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1、,InsuranceKoreaKorea Non-lifeInsurance3Q12 Preview:Lowering expectations,abcGlobal Research Severe auto loss ratio deterioration andexpense burden from stronger-than-expected new business growth topressure insurers near-term earnings Upcoming regulatory changes to weighon investor sentiment(ie,upcom
2、ing,CompanynameDongbuHyundai,Bbergticker005830 KS001450 KS,Price Rating New TP Old TP Chg in PotlKRW KRW KRW TP return44,500 OW(V)62,000 67,000-7%39%33,150 OW(V)44,000 44,000 0%33%,implementation of the acquisition costdeferral limit,introduction of standalonemedical treatment coverage and the,LIGMe
3、ritz,002550 KS000060 KS,24,400 N(V)29,000 33,00013,300 N(V)14,000 15,000,-12%-7%,19%5%,ongoing RBC model tightening),Samsung,000810 KS,216,000,OW 290,000 300,000,-3%,34%,F&MSource:HSBC estimates.Note:Potential return equals the percentage difference between the currentshare price and the target pric
4、e.Price at 07/01/1310 January 2013Sinyoung Park*AnalystThe Hongkong and Shanghai Banking Corporation Limited,Seoul Securities Branch,We cut FY12-13 earnings estimates by11%and 3%on average and revisedown price targets;Samsung F&Mremains our highest conviction sectorcall as we seek for a more prudent
5、underwriter with strong capital positionWeakening earnings momentum:Non-life insurers are setto miss FY12 profit targets due to worse-than-expected autoloss ratio deterioration from unfavourable weatherconditions/discount effect(Apr 12 auto premium rate cut,mileage and black box discounts)and expens
6、e burden fromstronger-than-expected pure protection new business growth.With severe auto loss ratio deterioration expected forDecember,Korean non-life insurers earnings momentumwill weaken further and miss consensus by 31%for 3Q12.Upcoming regulatory changes to weigh on investorsentiment:While the p
7、ossibility of auto premium rate hike,+822 3706 8770,on the back of far worse-than-expected auto loss ratio,James E Garner*,CFAHead of Asian Insurance ResearchThe Hongkong and Shanghai Banking Corporation Limited+852 2822 4321.hkView HSBC Global Research at:http:/*Employed by a non-US affiliate of HS
8、BC Securities(USA)Inc,and is not registered/qualified pursuant to FINRA regulationsIssuer of report:The Hongkong and Shanghai BankingCorporation Limited,Seoul Securities BranchDisclaimer&DisclosuresThis report must be read with thedisclosures and the analyst certificationsin the Disclosure appendix,
9、and with theDisclaimer,which forms part of it,deterioration remains low,upcoming regulatory changesshould weigh on the investor sentiment:(1)Apr13implementation of the acquisition cost deferral limit maypressure insurers near-term expense ratio,(2)ongoingtightening of the overly lenient RBC model co
10、uld posedownside risk for dividend payout at insurers with below200%RBC ratio,(3)all eyes on the sale of standalonemedical coverage products launched from 2 Jan 2013.Samsung F&M(OW,target KRW290,000)remains ourhighest conviction call:For five non-life insurers under ourcoverage,we cut FY12-13 earnin
11、gs estimates by 11%and3%on average and revise down price targets by 6%onaverage(see Exhibit 2 for details)to reflect weakeningearnings momentum.See page 3 for valuation and risks.,InsuranceKorea10 January 2013Exhibit 1:Korean Non-life insurers 3Q12 earnings estimates versus consensus,abc,(KRW bn),De
12、cQ11 MarQ12 JunQ12 SepQ12 _ Monthly _ DecQ123Q11 4Q11 1Q12 2Q12 Oct-12 Nov-12 Dec-12*3Q12E,QoQ,YoY,Cons,Diff%,Samsung F&MDongbuHyundai M&FLIGMeritz F&MNon-life sector,86101854641359,21681936232484,2511121187548605,185130925735499,7832221610158,463030149128,2721139171,15182653820357,-18%-37%-29%-32%-
13、43%-28%,76%-19%-23%-17%-51%-1%,214132874937518,-29%-38%-24%-21%-46%-31%,Source:HSBC estimates and Bloomberg(*December 2012 monthly net earnings figures are HSBC estimates)Exhibit 2:Change in estimates,KRW bn,%,_ SFM _FY12E FY13E FY14E,_ Dongbu_FY12E FY13E FY14E,_ HMF _ _LIGz _ _ Merit _FY12E FY13E F
14、Y14E FY12E FY13E FY14E FY12E FY13E FY14E,Revised Net ProfitOld Net ProftChangeChange(%),829915(86)-9%,1,0981,118(20)-2%,1,2631,286(23)-2%,420464(44)-9%,501535(34)-6%,583618(35)-6%,373402(29)-7%,453468(15)-3%,491501(10)-2%,233260(27)-10%,304311(7)-2%,352365(13)-4%,136168(32)-19%,18418400%,22522421%,S
15、ource:HSBC estimatesEarnings changesWe make earnings changes to reflect worse-than-expected auto loss ratio deterioration(i.e.,top 5insurers auto loss ratio average jumped to 102.3%for December according to Hankyung on 9 Jan 2013),higher expenses arising from stronger-than-expected pure protection n
16、ew business sales.Samsung F&M:A big jump in December auto loss ratio is likely to result in c8%q-o-q deteriorationfor DecQ12 and we have also reflected cKRW15bn for early retirement expenses in FY12.Dongbu Insurance:With the rising on-line portion(36%)and worse-than-expected auto loss ratiodeteriora
17、tion industry-wide,we have factored in 2.6%pt higher auto loss ratio assumption for FY12.Hyundai M&F:Worse-than-expected auto loss ratio deterioration and potentially higher expenseratio in 4Q12 as the company expects to recognize excess amortization cost.LIG Insurance:We reflected higher auto loss
18、ratio assumption and a higher expense ratio given thecontinued increase in the GA sales portion at LIG.Meritz F&M:Like peers,we will see a higher-than-expected auto loss ratio due to unfavourableweather conditions and other discount effect(mileage discount subscription is the highest at Meritz).In a
19、ddition,due to the strong pure protection new business sales with year-to-November figures up29%y-o-y and lack of deferred acquisition cost buffer,the company has been recognizingaccumulative excess amortization cost of KRW55bn since May to November and we expect to seefurther expense recognition fo
20、r the remaining FY122,InsuranceKorea10 January 2013Valuation and risksOur price targets are based on a price-to-book value methodology following a Gordon growth model,netof company specific discounts and our multiple is predicated on a company-specific cost of equity and along-run growth assumption
21、of 1.0%(we assume 5%in China).For five non-life insurers under our coverage,we cut FY12-13 earnings estimates by 11%and 3%onaverage and revise down price targets by 6%on average(see Exhibit 2 and Exhibit 3 for details)to reflectweakening earnings momentum and lower book value assumptions as insurers
22、 use up the unrealized gainon the AFS securities to boost net investment yields,except for Samsung F&M.At the end of SepQ12,we saw 8.5%increase in shareholders equity due to a sharp increase in theunrealised gain of AFS(available-for-sale)securities under the accumulated other comprehensiveincome,wh
23、ich is a shareholders equity item with the Bank of Korea cutting the policy rate twice(asurprise rate cut on 12 July 2012 and much expected one on 11 October 2012).However,asaforementioned,second-tier non-life insurers boosted net investment yields with disposal gains and thusreduced the balance of
24、the unrealized gain on AFS securities,consequently lowering our FY13 BVPSestimates by 7%on average and leading to target price revisions(see Exhibit 3).ExhibitExhibit 3:Change in BVPS,abc,SFM _ Dongbu _,_ HMF _,_ LIG _,_ Meritz _,KRW bn,%Revised BVPSOld BVPSChangeChange(%),FY12E203,993195,9378,0564%
25、,FY13E227,821219,7188,1024%,FY12E42,31644,237(1,921)-4%,FY13E49,79852,067(2,268)-4%,FY12E26,63427,928(1,294)-5%,FY13E31,27732,651(1,374)-4%,FY12E28,30830,971(2,663)-9%,FY13E33,69436,365(2,671)-7%,FY12E9,92611,880(1,955)-16%,FY13E11,65313,511(1,858)-14%,Source:HSBC estimatesWe continue to prefer Sams
26、ung F therefore,we reiterate our Overweight(V)rating on Hyundai stock.3,InsuranceKorea10 January 2013Our target price of KRW29,000 for LIG implies a potential return of 19%,within the Neutral band of ourmodel;therefore,we are reiterating our Neutral(V)rating on LIG stock.Our target price of KRW14,00
27、0 for Meritz implies a potential return of 5%,within the Neutral band ofour model;therefore,we are reiterating our Neutral(V)rating on Meritz stock.Our target price of KRW290,000 for Samsung F therefore,we are reiterating our Overweight rating on Samsung F&M stock.Potential return equals the percent
28、age difference between the current share price and the target price,including the forecast dividend yield when indicated.Exhibit 4:Valuation and rating summary,abc,Company,Bloomberg Rating,Market,Market,Price at,Price,Potl,P/EV,Avg,PB Avg ROE,PE,PE,Div yld,name,ticker,cap,cap,7/1/13,target,return,RO
29、EV,KRWbn,USDbn,KRW,KRW,2013e 2013-15e,2013e 2013-15e,2012e,2013e,2013e,DongbuHyundaiLIGMeritzSamsung,005830 KS001450 KS002550 KS000060 KS000810 KS,O(V)O(V)N(V)N(V)O,3,1512,9641,4641,28610,233,3.02.81.41.29.6,44,50033,15024,40013,300216,000,62,00044,00029,00014,000290,000,39%33%19%5%34%,0.5x0.5x0.3x0
30、.4x0.6x,19%17%20%21%16%,0.88x1.03x0.72x1.12x0.92x,17%18%18%18%12%,6.7x7.1x5.5x9.5x11.0 x,5.6x5.9x4.2x7.0 x8.3x,3.4%4.7%4.8%3.6%3.1%,F&M,Sector,17.9,32%,0.5x,17%,0.93x,15%,9.2x,7.1x,3.6%,Source:Thomson Reuters Datastream,HSBC estimates.Potential return equals the percentage difference between the cur
31、rent share price and the target price.Exhibit 5:Our target prices represent an average of five valuation methodologies with the appropriate weightings,Company,_ Valuation per share methodology _ _ Price target weight _12M Rdual 12M Rdual,Wtd 2013e,Dis-,Price,name,Curr,SOTP,P/EV income P/TNAV,P/BV SO
32、TP P/EV income P/TNAV P/BV,valn,div count,Target,Dongbu,KRW 169,636 162,173,36,459,75,257,75,787,0%,0%,0%,0%100%,75,787 1,504,(20%),62,000,HyundaiLIG,KRW 89,863 89,030 23,279 47,067 48,152KRW 124,156 124,428 26,034 48,734 48,700,0%0%,0%0%,0%0%,0%0%,100%48,152 1,520100%48,700 1,159,(10%)(40%),44,0002
33、9,000,Meritz,KRW 56,357 61,402 25,110-15,756 19,441,0%,0%,0%,0%,100%19,441,476,(30%),14,000,Samsung F&M,KRW 625,190 570,692 168,481 288,340 286,552,0%,0%,0%,0%,100%286,552 6,481,0%,290,000,Source:HSBC estimatesExhibit 6:We employ company-specific discount rates to strike our target prices,Group,Disc
34、ount rationale,DongbuHyundaiLIGMeritzSamsung F&MSource:HSBC estimates4,20%10%40%30%0%,Poor disclosure(10%),Group Risk(10%)Poor disclosure(10%)Poor disclosure(10%),high equity gearing(10%),Shares overhang(10%),Weak capital(10%)Poor disclosure(10%),lack of scale(10%),Capital(weak RBC ratio-below 200%)
35、(10%)NA,InsuranceKorea10 January 2013Exhibit 7:Key risks,abc,Company,Ticker,Rating Share price 7Jan 2013,Target Price Key risks to rating,DongbuHyundai M&F,005830 KS001450 KS,OW(V)OW(V),44,50033,150,62,000 Downside risks:(i)A financial company holding structure migration(ii)further government interv
36、ention with material negative impact44,000 Downside risks:(i)Further government intervention could undermine,profitability,(ii)Longer than expected low interest rate environment,(iii)Cannibalization between Hyundai M&F and Hi-Car,its own directunderwriter.,LIG,002550 KS,N(V),24,400,29,000 Upside ris
37、ks:(i)Stronger than expected pure protection new businessmomentum.(ii)Slower than expected implementation of the capital,tightening measures.Downside risks:(i)Slower than expected closing ofauto loss ratio gap versus peers,(ii)Any significant one-off losses,(iii)further government intervention with
38、material negative impact,Meritz F&M,000060 KS,N(V),13,300,14,000 Upside risks:(i)Stronger-than-expected synergies from a holding company,structure.(ii)Much slower-than-expected tightening of the overly lenientRBC.Downside risks:(i)Discontinuation of syndication-based underwritingpractice for the com
39、mercial line,(ii)Faster-than-expected implementation oftightening measures for the overly lenient RBC framework.,Samsung F&M,000810 KS,OW,216,000,290,000 Downside risks:(i)Weaker-than-expected capital markets,(ii)Potential,value-destructive M&A.Source:HSBC estimates5,InsuranceKorea,abc,10 January 20
40、13Disclosure appendixAnalyst CertificationThe following analyst(s),economist(s),and/or strategist(s)who is(are)primarily responsible for this report,certifies(y)that theopinion(s)on the subject security(ies)or issuer(s)and/or any other views or forecasts expressed herein accurately reflect theirpers
41、onal view(s)and that no part of their compensation was,is or will be directly or indirectly related to the specificrecommendation(s)or views contained in this research report:Sinyoung Park and James GarnerImportant disclosuresStock ratings and basis for financial analysisHSBC believes that investors
42、 utilise various disciplines and investment horizons when making investment decisions,whichdepend largely on individual circumstances such as the investors existing holdings,risk tolerance and other considerations.Given these differences,HSBC has two principal aims in its equity research:1)to identi
43、fy long-term investment opportunitiesbased on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon;and 2)from time to time to identify short-term investment opportunities that are derived from fundamental,quantitative,technical or event
44、-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating.HSBC has assigned ratings for its long-term investment opportunities as described below.This report addresses only the long-term investment opportunities of the companies referred to in the repor
45、t.As and whenHSBC publishes a short-term trading idea the stocks to which these relate are identified on the website Details of these short-term investment opportunities can be found under the Reports section of thiswebsite.HSBC believes an investors decision to buy or sell a stock should depend on
46、individual circumstances such as the investorsexisting holdings and other considerations.Different securities firms use a variety of ratings terms as well as different ratingsystems to describe their recommendations.Investors should carefully read the definitions of the ratings used in each research
47、report.In addition,because research reports contain more complete information concerning the analysts views,investorsshould carefully read the entire research report and should not infer its contents from the rating.In any case,ratings should notbe used or relied on in isolation as investment advice
48、.Rating definitions for long-term investment opportunitiesStock ratingsHSBC assigns ratings to its stocks in this sector on the following basis:For each stock we set a required rate of return calculated from the cost of equity for that stocks domestic or,as appropriate,regional market established by
49、 our strategy team.The price target for a stock represents the value the analyst expects the stockto reach over our performance horizon.The performance horizon is 12 months.For a stock to be classified as Overweight,thepotential return,which equals the percentage difference between the current share
50、 price and the target price,including theforecast dividend yield when indicated,must exceed the required return by at least 5 percentage points over the next 12 months(or 10 percentage points for a stock classified as Volatile*).For a stock to be classified as Underweight,the stock must beexpected t
