20160707-招商证券_香港_-Identifying_mid-_long-term_investment_risks_on_insurers_22页_918kb

Investment Thesis Summary

Core Content

The document provides an investment analysis of Chinese insurance stocks, particularly those listed in Hong Kong, focusing on valuation suppression factors and potential re-rating scenarios.

Major Factors Suppressing Valuation

1. Declining Long-Term (LT) Investment Yields:

   • The downward trend in global interest rates has raised concerns about Chinese interest rates possibly entering negative territory, which would lower investment yields for insurance companies to around 3%, similar to Japan.
   • This is a significant factor affecting the valuation of HK-listed insurance stocks.

2. Mid-Term Credit Risks:

   • Credit default risks have increased due to economic restructuring and the exposure of credit risk in fixed-income investments, similar to the non-performing assets (NPAs) in the banking sector.
   • These risks are a second key factor suppressing the valuation of HK-listed Chinese insurers.

3. Investment Impairment Risks:

   • Potential investment losses could range from 5.5% to 12.3% of FY15 net assets under various scenarios.
   • These losses are considered manageable and controllable.

Long-Term Investment Outlook

• Chinese insurers' LT investment yields could stay above 4.2%, even in a low-interest-rate environment.
• This is based on comparisons with overseas markets (U.S., Japan, Korea, Germany, and Taiwan) where LT yields are lower but still positive.

Main Points

• Investment Impairment Impact:

  • The impact of potential losses on net assets is quantified using different assumptions for various investment categories:
    • Listed equity investment loss: 10%
    • Corporate bonds investment loss: 3%
    • Trust and debt schemes investment loss: 5%
    • Wealth management products investment loss: 2%
  • The total impact on net assets ranges from 5.5% to 12.3%.

• Target Price (TP) Adjustments:

  • The TP for Chinese life insurers was cut by an average of 12.6%.
  • China Re's TP was reduced by 14.6% due to limited potential for ROE improvement over the next 2-3 years.
  • TP for PICC was cut by 6.6% for Ping An and 7.6% for NCI.

• Recommended Investment Strategies:

  • Short-term Range Trading: Investors should consider short-term trading opportunities.
  • Long-term Holding: The document suggests long-term holding for potential re-rating, especially as economic conditions improve.
  • Recommended Stocks: NCI, PICC, and China Taiping are highlighted for their attractive valuations and growth prospects.

Key Information

• Sensitivity Analysis:

  • Figures 1 to 7 show the potential impact of investment losses on insurers' net assets and provide detailed data on the loss rates for different investment categories.
  • Figure 7 provides a table of investment assets and loss assumptions for various insurers.

• Valuation Metrics:

  • The document includes valuations in terms of P/B (Price to Book), P/EV (Price to Equity Value), and EV/shr (Equity Value per Share).
  • For example, PICC has a P/B of 1.39 and a ROE of 15% in 2016E.

• Economic and Market Context:

  • The analysis compares the performance of stock markets and 10-year treasury bond yields across several countries.
  • It highlights the correlation between bond yields and GDP growth, as well as the impact of economic transformation on market returns.

• Credit Risk Analysis:

  • The trust industry's non-performing ratio is higher than that of the banking sector.
  • Insurance companies primarily invest in trust and debt schemes related to finance, infrastructure, and property, which are considered lower risk compared to other sectors.

• Investment Grade Bonds:

  • Investment grade bonds have very low default rates, with AAA-rated bonds having a default rate of 0.5% and AA+ rated bonds having a default rate of 1.0%.

Investment Ratings

Analyst and Regulatory Disclosures

• The analysis is prepared by China Merchants Securities (HK) Co., Limited (CMS HK).
• The analyst certifies that the views expressed are their personal views and not influenced by compensation.
• Regulatory disclosures are available on CMS HK's website: http://www.newone.com.hk/cmshk/en/disclosure.html