PICCP&C(2328.HK)：MOSTPROFITABLEP&COPERATIONSINASIA0117.ppt

,69.98,9.90,PICC P&CPICC P&C-Buy,Company Report,Property&Casualty InsuranceInitiation(2013E TP:HK$13.48),Key sector dataShare price(HK$)Target price(HK$)Upside potential(%)52Wk H/L(HK$)Issued shares:Market cap(HK$mn)30-day avg vol(HK$mn)Major shareholder(%):PICC GroupAIGSource:Company&BloombergPremium composition in 2011(%)MotorNon-motor*data as of 2011Source:Company dataSector performance(%)Absolute1-mth 18.4,12.1013.4811.4012.28/7.8112,256148,297183.773.626.4Relative*12.7,Most profitable P&C operations in AsiaPICC P&C is the most profitable P&C operations in Asia,makingUS$1.3bn earnings in 2011.Also,the insurer continues to benefitfrom the bottoming combined ratios and stabilized 20%plus ROEs,as per our forecast.Lastly,the company will benefit from theSannong policy going forward.Therefore,we initiate our researchcoverage on PICC P&C with a BUY recommendation.Our TP isHK$13.48(2.45x 2013E PBV),representing 11.4%upside from now.Most profits among regional peers.PICC P&C reported net profits ofUS$1.3bn(Rmb8.1bn)in 2011,up 51%YoY from 2010.Simultaneously,PICC recorded ROE of 26%,ranked the 2nd among 11 peers in Asia.ItsROE improved by 17.4ppt since 2009,topped its peers during 2009-11.This is driven by 8.2ppt improvement in its combined ratios since 2009.Bottoming combined ratios.In 2009,the companys combined ratio wasat 102.2%.In 2011,its underwriting profits increased to Rmb8.0bn,up192%YoY,with a combined ratio of 94.0%.In 1H12,underwriting profitsimproved further to Rmb5.6bn,up 14%YoY and 82%HoH.Combined,3-mth6-mth,17.240.9,4.014.5,ratio was contained at 92.4%.Most importantly,this is a broad-basedimprovement,with all segments reporting underwriting profits.As such,*Relative to MSCI Hong Kong IndexSource:Bloomberg1 year price performance,we believe the improvement is a sustainable one.Riding on Sannong policy.PICC P target price atHK$13.48.Factoring in the continuous strength in underwriting,andprospective upswing in investment income,we assume PICC P&C toachieve an average ROE of 23.7%going forward.Accordingly,we setour target price at HK$13.48,based on 2.45x 2013E PBV and 10.8x2013E PER.Our TP is derived from our Gordon Growth Model,representing a 11.4%upside from the current share price.We initiatecoverage of PICC P&C with a BUY recommendation.,Source:BloombergAnalyst,Risk factors:worse-than-expected underwritingperformance,tighter-than-expected regulationsResults and valuation,and,investment,Report Date:16 January 2013Francis ChanTel:(852)2147 8311Email:.hk,FY ended Dec 31Revenue(Rmb mn)Chg(YoY)Net profit(Rmb mn)Chg(YoY)EPS(HK$)PER(x)BPS(HK$)P/B(x)DPS(HK$)Div.yield(%)Combined Ratio(%)Gross invt yield(%),2010127,89230.855,288196.580.5721.392.874.220.000.0097.83.94,2011136,9047.058,02751.800.8414.483.493.460.272.2694.02.33,2012E156,82714.5511,88648.071.2010.064.512.680.262.1594.34.12,2013E177,04112.8912,1161.931.259.675.512.190.272.2396.34.65,2014E197,76711.7113,2349.231.438.496.821.770.272.2396.34.60,*Prices as of 15January 2013Source:Company,ABCI Securities estimates1,3,5,6,8,9,11,13,PICC P&CContents,ContentsExecutive Summary Most profitable P&C operations in AsiaHighest profits among regional peersBottoming combined ratios&stabilized marginsWell reserved for claimsRecovering motor sales leading to rebounding premiumsAgricultural insurance aligning with national policiesValuation&RecommendationDisclosures,2162,PICC P&CExecutive Summary Most profitable P&Coperations in Asia,Most profitable P TP of HK$13.48on five positivesNot only the biggest,but the oneimproved the most in ROE since2009Broad-based improvement inunderwriting in 1H12,implyingsustainabilityClaim provision greatlyenhanced to 49.8%NEPin1H12,We are initiating coverage on PICC P and(v)agricultural insurance aligning with national policies.However,we note thatPICC P&C also has a few investment negatives,which include:(a)possiblereversal of favorable underwriting cycle and(b)severe competition fromPing An and China Pacific.As a result,while we are positive on the stocksfundamentals,we are holding a slightly conservative stance towards PICCP&C.We derived our target price of HK$13.48/share,equivalent to 2.45x2013E PBV and 10.8x 2013E PER.Our TP was set by our Gordon GrowthModel,applying assumptions of a 11.6%discount rate and 23.7%mid-termROE.Such TP represents 11.4%upside from the current trading price.Assuch,we initiate coverage of PICC P&C with a BUY recommendation.Highest profits among regional peersPICC P&C reported net profits of US$1.3bn(Rmb8.1bn)in 2011,up 51%YoY from 2010.This is the most profitable P&C operations in the year.PICCs profits was 178%of QBEs from Australia,371%of HyundaiInsurances from South Korea,1,256%of Fubon Insurances from Taiwanand 1,642%of Tokio Marines from Japan.On the other hand,PICC P&Cdemonstrated great improvement in operating efficiency during 2009-11.PICC recorded ROE of 26%,ranked the 2nd among 11 peers in Asia.ItsROE improved by 17.4ppt since 2009,topped its peers during 2009-11.Thisis driven by 8.2ppt improvement in its combined ratios since 2009.Bottoming combined ratios and stabilized marginsPICC P&C demonstrated great improvement in combined ratios and henceunderwriting profits of different segments from 2009 to 2011.In 2009,thecompanys combined ratio was at 102.2%.In 2011,its underwriting profitsincreased to Rmb8.0bn,up 192%YoY,with a combined ratio of 94.0%.In1H12,underwriting performance improved further,with profits at Rmb5.6bn,up 14%YoY and 82%HoH.Combined ratio was contained at 92.4%.Mostimportantly,this is a broad-based improvement,with all segments reportingunderwriting profits.We believe such an improvement is a sustainable one,inview of multiple profit sources for PICC P&C in the future.Well-reserved for claimsPICC P&C was complained about the adequacy of claim provision in earlieryears.However,things have improved fast since 2009.In 2005,PICCreported net outstanding claim reserve of Rmb15.4bn,representing only 31.0%of net earned premiums(NEP).In 2011,net outstanding claims reservereached Rmb62.6bn,representing 47%of NEP.In 1H12,the reserve wasfurther raised to 49.8%of NEP.Based on such an improvement,we believeits profits will not be adversely affected by under-provided claims in thefuture.Recovering motor sales leading to rebounding premiumsThe companys premium sales growth rebounded from the low in Jan 2012,3,PICC P&C,Premium growth intact becauseof reviving car salesRiding on Sannong policyInitiate coverage with a BUYrating;our TP implied 11.4%upside potential,along with the improving car sales.Year to Nov 2012,PICC P&C reportedpremium income of Rmb175.6bn,up 11.5%YoY.This was compared to adecline of 0.5%YoY in Jan 2012.With a continuous increase in carownership(105.8mn in 2011,+16.7%YoY)in China,we forecast passengercar sales to maintain a double digit growth rate in 2012-14E.Based on thisassumption,we forecast premium growth of 11.4%YoY in 2012E,12.7%YoY in 2013E and 12.8%YoY in 2014E,for PICC P&C.Agricultural insurance aligning with national policiesPICC P&C is in the best position to ride on the Sannong policy.PICC P&Cwas the market leader in the agricultural insurance,with a 51.9%marketshare(Rmb7.1bn of agriculture premiums)in 2011.In 2010,Agricultureinsurance premiums grew 18.6x from Rmb730mn to Rmb13.6bn in China.In2011,its premiums grew by 28%YoY to Rmb17.4bn.PICC P&C controls anunparalleled distribution network in county areas.In 1H12,87,100,or 51.4%of its total P&C agents,were located in these areas.Also,PICC P&Claunched a successful pilot program on agricultural insurance,calledChangde Model and enjoyed a great success.Therefore,we expect PICCP&C to continue benefiting from such policies in the future.Valuation&Recommendation-Initiate coverage with a BUYrating and a TP of HK$13.48/shareFactoring in the continuous strength in underwriting,and prospectiveupswing in investment income,we assume PICC P&C to achieve an averageROE of 23.7%going forward.Accordingly,we derive our target price from,our Gordon Growth Model,with assumptions of a 11.6%discount rate andmid-term ROE of 23.7%.As such,we set our target price at HK$13.48,basedon 2.45x 2013E PBV and 10.8x 2013E PER.Our TP represents a 11.4%upside from the current share price.We initiate coverage of PICC P&C witha BUY recommendation.PICC P&C:investment positives&concerns,PICC P&C(2328.hk),BUY,TP:HK$13.48Investment positivesMost profitable P&C operations in AsiaBottoming combined ratios and stabilized marginsWell reserved for claimsRecovering motor sales leading to rebounding premiumsAgricultural insurance aligning with national policiesSource:Company data,ABCI SecuritiesPICC P&C Gordon Growth Model,Most profitable P&C operations in AsiaInvestment concernsPossible reversal of favorable underwriting cycleSevere competition from Ping An and China Pacific,Implied ROE,22.7%,23.2%,23.7%,24.2%,24.7%,Long term dividend payout ratio(k)Market risk free rate(Rf)Market risk premium(Rm)Stock beta(B)Cost of Equity(CoE=Rf+Rm*B)Long term sustainable growth(g)Discount rate(CoE-g),64.0%3.6%11.6%0.9614.7%8.5%6.2%,Target Price to Book Value(ROE*k)/(CoE-g),2.34,2.39,2.45,2.50,2.55,2013E BVPS(HK$),5.51,Est.Fair Price YE2013,12.92,13.20,13.48,13.77,14.05,Target Price YE2013 based on DDM,13.48,Source:Company data,ABCI Securities estimates4,CathayCentury,FubonInsurance,FubonInsurance,DongbuInsurance,HyundaiInsurance,ChinaPacificP&C,CathayCentury,TokioMarine,IAG,QBE,SamsungFire&Marine,HyundaiInsurance,DongbuInsurance,ChinaPacificP&C,SamsungF&M,PingAnP&C,TokioMarine,PICCP&C,PingAnP&C,PICCP&C,IAG,QBE,PICC P&CHighest profits among regional peers,The most profitable P&Coperations in Asia,PICC P&C reported net profits of US$1.3bn(Rmb8.1bn)in 2011,up 51%YoY from 2010.This is the most profitable P&C operations in the year.PICCs profits was 178%of QBEs from Australia,371%of HyundaiInsurances from South Korea,1,256%of Fubon Insurances from Taiwanand 1,642%of Tokio Marines from Japan.While Ping An P&C and ChinaPacific P&C delivered considerable profits in the same year,they are parts ofthe other two integrated insurance groups.Therefore,we regard PICC P&Cas the single largest P&C exposure in either China or Asia.,PICC P&C:net profits vs regional peers in 2010,PICC P&C:net profits vs regional peers in 2011,1,4001,200,1,308,1,4001,200,1,281,1,000800600400200,7,92,142,202,505,533,586,701,810,886,1,000800600400200-,20,78,89,102,245,345,606,674,719,791,-,Source:Company data,ABCIMost improved P&C operationsin Asia since 2009,Source:Company data,ABCIOther than the absolute amount of net profits,PICC P&C demonstrated greatimprovement in operating efficiency during 2009-11.PICC recorded ROE of26%,ranked the 2nd among 11 peers in Asia.Its ROE improved by 17.4pptsince 2009,topped its peers during 2009-11.In the meantime,PICC P&Creported combined ratios of 94.0%,representing an underwriting marginexcluding investment yield of 6.0%,in 2011.Its combined ratio was the 4thlowest among peers.The marginal improvement in its combined ratio was8.2ppt since 2009,only second to Fubon Insurance(9.3ppt).Therefore,weregard PICC P&C the most improved P&C unit in Asia from 2009 to 2011.,PICC P&C:ROE against regional peers(2009-11),Chg,PICC P&C:Combined ratios against regional peers(2009-11)Chg,(%)Hyundai InsurancePICC P&CPing An P&CDongbu InsuranceChina Pacific P&CCathay CenturyFubon InsuranceSamsung F&MQBEIAGTokio MarineAverageHighLowPICC Ranking,200919.48.68.622.514.021.26.923.618.44.16.814.023.64.17,201014.421.529.222.326.37.811.924.613.11.93.516.029.21.95,201127.626.025.122.519.916.513.411.56.85.60.315.927.60.32,since 098.1517.3616.570.035.95(4.70)6.52(12.18)(11.62)1.47(6.44)1.923.91(3.76)Up 5,(%)China Pacific P&CPing An P&CFubon InsurancePICC P&CTokio MarineQBESamsung F&MIAGCathay CenturyDongbu InsuranceHyundai InsuranceAverageHighLowPICC Ranking,200997.598.984.7102.2102.889.6103.2103.789.4101.8102.597.8103.784.76,201093.793.289.197.690.989.7103.1100.9103.3101.5103.497.0103.489.15,201193.193.594.094.094.196.897.197.697.799.299.496.099.493.14,since 09(4.40)(5.40)9.30(8.20)(8.72)7.17(6.17)(6.03)8.30(2.62)(3.12)(1.81)(4.31)8.40Up 2,Source:Company data,Bloomberg,Source:Company data,Bloomberg,5,PICC P&CBottoming combined ratios&stabilized margins,Making underwriting lossesbefore 2009Underwriting picking up speedsince the industry turnaroundin 2010More balanced improvement in1H12,viewed as a sustainableone,PICC P&C demonstrated great improvement in combined ratios and henceunderwriting profits of different segments from 2009 to 2011.In 2009,thecompany ran at an underwriting loss(excluding investment yield)ofRmb2.1bn.Only Cargo and Other reported small underwriting profits in thesame year.The companys combined ratio was at 102.2%.However,in light of the industry turnaround in 2010,PICC P&C reportedunderwriting profits of Rmb2.8bn,with a combined ratio of 97.8%.90.7%ofits underwriting profits were contributed from motor insurance in that year.The only loss-making segment was commercial property,with a segmentalunderwriting loss of Rmb292mn and combined ratio of 104.3%.Eventually,its underwriting performance improved drastically in 2011.Underwritingprofits increased to Rmb8.0bn,up 192%YoY,with a combined ratio of94.0%.In 1H12,underwriting performance improved further,with profits atRmb5.6bn,up 14%YoY and 82%HoH.Combined ratio was contained at92.4%,compared to 92.5%in 1H11.Most importantly,this is a broad-basedimprovement,with all segments reporting underwriting profits.We believe,such an improvement is a balanced and sustainable one,in view of multipleprofit sources for PICC P&C in the future.PICC P&C:underwriting profits&combined ratios(2009-1H12),HoH,YoY,(Rmb mn)MotorCommercial PropertyCargoLiabilityAccidentOtherPICC,2009(1,042)(1,533)287(73)(224)525(2,060),1H101,0894741433311781,918,2H101,415(764)1993441(76)849,20102,492(292)3426642982,748,1H113,67814535959216744,936,2H11997168389262941,1703,080,20114,6753137483211151,8448,016,1H123,4756633322142396885,611,(%)249295(15)(18)154(41)82,(%)(6)357(8)2631,038214,HoH,YoY,Combined Ratio(%)MotorCommercial PropertyCargoLiabilityAccidentOtherPICC,2009101.5125.585.8102.3108.493.9102.2,1H1097.785.789.498.499.995.096.7,2H1097.3121.684.498.497.3101.598.7,201097.5104.387.098.498.598.997.8,1H1193.096.476.597.498.882.192.5,2H1198.195.169.789.095.380.095.4,201195.595.873.493.196.980.894.0,1H1294.182.976.291.888.286.892.4,ppt(4.0)(12.2)6.62.7(7.0)6.8(3.0),ppt1.0(13.5)(0.3)(5.6)(10.6)4.7(0.1),Underwriting profit increment for,1 ppt improvement in combined ratio,933,582,670,1,239,659,672,1,331,735,9,12,1 ppt for U/W profits as%of pretax,profitsPICC Pretax ProfitPICC Underwriting ProfitPICC Combined Ratio,432,167(2,060)102.2,173,4001,91896.7,213,19684998.7,196,5962,74897.8,106,7974,93692.5,193,4893,08095.4,1310,2868,01694.0,98,4135,61192.4,(55)14182(3.0),(10)2414(0.1),Source:Company data,ABCI,Continuous improvement inloss ratios since 2007,We believe the improvement in combined ratio and underwriting profits to besustainable for PICC P&C.In fact,PICC P&C has well contai