A clear choice
Valuation upgrades: Ping An is our preferred pick
We have upgraded our target prices for the life insurance sector in China. Our
new TP for China Life is HK$31 (previously HK$29.1), Ping An HK$77
(previously HK$67.5) and China Insurance International Holdings (CIIH)
HK$18.20 (previously HK$17). Ping An offers 36% upside, and we retain our
Outperform rating. Ping An remains our preferred sector pick. We have
downgraded China Life to Neutral from Outperform.
Clear divergence in growth trends
A review of YTD sales growth has driven upgrades to our FY09 VoNB forecast
for Ping An to 25% from 20% and CIIH to 48% from 40%. For Ping An, this
reflects better than expected volumes (GWP up 42% YTD), while for CIIH, mix
improvement should result in further margin expansion driven by stronger growth
in regular premium products. However, for China Life, despite improved product
mix (and margin expansion), we have downgraded our VoNB growth forecast to
15% from 20%, reflecting worse than expected volume growth (-2% YTD).
EV growth intact, Ping An and CIIH offer the most upside
EVs are set to rebound strongly in 2009. Our forecast 32% growth rates for Ping
An and 29% for CIIH, are likely to more than double forecasted growth of 14%
for China Life. We have built in 30% equity market returns in 2009. With markets
up 45% YTD, there is upside risk to our estimates. More so, equity markets are
providing a very strong buffer against any unforeseen negative shock.
Interest rates have stabilised, investment scope widening
Analyst forecasts (and valuations) are currently factoring in China’s low interest
rate environment. With rates stabilising and economic indicators improving,
further downside risk appears to have abated. While it may be too early to think
about upside to investment return assumptions from rising rates, an ongoing
positive is the regulators’ widening of insurers’ investment scope, which is
allowing greater investment in higher yielding assets.
Risks
Less obvious risks for the sector over the next 12 months include: 1) The
introduction of new accounting standards for the China insurance sector, which
could result in lower reported profits; and 2) the entry of banks into the insurance
market, which could result in increased competition and loss of market share for
the leading players over the medium term.
We expect Ping An to continue to outperform China Life
In the large-cap space, Ping An has outperformed China Life 25% YTD.
However, at 10x FY10 NB vs 19x for China Life, Ping An’s valuation still looks
attractive. In our view, the gradual closing of this valuation gap and stronger
growth in both EV and NB will result in further outperformance for Ping An vs
China Life over the next 12 months. CIIH offers modest upside from current
levels. It remains our preferred small-cap play, driven by strong growth and high
leverage to stronger sustainable investment returns.

Valuations: Are they still attractive?
Revised target prices
Our favoured valuation methodology for life insurers is SOTP using embedded value
techniques. We believe this is the best valuation tool, eliminating earnings volatility and
accounting differences. While some parts of the investment community still have concerns
with the subjectivity surrounding embedded values, we continue to view them as the best way
of assessing life insurance value given the long-term nature of life insurance contracts, which
may span 20 to 30+ years in duration. For a more detailed explanation, please refer to
‘Appendix: Embedded value and appraisal value methodology’.
Key points
􀂃 We have set a new TP for China Life of HK$31 (previously HK$29.1) – upside 4%.
􀂃 We have set a new TP for Ping An of HK$77 (previously HK$67.5) – upside 35%.
􀂃 We have set a new TP for CIIH of HK$18.20 (previously HK$17) – upside 18%.
Key changes
􀂃 We have increased our NB growth assumption for Ping An to 25% from 20% and Tai Ping
to 45% from 40%.
􀂃 We have decreased our China Life NB growth assumption to 15% from 20%.
􀂃 We have increased our equity capital growth assumption to 30% from 15%. This still
leaves around 15% of equity market gains not included in our valuation.
􀂃 We have rolled forward our EV and NB forecasts from 31 December 2008 to 30 June
2010, to calculate our 12-month target price.
China Life overview – Target price of HK$31 (previously HK$29.1)
Upside 4%
Based on our preferred SOTP valuation methodology we have raised our China Life target
price to HK$31 (HK$29.1 previously). Our target price offers around 4% upside from current
levels. Our target price implies a FY10 P/EV of 2.3x and FY10 new business multiple of 21x.
Summary valuation table
China Life’s predominantly mono-line insurance operations and group-wide capital disclosure
means that ~100% of its value is within the EV and that attributed to future new business. For
our target price, we use forecast 2009 EV and value of new business, applying a 25x multiple
to new business.Valuations: Are they still attractive?
Revised target prices
Our favoured valuation methodology for life insurers is SOTP using embedded value
techniques. We believe this is the best valuation tool, eliminating earnings volatility and
accounting differences. While some parts of the investment community still have concerns
with the subjectivity surrounding embedded values, we continue to view them as the best way
of assessing life insurance value given the long-term nature of life insurance contracts, which
may span 20 to 30+ years in duration. For a more detailed explanation, please refer to
‘Appendix: Embedded value and appraisal value methodology’.
Key points
􀂃 We have set a new TP for China Life of HK$31 (previously HK$29.1) – upside 4%.
􀂃 We have set a new TP for Ping An of HK$77 (previously HK$67.5) – upside 35%.
􀂃 We have set a new TP for CIIH of HK$18.20 (previously HK$17) – upside 18%.
Key changes
􀂃 We have increased our NB growth assumption for Ping An to 25% from 20% and Tai Ping
to 45% from 40%.
􀂃 We have decreased our China Life NB growth assumption to 15% from 20%.
􀂃 We have increased our equity capital growth assumption to 30% from 15%. This still
leaves around 15% of equity market gains not included in our valuation.
􀂃 We have rolled forward our EV and NB forecasts from 31 December 2008 to 30 June
2010, to calculate our 12-month target price.
China Life overview – Target price of HK$31 (previously HK$29.1)
Upside 4%
Based on our preferred SOTP valuation methodology we have raised our China Life target
price to HK$31 (HK$29.1 previously). Our target price offers around 4% upside from current
levels. Our target price implies a FY10 P/EV of 2.3x and FY10 new business multiple of 21x.
Summary valuation table
China Life’s predominantly mono-line insurance operations and group-wide capital disclosure
means that ~100% of its value is within the EV and that attributed to future new business. For
our target price, we use forecast 2009 EV and value of new business, applying a 25x multiple
to new business.