NCI announced 9M19 results on 30 Oct 2019. Gross written premiums increased 7.9% YoY to RMB 107.9bn whereas net profit increased 68.8% YoY to RMB13bn, or 44.3% YoY after deducting non-recurring benefits from tax policy adjustment. Total investment yield remained largely stable at 4.7% on annualized basis.
- Result positives. 1) Net profit beat. However, when compared with peers, NCI’s net profit surge after deducting one-off items was primarily attributable to underwriting cost and G&A cost reduction (likely resulting from negative FYRP growth, agent headcount shrinkage, and etc.), rather than to rapid increase in investment income. 2) Stable, albeit not outstanding investment performance. Investment income, including interest & dividend income, realized gains as well as fair value gains, rose 3.0% in 9M19 and 4.5% in 3Q19. Investment assets advanced 12.2% YoY/1.5% QoQ to RMB 785bn as of 30 Sep 2019.
- However, lackluster FYRP growth in both individual and bancassurance channel may cloud NBV growth. Overall FYRP decreased 23.5% YoY in 3Q19, reversing +1.1% growth in 1H19 (18.2%/-17.6% in 1Q/2Q). Although the Company did not announce NBV figures in quarterly report, we think disappointing FYRP growth and a relatively high base in 2H18 will weigh on 2H19 NBV growth. We therefore revise down 2019 NBV forecast by 2.8% to RMB 11.6bn, representing YoY decrease of 5%.
- We see more challenges than positive catalysts in 4Q19. Although we acknowledge that the upgrade of critical illness products may expand underwriting business of the Company, we see more challenges in 4Q19 particularly on the underwriting front. FYRP growth has not turned positive yet and NBV margin pressure also exists. We think management reshuffle at the beginning of the year has to some extent crimped business development of NCI. The Company may need extra amount of time to revisit its growth strategy and execution roadmap.
- Revise down TP to RMB 53.51. We rolled over valuation basis to FY20E. However, due to less optimistic NBV outlook, we trimmed NBV and EV forecast. Accordingly, new TP is RMB53.51 based on 40% premium to H-share TP. The Company’s A-share is now trading at 0.73x FY20E P/EV. Valuation is fair. Maintain HOLD.
