Life sector’s 1Q22 growth might be under pressure
In the third quarter of 2021, CPIC Life’s agent channel first year regular premium dropped by 39.8% yoy, and total number of life business agents should have significantly dropped. In contrast, CPIC’s automobile insurance premiums have resumed positive growth recently from a low base. We expect challenging life business growth in 1Q22 for the life sector and CPIC, given: 1) The life sector is still under heavy pressure, due to stricter regulation on customer protection, downsized sales force, weakened demand, and competition from alternative products such as Huiminbao, etc. 2) Although CPIC still launched its new year pre-sales, the Company has been de-emphasizing the jumpstart sales campaign and increasingly focusing on long-term quality growth. Therefore, we expect a relatively weak jumpstart performance for CPIC. 3) Since 1H21, CPIC’s number of agents has been decreasing, in line with major peers. Earlier the Company indicated that its strategy is to reduce the over-sized agent team, retain the core sales force, and strive to recruit new agents that meet high standards. While a smaller and higher productivity team may increase its long-term efficiency, it may hinder the Company’s short-term business growth. As a result, we revised down our NBV forecasts for CPIC (Fig. 2).
Property investment risk might be under control
Based on available figures only, around 5.1% of CPIC’s insurance investment assets was allocated on real estate sector (Fig. 7) as of 1H21- end, a level similar to PingAn Life insurance (PingAn Bank and PingAn Trust were not included) and NCI. As for specific real estate investment, CPIC said that their investment exposures to Shimao Group and Huaxia Fortune are very limited. Moreover, CPIC has zero exposure to other real estate companies with potentially high risks (i.e. Evergrande, Sunac and BRC).
Overall speaking, CPIC’s property-related investment risks are under control according to the Company.
Valuation undemanding; Maintain BUY
CPIC is trading at ~0.34x 21E P/EV and ~0.75x 21E P/B, or ~0.31x 22E P/EV and ~0.70x 22E P/B, valuation undemanding. Our test further shows, if we eliminate CPIC’s entire VIF on the market’s concern that life insurers’ VIF assumptions will not be met, and further apply a valuation discount equal to 5% of insurance investment assets on concern of property investment risk, its P/EV ratio is still lower than 1x (Fig. 9). Maintain BUY for CPIC on valuation, and maintain EV-based at HKD31.25, equivalent to 0.50x 21E P/EV, representing a ~30% discount to past 5-year avg. P/EV of 0.71x, or equivalent to ~1.1x 21E P/B. Key catalysts: a good capital market, higher- than-expected NBV growth; Key downside risks: an adverse capital market, lower-than-expected NBV growth.