Hong Kong stocks receded. The U.S. Federal Reserve hiked interest rate by 25 bps as expected. Dow Jones Industrial Average set new high at close for the fourth day, shoring Hang Seng Index up 113 pts at open. At close, Hang Seng Index dipped 55 pts or 0.2% to 29,166. Hang Seng China Enterprises Index rose 11 pts or 0.1% to 11,531. Market turnover reached $106.462 billion.
For the outlook on Chinese insurers, there are five things that will propel Ping An (2318.hk) stock higher in 2018. Ping An is an innovation and technology leadership plus more clarity on non-insurance divestments should strengthen the investment case. It is large in scale with attractive valuation and believed that it was well-tested of premium. The accumulated gross premium income of the life insurance business for the first eleven months of this year increased 34.23% yearly to RMB361.6 billion.
Secondly, Ping An’s NBV of China will maintain strong growth for several years, benefited from penetration uptrend and product portfolio in 2018. Strong new business value (NBV) growth on the back of product margin enhancement and lower liability reserve and reinvestment risk should drive further EV multiple expansion.
Multiple catalysts to drive future growth
Ping An’s third charm is its benefit from a more diverse product mix on increases in protection/critical illness sales. In the context of more stable macro conditions (China's 10-year yield at 3.95% vs. 2.76% in Oct-16), there are large improvements in actuarial disclosures (residual margin in the liability reserve) and gradual earnings de-coupling from market cycles, can specifically boost revenue.
In particular, the new product regulations, effective Oct 1, were designed to ensure insurers focus on providing protection coverage, by prohibiting large cash benefits in the first five policy years.
Fourth, Goldman Sachs in the latest report, foresaw the industry to have further revaluation room next year, adding valuation of H-share Chinese insurers looked compelling. The research house believed that strong profit growth next year to provide support.
Solid premium growth momentum should continue in 2018, supported by agent headcount growth and further regulatory tightening over bank wealth management products (WMPs). Revenue/profit generation of its FinTech platforms should improve further, after achieving profitability in FY17. Ping An Bank’s shift towards retail banking could also reduce the potential asset quality drag on Group earnings/balance sheet.
Analysts at J.P. Morgan in the latest report, the house raised the price target on top pick Ping An, backed by strong agency distribution, sector-leading growth and through-cycle earnings potential. The house raised the target price for Ping An H/A to HK$130/Rmb111 (from HK$100/Rmb86) which is the hottest pick in the market, reflecting Ping An’s additional estimated value stemming from product and technology innovations on improved scale and fortress capital bases.
And lastly, given multiple drivers and competitive advantages, Ping An remains attractive despite strong share price performance in 2017. Ping An H/A now trades at 1.2X/1.3X 12-month forward P/EV, a 7%/17% discount to long-term averages of 1.3X/1.6X. Ping An A/H-share still trade at a discount to mid-cycle multiples, and there is a room for further valuation catch-up .
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