20180524-招银国际-中国财险-02328.HK-Undervalued_leading_P_C_insurance_company_24页_1mb

Summary of PICC P&C (2328 HK)

Core Content

PICC P&C (2328 HK) is the leading property and casualty (P&C) insurance company in China, offering a wide range of insurance products including motor vehicle insurance, accidental injury and health insurance, agriculture insurance, liability insurance, and others. It has a strong brand recognition and a dominant market position, with a leading market share of 33.1% in 2017, which surpassed the combined market share of the second and third largest P&C insurance companies.

In 2017, PICC P&C achieved a Gross Written Premium (GWP) of Rmb350bn, representing a 12.6% year-over-year (yoy) increase. Its expense ratio was 34.7%, 7.2ppt below the average of listed peers (41.9%), contributing to a combined ratio of 97.0%, 1.17ppt below the peer average of 98.2%. This efficient cost management has allowed the company to maintain a higher underwriting profit margin than its peers.

The company has been investing in associates, which has yielded significant returns. From 2013 to 2017, investments in associates grew at a CAGR of 80%, reaching Rmb41,832mn. The share of profits from these investments increased from Rmb77mn to Rmb4,575mn, with a CAGR of 178%. These investments include stakes in Hua Xia Bank, PICC Health, and Industrial Bank Company (IBC), with PICC Group being the second largest shareholder of IBC.

Main Points

• Market Leadership: PICC P&C leads the P&C insurance market in China, with a 33.1% market share in 2017.
• GWP Growth: In 2017, GWP reached Rmb350bn, up 12.6% yoy. The company aims to maintain growth in FY18-20E with projected GWP increases of 16.1%, 15.2%, and 13.8% respectively.
• Underwriting Efficiency: The company has a lower expense ratio (34.7%) and a better combined ratio (97.0%) compared to its peers, indicating strong underwriting performance.
• Investment Strategy: The company has a prudent investment strategy, with a focus on fixed income instruments (72% of total investment assets in 2017) and has seen significant growth in associate investments.
• InsureTech Innovation: The company has implemented technological advancements such as an intelligent claim-handling system, UAV-based loss estimation for agricultural insurance, and biometric recognition for breeding insurance, which have enhanced efficiency and reduced fraud.

Key Information

• Sales Network: As of year-end 2017, PICC P&C had 13,985 branches, sales and service outlets, 72,775 sales personnel, 375,329 insurance agents, 25,952 insurance agencies, and 1,173 insurance brokerage agencies.
• Geographic Distribution: In 2017, 45% of GWP came from coastal and developed regions, while the rest were distributed across western, central, northern, and north-eastern China.
• Channel Optimization: The company has optimized its sales channels, increasing the proportion of GWP from agency channels from 58% in 2015 to 71% in 2017. Individual agents accounted for 36% of GWP in 2017.
• Investment Allocation: In 2017, the company allocated 72% to fixed income, 16% to equity securities, and 10% to investments in associates. The allocation to fixed income increased while equity investment decreased due to rising interest rates.
• Valuation: The company is currently valued at HK$13.86 per share, with a forecasted fair value of HK$16.32 based on a Gordon Growth Model with a P/B ratio of 1.32x. This represents an upside potential of 21.1%.
• Risks: Key risks include underwriting losses in the A&H insurance segment, potential increases in the effective tax rate due to rising fees and commissions, and the impact of macroeconomic factors and regulatory changes on the insurance and investment sectors.

Financial Highlights

Investment Recommendation

• Initiation: BUY
• Target Price: HK$16.32
• Upside Potential: 21.1%

Shareholding Structure

• PICC Group: 69.0%
• Free Float: 31.0%

Conclusion

PICC P&C is a well-positioned and undervalued P&C insurance company in China, with strong market leadership, efficient underwriting, and a diversified investment strategy. The company is leveraging technology to improve its operations and customer experience, while maintaining a focus on cost control and profitability. Despite some risks, its strong fundamentals and growth potential make it an attractive investment opportunity.