20140403-大和证券-Core_business_undervalued_15页_495kb

Ping An Insurance (2318 HK) Summary

Core Business Overview

Ping An Insurance is a diversified financial group that operates in life and non-life insurance and has a bank subsidiary. Founded in 1988 in Shenzhen, it shifted its focus to life insurance in 1994 and was listed in 2004. As of 2013, it held market shares of 14% and 18% in the life and non-life insurance sectors, respectively.

Growth Outlook

• Ping An is expected to lead the major Chinese insurers in delivering robust value-of-new-business (VNB) growth for 2014.
• The company's VNB growth in 2013 was 14% YoY, driven by the launch of its Pinganfu product following the liberalisation of guaranteed rates in August 2013.
• Ping An Life reported 14% YoY VNB growth in 2013, while the company's agency force grew by 9% YoY to 557,000 agents, outperforming other major insurers.
• Agent productivity and cross-selling strategies have contributed to Ping An's strong performance in the insurance sector.
• For 2014-15, we forecast 17-18% YoY VNB growth, supported by improved product mix, agency network expansion, and cross-selling capabilities.

Financial Performance

• Ping An P&C insurance business saw 15% HoH gross premium growth in 2H13, with a combined ratio of 97.3% in 2013, in line with expectations.
• Non-auto P&C insurance business improved significantly, with a combined ratio dropping to 95% in 2013 from 98% in 2012, contributing 42% of total P&C underwriting profit.
• Ping An Bank reported 13% YoY net-profit growth to CNY15.2bn, with a core Tier-1 CAR of 8.56% in 2013.

Earnings Forecast Revisions

• We have cut our 2014-15E earnings by 6-14%, primarily due to lower net premium growth and higher claim-and-reserve-ratio assumptions.
• We expect Ping An to reinsure a greater proportion of its premiums to diversify risk and improve stability.
• Our 2015-16E EPS are 9.4% higher than the consensus, based on confidence in Ping An's ability to enhance its recurring investment yield by extending investment duration.

Valuation Analysis

• The target price is revised to HKD75.7 from HKD78.4, implying a 1.3x 2014E PEV.
• We believe Ping An is more attractively valued compared to CPIC (2601 HK), despite both having a Buy (1) rating.
• Ping An is trading at a premium to PICC Group, but a discount to China Life, due to market concerns over its bank subsidiary.

Valuation Table

Key Financial Metrics

Investment Performance

• Ping An's recurring investment yield improved to 5.1% in 2013 from 4.7% in 2012.
• Total investment yield also rose to 5.1% in 2013, driven by reduced impairment losses, increased fixed-income yield, and higher cash-dividend income.
• As of end-2013, Ping An increased its fixed-maturity investment weighting to 82% (from 81%), reduced its cash position to 5.6% (from 6.8%), and increased equity investment weighting by 0.3pp to 9.8%.
• The company's average asset duration is 7 years, compared to a liability duration of 20 years, indicating an asset-liability mismatch.
• We forecast the recurring investment yield to fall to 4.6% in 2014 and rise to 5.0% in 2015, as the company invests in longer-duration products.

Risk Factors

• The key risk to our view is a deterioration in Ping An Bank's asset quality, as it contributed 22% of the company's net profit in 2013.
• We also note the potential impact of auto-insurance pricing liberalisation in 2H14, which could affect the P&C business.

Forecast Revisions

Conclusion

• Ping An is viewed as undervalued compared to its peers, particularly due to its attractive valuations and robust VNB growth.
• Despite the revised earnings forecast due to higher claim-and-reserve-ratio assumptions, the company's investment in long-duration products and cross-selling capabilities support its growth outlook.
• The SOTP-based target price is now HKD75.7, reflecting a 1.3x 2014E PEV.
• The company's solvency ratio declined to 174% in 2013 but remains adequate, with the potential for further improvement through sub-debt issuance.