Ping An Insurance - Life business reform yields positive result
- 3-year life business reform approaching final year. Positive initial result seen in pilot-run outlets
- Expect VBN to show positive growth in FY23F, as reform scheme will cover 65% of total outlets by 1Q23F
- VNB margin impacted by 750-day yield curve and product mix, but negative effect to alleviate in 2H22F
- Lower FY22/23F earnings by 10%/5% and VNB growth to -19%/+6% y-o-y. Cut TP to HK$80 to reflect lower fintech value and TP on PBA (000001 CH, BUY). Maintain BUY
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We have seen positive initial results from Ping An’s three-year life business reform and believe the continuous constructive reform progress will lead to a gradual recovery in VNB growth moving into FY23F and onward. In addition to transforming its life agent channel to enhance its productivity, increasing the agent income level, and streamlining its overall agent force, Ping An also piloted a scheme to enable its agent channel operation to become more digitally driven.
As of 1H22, the insurer has conducted a pilot run for two batches over 18 and 12 months, covering 5% of each of its business outlets. The result is considered promising, as the two batches have generated 13% and 30% y-o-y VNB growth in 2Q22. Ping An further launched batch 3 and batch 4, which have been under a pilot run for six and three months, and account for 20% and 35% of its overall business outlets, respectively. According to Ping An, the company expects to see positive results once the batches have operated for 12-18 months. This implies that by end-1Q23 at the earliest, 65% of its overall business outlets from its agent channel would generate positive VNB contributions.
Concerns over real estate investment risk alleviating. In 1H22, Ping An further reduced the proportion of real estate exposure of total investment portfolio to 5.2%, compared to 5.5% at the end of FY21, composed of 2.7% in physical buildings, 1.2% in equities and 1.3% in fixed-income (Fig 1). The physical buildings are mostly located in tier 1 and 2 cities in China and overseas (details refers to Fig 2), where the property markets have limited downside risk to property prices. A large majority of fixed-income investments are financed in commercial real estate projects for AAA-rated SOE companies. More than 60% of equity investments are stakes in physical buildings through a company, and the exposure to secondary market names (including Country Garden, CIFI, Jinmao, China Fortune Land) was less than 0.5% of total investment portfolio (details refer to Fig 3). Considering the premium location of physical buildings that Ping An invested in, good quality of fixed income bonds and the issuers, and relatively small portion of listed property developers’ stakes on the total investment portfolio (less than 0.5%), we believe Ping An’s overall risk on real estate should be manageable. The recent policy support for real estate may also help alleviate market concerns over Ping An’s real estate investment risk. The long-term strategy to increase its commercial real estate exposure, which generates stable rental fee income, will enable Ping An to improve its recurring investment yield and reduce the mismatch of assets and liabilities.
Overall, we estimate Ping An’s VNB to reduce 19% y-o-y (1H22 VNB was down 28.5% y-o-y) but its growth cycle is likely to resume in FY23F by increasing 6% y-o-y (previously expected VNB to change by -10%/+7% y-o-y in FY22/23F). To also factor in the 1H22 result, we lower FY22/23F earnings by 10%/5%. We rolled over the valuation base to FY23F with a lower P/EV multiple of 1.1x (previously using 1.2x), marked-to-market its listed fintech businesses, referred DBS’s latest TP of CNY15.9 on Ping An Bank (000001 CH, BUY), and lowered Ping An’s TP to HK$80 (from HK$90). With positive initial life business reform results in sight and trading at 0.7x FY23F P/EV (2SD below its past five-year mean), we believe most of the negatives are priced in. Ping An remains one of the top picks within the China insurance space. With a 90% share price upside, we reiterate BUY on Ping An.
A recap of the 1H22 earnings call: Main Q&A summary
Q: What is your total risk exposure to the real estate market and how are you going to respond to the lingering risk in the property market?
A: Real estate investments represent 5.2% of total investments, down 0.3ppt h-o-h. Total exposure to real estate was Rmb222.8bn at the end of 1H22; fixed income: 24.5%, equity: 23.5%, and real properties: 52%. The real properties and equity-type investments were mainly commercial and office properties on lease to generate stable cash flows. Fixed income investment is strictly controlled by internal ratings. The most difficult period has passed, and the quality of PAB and insurance investment exposure on real estate is better than that of the company’s peers. Ping An will continue to increase its commercial real estate exposure which will generate stable rental fee income, in line with the principle of allocating insurance funds to long-duration assets to decrease any asset-liability mismatch.
Q: What would be the NBV for 2H22, given the company’s life insurance reform is coming to an end in FY22?
A: The reform aims to increase sales agent productivity, and in the end, drive VNB growth. 2022 will be the last year in the three-year life insurance reform. Despite the negative impact of COVID and shrinking sales force, Ping An Life’s NBV per agent increased 26.9% y-o-y and 13-month persistency ratio improved by 4.1ppt y-o-y. 65% of its business outlets (80% of NBV contribution) has implemented the reform plan through three batches since 2019, and the impact on the financial results will gradually be realised. The management didn’t conclude that there will be a turnaround in VNB in 2H22.
Q: What measures does the company have in place to attract the younger generation?
A: Ping An launched a tailored critical illness product with a mix of savings and protection features to target younger customers. 7% of the sales forces are a new type and internet-based. The company also provides the virtual conference room to help these sales agents deliver products. The average revenue of a pilot outlet increased by 35%, which also attracts a young sales force to join the company.
Q: How do you think the home-based elderly care product is faring?
A: The home-based elderly care product is quite popular with the stable investment yield (3.5%-4%) feature and promotes the cross-selling of other insurance products. The product will be a strategic product, and the growth is expected to be long term and stable.
Q: What is the internal minimum limit of the core solvency ratio under CROSS II for the life and P&C insurance businesses?
A: The management expects the core solvency ratio to be stable in the short term under basic and medium-stress scenarios, and the internal minimum limit is 100% for both the life and P&C businesses.
Q: Could you please give more colour on the sales force structure and productivity?
A: The number of individual life insurance sales agents declined by 13.5%, but agent structure improved by 1) the number of top performers: +7.7% and 2) “talent+” new agents: +9ppt y-o-y, where the company aims to recruit a proportion of new high-quality agents. Ping An will leverage the reform of its digital business outlets to support agent sales. NBV per agent improved by 26.9% and boosted new agents’ income.
Q: Can you tell us about the dividend policy?
A: Ping An links dividend payout to operating profit, as it is more stable than net profit, which is impacted by short-term investment volatility. In the last 10 years, the difference between the net profit and operating profit was stable over eight years; the divergence expanded only in 2021 and 1H22, due to 1) the China Fortune Land provision in 2021 and volatile capital market in 1H22 and 2) increasing reserves due to decreasing 750-day government bond yield. But the divergence will be manageable, as 1) a solid solvency ratio gives a buffer for stable dividend payout and 2) the negative impact from reserves will be capitalised after implementing IFRS 17.
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COMPANY-SPECIFIC / REGULATORY DISCLOSURES
1. | DBS Bank Ltd, DBS HK, DBSVS or their subsidiaries and/or other affiliates have a proprietary position in Ping An Insurance Group Co of China Ltd (2318 HK) recommended in this report as of 21 Sep 2022.
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2. | Compensation for investment banking services: DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past 12 months for investment banking services from Ping An Bank Company Limited (000001 CH) as of 31 Aug 2022.
DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA, within the next 3 months, will receive or intend to seek compensation for investment banking services from Ping An Bank Company Limited (000001 CH) as of 31 Aug 2022.
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