CPIC announced 3Q19 results on 30 Oct 2019. GWP increased 7.7% YoY in 9M19 (Life +5.0%, P&C +12.9%). Net profit rose to RMB 22.9bn, representing YoY growth of 80.2%, or 42.6% after deducting non-recurring benefits from tax policy adjustments. Deepening decline of FYRP may spook market, but the Company’s adherence to high-margin products would ensure a benign trend of NBV in the future.
- Result highlights. 1) Satisfactory investment performance. Total investment income increased 24.4% YoY. Net investment yield stayed flat at 4.8% whereas gross investment yield inched up 0.4ppt YoY to 5.1%. 2) P&C premium growth were on track by advancing 12.9% YoY to RMB 100.5bn. Auto GWP rose 5.3% YoY. We think underwriting quality outlook also remains positive, although combined ratio was not announced in quarterly reports.
- FYRP decline deepened, but margin improvement may boost NBV. The decline of agency channel FYRP deepened in 3Q19 to -25%, vs. -16% in 1H19 (-18.1%/-11.7% in 1Q/2Q), primarily resulting from macro and industry headwinds as well as a high base last year. Management said the decline was mainly attributable to the shrink of lower-margin products. As the Company sticks to margin priority strategy, NBV decline could narrow in 2H19. We slightly revise down NBV forecast for 2019 to RMB 25.6bn, representing YoY decline of 5.5% (1H19 YoY decline was 8.4%).
- Life business strategy unfolded during Investor Day event. The Company introduced clear strategic focus and action plans, which emphasizes 1) value, over volume, 2) core agent force expansion, 3) enriching “insurance + health + retirement” service ecosystem, and 4) technology empowerment. We think the above will lay solid foundation for long-term development for CPIC’s life insurance business in light of new market environment.
- Risks. 1) FYRP and NBV growth. 2) Potential short-term per share figures dilution following GDR issuance. 3) Capital market volatilities.
- Valuation. We keep TP unchanged, after rolling over valuation basis to FY20E but slightly revise down FYRP, NBV and EV forecast in FY19. The H-share is now trading at 0.57x FY20E group P/EV with ~6% dividend yield, 1std below historical average. Our TP corresponds to 0.74x FY20E group P/EV. Reiterate BUY.
