Daily Insight:ORD Daily Insight

We held an investor conference with New China Life Insurance’s (NCI) management on 14 July,and discussed the company’s latest business developments. We believe NCI’s increased focuson the traditional insurance business model will improve company fundamentals, underpinnedby increased agent productivity and new business value (NBV) margin expansion, as thedevelopment of long-term protection products accelerates. We anticipate higher-than-expectedNBV growth in the upcoming interim results. We revise up our embedded value per share (EVPS)forecasts from HK$45.96 to HK$46.67 in 17E (+12.5% YoY), from HK$49.58 to HK$51.30 in 18E(+9.9% YoY), and from HK$55.86 to HK$59.03 in 19E (+15.1% YoY). We raise our target pricefrom HK$55.0 to HK$63.0, representing 1.18x 17E P/EV. With 24% upside, we maintain our BUYrating.

    Value focus. Gross written premiums decreased 20.2% YoY in 1Q17, due to a significant declinein bancassurance products (-67.7% YoY), as the company continued to shift its focus towardstraditional insurance. By contrast, first-year premiums in the agency channel grew 34.6% YoY,with first-year premiums from regular products up 46.9% YoY. In particular, first-year premiumswith payment periods of 10 years or more (accounting for 82% of regular first-year premiums in1Q17; 1Q16: 68%) increased 78.4% YoY. We believe the strong agency first-year premiumsgrowth and premium mix improvement will help increase NCI’s NBV growth. Meanwhile, thenumber of agents decreased from 320k to 310k in 1Q17, while the monthly average per capitaproductivity increased from Rmb8,400 to over Rmb10,000 (+20%). We see the agency channelas key in NCI’s business transformation, with an increased focus on agents’ productivity ratherthan quantity.

    Health insurance. NCI has increased its focus on health insurance, from 15% of gross writtenpremiums in 2015 to 21% in 2016, generating a total of Rmb23.5bn (+42% YoY). The companyintroduced its flagship product Jian kang wu you in 2015, totalling Rmb6.5bn in first-yearpremiums in 2016 with a leading market share. By end-1H17, the firm completed 50% of itsprotection sales full-year target and 60% of its savings sales goal. Given the higher margin forhealth insurance, we expect NCI’s new business margin (NBM) to grow as contribution fromhealth insurance increases.

    Maintain BUY. We believe NCI’s increased focus on traditional insurance will improve companyfundamentals. We see the widening spread between the firm’s A- and H-share valuations aslikely to result in inflows from mainland investors. We revise up our EVPS forecasts fromRmb45.96 to Rmb46.67 in 17E (+12.5% YoY), from Rmb49.58 to Rmb51.30 in 18E (+9.9% YoY),and from Rmb55.86 to Rmb59.03 in 19E (+15.1% YoY). We raise our target price from HK$55.0to HK$63.0, representing 1.18x 17E P/EV, based on higher EV assumptions and NBV growthestimates. With 24% upside, we maintain our BUY rating.