Ping An Insurance - Exceeding expectation
- 3Q24 VNB +110% y/y to RMB12.8bn, well above market consensus, and expected to lead major Chinese pee
- Net profit +151% y/y to RMB44.6bn, beating expectations, mainly driven by robust operating profit an
- Trading moderately below 5-year mean, strong embedded value growth recovery warrants for further sha
- Revise up FY24F VNB growth to 36%, FY24/25F/26F earnings by 21%/19%/19%; lift TP to HKD72, reiterate
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We participated in Ping An’s 3Q24 analyst call on 21 Oct 2024 and were left with constructive takeaways.
Robust growth in the L&H segment
The structural recovery of the agency channel continued in 3Q24, with VNB rising by 110% y/y to RMB12.8bn. 9M24 VNB of RMB35.2bn has already reached market’s full-year expectations. Agent productivity improved substantially, with VNB per agent increasing by 54.7% y/y, while agent headcount has stabilised at 362k. VNB margin improved by 7.3ppt to 25.4%, mainly driven by improvements in the product mix and reduced pricing rates and commission expenses. With 1) continuous improvements in agent productivity and a stabilising agent headcount; 2) robust growth expected at the bancassurance channel from a low base; 3) attractive returns on savings offering compared to other bank products; and 4) rising penetration of the healthcare+insurance ecosystem to capture more value from existing customers, we expect Ping An’s VNB to further grow by 36%, 11%, and 11% y/y in FY24, FY25, and FY26, respectively, on a high base, ahead of its Chinese peers.
P&C saw underwriting profit recovering
Operating profit in the P&C segment rose by 39.7% y/y to RMB14.0bn. Insurance revenue increased by 4.5% y/y to RMB246bn, and the combined ratio (COR) improved by 1.5ppt y/y to 97.8%, benefiting from reduced exposure to loss-making credit guarantee insurance. We expect moderate premium growth and an improved COR to drive a further recovery in P&C underwriting in 2H24F.
Net profit on upward trend
We expect Ping An’s net profit to see a turnaround in FY24F, mainly benefiting from 1) robust VNB growth in the life segment, 2) improvements expected in the P&C segment’s underwriting performance, 3) investment performance being boosted by a stock market rally, and 4) a turnaround in asset management and technology segments with mitigated macro headwinds. We, therefore, revise our net profit forecast upward by 21%, 19%, and 19% for FY24, FY25, and FY26, respectively.
Concerns on negative spread risk overdone
We believe investors’ concerns about declining interest rates in China are overdone, given that Ping An’s cost of liability remains below 2.5%. The net investment yield stood well above 3.3% in 1H24, providing a 70bps buffer before reaching a negative investment spread. With the cost of liability on a declining trend and pricing rates cut by another 50bps in September 2024, we think investors’ concerns about negative spread risk are overdone.
Valuation undemanding
Despite the recent rally, Ping An is currently trading moderately below its past five-year mean. Risk-reward remains attractive. We believe the market has not yet factored in the structural turnaround of Ping An’s continued underwriting growth and EV improvement. Based on our positive outlook for Ping An’s EV recovery and net profit growth, we raise Ping An’s target price to HKD72 from HKD70, based on: a) 1.0x (previously 0.9x) FY25 price-to-embedded value ratio (P/EV) for the life business; b) DBS target price of RMB12.8 for PAB; c) unchanged 0.8x FY25 price-to-book ratio (P/B) for the P&C segment and 0.8x for the asset management segment; and d) MTM being listed as a fintech business. We believe the strong recovery in both VNB and EV growth will warrant a further share price upside. Reiterate BUY.
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