Ping An’s OPAT grew 4.3% YoY to RMB85bn in 1H22, meeting 54% of our FY22E forecast. Life new business momentum marginally improved in 2Q22, in spite of the headwinds from COVID restrictions. Excluding the negative EV assumption changes over surrender and expenses, VNB declined 20% YoY in 1H22, translating into around 10% YoY decrease in 2Q22, substantially narrowing from the 25% YoY drop in 1Q22. The risk exposure to real estate sector remained under control, as the insurer recorded zero default event in 1H22. Ping An’s channel reform is close to the finish line, and we expect the VNB growth to turn positive in 4Q22 or 1Q23. Reiterate BUY.
Agency reform is close to the finish line. Entering the final year of its three-year channel reform, Ping An’s digital agency reform has covered 65% of its business outlets as of end-1H22. And the early pilots launched in late 2020/mid-2021 delivered strong VNB growth of +13%/+20% YoY in 2Q22, while the more recent pilots started in late 2021 and Mar 2022 also reported positive data points in agency activity and productivity. We expect the reform will extend to the rest 35% outlets in 2H22, and estimate the insurer’s overall VNB momentum will turn positive in 4Q22 or 1Q23.
Investment exposure to real estate sector was down 0.3pts HoH to 5.2%. Among the insurer’s RMB223bn investment in real estate sector, 52% are rental-generating investment properties, and only less than 10% are in property stocks. As Ping An saw no default event from its real estate investment in 1H22, we think the risk for extra massive impairment is low.
NPAT may benefit from IFRS17 in 2023. As the new accounting rules of IFRS 17 is set to be implemented in 2023, the management guided that reserve catch-up due to interest rate changes could be amortized under IFRS 17 instead of immediately through P&L, which may narrow the gap between OPAT and NPAT. And with the sound capital position, the management is confident to maintain a progressive dividend policy.
Valuation. Ping An-H is trading at 0.5x P/EV FY22E and 0.8x P/BV FY22E with operating ROE of 20%, at a historical trough valuation. We believe the worst is over and expect the recovery of new business growth will support the company’s share price performance.