EUR 850.00 For Business Accounts Only

Morningstar | Ping An's 1H Recorded Strong Growth in Operating Profits and EV. See Updated Analyst Note from 22 Aug 2018

No-moat Ping An Insurance's first-half results were strong, posting 34% year-on-year growth in net profits and accounting for 65% of our full-year forecast. We maintain our CNY 80 fair value estimate for A shares and lower fair value estimate for H shares to HKD 92 from HKD 100 to reflect the latest Chinese yuan/Hong Kong dollar exchange rate. With the H shares trading at a 20% discount to our fair value estimate, while the A shares are on a 22% discount, we believe the stock is undervalued as the market is overly concerned about short-term regulatory impact to the company while we believe such an impact is mitigating and underlying growth momentum across major business lines remains strong.

The stronger-than-expected growth was driven by relatively stable investment income despite highly volatile capital market during the period, strong growth in residual margin amortization and less provision expense for life insurance reserve. Adjusted operating profits, which excluded short-term investment variance, impact of discount rate change and one-off material nonoperating items growth increased 24% from the year-ago period, indicating strong growth momentum of underlying business. Year-on-year growth in new business value, or NBV, came largely in line with our expectation at 0.2%, with second-quarter NBV rebounding to 9.9%, improving from a 7.5% contraction in the first quarter. We maintained our full-year NBV growth forecast at around 13% as we expect both NBV growth per agent and agent headcount will pick up in the second half. Increasing 12% from 2017, embedded value, or EV, growth was higher than market consensus. This was attributable to higher-than-peer NBV contribution and positive operating variance of life insurance business. Net assets of other business also grew 8% from 2017. We expect EV growth will meet our forecast of 20% in 2018.

Adjusted operating profits of the life insurance business grew 24% and accounted for 51% of the group, with second-quarter profits increasing 14% from the previous quarter. This was driven by NBV margin expansion and mild recovery in agent headcount. Despite industrywide headwinds, Ping An's life premium income grew 22%, higher than the 4% and 18% growth for China Life and CPIC, respectively. Its market share further expanded nearly three percentage points to 18%. Though premium per agent contracted 24% from the year-ago period primarily due to product restructuring required by regulations, Ping An was able to achieve relatively steady NBV per agent helped by four percentage point NBV margin expansion to 38.5%. Agent headcount resumed positive growth at 1% from 2017. Ping An's agency force continued to outperform thanks to the group's strategic priority on agent income which enable steady agent compensation supported by strong cross-selling opportunities.

Adjusted operating profits of P&C insurance business contracted 14% and contributed to 9% of the group profits. The contraction was mainly driven by increased tax expenses as the selling expense which exceeded the regulatory ceiling were not tax deducted. Weaker investment return also contributed to the profit contraction. Premium growth slowed to 15% from 21% in 2014, at the pace in line with peers. Market share remained steady at 20%. Underwriting margins continued to improve as combined ratio dropped to 95.8% from 96.1% in the year-ago period, boosted by steady auto insurance underwriting margin and strong growth in high-margin guarantee insurance. We expect combined ratio will remain at current level in 2018.

Second-quarter operating profits of fintech and healthtech business grew 28% from the previous quarter, contributing 6% of total operating profits. Such revenue was recurring with Lufax and Auto Home were primary profit contributors. Impacted by new asset rules, assets under management of Lufax fell 17% to CNY 385 billion, while loans under management grew 9% from 2017. Lufax has completed product restructuring to comply with new rules by end of June and we expect the company will continue to outperform peers during the transition.