20161028-美银美林-中国平安-02318.HK-3Q16_net_profit_up_15__YoY__9M16_profit_up_17__YoY_11页_788kb

Summary of Ping An Insurance (9M16)

Core Content

Ping An Insurance Group reported strong performance in the first nine months of 2016 (9M16), with earnings reaching 95% of full-year estimates. The company expects sustainable earnings growth in 4Q16 due to a low base in 4Q15. The Life insurance segment saw significant YoY growth, reaching 48% in 9M16, with margin improvements. The core solvency margin for Life improved from 207% in 2Q16 to 216% in 3Q16.

The company made an extra RMB8bn reserve catch-up in 3Q16 in response to the 750-day average CGB yield decline. For 9M16, total extra reserves amounted to RMB17bn. The firm believes Ping An booked more reserves than necessary, providing a stronger buffer for 2017 earnings, which are expected to face greater reserve pressure due to a 30bp decline in 1H17.

The P&C combined ratio remained stable at 94.9%, and Ping An's combined ratio was the lowest among peers. Bank earnings grew by 5.5% YoY in 9M16, with a T1 ratio of 9.67%, above the minimum requirement of 8.5%. The bank does not have an immediate need for equity raising.

Investment performance improved in 3Q16, with recurring investment yield increasing by 40bp YoY to 6.0% in 9M16. Total investment return declined to 4.9% in 9M16 due to lower capital gains in the first half of the year.

Key Financial Data

Earnings Growth (2014A to 2018E)

Valuation (Dec)

Investment Rationale

Ping An Insurance Group is a multi-line insurance company with life insurance, non-life insurance, securities, trust, and bank subsidiaries. The company's fundamentals are considered strong, with consistent new business momentum, stable underwriting profits, and improved investment returns. The firm maintains a "Buy" rating for both H and A shares, with price objectives of HK$52.26 and CNY41.34 respectively.

The price objective for Ping An Insurance (PIAIF) is based on a SOTP (Sum of the Parts) valuation model. It includes:

1. Life Insurance: Appraisal value based on 2016 forecast embedded value (adjusted for 100bps below company's assumption) plus new business value multiplied by a 10x multiplier.
2. P&C Insurance: Valued at 2.0x P/B using the Gordon Growth model with normalized RoE of 19%, terminal growth rate of 4%, and 11% discount rate.
3. Ping An Bank: Valued at 0.5x P/B for 2016E.
4. Other Business: Valued at 1x P/B.

The price objective for Ping An Insurance (XPSPF) includes a 10% discount to the fair value for the A share, given the high market volatility. The firm's PO implies a 1.32x P/EV Group.

Key Risks

• The credit quality of Ping An Trust and Ping An Bank could be better or worse than the assumptions used in the price objective.
• In a bull-run scenario driven by liquidity, Ping An's share price may overshoot.

Analyst Certification

Katherine Hu, a Research Analyst at Merrill Lynch (Hong Kong), certifies that the views expressed in the report reflect her personal views and that no part of her compensation was related to the specific recommendations or views in the report.

Company Description

Ping An Insurance Group, established in 1988 in Shenzhen, is a financial conglomerate in China. It became the second largest life insurer in 2006 with a 17% market share in life insurance and 11% in non-life insurance. The company has diversified operations across insurance, securities, trust, and banking sectors.

Investment Rating

Additional Information

The report includes several charts that illustrate Ping An's solvency margin, investment returns, earnings mix, and valuation multiples. These visual aids provide further insight into the company's financial health and performance trends.