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1、,regulations,Company reportOverweight(V),FIGInsuranceEquity ChinaPICC Group(1339 HK)Initiate OW(V):Its all about Life,abcGlobal Research,Target priceShare pricePotential return(%),HKD4.92HKD4.0920,Life and Health operations deserve premium P/EV valuationsin light of near-term superior ROEV outlook,N
2、ote:Potential return equals the percentagedifference between the current share price and,A-share market proxy;10%rise in SHCOMP raises PICC,the target price,2011 a 2012 e,2013 e,Group BV by 5.5%versus 2.7%peer group average,HSBC EPSHSBC PEPerformanceAbsolute(%)Relative(%),0.2020.8x1MNANA,0.2417.3x3M
3、NANA,0.2714.9x12MNANA,Initiate with OW(V)rating and HKD4.92 target price for 20%potential return;prefer over N(V)rated PICC P&C,Note:(V)=volatile(please see disclosure appendix)Five major reasons to be positive:1)We believe PICC Life business should be valued at,10 January 2013James E Garner*,CFAHea
4、d of Asian Insurance ResearchThe Hongkong and Shanghai BankingCorporation Limited+852 2822.hkGrace Zhou*AnalystThe Hongkong and Shanghai BankingCorporation Limited+852 2822.hkMichael P Chang*CFAAnalystThe Hongkong and Shanghai BankingCorporation Limited+852 2996.hkView HSBC Global Research at:http:/
5、*Employed by a non-US affiliate ofHSBC Securities(USA)Inc,and is notregistered/qualified pursuant to FINRAIssuer of report:The Hongkong andShanghai BankingCorporation LimitedDisclaimer&,1.88x FY13e EV,a premium to the 1.33x peer group average owing to its superior ROEVgeneration(21%ROEV vs.peers 18%
6、)driven by high NBV leverage and a relativelystrong NBV growth outlook(16%CAGR vs.peers 11%).2)Extraction of Groupsynergies helps ensure that PICC Groups valuation is greater than the sum of the parts(SOTP)and leaves the Life business well positioned to deliver superior growth to pureplay peers devo
7、id of synergy benefits.3)Group has an enviable and costly to replicatefirst-mover advantage in the high growth rural areas.4)Restructuring opportunities frominfancy of operations(e.g.5.4%FYP/NBV margin vs.15.4%peer average).5)Shareholder base and diversified business mix leave PICC Group well placed
8、 tobenefit from the forces that drive high growth in domestic Life,Health and P PICC Life has high exposure to thebancassurance channel and low margin(but equally capital intensive)single premiumproducts.2)Pending liberalization of commercial auto pricing tariffs may lead to a pricewar.3)18.7%free f
9、loat versus 39%sector average.4)Groups book value and solvencyratios are highly geared to an uncertain A-share market outlook,which is a double-edgedsword.5)Sub-optimal financial disclosure(i.e.,no Group EV).Our H-share target of HKD4.92 implies 20%potential return.We value PICC Groupusing a SOTP va
10、luation methodology where we appraise Life at 1.88x FY13 EV,P&C at1.97x FY13 BV,Health at 2.80 x FY13 EV,and Asset Management at 8x FY13 earnings.Business valuations are based on a Gordon Growth model formula using standard 13.5%COE and 5%terminal growth rate assumptions.,DisclosuresThis report must
11、 be readwith the disclosures andthe analyst certifications inthe Disclosure appendix,and with the Disclaimer,which forms part of it,IndexIndex levelRICBloombergSource:HSBC,Hang Seng23,3311339.HK1339 HK,Free float(%)Market cap(USDm)Market cap(HKDm)Source:HSBC,18.722,389173,514,PICC Group(1339 HK)Insu
12、rance10 January 2013Financials&valuationP&L summary(RMBm),Group valuation metrics,abc,Year to,12/2011a 12/2012e 12/2013e 12/2014e,Year to,12/2011a,12/2012e,12/2013e,12/2014e,Non-lifeLifeHealthAMCOtherPre-tax profitTaxMinority interest,10,331518(482)829(985)10,211(2,313)(2,712),13,7471,166(332)913(80
13、9)14,686(3,671)(3,702),15,0742,0965091,123(809)17,994(4,498)(4,359),16,4523,1931,0841,330(809)21,250(5,313)(5,040),P/EV Group-Group RoEVP/Tangible NAV-RoTNAVPB-RoEPEDividend yield,N/AN/A3.4xN/A3.4x19.0%20.8x0.0%,N/AN/A2.0 x15.8%2.0 x15.3%17.3x0.0%,N/AN/A1.8x13.4%1.8x12.7%14.9x1.3%,N/AN/A1.5x14.3%1.5
14、x13.6%12.2x1.6%,Net profit to shareholders,5,186,7,312,9,136,10,897,Per share data(HKD),Operational metrics,Year to,12/2011a,12/2012e,12/2013e,12/2014e,Year toLife NBV(11%RDR)Life NBV growthLife FYP growthLife NBV/FYP marginLife RoEVHealth NBV(11%RDR)Health NBV growthHealth FYP growthHealth NBV/FYP
15、marginHealth RoEVP&C GPW growthReported P&C CORNet investment yield(Group),12/2011a 12/2012e 12/2013e 12/2014e3,523 4,224 4,953 5,789N/A 20%17%17%-6%2%16%16%5.4%6.3%6.4%6.4%N/A 39.7%21.4%21.0%768 624 964 1,340N/A-19%54%39%61%85%60%42%16.7%7.3%7.1%7.0%N/A27.2%27.6%29.7%8.1%14.1%22.4%15.6%94.0%94.4%95
16、.7%96.6%4.0%4.0%4.0%4.0%,EV group-growthTNAV-growthEPS-growthDPS-payout ratioIssuer informationH shares,N/AN/A1.0453%0.2028%0.00NM,N/AN/A1.9588%0.2420%0.00NM,N/AN/A2.139%0.2716%0.05NM,N/AN/A2.5721%0.3423%0.0723%,Share price(HKD)Target price(HKD)Market cap(HKDm),4.094.92173,514,Embedded value(RMBm)Ye
17、ar toLife ANWVIF before cost of capitalCost of capitalVIF postLife EV(11%RDR)Group EV,12/2011a11,17212,494(980)11,51422,6860,12/2012e24,84417,541(1,376)16,16541,0090,12/2013e26,87024,845(1,949)22,89649,7660,12/2014e29,01533,860(2,656)31,20460,2190,Market cap(USDm)Free floatPrice relative5.55,22,3891
18、8.7%,5.55,4.543.5,4.543.5,3,Dec-12,PICC Group,Rel to HANG SENG INDEX,3,Source:HSBCNote:price at close of 4January 20132,4,14,PICC Group(1339 HK)Insurance10 January 2013ContentsExecutive summaryValuation and forecastsKey positivesKey risksAppendixPICC GroupPICC P&CPICC LifePICC HealthOther businesses
19、Disclosure appendixDisclaimer,325265667487100108112115,abc3,PICC Group(1339 HK)Insurance10 January 2013Executive summary We view PICC Group as a harmonious family comprising a marketdominant P&C business married to a highest of peer ROEVLife franchise PICC Life should be valued at a premium to peers
20、 owing to itssuperior ROEV generation(21%ROEV vs.peers 18%)driven byhigh NBV leverage and relatively strong NBV growth outlook Groups book value and solvency ratios are highly geared to anuncertain A-share market outlook,which is a double-edged swordbut highly sought after in rising markets,abc,Intr
21、oducing PICC GroupThe Peoples Insurance Company(Group)ofChina Limited(PICC Group)is the fastestgrowing insurance group in terms of premium andassets in the worlds fastest growing insuranceemerging market,China.PICC Group is a composite insurance group withleading positions in the high growth potenti
22、alP7.5%market share),Health(No 1,94.9%marketshare according to CIRC),and Asset Management(No 4,5.6%market share)markets.Established in 1949,PICC Group is the pioneer ofthe Chinese insurance industry.PICC Group,which is owned by the Ministry of Finance(MOF)(70.5%)and National Social Security Fund(NSS
23、F)(10.8%),has five main business segments:P&C:the Group has a 69%stake in PICCP&C,Chinas largest P&C insurer whichlisted on the Hong Kong Stock Exchange on 64,November 2003.Please see ouraccompanying report on PICC P&C(2328HK,HKD11.58,TP HKD11.6)N(V):Expectcombined ratio to remain near record levels
24、,10 January.Life:the Group has a 71%stake in PICCLife,the fifth largest life insurer,which begangenerating profits four years after beingestablished in 2005.Health:the Group has an 88%stake in PICCHealth,the first specialized insurer in Chinashigh growth potential health market.Asset Management:the
25、Group has an 81%stake in PICC AMC,the first insurance assetmanagement company in China.Non-insurance financials:the Group has a33%stake in Chinas fourth largest trustcompany,China Credit Trust,and an 11%stakein Chinas ninth largest bank,Industrial Bank.,PICC Group(1339 HK)Insurance10 January 2013The
26、 Groups mission statement is:Building intoan international leading insurance financialgroup with solid comprehensive capabilities,outstanding profitability,efficient operations andpreeminent services,capable of rewardingshareholders with stable and competitive returns.Management will execute the mis
27、sion statementthrough four initiatives(integrated operations,differentiated competition,detail orientatedmanagement,comprehensive products andservices),while striking a balance betweeninsurance vs.wealth management and urban vs.rural areas.PICC Group management have also made greatstrides in improvi
28、ng the Groups profitability:P&C business has cut its combined ratio by9.8ppts since 2009 to a market-leading 92.4%versus 93.1%for Ping An and 94.2%forChina Pacific.PICC Life broke even in its fourth yearof operation.According to HSBC analysis,Group hasconsistently delivered highest of peerinvestment
29、 returns since 2009.PICC Group net income has grown at 112%CAGR from 2009-11 versus-1%peer groupaverage enabling it to deliver highest of peergroup ROAE(28%versus 11%peer average).Life new business value(NBV)recordedhighest of peer growth in 1H12/FY11(12-month basis)at 10%versus-0.5%peer average.,In
30、 short,we view PICC Group as a harmoniousfamily comprising a market dominant P&C businessmarried to a highest of peer ROEV Life franchise.Reasons why we are OW(V)PICC Group has many attractions,summarized inExhibit 8.That said,we believe the Group hasseven main strengths which should not onlysupport
31、 significant value creation over the mediumterm but also differentiate it from its peers.1)Valuation appealDespite rising 18%since listing on 7 December2012(sector up 19%over comparable period),PICC Group shares offers 20%potential returnagainst our HKD4.92 target price.We derive ourtarget using a f
32、undamental SOTP model.With theP&C business appearing fairly valued at 1.97xBV versus PICC P&C trading multiple of 2.0 x most of valuation upside resides in PICC GroupsLife and Health operations.2)Superior Life and Health ROEVsupport higher P/EV multipleWe believe PICC Life and Health businesses arew
33、ell positioned to deliver superior ROEV giventhe high NBV leverage(e.g.sensitivity of ROEVto NBV change)and relatively strong NBVgrowth outlook.Theoretically,higher ROEV insurers shouldcommand higher fair value P/EV multiples underthe Gordon Growth model formula where fairmultiple=(ROEV g)/(COE g).,
34、abc,Exhibit 1:PICC Life and Health deliver high P/EV supported by superior life and health ROEV,Company3year NBV growth CAGR3year avg NBV gearing3year average ROEVSustainable growthCOEFair Life business P/EV 2013e multiple(x),ChinaLife8.7%6.2%15%5%13.4%1.24x,ChinaPacific12.4%8.6%19%5%13.4%1.61x,Chin
35、aTaiping8.9%8.3%17%5%15.4%1.13x,New ChinaLife12.5%8.1%17%5%14.6%1.29x,PICCLife16.3%11.6%21%5%13.5%1.88x,PICCHealth38.1%21.1%29%5%13.5%2.80 x,Source:HSBC estimates5,50,23,66,10,300,EV t-1,PICC Group(1339 HK)Insurance10 January 2013Exhibit 2:Return on Embedded Value(ROEV)and NewBusiness Value(NBV)gear
36、ing explainedEmbedded Value roll forward,than the standalone parts.The Group has adopteda comprehensive and calculated approach to,abc,EVt-1NBVtReturn NAVtIn-force UnwindtVariancestDividend tCapital InjectiontEVtROEV definition(1),1,000(50)1,399,harvesting theoretically significant synergies.Key str
37、ategies(which include unified brandpromotion,Group level negotiation of strategicagreements,shared distribution and leveraging ofits IT platform)should garner efficiency savings,cross-selling opportunities and ultimately superiorprofit growth.,ROEVt=(EVt EVt-1+Dividendt Capital Injectiont)(EV t-1)RO
38、EVt=(1,399 1,000+50 300),PICC Life has profitability developed intoChinas fifth largest insurer within five years of,ROEVt=14.9%,1,000,operation,suggesting that this Group synergystory has only just begun.Pure play listed Life,ROEV definition(2),NBV gearing,insurers have no such synergy story.,ROEVt
39、=NBVt+Return NAVt+In-force Unwindt+Variancest,EV t-1ROEVt=(50)+(23+66+10),4)Brand strength,1,000,1,000,The“PICC”brand gives the Group a tangible and,ROEV t=5%+9.9%ROEVt=14.9%Source:HSBC estimatesWe expect PICC Life to deliver a relatively high16%NBV three-year CAGR(versus 11%listedpeer group average
40、).This forecast of superior Life NBV growth mainlyreflects the upside potential we see from:1)cross-sell synergies across Group operations that have alarge customer base;2)PICCs strong brand;3)alow base due to its smaller size;and 4)its strongpresence in the fast growing rural and inland regions.PIC
41、C Life is also geared to a recovery ofbancassurance volumes,which should benefitfrom the low base effect and there is significantscope to boost NBV through the eventualprovision of higher margin regular premium andprotection products.See Forecasts section for adetailed discussion.3)Systematic extrac
42、tion of GroupsynergiesSystematic extraction of Group synergies shouldhelp ensure that PICC Groups valuation is greater6,difficult-to-replicate competitive advantage whenit comes to acquiring customers(particularly inthe rural areas),recruiting agents,hiringemployees,and securing important strategicc
43、ooperation agreements.5)First-mover advantage in highgrowth rural areasPICC Group has a costly-to-replicate first-moveradvantage in the high growth rural areas;withPICC Group having 100%coverage of Provincial,Municipal and 70%coverage of County areas.6)Advanced IT to leverage customerresourcesPICC G
44、roups IT investments,notably throughthe creation of the South Information Centre(opened April 2011)and North InformationCentre(to open in 2015),should drive efficiencysavings and leverage the Groups customerresources through cross-selling and improvedpricing databases.PICCs IT investments mean that
45、even standalonelow-return businesses can create value for the,PICC Group(1339 HK)Insurance10 January 2013Group through the efficient leveraging of thisadditional customer data.According to HSBC analysis,PICC Group isalready a relatively efficient insurer with lowest ofpeer P&C and Life SG&A expense
46、ratios owingto tight budgetary controls and small seniormanagement numbers.IT investment will likelyexpand PICC Groups efficiency advantage further.7)Restructuring upsideThe relative infancy of some of PICC Groupsoperations lends itself to further restructuringpotential(in addition to the aforementi
47、oned Groupsynergies and IT leverage)including:PICC Life NBV/FYP margin was a relativelylow 5.4%last year compared to listed peers(15.4%)due to an undeveloped RegularPremium and Protection offering.According to HSBC analysis,averagemonthly premium per bancassurance outletwas RMB65,000 for PICC Life v
48、ersusRMB125,000 for China Life.PICC Life derives 11%of first year premiumsfrom higher margin agent channel versus 32%for peers.PICC P&C derives 9.2%of P&C premiumfrom telemarketing versus 13%at ChinaPacific and 27%at Ping An.PICC P&C derives 1.1%of its P&C premiumthrough cross-selling in the Life ch
49、annel versusChina Pacific(3.6%)and Ping An(14.9%).8)Balanced play on high potentialLife,P&C and Health marketsPICC Groups government access and diversifiedbusiness mix leave it relatively well placed tobenefit from all of the forces(and challenges)thatshould drive high long-term growth in Life,Healt
50、hand P&C markets,some of which are supported by,government initiatives(e.g.tax deferred producttrial,agriculture insurance policy).Although Life growth has slowed in recent years,due to a number of largely cyclical challenges,we estimate the Chinese Life and P&C marketswill deliver 15-year premium C
