We upgrade PICC P&C to Buy from Neutral, as we believe it’s bestpositioned within our coverage to benefit from the government’spush for SOE to lift valuations. Utilizing the large balance of excesscapital to implement shareholder return initiatives, either at PICCP&C or PICC Group, should lead to improving ROE and valuation.
　　We raise our target price to HK$16.1, by applying a 0.8X multiple tothe excess capital and 1.2X P/B to the underlying operation. Ourtarget price implies a 7% potential upside, vs. 6% potentialdownside of its H-share peers.
　　We raise our FY25E net profit estimates by 20%, mainly to reflect arecovery in the equity market post early April decline and slightlyhigher profit contribution from investment in associates. Wefine-tune our FY26-27E net profit estimates by 1%. We also raiseour FY25-27E book value by 1%, after reflecting the change in profitestimates.
　　Our FY25/26/27E profit estimates are 4%/10%/12% below VisibleAlpha Consensus Data. We believe consensus estimates arestretched, and have priced in either 1) further improvements incombined ratio, or 2) persistent equity investment gains, or acombination of both.
　　Potential catalysts: we would focus on underwriting results at 1H25,especially in non-auto segment, as PICC P&C expects industry-widecost discipline measures to lead to improvements in COR. Inaddition, we believe any shareholder return initiatives are likely to beannounced at 1H25/FY25 results.
Downside risks
　　No additional shareholder return initiatives: PICC P&C has a profitable underlyingoperation, generating c.14% ROE. Business growth has slowed to c.5%, and if PICCP&C maintains a payout ratio of c.40% with no additional shareholder returns, it wouldlead to further build up of excess capital and ROE dilution. This could lead to furthervaluation multiple de-rating.
　　Underwriting result below expectations: PICC P&C’s target for 99% non-autosegment COR partly reflected management’s expectation of industry-wide costdiscipline with regard to channel commission. If other P&C insurers continue to adoptaggressive competitive positions, it could lead to prolonged pricing/commissioncompetition, and reduce underwriting profit.
　　Increase in natural catastrophe-related claims: FY24 underwriting result showed thatunderwriting result is more sensitive to mid-size catastrophe-related loss events, whichdon’t trigger reinsurance payments. If climate changes lead to an increase in thefrequency of such events, it could lead to higher-than-expected claims and force PICC P&C to increase reinsurance cost.
　　Investment Thesis - PICC Property and Casualty Co.
　　PICC P&C is the largest P&C insurer in China, with 32% market share in FY24, by grosswritten premiums. We believe PICC P&C has industry-leading risk underwriting andclaims assessment capability, reflected in its industry-leading underwriting results inauto insurance, which made up close to c.60% of gross written premiums for PICC P&C& the industry.
　　In addition, we believe PICC P&C is well positioned to provide higher shareholder returnto investors, given its strong profit generation and balance sheet. We estimate excesscapital of Rmb47bn of FY24 and an underlying operating ROE of 14% over the next3-years. Downside risks include: No additional shareholder return initiatives,Underwriting result below expectations, Increase in natural catastrophe-related claims.
　　Price Target Risks and Methodology - PICC Property and Casualty Co.
　　We are Buy rated on PICC P&C. Our 12-month, ROE-based target price of HK$16.1 isbased on a 0.8X P/B for the excess capital (in excess of 170% core solvency ratio) and1.2X FY26E P/B for the underlying operation. This implies 1.1X FY26E P/B and 10XFY26E P/E.
　　Downside risks: No additional shareholder return initiatives, Underwriting result belowexpectations, Increase in natural catastrophe-related claims.