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Insurance Industry Report Summary - 2017 Sector Outlook

Core Content

The China Merchants Securities (HK) Co., Ltd. report outlines the outlook for the Chinese insurance sector in 2017, focusing on potential rallies and re-rating opportunities in the coming months, particularly in the Spring season. The report highlights that while the sector correction is not yet complete, there are positive signals for a rebound in the first quarter of 2017, driven by improved market liquidity, favorable economic environment, and strong fundamentals of select insurers.

The report emphasizes that the Spring rally (Spring blossom) is more likely than the Autumn re-rating (Autumn harvest), which depends on progress in economic reforms, capacity reduction, and improving PPI and corporate earnings. The pecking order for investment is Ping An, NCI, and PICC, with Ping An and NCI being highlighted for their strong fundamentals and potential for growth.

Main Views

• Spring Rally Expectations: The report anticipates a rally in Chinese insurance stocks in the first quarter of 2017, driven by:

  • Improved market liquidity from domestic funds seeking overseas investment opportunities due to RMB depreciation.
  • Positive economic policies expected from the Two Sessions in March.
  • A low base for 2Q17 GDP growth.
  • Better-than-expected 2016E NBV growth for Ping An and NCI.

• Autumn Re-rating Uncertainty: While the potential for re-rating in the Autumn is dependent on economic progress, the report notes that uncertainties remain, and the sector is still in a correction phase.

• Fundamental Improvements: The report recommends focusing on insurers with strong fundamentals and high earnings visibility. These include:

  • Ping An: Low valuation (0.86x 2017E P/EV), strong NBV growth, and potential re-rating due to the HK listing of Lufax.
  • NCI: Ongoing business transformation, improved premium structure, and expected NBV growth.
  • PICC: High profitability, low valuation (1.23x 2017E P/B), and good long-term earnings quality.

• P&C Insurance Outperformance: The P&C segment is expected to outperform, with Ping An and PICC maintaining premium growth above 10% and ROEs above 15%.

• Life Insurance Outlook: While profitability is expected to improve, NBV growth will decline. Ping An and NCI are highlighted for their stronger fundamentals and potential to outperform.

Key Information

• Investment Thesis:

  • Ping An and NCI are preferred for their fundamental improvements and growth potential.
  • PICC is also recommended for its strong profitability and attractive valuation.
  • CPIC, China Life, and Taiping are seen as having only short-term trading opportunities due to lack of fundamental inflection points.

• Target Prices (TP):

  • Ping An (2318 HK): Raised to HK$53.39 (up 5.7%).
  • NCI (1336 HK): Raised to HK$45.22 (up 13.5%).
  • AIA (1299 HK): Cut to HK$55.45 (down 8.7%).

• Earnings Forecasts:

  • Ping An is expected to see a significant increase in NBV and earnings due to the Lufax listing.
  • NCI is projected to have improved NBV growth and reduced reliance on Bancassurance single premium.
  • PICC is anticipated to have strong profit growth and ROE, with a potential net profit CAGR of 24%.

• Valuation Metrics:

  • Ping An: 0.86x 2017E P/EV, significantly undervalued.
  • NCI: 0.69x 2017E P/EV, also undervalued.
  • PICC: 1.23x 2017E P/B, with ROE of 16.2%.

• Risks and Uncertainties:

  • The report notes the uncertainty of the Autumn re-rating and the potential impact of the US rate hike in December.
  • There are concerns about the sustainability of short-term bond yields and asset shortages affecting net investment yield.

Investment Recommendations

• Pecking Order: Ping An, NCI, and PICC are the top picks for investment in 2017.
• Timing: Investors are advised to wait for the confirmation of the US rate hike in December and consider buying opportunities around the Spring Festival.
• Alpha Opportunities: The report suggests that the strong insurers will get stronger, and there are alpha opportunities for those with fundamental improvements.

Conclusion

The report is optimistic about the potential for a Spring rally in the Chinese insurance sector, with Ping An and NCI leading the charge due to their strong fundamentals and growth prospects. While uncertainties remain for the Autumn re-rating, the report maintains a positive outlook for the sector in the short term and recommends focusing on companies with the strongest fundamentals and earnings visibility.