The Company released 1H19 results. Overall speaking, result was mixed with disappointing underwriting performance as we’ve pointed out in previous notes, offset by improving investment income and tax savings. GWP increased 15.1% YoY to RMB 236bn (representing 56% of our full-year forecast), outperforming market growth and nudging the Company’s market share to 35.1%. Benefitting from tax credit, net profit increased 39.1% YoY to RMB 16.8bn.
- Result positives. 1) Non-motor insurance surged. Motor vehicle insurance increased 4.1% YoY to RMB 127bn, in line with our full-year forecast. GWP from non-motor insurance increased 31.4% YoY, higher than our full-year forecast of 20% growth, to 108.5bn. Non-motor insurance accounted for 46% of total GWP, up 5.7ppt YoY. The fastest growing non-motor insurance products include credit and surety insurance (+115% YoY), accidental injury and health insurance (+41% YoY), and liability insurance (+32%). 2) Equity investment gains. Realized gains and fair value gains was RMB 818mn (vs. net loss of RMB 201mn in 1H18). 3) Tax credit was RMB 1.65bn (vs. tax expense of RMB 4.77bn in 1H18) due to implementation of new tax-deduction policies.
- Underwriting margin shrank. Both motor and non-motor insurance experienced underwriting margin pressure. Underwriting profit declined to RMB 4.34bn, from RMB 6.76bn in 1H18. Combined ratio rose 1.7ppt YoY to 97.6%. 1) Loss ratio rose 3.6ppt. Due to impacts of natural disasters such as windstorm and rainstorm and epidemics such as African swine fever, loss ratio of agriculture insurance rose 13.1ppt YoY to 75.9%. 2) Expense ratio improved 2.0ppt YoY, of which expense ratio of motor vehicle insurance improved 6ppt to 36.5%.
- A&H insurance boosted topline growth... Benefitting from policy incentives (《关于做好2019年城乡居民基本医疗保障工作的通知》), A&H insurance increased 41.0% YoY to RMB 40.9bn, representing 38% of non-motor insurance business. …but weighed on underwriting performance. Loss ratio of A&H insurance was 88.0%, down 3.1ppt YoY. Expense ratio of A&H insurance was 13.5%, rose 3.3ppt YoY. A&H insurance was 101.5%, leaving it the only major type of products incurring underwriting loss. The Company likely seized opportunities of the critical illness insurance market at the expense of short-term underwriting losses.
- Lift TP to HK$ 9.64. Maintain HOLD. We revise 2019E GWP estimate up 3.1% to reflect higher-than-expected non-motor insurance growth, and adjust 2019E net profit up 57.6% to factor in equity investment gains and tax credit. The Company is currently trading at 1.0x 2019E P/B, lower than historical average. Our TP corresponds to 1.1x 2019E P/B, which is 5-year historical average less one standard deviation. Upside potential is 8.57%. Maintain HOLD.
