2013 outlook – At the beginning of rerating;
Top picks: Ping An & NCI
Pricing in A-share recoveries; upgrading Ping An to Buy
________________________________________________________________________________________________________________
Deutsche Bank AG/Hong Kong
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should
be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should
consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST
CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 072/04/2012.
Esther Chwei
Research Analyst
(+852) 2203 6200
esther.chwei@db.com
Top picks
China Life (2628.HK),HKD27.00 Buy
Ping An (2318.HK),HKD69.65 Buy
CPIC (2601.HK),HKD30.90 Buy
NCI (1336.HK),HKD32.55 Buy
Companies Featured
China Life (2628.HK),HKD27.00 Buy
2011A 2012E 2013E
P/EV 2.0 1.7 1.5
Implied NB multiple (x) 16.2 12.9 8.7
Yield (net) (%) 1.1 1.1 2.0
Ping An (2318.HK),HKD69.65 Buy
2011A 2012E 2013E
P/EV 1.9 1.6 1.3
Implied NB multiple (x) 12.0 6.8 3.0
Yield (net) (%) 0.7 0.7 0.9
CPIC (2601.HK),HKD30.90 Buy
2011A 2012E 2013E
P/EV (x) 1.8 1.6 1.5
Implied NB multiple (x) 13.4 9.8 7.3
Yield (net)(x) 1.4 0.7 1.3
NCI (1336.HK),HKD32.55 Buy
2011A 2012E 2013E
P/EV (x) 1.3 1.4 1.1
Implied NB multiple (x) 7.7 5.2 1.8
Yield (net)(x) 0.4 0.6 0.8
CTIH (0966.HK),HKD16.00 Hold
2011A 2012E 2013E
P/EV 1.9 1.4 1.2
Implied NB multiple (x) 9.2 6.3 3.0
Yield (net) (%) 0.0 0.0 0.6
We believe the Chinese insurance sector is only at the beginning of a re-rating
on the back of an improved outlook for China’s A-share markets. We note that,
despite recent rallies, the sector valuation of 1.3x forward P/EV is still at the
low end of the historical range. As such, we believe the sector re-rating should
continue. We have priced in a 10% return on A-share markets in 2013, and we
upgrade Ping An to Buy. We prefer Ping An and NCI given their relatively high
leverage to equity markets. We also have Buy ratings on CPIC and China Life.
The impacts of A-share markets
Historically, A-share markets have been the strongest catalyst for multiple
expansion of Chinese insurance shares. In our view, favorable A-share markets
should provide the much-needed relief for the sector’s operations, as this
should (i) improve insurers’ investment returns, which should increase capacity
to pay par dividends and increase competitiveness of insurance policies, (ii)
drive strong earnings and EV growth in 2013E, and (iii) ease capital pressure.
On the back of better markets, we believe investors will likely look through
near-term operating challenges and look forward to the structural growth
potential of the sector, which we believe is intact and will be supported by
more favorable government policies. We see average 16% upside potential to
current levels, assuming 10% A-share appreciation in 2013 (SHCOMP 2,500).
We estimate potential upside could increase to 43% on a more bullish scenario
(SHCOMP 3,000). On the flip side, we see potential downside of 23% on a 10%
decline in SHCOMP to the 2,000 level.
Forecast revisions – higher EV to offset lower VNB and earnings
We have raised our EV forecasts for the sector (except CTIH) by 1.8-7.3% in
2012 and 4.8-10.8% in 2013, as we price in better-than-expected A-shares
return in 2012 and a 10% appreciation in 2013. However, we have lowered our
VNB forecasts by 1.6-3.3% in 2012E (for China Life, NCI and CTIH) and 1.7-
8.2% in 2013E (for the whole sector) due to slower than expected growth
recovery. We have also lowered our 2012E earnings to reflect impairment
charges.
Prefer Ping An and NCI; investment risks
On the back of more optimistic A-shares outlook, we have raised our target
prices by 8.7-23.4%. Our new target prices for major insurers reflect a forward
P/EV multiple of 1.6-1.7 (slightly below the 1.8x average seen in 2011) and 1.3x
for smaller insurers (~20% discount to major insurers, as we expect a more
challenging operating environment for small insurers).We upgrade Ping An to
Buy, and it is our top pick in the sector, along with NCI, as we see them as the
most leveraged to A-share recoveries. In addition, we believe Ping An’s
exposure to coastal cities and its affluent customer base should enable it to
capitalize on the potential implementation of inheritance tax and product
innovation. We continue to prefer NCI given its attractive valuation at 1.1x
2013E P/EV, and we see it as relatively safe given its solid capital position. We
also have Buy ratings on CPIC and China Life, and we maintain our Hold rating
on China Taiping. Investment risks to our bullish view on the sector include a
major correction in A-share markets, unfavorable regulatory changes, Chinarelated
risks and a weaker-than-expected growth recovery. (This report
changes ratings, target prices, and/or estimates for several companies under
our coverage; for details, see Figures 42-47.)