Event
Following our recent decision to upgrade our valuation assumptions for Ping
An (2318 HK, HK$103.10, Neutral, TP: HK$95), we have applied consistent
inputs into our China Life valuation, lifting our target price to HK$50, from our
previous HK$41.50 price target.
Impact
Sector due to consolidate: Share prices in the China insurance sector have
increased by between 70% and 90% since 1H07 results were reported in mid-
August and have doubled since our China report, The Rising Tide, was
published at the start of June. With valuations at especially-stretched levels,
we believe the insurers are due to consolidate and we have downgraded the
sector weighting to Neutral (from Overweight).
China Life offers best value: Within a Neutral sector weight, China Life
offers the best exposure, in our opinion. Using actuarial valuations, we believe
China Life is 15–20% cheaper than Ping An while its exposure to a reversal of
equity markets (the key risk for the sector) is estimated to be equal or lower
than its peers, in terms of earnings and value.
Catalysts for relative performance: We believe confirmation that VNB
growth trends remain strong and deployment of surplus capital will be the key
drivers of relative performance for China Life. In particular, we believe fears
about weakening premium growth in monthly disclosures are overdone. The
softer premium trends reflect a one-off period of adjustment where renewal
premiums are weak due to a maturing product and Hongxin premium payment
plans. New business volume remains solid, and business mix continues to
improve, paving the way for VNB growth above 20% for 2007, in our opinion.
Earnings revision
No change.
Price catalyst
12-month price target: HK$50.00 based on an Appraisal value methodology.
Catalyst: Near term, QDII and QDRI reforms. Long-term, higher investment
returns, strong earnings and value growth and deployment of surplus capital.
Action and recommendation
Given the run-up in sector share prices, we recommend a pragmatic
approach: retain weightings, but look to take some risk off the table. While we
worry about valuations, the growth credentials of the sector remain extremely
strong in terms of both organic expansion and M&A.
We retain an Outperform recommendation with 10% upside to our HK$50
target price. China Life remains our top pick in the China insurance sector.
