12-month investment horizon should look at insurers, as they outperform six
months ahead of an actual rate hike and this outperformance will gain
momentum as we approach the first actual rate hike. With GDP growth
expected to turn positive in 4Q09 (after four consecutive quarters of decline),
the prospect of an interest rate increase should improve significantly and
investors’ expectations for a rate hike will be reinforced. Our economist
expects the first rate hike to take place in 2Q next year – 50 bps in 2010.
■ VNB tracking ahead of expectations and positive property price
outlook should help EV growth. In 1H09, most insurers reported 15-30%
VNB growth despite a 17% YoY decline in FYP. This is mainly due to growth
in high margin products that has continued to sell well into 3Q09. Our
property analyst’s positive view on property price into 2010 also bodes well
for insurers, who own sizable real estate investments and price appreciation
will help to support EV growth.
■ Upgrade Cathay and Shin Kong to OUTPERFORM. Cathay is likely to be
in the spotlight in the coming months with its upcoming bi-annual property
reappraisal at year-end. Better-than-expected VNB growth from high margin
products and improving bank profits into 2010 should lead the shares to
outperform. Our NT$62.5 target price (from NT$52.5) implies 8.4x VNB. Shin
Kong is much more leveraged to both interest rate changes and the property
price outlook. It is trading at a lower valuation of 1.2x FY10E P/EV and 2.2x
VNB. With the bulk of its capital-raising done and major shareholders
committed to complete the NT$5 bn rights issuance, the worst for the stock
is likely over. Our target price of NT$16.4 (from NT$12) implies 7.3x VNB.