Date of Report: 7 October 2024
Broker: OCBC Investment Research
Company Overview
China Pacific Insurance (CPIC) is a leading integrated insurance group in China, providing a broad range of risk protection, wealth management, and asset management services. Through its subsidiaries, it offers life and health insurance via CPIC Life, property and casualty insurance through CPIC P/C and CPIC Anxin Agricultural, and specialized health insurance and health management services through CPIC Health.
The company also manages insurance funds, including third-party assets, via CPIC Asset Management Company (AMC). Additionally, CPIC operates pension fund management through Changjiang Pension, private equity fund management via CPIC Capital, and mutual fund management through CPIC Fund. CPIC Technology provides market-oriented technological empowerment services.
Investment Thesis
CPIC is the third-largest player in both life and property and casualty (P&C) insurance segments in China. The company generated two-thirds of its insurance revenue from its P&C segment under the new accounting standards. The life and health insurance business is expected to continue growing, driven by increased agent productivity and fee cost control due to past reforms.
CPIC’s focus on technology empowerment, health and elderly care diversification, and improvements in agent productivity, coupled with rising income per capita and under-penetration in China’s life insurance market, bolster its long-term growth prospects.
Recent Performance and Market Position
As of 7 October 2024, CPIC’s share price has outperformed the market, with H-shares and A-shares surging by 52.2% and 27.3%, respectively, outperforming both the Hang Seng Index and CSI 300 Index. This rally, which occurred in a short period, has led to a potential consolidation in the near term, though CPIC is still positioned for further re-rating due to improved fundamentals.
The company’s fundamentals are robust, with valuation metrics still reflecting meaningful discounts to their 10-year averages. This outperformance is attributed to the continued rollout of supportive policy stimulus measures by the Chinese government.
Key Financial Metrics
- Ticker: 2601.HK
- Market Cap: HKD 386.0 billion
- Free Float: 69%
- Shares Outstanding: 9,620 million
- Profit Before Tax (FY24E): CNY 38.2 billion
- PATMI (FY24E): CNY 32.9 billion
- P/E Ratio (FY24E): 8.6x
- Dividend Yield (FY24E): 4.1%
- ROE (FY24E): 12.1%
Policy Support and Future Outlook
Several recent policy measures have bolstered CPIC’s outlook. These include a CNY500 billion swap facility established by the People’s Bank of China (PBoC) to increase leverage for brokers, funds, and insurance companies in equity investments. In addition, the China Securities Regulatory Commission (CSRC) and National Financial Regulatory Administration (NFRA) are working to facilitate long-term funds to invest in equity markets through stock index exchange-traded funds (ETFs) and insurance funds. CPIC also benefits from policies encouraging insurance companies to establish private funds designated for stock investment.
Further fiscal stimulus policies could provide a continued boost to market sentiment, liquidity, and economic recovery, supporting CPIC’s re-rating potential.
Valuation Upgrade
OCBC has shifted its valuation methodology for CPIC from a Dividend Discount Model (DDM) to a price-to-embedded value (P/EV) approach. Using a target P/EV multiple of 0.62x, OCBC derived a higher fair value estimate of HKD 42.50, up from the previous estimate of HKD 26.10. This reflects improved fundamentals and optimism regarding CPIC’s future performance.
ESG Initiatives
CPIC’s ESG rating was upgraded in December 2023, highlighting its leadership development programs and improved business ethics, including executive-level oversight of its ethics framework. CPIC is also a signatory to globally recognized initiatives such as the UN Principles for Responsible Investment (PRI) and UN Principles for Sustainable Insurance (PSI). The company invests in green and sustainability-linked bonds, showcasing its commitment to responsible investment. However, there is limited evidence of CPIC integrating climate change considerations into its risk assessment approach compared to its peers.
Potential Catalysts
Several factors could drive CPIC’s future growth:
- Higher bond yields could lower reserve charges, improving life profits and overall earnings.
- A faster-than-expected pace of New Business Value (NBV) growth and agent productivity could boost recovery in its life insurance business.
- Improved competitive dynamics in the insurance sector.
- A rally in A-shares could lead to higher valuations and investment gains, with better asset-liability matching and disclosure.
Risks
Key risks for CPIC include:
- Lower-than-expected investment yields due to weak markets, leading to unrealized losses.
- Higher-than-expected claims or loss ratios that could depress earnings.
- Volatility in equity markets affecting profitability.
- Macro-economic risks, regulatory/policy risks, and competitive pressures.
- Catastrophes or disease outbreaks impacting performance.
- Possible senior management departures and capital-raising/dilution risks.
Conclusion
With a BUY rating and positive outlook for the upcoming year, CPIC stands out for its robust fundamentals, policy support, and growing market share in both life and P&C insurance segments. Although there are risks associated with the volatility of equity markets and macroeconomic conditions, CPIC’s long-term growth prospects remain strong, supported by policy stimulus and improved financials.
