provides an opportunity to accumulate ahead of strong 1H09 results.
Solid growth in EV and VNB will be the key feature for Ping An and CIIH,
while China Life and PICC should report superior profit growth.
■ Our top pick in the sector remains Ping An (OUTPERFORM, TP HK$71).
We believe it will deliver superior value progression among the largecaps
in 1H09 (especially VNB), and we expect 2Q earnings to recover
sharply after the disappointing 1Q. Also, it trades at the lowest P/EV
multiple in the sector.
■ We upgrade China Life to OUTPERFORM (from Neutral) with a HK$35
target price. We expect a positive earnings surprise in 1H09, premium
growth should begin to improve from 4Q09 against weaker
comparatives and the prospect of interest rate hikes in 2010 would
support the outlook for earnings and value.
■ We like CIIH (OUTPERFORM, TP HK$21). While reported profit may
suffer from higher costs, life insurance value growth should be very
strong and this continues to underpin the investment case.
■ We remain NEUTRAL on PICC (TP HK$5.50). We expect a strong
headline result in 1H09 though this is likely to be dominated by
investment gains rather than material progress in underwriting returns.
Many happy returns
What a difference six months can make. After a dismal 2008 as far as investment returns
go, the 62% YTD rebound in the Shanghai Composite Index should provide a tailwind for
the insurers in terms of earnings, book value and EV in the upcoming 1H09 results.
Looking beyond this reporting season, we continue to see a bright future. We expect EV
and book value to continue delivering positive natural progression (15-20% YoY run-rate)
while recent equity market gains should provide improved flexibility for insurers to realise
investment gains in future results, paving the way for a solid reported earnings profile.
Earnings: bouncing back
The improved performance of the equity market in 1H09 is expected to provide a tailwind
for reported profits. However, we believe investors should temper expectations for a return
to 2007 levels of investment income and profit as the magnitude and emergence of
investment gains can be distorted by accounting treatment.
In our view, investors positioning for earnings surprise should prefer China Life and PICC.
■ The strongest earnings recovery should come from PICC due to lower catastrophe
claims, improved investment income and a sharp reduction in forex losses.
■ China Life is expected to report a solid 1H09 result. Our Rmb1.10 EPS forecast is well
above consensus and we believe the result should provide upside risk.
■ CIIH should also report solid earnings growth in 1H09 however, it earnings picture is
complicated by elevated costs associated with franchise expansion.
■ Ping An is likely to have the softest earnings on a YoY basis due to the high base
provided by 1H08 and the weak 1Q09 results. Nonetheless, we still expect Ping An to
show strong QoQ improvement.
Embedded value: double run-rate
We forecast HoH growth in EV of between 15.3% and 21.2%. Effectively, the insurers are
expected to deliver a full year’s worth of EV growth in just six months.
While the equity market has boosted growth, the underlying EV growth run-rate remains
solid. In our view, these growth rates (15% to 22% annualised) underpin our positive call
on the life insurers. Current P/EV multiples of c2x are expected to compress quickly in
coming years, providing the impetus for share price performance.
The strongest EV growth is expected to be delivered by CIIH and PICC. For CIIH, EV
growth is helped by the relative immaturity of its in-force book. For PICC, the solid growth
is primarily equity market driven as it does not share investment gains with policyholders
Recommendations
Given our focus on EV as the most reliable indicator of underlying value, we continue to
prefer the insurers expected to deliver the best EV and VNB growth: Ping An and CIIH
remain our top picks and we see upside risk to our VNB growth forecasts of 25% and 20%
respectively. However, we have also upgraded China Life as we expect improved absolute
performance in 2H09 on the back of a strong interim earnings result, a recovery in
premium growth and growing expectations of interest rate hikes in China for 2010. While
we believe consensus forecasts will be upgraded on PICC, we believe the cyclical
improvement in profitability is being fairly reflected in the current share price.