to be construed as a recommendation or a solicitation to trade in such securities. BNP Paribas Securities (Taiwan) Co., Ltd. may not execute transactions for clients in these securities. This publication may not be distributed to the public media or quoted or used by the public media without the express written consent of BNP Paribas. Thailand: Research relating to Thailand and Thailand based issuers is produced pursuant to an arrangement between BNP PARIBAS ( BNPP ) and Finansia Syrus Securities Public Company Limited ( FSS ). FSS International Investment Advisory Securities Co Ltd ( FSSIA ) prepares and distributes research under the brand name BNP PARIBAS/FSS. BNPP is not an affiliate of FSSIA or FSS. FSS also publishes a different research product under the brand name FINANSIA SYRUS, which is prepared by research analysts who are not part of FSSIA and who may cover the same securities, issuers, or industries that are the subject of this report. The ratings, recommendations, and views expressed in this report may differ from the ratings, recommendations, and views expressed by other research analysts or research teams employed by FSS. This report is being distributed outside Thailand by members of BNP Paribas. Turkey: This report is being distributed in Turkey by TEB Investment (TEB YATIRIM MENKUL DEGERLER A.S., Teb Kampus D Blok Saray Mah. Kucuksu Cad. Sokullu Sok., No:7 34768 Umraniye, Istanbul, Turkey, Trade register number: 358354, www.tebyatirim.com.tr) and outside Turkey jointly by TEB Investment and BNP Paribas. Information, comments and suggestions on investment given in this material are not within the scope of investment consulting. The investment consulting services are rendered tailor made for individuals by competent authorities considering the individuals risk and return preferences. However the comments and recommendations herein are based on general principles. These opinions may not be consistent with your financial status as well as your risk and return preferences. Therefore, making an investment decision only based on the information provided herein may not bear consequences in parallel with your expectations. This material issued by TEB Yatırım Menkul Değerler A.Ş. for information purposes only and may be changed without any prior notification. All rights reserved. No part of this material may be copied or reproduced in any manner without the written consent of TEB Yatırım Menkul Değerler A.Ş. Although TEB Yatırım Menkul Değerler A.Ş. gathers the presented material that is current as possible, it does not undertake that all the information is accurate or complete, nor should it be relied upon as such. TEB Yatırım Menkul Değerler A.Ş. assumes no responsibility whatsoever in respect of or arising out or in connection with the content of this material to third parties. If any third party chooses to use the content of this material as reference, he/she accepts and approves to do so entirely at his/her own risk. United States: This report may be distributed in the United States only to U.S. Persons who are major U.S. institutional investors (as such term is defined in Rule 15a-6 under the Securities Exchange Act of 1934, as amended) and is not intended for the use of any person or entity that is not a major U.S. institutional investor. U.S persons who wish to effect transactions in securities discussed herein must do so through BNP Paribas Securities Corp., a USregistered broker dealer and member of FINRA, SIPC, NFA, NYSE and other principal exchanges. Certain countries within the European Economic Area: This document may only be distributed in the United Kingdom to eligible counterparties and professional clients and is not intended for, and should not be circulated to, retail clients (as such terms are defined in the Markets in Financial Instruments Directive 2004/39/EC ( MiFID )). This document will have been approved for publication and distribution in the United Kingdom by BNP Paribas London Branch, a branch of BNP Paribas SA whose head office is in Paris, France. BNP Paribas SA is incorporated in France with limited liability with its registered office at 16 boulevard des Italiens, 75009 Paris. BNP Paribas London Branch (registered office: 10 Harewood Avenue, London NW1 6AA; tel: [44 20] 7595 2000; fax: [44 20] 7595 2555) is lead supervised by the European Central Bank (ECB) and the Autorité de Contrôle Prudentiel et de Résolution (ACPR). BNP Paribas London Branch is authorised by the ACPR and the Prudential Regulation Authority (PRA) and subject to limited regulation by the Financial Conduct Authority and PRA. Details about the extent of our authorisation and regulation by the PRA, and regulation by the Financial Conduct Authority are available from us on request. This report has been approved for publication in France by BNP Paribas, a credit institution licensed as an investment services provider by the ACPR whose head office is 16, Boulevard des Italiens 75009 Paris, France. This report is being distributed in Germany either by BNP Paribas London Branch or by 16 BNP PARIBAS 26 OCTOBER 2015