中国大陆与香港的保险业：一个被低估的转机故事.pdf

MMHong Kong/China InsuranceAn Underappreciated Turnaround Story Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research.As a result,investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research.Investors should consider Morgan Stanley Research as only a single factor in making their investment decision.For analyst certification and other important disclosures,refer to the Disclosure Section,located at the end of this report.+=Analysts employed by non-U.S.affiliates are not registered with FINRA,may not be associated persons of the member and may not be subject to FINRA restrictions on communications with a subject company,public appearances and trading securities held by a research analyst account.PICC Group has become noticeably more modern,progressive,and commercial since 2018.We believe the company could show further improvement on all fronts,driven by its continued tech investment and model reforms.Reiterate OW on PICC Group-H and PICC P&C.August 31,2020 10:08 PM GMTMMA transformation in quality,led by innovation:PICC Group has laid out a detailed plan to transform itself into a more competitive,high-quality operator,aiming to become Chinas Allianz over time.It has initiated a wide range of reforms in its organizational structure,technology infrastructure,capital allocation,distribution strategy,and even fundamental business models to address growth,effi-ciency and profitability challenges that have faced the company in the past.In our view,the reinvention process could help in four ways:1.Strengthening its dominant auto insurance position with improving profitability it has been investing in roadside assistance to enhance the customer experience while piloting a direct auto parts purchase model to control costs.2.Continuing to innovate in non-auto to drive growth in new markets it has been the first mover in many new lines,com-manding 50%share in areas such as agriculture and envi-ronmental liability.3.Developing proprietary channels to build sustainable growth lifes agency expansion in urban areas and cross-selling initiatives have brought stronger growth in higher-value segments.4.Expanding its market reach via ecosystem partnerships sales of health products have shown exponential growth through its exclusive partnership with WeChat.Hong Kong/China InsuranceAn Underappreciated Turnaround Story PICC Group has become noticeably more modern,progressive,and commercial since 2018.We believe the company could show further improvement on all fronts,driven by its continued tech investment and model reforms.Reiterate OW on PICC Group-H and PICC P&C.Regaining earnings momentum from 2020,despite the Covid-19 storm:Recovery in PICC P&Cs underwriting profitability should be the most important driver of its near-term earnings,and we expect its CoR to come down from the 2019 peak of 99%to 97%by 2022e every 1ppt improvement in CoR could increase P&C earnings by 15%,we estimate.Over the medium term,PICCs Life and Health business could continue to outgrow the industry(we expect VNB CAGR of 15%+over the medium term),contributing 16%of group earnings in 2022e vs.12%in 2019.The asset management business,though still small,could provide additional long-term upside the company aims fors this unit to make up 12%of earnings by 2028.Growth still with deep value;reiterate OW on both PICC Group H-shares and its P&C subsidiary:P/B is at a historical trough of 0.5x for PICC Group and 0.7x for PICC P&C owing to short-term over-hangs such as 1)credit losses arising from Covid-19;2)uncertainty from auto insurance reform;3)questions about its investment disci-pline(substantial positions in Industrial Bank and Hua Xia Bank);and 4)management changes the chairman just left to join CMG.We think concerns could diminish over the next 12 months:We look for the stocks to rerate towards fair P/B multiples of 0.8x for Group and 1.3x for P&C,if the company can lift its earnings to new highs in 2020(current multiples suggest the market does not believe that its record 2019 earnings are sustainable),we forecast an EPS CAGR of 10%for Group and P&C during 2021-22e.Divestment of banking shares and further dividend payout hike could be addi-tional catalysts.Our price targets suggest returns of 60%for PICC Group-H and 90%for PICC P&C shares,among the highest in our coverage.WHATS CHANGEDPICC GroupFromToPrice TargetHK$2.90HK$4.30Price TargetRmb2.60Rmb3.80Industry ViewHong Kong/China Insurance In-LineM4M Contents 5Investment Summary7 Could PICC Group Become Chinas Allianz?12P&C Recovery More Structural Than It Appears 19Life&Health Turnaround A Multi-year Story21AMC Business Expansion Just Starting22SOE Discount How Big Is Enough?23Value Play or Value Trap?24Addressing Key Market Concerns25PICC Group Price Target/Estimate Changes26PICC P&C Price Target/Estimate Changes27PICC Group Financial Summary28PICC P&C Financial Summary35Appendix I PICC P&C/Group Share Performance36Appendix II Global Valuation Comps37Appendix III PICC P&C Valuation Multiples38Appendix IV PICC Group Valuation MultiplesMMORGAN STANLEY RESEARCH5MExhibit 1:PICC outperformed Ping An before 2015,but has lagged in recent years 50100150200250300350Dec-12Apr-13Aug-13Dec-13Apr-14Aug-14Dec-14Apr-15Aug-15Dec-15Apr-16Aug-16Dec-16Apr-17Aug-17Dec-17Apr-18Aug-18Dec-18Apr-19Aug-19Dec-19Apr-20Aug-20PICC P&CPICC GrpPing AnSource:Refinitiv;Morgan Stanley ResearchExhibit 2:EPS reached new highs and will expand further,we believe0.10.30.40.60.50.71.00.80.90.70.00.10.20.20.20.30.50.30.40.31.11.11.21.40.50.50.60.70.00.20.40.60.81.01.21.41.6FY09FY10FY11FY12FY13FY14FY15FY16FY17FY18FY19FY20EFY21EFY22EPICC P&CPICC GroupEPS(Rmb)MS forecastSource:Company data;Morgan Stanley Research(E)estimatesInvestment SummaryPICC P&C stock outperformed Ping An during 2012-2015:PICC P&C generated strong shareholder returns prior to 2015,almost dou-bling between 2012 and 2015 and outperforming the leading insur-ance group Ping An during that time(Exhibit 1),driven by strong earnings expansion(EPS also up 100%).However,more recently,PICC P&C shares have been sluggish as earnings fell 10%p.a.during 2015-2018.Despite earnings recovering in 2019 to reach all-time highs,market confidence in the stock remains low,with investors not yet believing the company has completely turned things around;P/E multiple reached its lowest point of only 5x at the moment.PICC Groups share performance largely followed that of its P&C subsid-iary since its listing in 2012 because its life operation was too small to create a different equity story.However,we think all of this will change in the next couple of years.Aiming to be Chinas Allianz:PICC Group performed a strategic review in 2018 and set ambitious goals to transform itself into a more efficient and competitive corporation with business mix and profit-ability similar to global leading players,such as Allianz.This will mean that its mix will be more diversified and balanced with sizable life and AMC business,as well as a more profitable P&C operation.We believe this transformation process,planned to be achieved through a number of digitalization and innovation projects,will create signifi-cant value for shareholders.We believe both PICC Group and the P&C subsidiary can continue to expand earnings from their highs in 2019.Expect the shares to double within the next three years:This is one of the few stock(s)in our coverage where we see the opportunity for it to double over the next three years due to its historical trough valuation,strengthening fundamentals and more importantly increasing management focus on shareholder returns.PICC Group and Ping An were the only two stocks we cover that raised dividends to reward shareholders during tough times in 1H20.M6MExhibit 3:Valuation comps PICC Group/P&C trading at lowest multiple amongst peers CompanyPriceMarket Cap Turnover(LC)(USD mn)(USD mn)RatingPTUpside2020E2021E2020E2021E2020E2021E2020E2021E2020E2021EPing An83.30196,462344.8O119.043%1.11.01.81.510.47.61.70.03.13.8PICC Group2.5914,77814.1O4.366%-0.1-0.10.50.54.64.00.00.06.67.4China Pacific22.5026,30752.9O34.051%0.10.10.90.86.66.20.00.06.76.9China Life18.9268,997114.4E18.0-5%0.40.41.11.09.89.10.00.03.63.9China Taiping12.605,84322.9E13.03%0.00.00.50.55.14.50.00.03.35.1New China Life31.9012,84038.8U29.0-9%0.40.40.90.86.56.00.00.04.65.0PICC P&C6.0217,27631.4O12.099%NANA0.70.64.94.3NANA8.79.9Zhong An52.209,89922.6E42.0-20%NANA4.54.2288.466.5NANANANAPing An77.89207,387743.8O107.037%1.21.01.91.611.08.13.00.62.93.6China Pacific31.5341,618135.0E30.0-5%0.40.31.41.310.49.80.00.04.24.4China Life44.77184,31793.2U17.0-62%1.21.02.92.726.224.43.00.81.31.4New China Life61.6928,031109.6U26.0-58%0.80.72.01.814.213.00.00.02.12.3PICC Group7.3347,21772.0U3.9-47%2.31.91.61.514.612.918.612.92.12.3Non-Life InsurersP/BP/ENBMA share InsurersP/EV*Dividend Yield%Life Insurers*Closing prices as of August 28,2020.Source:Refinitiv;Company data;Morgan Stanley Research(E)estimatesMMORGAN STANLEY RESEARCH7M Could PICC Group Become Chinas Allianz?Exhibit 5:Profitability lagged Allianz in the core P&C unit*99.295.523.322.723.045.9.020.040.060.080.0100.0120.0PICC Grp AllianzPICC Grp AllianzPICC Grp AllianzP&C CoR(%)L&H APE margin(%)Fee margin(bps)*Allianz AMC results include PIMCO and AGI.Source:Company data;Morgan Stanley ResearchExhibit 4:PICC Group could become more balanced like Allianz*2254124215477742764985290.4538239102030405060708090100PICC GrpAllianzPICC GrpAllianzPICC GrpAllianzL&HP&CAMC and othersOthers%Revenue mixEarnings mix*Valuation mix*As of F19;PICC Groups valuation mix is based on PICC Group and PICC P&Cs H-share valuation;Allianzs valuation is based on MS estimates;AMC and others include asset management,corpo-rate&others and group eliminations*Earnings mix is based on net profit after minority for PICC GroupSource:Company data;Morgan Stanley ResearchExhibit 6:PICCs CoR volatility could subside.96.596.598.197.298.599.294.394.694.395.294.095.59092949698100102104106FY14FY15FY16FY17FY18FY19PICC Auto CoRPICC Non-auto CoRPICC P&C CoRAllianz%Source:Company data;Morgan Stanley ResearchExhibit 8:Life&Health business gaining momentum 5356378798929701,3301,6092,0912,3192,4085001,0001,5002,0002,5003,000FY15FY16FY17FY18FY19PICC GroupAllianzVNB(US$,mn)Source:Company data;Morgan Stanley ResearchExhibit 7:.as PICC P&C scales up smaller non-auto lines*382484630157810510152025303540AutoCommercialpropertyLiabilityA&HAgricultureOtherPICC P&CAllianzUS$bn*GWP as of FY19 for PICC;GWP for Allianz by product lines is estimated based on product mix in key countriesSource:Company data;Morgan Stanley ResearchExhibit 9:Significant asset management opportunities ahead*1001,5644205001,0001,5002,0002,500PICCAllianzAUM(US$,bn)AGIPIMCO*Third-party AUM as of FY19Source:Company data;Morgan Stanley ResearchM8MWhat PICC Group/P&C Could Look Like in Three YearsMore stable P&C performance:Despite the recent volatility that we have seen in its CoR,we believe PICC P&Cs performance will sta-bilize in both the auto and non-auto businesses over time.On the auto side,regulators will keep a tight rein over P&C insurers amid a new round of premium rate detariffication.The recently released C-ROSS draft suggests that regulators will use solvency regulation as a policy tool to control market behavior insurers behaving more aggressively will be charged with more capital based on CoR deterio-ration and excessive growth above industry level.We expect the industry transition to be stable,with the industry profit pool remaining intact.For PICC P&C,the company will leverage its new centralized procurement model to secure additional claim savings to cushion any downside caused by auto deregulation while continuing to explore new ways to better service customers to increase reten-tion ratios.For non-auto,the company will benefit from continued government support to grow new lines of coverage and build scale.Recent profitability fluctuation suggests that the company is expanding catastrophe coverage and taking on risks from a wider spectrum.The impact from single catastrophic events will be more manageable/less noticeable with a more diversified portfolio and sufficient scale(most new lines are still sub-scale vs.global players).Life&Health(L&H)to become a more material segment:We believe investing in smaller life insurers is a way to find higher growth as the life and health insurance market becomes well covered.Large insurers tend to outgrow the industry at the early stage of the product cycle with smaller insurers likely to take the lead as growth becomes more difficult to find.PICC Group has been generating VNB growth higher than peers(9%VNB in 2019 and 21%in 1H20 vs.nega-tive growth for most listed insurers),helped by its reforms.With VNB of only Rmb6.8bn,like Ping An in 2007,we believe there is significant headroom for PICC to build up the L&H business by building a bigger and more productive agency distribution,improving product mix and margin as well as tapping cross-selling opportunities among its wealthier auto insurance customers(it covered 70mn cars in 2019).Ambitions in asset management:Chinas fund management industry has developed significantly since 2011,with an AUM CAGR of 30%in the past eight years.Despite being a relatively low-margin business,fee-based income is high-quality in nature and has synergies with the life insurance business.Asset management can complement the insurance business by providing wider product choices to cus-tomers(such as higher risk mutual fund products),spread in-house asset management costs over a larger asset pool(by taking third party institutional money)as well as accumulate low-risk fee-based earnings to reduce rate sensitivity.PICC Group is currently small in this area but it is already well positioned,having launched multiple investment platforms to build both institutional&retail asset man-agement businesses across a variety of asset classes(equity,fixed income and alternatives).These initiatives,combined,will make PICC Group a more balanced insurance group,akin to global leader Allianz.Exhibit 10:PICC Group Key financials*FY19FY22EChg%Revenue mix%P&C7872-5.4pptsL&H22285.9pptsAMC and others10-0.5pptsTotal100100-Earnings mix%P&C7674-2.1pptsL&H12163.6pptsAMC351.8pptsOthers95-3.3pptsTotal100100-ProfitabilityP&C CoR%99.297.2-2.0pptsAPE margin%23.327.54.3pptsFee rate%*23.025.32.3pptsEarnings growth drivers(US$,mn)3yr CAGRP&C Underwriting profit4541,83959.4L&H VNB9701,58417.8Third party AUM10019926.0Group earnings3,1624,1559.5*Fee margin includes performance fee and other net fee and commissions;earnings mix is based on net profit after minoritiesSource:Company data;Morgan Stanley Research(e)estimatesMMORGAN STANLEY RESEARCH9MExhibit 11:An organizational culture that embraces change DateDescription1979First insurer resumed business under Chinas openning-up and reform2003First domestic financial company listed oversea2003