20120202105125Eng-China Insurance Sector - 120202

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20120202105125Eng-China Insurance Sector - 120202 Powered By Docstoc
					                                                                                                     2 February 2012

China Insurance
Longer-term Value Emerges
Some improvement in 2012 for the industry after a
challenging 2011

2011 a difficult operating environment for life insurers – 2011 was a
tough year for China’s life insurers, mainly due to the three reasons below.

1.     New bancassurance regulations dampened sales – While
       bancassurance still accounts for more than 50% of China’s total premium
       income, the new bancassurance regulations imposed by the China
       Banking Regulatory Commission (CBRC) in November 2010 had not only
       significantly affected bancassurance sales activities at bank branches but
       also made insurers compete more fiercely for banks’ sales channels by
       paying higher commission rates.

2.     Less attractive returns on insurance products – China’s life insurers
       are still highly reliant on savings-oriented and investment-linked products.
       However, higher bank deposit rates had rendered the returns on
       savings-oriented insurance products less attractive, while the emergence
       of high-yield wealth management products offered by banks further
       cannibalized the demand for insurance. In addition, a weak A-share
       market affected sales of investment-linked products. All these not only
       affected new business sales but also significantly increased surrender

3.     Difficult agent recruitment – Life insurers also had difficulties in
       recruiting new agents to replace exiting agents (due to an industry
       downtrend, a national wage rise and labor shortage, and also rising
       income of other competing professions), thus limiting growth in the
       agency channels.

Bright spots in 2012 – While the difficulties experienced by the industry in
2011 are expected to follow through into 2012, the outlook in 2012 is
comparatively brighter. Firstly, as the impact from restricted bancassurance
sales implemented in November 2010 has already been discounted in 2011,
premium growth may improve in 2012 due to a lower prior-year comparison
base. Secondly, cannibalization from banks’ wealth management products may
ease, as banks now offer fewer wealth management products after the recent
reserve requirement ratio (RRR) cut and as the China Banking Regulatory
Commission (CBRC) is now monitoring more closely these wealth management
products. Overall, we expect some improvement in the challenging operating
environment in 2012, with life insurers continuing to strive for growth.

Stronger growth and more stable outlook for P&C insurers – For the
first eleven months of 2011 (11M11), China’s life premiums dropped 9.9% YoY,
while property and casualty (P&C) premiums grew 18.2%. In China, more than
70% of P&C premiums are derived from auto insurance, the demand for which
remains quite stable and is not profoundly affected by bancassurance
regulations, interest rate movement and agent recruitment, thus we expect a
more stable outlook for P&C insurers. We also expect P&C insurers to sustain
underwriting profitability given their improving business infrastructure and            Analyst: Michael Tam, CFA
internal control.                                                                         :(852) 2820 6322

Important: please refer to our disclosures and disclaimers at the end of this report.
CHINA INSURANCE                                                                                                                  2 FEBRUARY 2012

                                                                CHINA’S P&C AND LIFE MONTHLY PREMIUMS GROWTH
                                                       Jan 2007 Jul 2007 Jan 2008 Jul 2008 Jan 2009 Jul 2009 Jan 2010 Jul 2010 Jan 2011 Jul 2011
                                                                                        P&C                    Life

                                                  Sources: CEIC, South China Research

                                                  The protection market allows insurers to differentiate,
                                                  mitigate competition from banks and drive long-term

                                                  Insurers to add more protection elements to their life policies – In
                                                  December 2011, the China Insurance Regulatory Commission (CIRC) issued a
                                                  guideline that encourage insurers to increase protection coverage of life
                                                  insurance policies and leverage product innovation to meet diversified
                                                  consumer needs. At previously mentioned, China’s life insurers are still highly
                                                  reliant on sales of savings-oriented and investment-linked policies, and these
                                                  policies are vulnerable to competition from banks’ own wealth management
                                                  products and highly sensitive to investment markets. The protection market,
                                                  however, can only be served by life insurers and is relatively immune from
                                                  competition from banks, investment markets and economic cycles. Going
                                                  forward, as life insurers add more protection elements to their life insurance
                                                  policies, they can better differentiate themselves from banks and have a more
                                                  viable business model to drive long-term growth.

                                                  Long-term growth story remains intact – Despite the challenging
                                                  operating environment in the short run, the long-term growth potential of life
                                                  insurance in China remains bright given China’s low insurance density and
                                                  penetration, rising income, aging population and lack of social welfare

                                                  Trough valuation provides good entry opportunity for
                                                  long-term investors

                                                  Value emerges despite a lack of catalysts – The sector is currently
                                                  trading at high-single-digit VNB (value of new business) multiples compared
                                                  with the average VNB multiples of ~20x in 2009 and 2010. At the current
                                                  valuation level, we believe most of the industry’s negatives have been priced
                                                  in. However, since any meaningful re-rating would hinge on fundamental
                                                  improvements and growth recovery, major catalysts are scarce at present.
                                                  Nevertheless, we underscore the fact that current market expectation on the
                                                  sector is low, so any positive news or development can drive sector
                                                  performance. For investors who take a longer-term view, the current trough
                                                  valuation provides a good entry opportunity to gain exposure to an industry
                                                  with sound long-term potentials.

Important: please refer to our disclosures and disclaimers at the end of this report.                                                              -2-
CHINA INSURANCE                                                                                                                 2 FEBRUARY 2012

                                                           PEER GROUP COMPARISON
                                          -------PE-------              -------PB-------        -------Yield-------       ROA    ROE
Ticker   Company Mkt cap        Price 2010A 2011E 2012E              2010A 2011E 2012E         2010A 2011E 2012E        2011E   2011E     TP       UP
                  HK$bn          HK$       x        x      x             x       x       x         %        %       %      %       %     HK$       %

2628     China Life     637.9 22.60       15.4     21.1      15.2        2.64   2.53    2.24      2.2    1.4     1.9     1.65    12.0    23.10    +2.2
2318     Ping An       411.0 60.95        21.5     19.1      14.5        2.92   2.91    2.48      1.1    0.9     1.2     1.40    16.2   75.16    +23.3
2601     CPIC          218.9 25.60        20.8     18.0      14.3        2.23   2.17    1.94      1.7    1.8     2.1     1.92    12.2   32.70    +27.7
2328     PICC           124.0 10.12       18.4     10.9        9.7       3.14   2.83    2.25      2.6    2.5     1.6     3.75    29.0    11.92   +17.8
1336     New China Life 106.8 28.95       12.6      20.7      17.6        N/A   2.29    2.02        -    0.3     0.8     0.80    14.3    38.23   +32.1
966      China Taiping   24.4 14.32       10.8      27.1     14.2        1.88   1.50    1.34        -    0.1     0.3     0.69     7.7    19.42   +35.6

Source: Bloomberg    TP: Consensus target price   UP: Upside Potential

                                                  Top picks: China Pacific and Ping An – We prefer companies with higher
                                                  P&C exposure and strong capital positions. China Pacific, with P&C insurance
                                                  accounting for ~40% of profit and being the best-capitalized insurer, falls into
                                                  this category. We also like Ping An for its leading growth momentum in
                                                  premiums and strong agency force.


                                                  1.       Pricing reforms in auto insurance – According to Chinese media
                                                           reports, CIRC intends to introduce pricing reforms in auto insurance. If the
                                                           auto premium rates become deregulated, rates would probably decline.

                                                  2.       Investment markets – A weaker-than-expected investment
                                                           environment would pose downside risks to insurers’ solvency ratios and
                                                           investment yields.

                                                  3.       Market risks – The equity beta of most insurers are higher than 1. As
                                                           such, the sector is likely to be more volatile than the broad market.

Important: please refer to our disclosures and disclaimers at the end of this report.                                                            -3-
PING AN (2318 HK)                                                                                                                2 FEBRUARY 2012

BUY                                                              PING AN (2318 HK)
                                                                 Strongest growth momentum among listed peers
Date: 2 February 2012
HSI: 20,333.37                                                           Premium growth highest among peers – In 2011, Ping An’s total
                                                                         life premiums as measured under the new accounting standards grew
                                                                         28.4% YoY, higher than CPIC (2601 HK) (+6.0% YoY to RMB93.2bn)
                                                                         and China Life (2628 HK) (flat YoY at RMB318.3bn). For P&C insurance,
Share Price: HK$60.95                                                    Ping An’s total premiums received in 2011 (+34.2% YoY to
12-Mth Target Price: HK$75.16                                            RMB83.33bn) also outperformed its peers such as PICC (2328 HK)
(Bloomberg consensus)                                                    (+12.6% YoY to RMB173.4bn) and CPIC (+19.5% YoY to RMB61.6bn).
Upside Potential: +23.3%                                                 Such strong growth momentum of Ping An in both life and P&C
                                                                         premiums are expected to continue into 2012, leveraging on its strong
                                                                         agency force.
China Insurance                                                          Strong agency force – Ping An’s strong premium growth was
                                                                         attributed to its strong and productive agency force. In 1H11, agents
SHARE INFORMATION                                                        contributed nearly 70% of its first-year premium in life insurance,
                                                                         compared with 20-25% for China Life, China Pacific and Taiping. Ping
Ticker:                      2318 HK                                     An’s strength in agency force should also support its growth in agency
Market cap – Total       HK$411.0bn                                      channels going forward. Ping An has also been stepping up agency
Market cap – H shares    HK$190.8bn                                      training to improve its agents’ productivity and prepare for selling more
Issued H-shares                 3.13bn                                   policies with better margins.
3-year EPS CAGR                 20.8%
                                                                         Margin expansion can be expected – Under the old accounting
PEG                              0.92x                                   standards, Ping An’s total life premiums received in 2011 grew 13.7%
Embedded value (EV)    RMB25.39/share                                    YoY to RMB180.78bn. Under the new accounting standards, which
Price/EV                         1.95x                                   exclude investment-linked and universal life products, the growth rate
ROE                             18.3%                                    was much higher (+28.4% YoY to RMB118.97bn), indicating that Ping
ROA                             1.49%                                    An has become less reliant on investment-linked and universal life
Avg daily turnover           HK$926m                                     products. This, together with a higher proportion of business coming
Estimated free float            53.7%                                    from the agency channel, should help to improve margins.
12-mth high/low         HK$87.90/37.35
                                                                         Short-term fundraising needs subsided after announcement
Major shareholder      HSBC – 19.77%
                                                                         of A-share CB issuance – In December 2011, Ping An announced its
Exchange rate         RMB1 = HK$1.230                                    plans to issue RMB26bn in A-share convertible bonds (CB). The
                                                                         proceeds of the CB would primarily be used for replenishing capital for
                                                                         its banking operations, in our view. While the CB, if successfully issued,
SHARE PRICE CHART                                                        should alleviate Ping An’s further fundraising needs in the near term, it
                                                                         would also bring about an EPS dilution of 8%. However, the positive
                                                                         news is that the A-share CB would not increase the supply of H-shares.

    70.0                                                                 Underperformance in 2011 priced in negatives – Ping An’s share
                                                                         price performance was the worst among HK-listed Chinese insurers in
                                                                         2011. Such underperformance should have already priced in some key
    50.0               Ping An
                       HSI (rebased)
                                                                         negatives such as credit cost concerns for its banking business, weaker
    40.0                                                                 capital base and potential fundraising needs due to its strong growth
    30.0                                                                 profile.
  m shares
     150                                                                 Undemanding valuation – Ping An is currently trading at a
                                                                         high-single-digit VNB (value of new business) multiple, compared with
                                                                         the average VNB multiple of ~20x in 2009 and 2010. According to
           Feb   Apr     Jun       Aug   Oct      Dec      Feb           Bloomberg, the consensus target price (from 23 market estimates) for
Sources: Bloomberg, South China Research                                 Ping An is HK$75.16, implying an upside potential of 23.3%.

                  1mth          3mths     6mths         12mths   COMPANY BACKGROUND: Ping An provides a variety of insurance service
Share price chg +19.0%         +8.4%     -20.5%         -20.6%   in China. The company writes property, casualty, and life insurance. Ping An
Relative to HSI +7.9%          +3.2%     -11.4%          -8.3%   also offers banking services and other financial services.

                                                                 EARNINGS DATA
Analyst : Michael Tam, CFA
        : (852) 2820 6322                                        Year to 31 December                 2010A        2011E        2012E        2013E
        :                                Net profit     RMBbn                 17.31       19.94        26.25        31.17
                                                                 Growth                 YoY%          +24.7        +15.2        +31.6        +18.8
                                                                 EPS                     RMB           2.30         2.59         3.41         4.05
                                                                 Growth                 YoY%          +21.7        +12.7        +31.6        +18.8
                                                                 BVPS                    RMB          14.66        17.02        20.01        23.67
                                                                 Growth                 YoY%          +26.7        +16.1        +17.5        +18.3
                                                                 DPS                     RMB            0.60         0.47        0.61         0.73
                                                                 Growth                 YoY%          +33.3         -22.2       +31.5        +18.1
                                                                 PE                         x          21.5         19.1         14.5         12.2
                                                                 PB                         x           3.4          2.9          2.5          2.1
Important: please refer to our disclosures and                   Yield                      %           1.2          0.9          1.2          1.5
disclaimers at the end of this report                            Source: Bloomberg

Note: All prices in this report are based on the 1 February 2012 close                                                                          -4-
CHINA PACIFIC INSURANCE (2601 HK)                                                                                             2 FEBRUARY 2012

BUY                                                            CHINA PACIFIC INSURANCE (2601 HK)
                                                               Strong capital base provides room for growth
Date: 2 February 2012
HSI: 20,333.37                                                         Capital position highest among listed peers – In December 2011,
                                                                       CPIC gained regulator’s approval to issue 10-year sub-debt of up to
                                                                       RMB8bn. After the issuance, CPIC’s solvency ratio at the group level
Share Price: HK$25.60                                                  would reach about 300%, significantly higher than other listed peers.
12-Mth Target Price: HK$32.70                                          Such a strong capital position would allow CPIC to grow its premium
(Bloomberg consensus)                                                  base without any constraint on capital, and CPIC is under the least
Upside Potential: +27.7%                                               pressure to raise equity capital at the current trough valuation.

                                                                       The more stable P&C business accounts for ~40% of profit –
China Insurance                                                        P&C insurance, which has a more stable outlook, accounts for ~40% of
                                                                       CPIC’s profit. With premium growth and new business value growth
SHARE INFORMATION                                                      above peer averages in 2011, CPIC’s better growth momentum is
                                                                       expected to continue into 2012.
Ticker:                           2601 HK
Market cap – Total            HK$218.9bn
                                                                       Agent productivity and product mix upgrade gains as growth
Market cap – H shares          HK$59.2bn
                                                                       drivers – The number of CPIC’s life insurance agents had remained
Issued H-shares                      2.31bn
                                                                       largely flat at 280,000 throughout 2011, while the industry saw negative
3-year EPS CAGR                      19.7%
PEG                                   0.91x                            growth. Looking into 2012, we expect agent recruitment to remain
Embedded value (EV)         RMB12.80/share                             difficult. The good news is that CPIC actually achieved double-digit
Price/EV                              1.63x                            growth in first-year premium in the agency channel. That implies a
ROE                                  12.2%                             double-digit rise in agent productivity and product mix changes, which
ROA                                  1.92%                             were achieved by enhanced agency recruitment and training system, as
Avg daily turnover                HK$269m                              well as the offering of more long-term policies that focus on protection
Estimated free float                 75.9%                             and products. In fact, policies with payment terms of more than 10
12-mth high/low             HK$35.45/19.78                             years accounted for over 40% of CPIC’s first-year premium in 2011.
Major shareholder                                                      Going forward, although volume growth in life insurance would remain
               Fortune Investment – 18.79%                             challenging, agent productivity and product mix upgrade should drive
Exchange rate             RMB1 = HK$1.230                              growth in CPIC’s new business value.

SHARE PRICE CHART                                                      Trough valuation provides good entry point – CPIC was listed in
                                                                       December 2009. During 2010 and 1H11, CPIC traded between
                                      CPIC                             HK$25-35, which implied forward VNB (value of new business)
                                      HSI (rebased)                    multiples of about 20x. The counter is now trading at only a
    30.0                                                               high-single-digit VNB multiple, and an undemanding forward
    28.0                                                               price/embedded value of 1.4x. We set our target price for CPIC at
                                                                       HK$32.70 (implying a 27.7% upside potential from the current level)
    22.0                                                               based on the Bloomberg consensus (from 21 market estimates).
  m shares
                                                               COMPANY BACKGROUND: China Pacific Insurance (Group) Company is
     400                                                       an integrated insurance services provider. The company offers life and
    200                                                        property insurance products through its subsidiaries.
           Feb   Apr   Jun     Aug    Oct      Dec       Feb
                                                               EARNINGS DATA
Sources: Bloomberg, South China Research
                                                               Year to 31 December                2010A        2011E       2012E        2013E
                  1mth        3mths    6mths          12mths
Share price chg +15.8%       +9.4%    -15.4%          -16.9%
                                                               Net profit          RMBbn            8.56         9.89       12.42        14.69
Relative to HSI +5.0%        +4.2%     -5.7%           -4.0%
                                                               Growth                YoY%          +16.3        +15.6       +25.5        +18.3
                                                               EPS                    RMB           1.00         1.16        1.45         1.72
                                                               Growth                YoY%           +5.3        +15.6       +25.5        +18.3
Analyst : Michael Tam, CFA                                     BVPS                    RMB           9.34        9.61        10.71       12.11
        : (852) 2820 6322                                      Growth                YoY%           +6.1         +2.9       +11.5        +13.0
        :                              DPS                     RMB           0.35        0.37         0.44         0.53
                                                               Growth                YoY%          +16.7         +5.7       +18.9        +20.7
                                                               PE                        x          20.8         18.0        14.3         12.1
                                                               PB                        x           2.2          2.2         1.9          1.7
                                                               Yield                     %           1.7          1.8         2.1          2.6
Important: please refer to our disclosures and
disclaimers at the end of this report                          Source: Bloomberg

Note: All prices in this report are based on the 1 February 2012 close                                                                      -5-
CHINA INSURANCE                                                                                                                                       2 FEBRUARY 2012

                                                        South China Financial Holdings
      Tel: (852) 2820 6333          Fax: (852) 2845 5765             URL:                E-mail:           Telex: 69208 SCSL

 Head office
                     26/F, Tower I,                                          28/F, Bank of China Tower,
             Lippo Centre, 89 Queensway,                                           1 Garden Road
                       Admiralty                                                       Central
                 Tel: (852) 3196 6000                                           Tel: (852) 2820 6333
                 Fax: (852) 2536 4608                                          Fax: (852) 2845 5765
 RM1002-03, Nan On Com Bldg          Shop 2 G/F, Max Share Centre,        Shop 1&2, G/F, Yue Man Centre,         Shop A1, G/F, Kar Ho Building, G/F, 108 Chung On Street,
      69A Wuhu Street,                     373 King's Road,                300-302 Ngau Tau Kok Road,               27-31 Hong Lok Road,
         Hung Hom                            North Point                           Kwun Tong                           Yuen Long, N.T.                  Tsuen Wan N.T.
    Tel: (852) 2330 5881                 Tel: (852) 2570 4422                  Tel: (852) 2191 2822                  Tel: (852) 2442 4398            Tel: (852) 2614 1775
    Fax: (852) 2627 0001                                                       Fax: (852) 2793 3000                  Fax: (852) 2479 4418            Fax: (852) 2615 9427

   5-6 Carlos Place, Mayfair,
       London W1K 3AP,
        United Kingdom
    Tel: (4420) 7491 9225
    Fax: (4420) 7355 4423

DISCLOSURES: The Research Analyst(s) who prepared the research report hereby certify the views expressed in this research report accurately reflect the analyst(s)
personal views about the subject companies and their securities. The Research Analyst(s) also certify the Analyst(s) have not been, are not, and will not be receiving
direct or indirect compensation for expressing the specific recommendations(s) or view(s) in this report.

We and our affiliates, officers, directors and employees, excluding Research Analyst(s), will from time to time have long or short positions in, act as principal in, and buy
or sell, the securities or derivatives (including options and warrants) thereof of covered companies referred to in this research report.

IMPORTANT: This report and the information and opinions provided or expressed herein have been prepared by South China Research Limited for itself, its parent,
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Important: please refer to our disclosures and disclaimers at the end of this report.                                                                                     -6-

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