20180828-高盛-新华保险-01336.HK-NBV_beat_on_margin_expansion,_driven_by_product_mix_gains___cost_savings_8页_499kb

New China Life Insurance (1336.HK) Summary

Core Content

New China Life Insurance (NCI) reported strong financial results for the first half of 2018 (1H18), with a net profit of Rmb5.8bn, representing a 79% year-over-year (yoy) increase. This performance was in line with the pre-announcement of an 80% yoy increase. The company also showed a notable beat in New Business Value (NBV), which reached Rmb6.5bn, a 9% decline yoy but significantly better than the 22% decline of its peer, GSe.

Key Financial Highlights

• Net Profit: Rmb5.8bn, +79% yoy
• NBV: Rmb6.5bn, -9% yoy
• NBV Margin on FYP: 45.6%, up 8.6 pp yoy
• Embedded Value (EV): Rmb165.6bn, +8% yoy
• Book Value (BV): Rmb65.778bn, +3% YTD
• Comprehensive Solvency Ratio: 272%, -10 pp YTD
• EPS: Rmb1.86, +79% yoy

Drivers of Performance

The NBV beat was primarily driven by two factors:

1. Product Mix Improvements: Health insurance now accounted for 56% of new business sales, up from 36% in 1H17. This shift contributed to a higher margin on new business.
2. Cost Efficiency Gains: Administrative expenses decreased by 24% yoy, supporting the margin expansion.

Other Key Metrics

• First Year Premium (FYP): Rmb14.138bn, -26% yoy, with health insurance contributing Rmb7.8bn (+13% yoy) to the total.
• Agent Headcount: 334k, flat yoy but -4% YTD.
• Investment Income: Rmb16.307bn, +3% yoy.
• Operating Expenses / Net Earned Premiums (NEP): 21.0%, down 5.1 pp yoy.
• Total Benefit Payouts / NEP: 96.9%, up 4.8 pp yoy.
• Underwriting Profit / NEP: -12.3%, up 4.4 pp yoy.
• ROE: 17.9%, up 7.2 pp yoy.
• ROA: 1.58%, up 0.7 pp yoy.

Investment Outlook

• Price Target: HK$46.10 for H shares and Rmb45.30 for A shares.
• Upside/Downside: H shares have an upside of 28.4% from the current price of HK$35.90; A shares have a downside of 3.4% from Rmb46.90.
• M&A Rank: 3 (low probability of acquisition).
• Ratings: Buy/Neutral for H/A shares, with the rating unchanged.

Risks and Considerations

• Downside Risks: Deterioration in agency activity ratio and increase in expense overrun.
• Solvency Ratio: Down 10 points to 272%, indicating a need for continued monitoring.
• Investment Losses: Larger-than-expected investment losses impacted book value.

Analysts and Contact Information

• Thomas Wang: +852-2978-1697, thomas.wang@gs.com
• Stanley Tian: +852-2978-1945, stanley.tian@gs.com
• Dan Cao: +65-6654-5566, dan.cao@gs.com

Additional Context

• The company is part of the Goldman Sachs coverage for A-share Insurance, Greater China Insurance, Hong Kong Insurance, India Insurance, and Taiwan Insurance.
• Goldman Sachs has investment banking services relationships with NCI and may seek compensation for such services.
• The report highlights the long-term financial stability of NCI, with the agency/product strategy restructure initiated in 2015 beginning to show results.

Conclusion

New China Life Insurance demonstrated resilience in its financial performance, with significant improvements in NBV margin and net profit despite a decline in NBV. The company's strategic shift toward health insurance and cost efficiency has positively impacted its financial results, although challenges remain in terms of solvency and potential risks in agency activity and expenses. Goldman Sachs maintains its Buy/Neutral rating for the company, with unchanged price targets, suggesting continued confidence in its long-term prospects.