|作者：||Felix LUO,Laurel ZHU|
|摘要：||Report title:China Insurance Sector - Life sector’s long-term potential intact; Valuation undemanding
Analyst:Felix LUO,Laurel ZHU
■ Weak 1H20 NBV growth expected; sector’s long term potential intact
■ Overall trend of government bond yield likely to remain upward in 3Q20, driving sectors’ valuation re-rating
■ Undemanding Valuation; Maintain OVERWEIGHT
Government bond yield edged higher in July vs. June; overall trend likely to remain upward in 3Q20 driving valuation re-rating
China’s 10Y government bond yield on average are higher in July as we expected (see our June and July report). The yield ranged from 2.85% to 3.08% with a mean of 2.95% so far in July, vs. ranging from 2.74% to 2.92% with a mean of 2.83% in June. An upward trend of government bond yield may alleviate investors’ concern on the declining 750-MA line as well as improve the credibility of life insurers’ investment yield assumptions. Per our research, growth of aggregate social financing broadly shared similar trend with deferred China’s 10Y government bond yield (deferred for 3-4 months, except for the period of severe outbreaks of COVID-19). Given the fact that the growth of aggregate social financing strongly rebounded in Mar-June, China’s 10Y government bond yield is likely to rebound in 3Q20 (Figure 2), which may drive valuation re-rating of life insurance stocks.
Weak 1H20 NBV growth expected due to COVID-19; life sectors’ long-term potential remains intact
We expect Ping An/CPIC/NCI to record negative NBV growth yoy in 1H20, given: 1) their policy sales were hampered by the COVID-19, and 2) a relatively weak sales recovery in 2Q20 as some potential clients are still wary of face-to-face consultation. China Life might achieve positive NBV growth yoy in 1H20, as a result of its well-prepared ‘jumpstart’ pre-sales and continuously increased number of agents. However, the life sector’s long-term potential remains intact in our view: 1) The COVID-19 has raised Chinese residents’ awareness of insurance protection. For example, demand for insurance protection increased strongly in areas such as Hubei Province according to NCI. 2) In China, individuals carry heavy health expenditure burdens while not being insured enough (Figure 5), with ~36% of health expenditure being household out-pocket payment. As a result, health insurance showed robust growth (Figure 4) and remained main driver of gross premium growth in China’s life insurance industry. In 1H20, per the CBIRC data, health/life/accidental insurance gross premiums increased by 20%/4%/-6% yoy. 3) Life insurance density and penetration in China both are significantly lower than those in developed countries (Figures 6-7), indicating room for long-term growth.
Undemanding valuation; Maintain OVERWEIGHT
China’s insurance sector is trading at ~1.4x 20E P/B. Major life players are still trading at low-end of their respective historical P/EV ranges (Figures 11-14). Assuming the entire VIF is eliminated from their respective embedded values, China Life/NCI/CPIC’s P/EV ratios will still below 1x (Figure 10), implying most of the risks concerning VIF assumptions have been priced in. Valuation of China’s life sector is undemanding in long term view. We maintain our OVERWEIGHT rating for the life sector. China Life (2628 HK, BUY) is our top pick, on its undemanding valuation and a likely higher NBV growth in 2020. Maintain “BUY” for Ping An (2318 HK, BUY) on the basis that its high-quality agent force empowers its long-term competitive advantage. Maintain “BUY” for CPIC (2601 HK, BUY) and NCI (1336 HK, BUY) on undemanding valuation. Key catalysts: a good capital market, higher-than-expected NBV growths; Key downside risks: an adverse capital market, lower-than-expected NBV growths. Per our sensitivity test, if market value of equity investment increases by 10%, the positive impact on embedded value of major players might range between ~2.1-3.2% (Figure 9), with pure life players such as China Life & NCI benefiting more.