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1、,FlashnoteFinancialsInsuranceEquity China4 October 2012Michael P Chang*,CFAAnalystThe Hong Kong and ShanghaiBanking Corporation+852 2996.hkJames E Garner*,CFAAnalystThe Hong Kong and ShanghaiBanking Corporation+852 2822.hkGrace Q Zhou*AnalystThe Hong Kong and ShanghaiBanking Corporation+852 2996.hkV
2、iew HSBC Global Research at:http:/*Employed by a non-US affiliate ofHSBC Securities(USA)Inc,and is notregistered/qualified pursuant to FINRAregulations,abcGlobal ResearchChina InsuranceWhose NBV growth benefits most from low base effects?NCIs NBV growth is best placed of the listed insurers tobenefi
3、t in 2H12 from the low NBV base effect,which is asharp contrast to NCIs 2H12 high premium base While bancassurance-heavy insurers have de-ratednoticeably vs peers,the worst period for NBV YoY growthhas passed&the drag on overall growth is less than before We retain preference for mid-size insurers(C
4、hina Pacific&NCI)over the larger listed insurers,though we acknowledgea lack of share price triggers and overhang concernsNCIs NBV growth looks best placed to benefit from the low base effect,with2H11s y-o-y NBV growth the worst of peers(-15%YoY).This is sharp contrast to NCIshigh premium base effec
5、t in 2H11(largely single premium bancassurance),that weestimate only had a 1ppt impact to its NBV.All of the mid-large insurers saw their2H11s contribution to FY11s NBV to be 3-4ppt lower than historical averages.Recent investor feedback post 1H12 results indicate a continued loss of faith in NBVgro
6、wth outlook.Double digit NBV growth for the China life insurance industry looks tobe only achievable on the medium-term horizon,with completion of the necessaryindustry restructuring seen by numerous investors to be at least a few years away.Bancassurance heavy insurers have continued to derate vs p
7、eers in 2012ytd,as investorscontinue to worry about the tough bancassurance environment.Nevertheless,the 1H12 resultsdid show that the worst period for y-o-y growth has passed for bancassurance.Also,the dragon overall NBV growth for these insurers from the weak bancassurance environment is lesssigni
8、ficant than before.We therefore expect the NBV growth differential that had stemmedfrom greater bancassurance exposure,to thus narrow between the insurers.Agent productivity or agent growth,but not both?This is the first results season in whichonly one insurer(NCI)reported BOTH agent growth and agen
9、t productivity,with all of the,Issuer of report:,The Hongkong andShanghai BankingCorporation Limited,other insurers reporting either one or the other.This is likely to be the new norm,and is areflection of the continued challenges the life insurers are having with the agent recruitment/retention and
10、 lifting agent productivity.,Disclaimer&,DisclosuresThis report must be readwith the disclosures andthe analyst certifications inthe Disclosure appendix,and with the Disclaimer,which forms part of it,Preferred plays among the H share insurers remain China Pacific and New China Life(both OW(V)on valu
11、ation and capital strength grounds,though we acknowledge a lack ofshare price triggers and overhang concerns that could continue to adversely affect thesestocks in the near term.See page 5 for details on key valuation assumptions and risks.,China InsuranceInsurance4 October 2012How material is the l
12、ow base effect and who benefits most?Discussions with investors post 1H12 results indicate a continued loss of faith in the China life insurersfuture growth prospects over the near to medium term.This is in part due to 1H12 being the secondconsecutive half that the listed China life insurers have re
13、ported negative y-o-y new business value(NBV)growth(1H12:-2%y-o-y vs.2H11:-3%y-o-y vs.1H11:+11%y-o-y),a sharp contrast comparedto past periods when double digit NBV growth was by far the norm.Consensus is now of the view thatlife insurance industry NBVs will not likely hit double digit growth levels
14、 until 2014 at the earliest.This loss of faith of the life insurers growth prospects is in spite of life insurance penetration rates inChina(1.8%in 2011)still being significantly lower compared to those of more developed neighbouringnations(e.g.Hong Kong:10.1%;South Korea:7.0%;Taiwan:13.9%;Japan:8.8
15、%;Singapore:4.3%).Inthe absence of generous and easy-to-understand tax incentives,it is difficult to see the trigger for Chinaslife insurance penetration to rise rapidly towards the level of that of more developed countries over thenear to medium term.In the near term,there is a perception among som
16、e investors that the weak sales environment in 2H11should see the life insurers benefitting from a low base effect in 2H12,and a question often asked byinvestors is who will be the biggest beneficiary of this low base effect to NBV y-o-y growth in 2H12.The relevance of this question has increased gi
17、ven the marked shortening of some investor horizons in thecurrent uncertain investment climate.New China Life stands out as the biggest NBV growth beneficiary of the low base effect.It recorded byfar the weakest NBV growth of-15%y-o-y in 2H11(Exhibit 1),in large part due to its higher-than-peerexpos
18、ure to bancassurance.The worst clearly looks to be behind NCI,with NCI recorded the greatestimprovement of peers in the NBV y-o-y growth from 2H11s-15%to 1H12s-1%y-o-y,of 16ppt.Exhibit 1:NBV growth y-o-y for the listed China insurers,abc,1H11,2H11,1H12,2H12f,FY11,FY12f,China LifePing AnChina Pacific
19、NCITaiping*,6%16%18%-1%19%,-3%-1%1%-15%28%,3%-9%6%-1%2%,1%8%10%6%6%,2%8%10%-8%23%,2%-2%8%2%4%,Source:Company data,HSBC estimates*Taipings NBV growth in FY11 and 1H12 has benefitted from favourable actuarial assumption changesAnother way to assess the extent of the low base effect is to compare the r
20、elative composition of 1H and2Hs contribution to FY11 NBV,versus historical averages.All of the mid-large insurers 2H11scontribution to FY11s NBV were 3-4ppt lower than historical averages(Exhibit 2).Contrast NCIs low base effect for NBV with its high-base effect for premiumsOur earlier point that N
21、CI is the biggest NBV growth beneficiary of a 2H11 low base effect will surprisesome investors,given its recent weak y-o-y monthly premium growth figures(e.g.Jun.2012:+3%y-o-yvs.Jul.2012:-9%y-o-y vs.Aug.2012:-12%y-o-y).As we pointed out in New China Life:Near-term y-o-y premium growth to remain diff
22、icult,dated 17 Aug2012,NCIs y-o-y premium growth is currently hurting from a high base effect.We stress this high2,China InsuranceInsurance4 October 2012base effect for premiums is primarily due its significant sale of low-margin single premiumbancassurance policies in 2H11 leading up to its IPO in
23、December 2011.Exhibit 2:2H11s contribution to FY NBV was 3-4ppt lower than the historical norm for the mid-large listed insurers in 2011,abc,Average pre 2011,2011,Variation fromnorm in 2011,1H,2H,1H,2H,1H,2H,China LifePing AnChina PacificNCITaiping,57%55%53%51%56%,43%45%47%49%44%,60%60%57%54%56%,40%
24、40%43%46%44%,3%4%4%4%0%,-3%-4%-4%-4%0%,Source:Company dataAs Exhibit 3 shows,NCI was the only listed insurer in our Asia coverage to record positive growth of18%y-o-y in single premium bancassurance in 2H11,with the other insurers recording 35-65%falls.The low-margin nature of these policies means t
25、hat NCIs 2H11 bancassurance push only had a 1pptimpact to NCIs 2H11 NBV base in our view.As such,there is no“high base effect”for NCIs NBV.This important distinction does not seem to be fully appreciated by some investors,given NCIs recentshare price underperformance.Exhibit 3:Bancassurance single p
26、remium y-o-y growth of the insurers.Note NCIs bancassurance single premium 2H11 growth40%18%20%0%,-20%,-5%,-6%,-7%,-40%-60%,-41%,-36%,-23%,-18%,-35%-39%,-44%,-38%-36%,-80%,-65%,-60%,China Life,Ping An,1H11,China Pacific2H111H12,NCI,Taiping,Source:Company data,HSBCThis can be seen in the sizeable P/E
27、V derating of the bancassurance-heavy insurers over the last 6 monthsand in 2012 ytd,with both New China Life and China Taipings P/EV derating 15-18%over the last 6months and China Taipings P/EV having derated 33%in 2012 ytd(Exhibit 4).While the weak bancassurance sales environment obviously helped
28、drive the de-rating(1H12s weightedaverage fall in bancassurance first year premiums(FYP)(APE)was 26%for the listed insurers),investorsshould note the worst period for y-o-y growth looks to be over(note 2H11s y-o-y FYP(APE)growth wasthe worst period at-41%y-o-y)(Exhibit 5).3,China InsuranceInsurance4
29、 October 2012Exhibit 4:P/EV derating of the listed China life insurers,abc,Current,3 mths ago,6-mths ago,At start of year,P/EV derating,P/EV derating,P/EV,P/EV,P/EV,P/EV Current vs.6-mths Current vs.startagoof yr,Heavy bancassurance premium exposure,New China LifeChina Taiping,1.0 x1.0 x,1.2x0.9x,1.
30、3x1.1x,n.a.1.4x,-18%-15%,n.a.-33%,Moderate bancassurance premium exposure,China LifeChina Pacific,1.4x1.2x,1.3x1.2x,1.4x1.3x,1.5x1.3x,6%-7%,-5%-10%,Minimal bancassurance premium exposure,Ping An,1.3x,1.3x,1.3x,1.3x,-1%,1%,Source:Company data,Bloomberg,HSBC estimatesNevertheless,with monetary policy
31、initiatives being less than expected and given the strong premiumgrowth by the bank-owned insurers(albeit off a relatively low base),we believe that it is only in 2013that we will see a return to positive bancassurance growth for the listed insurers,with the demand forbancassurance also continuing t
32、o be adversely impacted by the relatively attractive yields offered byalternative financial products(e.g.trust products and shorter-duration wealth management products).Exhibit 5:Bancassurance first year premium(APE weighted)growth y-o-y,FY09,FY10,FY11,1H11,2H11,1H12,China LifePing AnCPICNCITaipingW
33、eighted average of listed insurers*,n.a.103%133%60%132%89%,n.a.26%47%13%21%25%,-25%-15%-29%-36%-29%-28%,-8%-13%-18%-32%-30%-17%,-44%-18%-45%-41%-29%-41%,-25%-6%-40%-26%-17%-26%,Source:Company data,HSBCOne other reason to expect a narrowing of the P/EV valuation gap for the bancassurance heavy insure
34、rs isthat the bancassurance drag on overall NBV is now significantly less than before,with bancassurancecomprising 23-25%of overall NBV in 2011 compared to 43-48%of NBV in 2010 for New China Lifeand China Taiping(Exhibit 6).Accordingly,we see a narrowing going forward of the NBV growth differential
35、that had emerged inrecent years between bancassurance-heavy insurers and the other insurers.Exhibit 6:Proportion of NBV comprising bancassurance,FY10,FY11,China LifePing AnChina PacificNCITaiping,20%7%25%43%48%,12%4%16%23%25%,Source:Company data,HSBC estimatesWhat about the agent distribution channe
36、l?While the growth outlook for the agent distribution channel remains better than the bancassurancechannel,investors should continue to expect agent NBV growth to remain below historical average4,TP,China InsuranceInsurance4 October 2012growth rates.The 1H12 results season was the first results seas
37、on whereby only one of the listed insurers,being NCI,recorded increases in BOTH agent numbers and agent productivity of+2%h-o-h and 5%y-o-y respectively(Exhibit 7).Such is likely to be the new norm,and is a reflection of the continuedchallenges the life insurers are having with the agent recruitment
38、/retention and lifting agent productivity.Exhibit 7:Growth in agent numbers and agent productivityGrowth in agent productivity,abc,FY09,FY10,FY11,1H11 y-o-y,2H11 y-o-y,1H12 y-o-y,China LifePing AnCPICNCITaiping,n.a.28%25%n.a.7%,n.a.26%8%40%46%,13%-10%14%-1%19%,35%-12%20%-2%14%,-12%-13%0%-1%23%,-13%-
39、12%14%5%-9%,Growth in agent numbers,FY09,FY10,FY11,1H11 h-o-h,2H11 h-o-h,1H12 h-o-h,China LifePing AnCPICNCITaipingTotal,9%17%12%17%30%13%,-9%9%10%-12%-17%-3%,-3%7%4%2%-9%1%,-6%5%1%3%-9%-1%,3%3%4%-1%0%3%,0%1%-8%2%11%0%,Source:Company data,HSBCPreferred plays:China Pacific and New China Life-Valuatio
40、n and key risksChina Pacific(OW(V),TP:HKD35)and New China Life(OW(V),TP:HKD36)remain our top H sharepicks in the China Insurance sector.We like China Pacific for its further restructuring potential,its strong solvency position and its relativelycheap valuations.We like New China Life for its better-
41、than-peer NBV growth outlook over the FY12-FY15 period,driven by both volume and margin growth within its agent distribution channel,as well asan improved business mix.We do not see any equity capital raising risk until at least end FY14.We value both of these companies using a P/EV methodology,with
42、 the key assumptions in Exhibit 8.Exhibit 8:Key valuation assumptions,Company,Ticker Rating Last price,PotentialReturn*,CurrentP/EV,Average SustainableROEVgrowth,Cost of Target P/EVequity,China Pacific HNew China Life HChina Life HPing An HChina TaipingChina Pacific ANew China Life AChina Life APing
43、 An A,2601 HK1336 HK2628 HK2318 HK966 HK601601 CH601336 CH601628 CH601318 CH,OW(V)OW(V)N(V)N(V)OW(V)OW(V)N(V)N(V)OW(V),23.4524.8522.4058.6012.1820.2324.5118.9041.94,35.0036.0024.0071.0016.0028.0028.0018.9056.00,49%45%7%21%31%38%14%0%34%,1.2x1.0 x1.4x1.3x1.0 x1.3x1.3x1.5x1.2x,20%19%17%20%21%20%19%17%
44、20%,5%5%5%5%5%5%5%5%5%,13%15%14%15%15%13%15%14%15%,1.8x1.4x1.4x1.4x1.6x1.8x1.4x1.4x1.4x,Source:Company data,HSBC estimatesPotential return equals the percentage difference between the current share price and the target price,including the forecast dividend yield when indicated.Under our research mod
45、el,the Neutral rating band for volatile Chinese equities equals the local hurdlerate(10%for China),plus or minus 10ppt,which translates into a potential return band of 0-20%.Stocksabove this band are rated Overweight and stocks below this band are rated Underweight.Potential return5,China InsuranceI
46、nsurance4 October 2012equals the percentage difference between the current share price and the target price,including theforecast dividend yield when indicated.Key downside risks on China Pacific weaker-than-expected NBV growth,and A-share market falls.Key downside risks on New China Life are rising
47、 surrenders,slower-than-expected monetary easing(which could adversely impact the timing of a recovery in bancassurance),and historically poor internalrisk management controls.Key upside risks are a faster-than-expected operational turnaround and greater-than-expected rise in the A-share markets.6,a
48、bc,China InsuranceInsurance,abc,4 October 2012Disclosure 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 e
49、xpressed herein accurately reflect theirpersonal 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:Michael Chang,James Garner and Grace ZhouImportant disclosuresStock ratings and b
50、asis for financial analysisHSBC believes that investors 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 ha
