|作者：||Felix LUO,Laurel ZHU|
|摘要：||Report title:China Insurance Sector - 1H20 results review and sector outlook
Analyst:Felix LUO,Laurel ZHU
■ Weak NBV in 1H20; Life sectors’ long-term potential intact
■ Positive impact from rising government bond yield
■ Sector valuation undemanding; Maintain OVERWEIGHT
Weak NBV in 1H20; Life sectors’ long-term potential intact
NBV growth of major life players, such as Ping An and CPIC, were hampered by COVID-19 and a weak sales recovery in 2Q20 given that potential clients are still wary of face-to-face consultation. Particularly, Ping An Life’s strong offline operation capability was hindered in both 1Q and 2Q. PAL’s NBV dropped by 24.4% yoy in 1H20, and down 24.9% yoy in 2Q alone. In comparison, NBV growth of China Life and NCI were relatively better in 1H20. This is partly due to their increased number of agents, and partly due to higher contribution of low-margin simple products in their product mix, which enabled them to leverage more on online channels. China Life outperformed peers with a NBV increase of 6.7% yoy in 1H20. Overall, agent productivity and NBV growth were weak in 1H20 across the sector (Figure 1), and we expect some recovery in 2H20 for the sector. Life sector’s long-term potential remains intact in our view: In China, individuals carry heavy health expenditure burdens while not being insured enough, with ~36% of health expenditure being household out-pocket payment (Figure 8). Also, 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.
Government bond yield trending up; Positive impact on the sector
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 rebounded in Mar-Aug, China’s 10Y government bond yield is likely to remain an overall upward trend in the next few months (Figure 12), which may drive valuation re-rating of life insurance stocks.
Investors are concerned that life insurers’ Value of In-Force (VIF) assumptions might not be met (e.g., assumed long-term investment yield of 5%). For the disclosed VIF sensitivity data is incomplete, we simplified this issue by assuming the entire VIF is eliminated while examining life players’ P/EV valuations. In such case, major life players’ P/EV ratio still falls short of 1x (Figure 4), implying most of the risks concerning assumptions have been priced in. Taking into account the rebound of 10Y government bond yield, we think major life insurance players are undervalued.
China’s insurance sector is trading at ~1.4x 20E P/B. We maintain our OVERWEIGHT rating for the sector on its long term potential, undemanding valuation, and rising government bond yield. China Life (2628 HK): Our top pick is China Life. Maintain BUY rating on its likely positive NBV growth in 2020E with TP at HKD26.0, equivalent to ~0.60x 20E P/EV. Ping An (2318 HK): Mgmt. is confident its life insurance reform projects will be completed by this year, and expects the reform to promote fast business growth for the next year. Maintain BUY with TP at HKD99.4, equivalent to ~1.2x 20E P/EV or ~2.0 x 20E P/B. CPIC (2601 HK): Maintain BUY on undemanding valuation with TP at HKD32.5, equivalent to 0.62x 20E P/EV. NCI (1336 HK): Maintain BUY on undemanding valuation with TP at HKD39.7, equivalent to 0.47x 20E P/EV. Key catalysts: a good capital market, higher-than-expected NBV growths; Key downside risks: an adverse capital market, lower-than-expected NBV growths.