China insurance CHINA
3 March 2009
Inside
January premium growth: upside
surprise 2
Positive drivers of ongoing growth in
2009 – Ping An’s product mix should
help growth 3
Negative drivers of ongoing growth in
2009 – Ping An more resilient 6
We have already cut our numbers
aggressively for lower interest rates 9
Equity markets begin on a positive note
– EV forecasts intact 11
Valuations still a positive theme 13
Appendix 1: Embedded value and
appraisal value methodology 18
Appendix 2: China industry gross written
premium 20
China insurance companies
Company Code Rec Price TP Upside
China Life 2628 HK OP 20.70 26.00 26%
Ping An 2318 HK OP 35.45 63.50 79%
Share price as of 2 March 2009.
Source: Macquarie Research, March 2009
Analysts
Mark Kellock
852 3922 3567 mark.kellock@macquarie.com
Vincent Yam
852 3922 3579 vincent.yam@macquarie.com
Growth intact, valuations attractive
A clear sector preference
􀂃 We reconfirm Ping An as our preferred Asia ex-Japan insurance pick (TP
HK$63.5). We have reviewed January’s strong premium numbers and drivers
of growth in 2009, and conclude that Ping An is better placed to outgrow its
peers. Adding to the strong underlying story, we believe negative news-flow
(Fortis, A-share over-hang and acquisition risk) will continue to improve.
􀂃 We have upgraded China Life to Outperform (TP HK$26), based on the
stocks recent price pull-back, better than expected premium growth numbers
in January and fundamental valuation upside. Interest by China Life in the
sale of AIA’s assets has created some near-term uncertainty, although recent
news-flow suggests China Life has withdrawn from the bidding process.
Impact
􀂃 Ping An better placed to maintain growth in 2009. Premium growth of
around 20% in January surprised on the upside. A review of growth drivers
suggests Ping An is better placed than China Life to maintain growth in 2009.
Our view reflects Ping An’s: 1) ability to pay above-market crediting rates on
UL products; 2) more diverse product mix; 3) lower reliance on
bancassurance sales in 2008 (13% vs 30% for China Life); 4) lower base
effect from 2008; and 5) 70% growth in agent numbers over the past two
years (compared with around 4% for China Life).
􀂃 Factoring in weaker interest rates. We have fully factored in China’s four
rate cuts since October 2008. In addition, we have assumed a further 81bp in
cuts in the near term. This suggests conservativeness in our numbers
reflective of China’s current economic conditions.
􀂃 Solid A-share markets support forecasts and reduce downside price
risk. YTD the A-share market has risen 18%. While markets continue to be
very volatile, and we are still very early in the year, this positive start is ahead
of the full-year normalised equity market return of 15% used in our earnings
forecasts and valuations. This provides strong support to our 34% and 13%
EV growth forecasts for Ping An and China Life, respectively.
􀂃 AIA uncertainty for China Life. The sale of AIA’s assets has created an
additional level of uncertainty for China Life. There are mixed messages
regarding China Life’s interest in these assets. Either way, news flow and
speculation may remain an over-hang against China Life’s near-term share
price performance.
Outlook
􀂃 The valuation gap. We have banged the valuation drum before – the bottom
line is that Ping An (at 1.5x FY09E EV and 6x new business (NB)) is cheap in
comparison to China Life (at 1.9x FY09E EV and 17x NB). We believe newsflow
is gradually improving for Ping An in terms of Fortis, A-share overhang
and acquisition risk. China Life, on the other hand, now has its own
uncertainties. The tide is slowly turning, and we believe this valuation gap will
gradually close.
Please refer to the important disclosures and