Ping An’s 1H20 group operating profit +1.2% YoY to RMB 74.3bn, while net profit decreased 29.7% YoY to RMB 68.7bn, including impact of discount rate change (~RMB 3.7bn) and short-term investment variances (~RMB 2bn). Most business lines suffered from market headwinds in time of COVID-19. Life insurance reform, which the Company embarked on since the end of 2018, also weighed on short run performance. Since the life business reform is about to be completed by year end, next year will likely witness substantial growth.
- Life business continue to be under pressure. Life business missed expectation. NBV of life and health insurance declined 24.4% YoY, among which agent channel NBV declined 23.5% YoY. NBV margin decreased 8ppt YoY to 36.7% (agent channel NBV margin -3.7ppt). Agent team building also remained challenging. Limited activities of agents in 1H20 also dragged persistency ratio of policies and renewal premium collection.
- Result positives. 1) P&C achieved premium growth of 10.5% against market headwinds (auto +3.6%, non-auto +26.4%); 2) Number of life insurance agents recovered 1.2% QoQ in 2Q to 1,145 thousand., suggesting stabilization of agent team. 3) Interim dividend increased to RMB 0.8 per share, +6.9% YoY and representing 19.6% of 1H20 attributable operating profit (18.6% in 1H19). This signals the Company’s increasing willingness to share returns with shareholders.
- Other result negatives. 1) Operating profit posted negative growth in 1H20 for P&C, banking, trust business and etc.; 2) EV growth less than expected due to lackluster NBV growth, negative investment return variances and fewer operating variances due to decrease in persistency ratio. 3) Combined ratio of P&C insurance rose to 98.1%, up 1.5ppt YoY.
- Catalysts. 1) Life insurance business recovery; 2) Future listing of Lufax.
- Risks. 1) Life insurance reform progress slower than expected; 2) Worsening of P&C underwriting margin.
- Valuation. We lower major forecasts for NBV, EV, net profit and etc. to reflect weaker-than-expected 1H20 results. We trim TP to HK$ 92.67 accordingly based on SOTP method. Given expected dividend yield of 3.0% in 2020, potential return is 14.2%. Maintain BUY.
