PICC is the second biggest PRC insurer in terms of combined TWP (total written premiums) from P&C (Property & Casualty) as well as life insurance business. PICC is also the biggest P&C (Property & Casualty) insurer in PRC with 36% market share by 2011 as it is the mother company of PICC Property & Casualty (PICC P&C Stock Code: 2328.hk) listed in Hong Kong since November 2003. People's Insurance Co. (Group) of China Ltd. (PICC Stock Code: 1339.hk) now owns a large customer basis in China with around 130 million of individual customers and around 2.42 million of institutional group customers (by end-June 2012). The group's solvency margin ratio is 156%, return on average assets is 2.3%, weighted average return on equity is 27.7%, and both total investment yield and net investment yield are also 4.5%.
People's Insurance Co. (Group) of China Ltd. (PICC Stock Code: 1339.hk) currently offers 14 major types of insurance products or services to customers through its multi-channel nationwide cross-selling distribution network including insurance agents (individual insurance agents, ancillary insurance agents and professional insurance agents), direct sales (branches, telephone hotline, in-house sales or service outlets), insurance brokers, bancassurance channels (bancassurance branches of PRC commercial banks, rural credit cooperatives or bancassurance managers) and group sales channels etc. Those 14 major products are:
(1) Motor Vehicle Insurance (for commercial motor vehicle assurance or compulsory motor vehicle liability assurance etc);
(2) Commercial Property Insurance (for basic commercial property assurance, all-risk commercial property assurance, comprehensive commercial property assurance, machine breakdown assurance and business interruption assurance etc);
(3) Agricultural Insurance (for crop assurance, forest damage assurance, livestock and aquaculture assurance against natural disasters or diseases etc);
(4) Liability Insurance (liability products for tourism, education, transportation, and safety of manufacturing operations etc);
(5) Cargo Insurance (covers losses or damage of goods transported by airplane, ground transportation, vessel, and multi-mode transport during the course of transportation etc);
(6) Hull Insurance (for coastal and inland hull assurance, ocean-going hull assurance, container liability assurance, hull construction assurance, hull repairment liability assurance, and indemnity and protection that provide coverage for coastal vessels, ocean-going and inland vessels etc);
(7) Construction Insurance (for erection project damage, all-risk construction project damage, and construction-related third-party liability products against natural catastrophes, accidents or insured construction etc);
(8) Accidental Injury or Short-term Health Insurance (cover events of death or disability of the insured for accidents, and provide daily hospital reimbursement or allowance of actual hospital expenses incurred by the insured etc);
(9) Homeowner Insurance (covers losses or damage to furniture, residential dwellings, home appliances, interior decorations and fixtures, or other household belongings caused by fire, lightning, explosion, landslides, hail, typhoons, floods, mudslides, snow, collision with falling or flying objects etc);
(10) Special Risks Insurance (covers aerospace and civil aviation assurance for satellite launches, commercial aircraft and related properties, or energy insurance such as gas and oil insurance or nuclear power insurance etc);
(11) Traditional Health and Life Insurance (long-term health insurance, annuities, whole life insurance, endowment life insurance, term life insurance etc);
(12) Participating Life Insurance (entitles policyholders to get benefits from distributable bonus or surplus);
(13) Universal Life Insurance (entitles policyholders to get benefits with minimum guaranteed interest-rate returns from investment contracts); and
(14) Health Insurance (for medical care, critical illness, nursing care, disability losses, participating endowment, or accidental injury etc).
People's Insurance Co. (Group) is headquartered in Beijing with state-owned MOF (Ministry of Finance) and NSSF (National Council for Social Security Fund) as its key original shareholders. After transferring the required state-owned shares, it will start trading (PICC stock code: 1339.hk for H-shares) on the main board of Hong Kong Stock Exchange (SEHK stock code: 388.hk) on 7 December 2012. It will become the largest IPO this year for Hong Kong and this H-share listing already make it the 5th biggest IPO this year in the world.
For this H-shares IPO listing, four joint global sponsors are Goldman Sachs (Asia) L.L.C., Hong Kong and Shanghai Banking Corporation (HSBC), Credit Suisse (H.K.), Deutsche Bank AG, and China International Capital Corporation Ltd. (CICC) HK Securities Ltd. Cornerstone investors, which shall be subject to a share lock-up period (minimum 6 months), are American International Group, Inc. (AIG) from U.S.A., Scor SE (SCOR) from Swiss, Ingosstrakh Insurance Company (Ingosstrakh) from Russia, Tokio Marine & Nichido Fire Insurance Co., Ltd. from Japan, Fosun International Ltd. (Fosun Stock Code: 656.hk) from Hong Kong, Pinpoint Asset Management Ltd. (Pinpoint) from Hong Kong, as well as other PRC domestic investors including China Life Insurance (Group) Company (China Life), China Export and Credit Insurance Corporation (Sinosure), China Reinsurance (Group) Corporation (China Re Group), China Property & Casualty Reinsurance Company Ltd. (CPCR), State Grid Yingda International Holdings Corporation Ltd (Yingda), China Aerospace Investment Holdings Ltd. (China Aerospace), China National Machinery Industry Corporation (SINOMACH), Yue Xiu Securities Holdings Ltd. (Yue Xiu), Zijin Mining Group Company Ltd. (Zijin), Munsun Financial Investment Fund LP (Munsun), China Southern International Select Allocation Fund (China Southern Fund), Zhongrong International Trust Co., Ltd. (Zhongrong). Upon this H-share IPO listing, PICC will shortly launch another A-share IPO in PRC by issuing up to 5.29 billion of new A-shares. PICC will use the IPO proceedings to strengthen capital base to support its continuous business growth. Here below is a table summarizing our detailed PICC IPO stock analysis (assumed full exercise of A-share offering):
|Attributable Net Profits (million in RMB)||Total Number of Shares (million) in issue||Earnings per Share (in HKD$)||Price/Earnings (P/E) Ratio|
RMB/HKD = 1.24
(i) We anticipate that attributable net profits to PICC shareholders will reach RMB 6319.8 million (whole year) in 2012.
(ii) The Stabilising Manager, Goldman Sachs (Asia) L.L.C., can exercise an over-allotment option (or called greenshoe) by issuing an additional 15% (maximum) of new shares during the first 30-day stock price stabilisation period as set with international underwriters. Assuming over-allotment option for A-shares can also be fully exercised, total number of PICC ordinary shares in issue will increase to 47.713 billion in 2012 (was 34.491 billion before global offering).
(iii) Our calculated PICC's earnings per share will be HKD$ 0.16 in 2012 (taking the basic and dilutive earnings per share as the same). Nevertheless, such stock valuation may be impaired by some key risk factors. PICC, according to its IPO Prospectus, is exposed to risks concerning PRC bancassurance policy such as Notice No. 90 (because bancassurance arrangements with rural credit cooperatives, commercial banks etc are the key distribution channels for PICC's products), discontinuity of rapid growth, changes in reinsurance market and market interest rates, changes in demand for motor vehicles, insufficient solvency margin ratio SMR (if PICC cannot meet the minimum SMR-related regulatory requirements, it is possible that the regulatory authority CIRC can impose certain limitations on its insurance business operations), diversification risk for its investment portfolio (now still being restricted by the applicable Chinese laws), investment risks for its extensive exposure to fluctuations of the fixed-income securities (government bonds, finance bonds or corporate bonds etc) and PRC equity markets (PICC has invested over 43% of its total asses there by end-June 2012) etc.
(iv) Stock price of PICC IPO listing is set as HKD$ 3.48 per each H-share, which is close to the lower end of its indicative offer share price ranges (HKD$3.42 to HKD$4.03). The 2012 forward Price-to-Earnings (P/E) ratio of PICC is thus calculated as 21.19 times. Price-to-Earnings (P/E) ratios for other years (prior to global offering) are just calculated for reference only. Some financial analysts, however, prefer to apply Embedded value (EV) as an alternative way to measure profitability and value of an insurer. By common definition, embedded value (EV) can be used to measure interests of shareholders in profit earnings distributable from embedded assets allocated to VIF (value of in-force business) after calculated allowance for aggregate risks in such business. From its IPO Prospectus, PICC's EV (Embedded value) and V1NB (Value of One Year's New Business) are RMB 3239 million (equivalent to HKD$ 0.084 per share) and RMB 696 million (equivalent to HKD$ 0.018 per share) respectively (by end-June, 2012) at 11% RDR (risk discount rate). Remark: PICC accountant calculates EV (Embedded value) and V1NB (Value of One Year's New Business) by using a traditional discounted cash-flow methodology.
RDR = Risk Discount Rate = 9%, 10% or 11% as selected by PICC;
CoC = Cost arising from holding of required Capital;
VIF = Value of In-force Business;
ANW = Adjusted Net Worth;
EV = Embedded value = Sum of VIF and ANW;
V1NB = Value of One Year's New Business (also called VNB)
Conclusion of PICC Stock Analysis
We conclude not to recommend a buy for this People's Insurance Company (Group) of China Limited (PICC Stock Code: 1339.hk) IPO due to the risks and other factors stated in the above paragraphs. Bear in mind that PICC's stock valuation, if not considering the upcoming A-share listing, is expected only as 18.84 times Price-to-Earnings (P/E) ratio in 2012, which looks quite reasonable. However, if taking A-share listing into account (as we do), P/E will become 21.19 times which is not too attractive as compared with PICC's domestic competitors such as Ping An Life Insurance Group (Ping An stock codes: 601318.sh for A-shares and 2318.hk for H-shares), China Life Insurance (China Life stock codes: 601628.sh for A-shares and 2628.hk for H-shares) or New China Life Insurance (NCL stock codes: 601336.sh for A-shares and 1336.hk for H-shares). In addition, due to the current keen competition in PRC health and life insurance sectors, PICC's actuarial assumptions in health and life business growths appear to be too optimistic and aggressive.
Although PICC looks a bit too expensive now, we would agree that the coordinated development of PRC rural and urban areas, as well as modernization of agriculture should bring broader market exposures and new development opportunities for boosting PICC's rural insurance business growth. In addition, the changes in PRC social structure and social wealth growth should continuously boost insurance demands in PRC as Chinese purchasing power or willingness to buy insurance-related products have continued to rise.
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