【Company Research】New China Life (1336 HK) – Set off to a challenging 2020

NCI’s 2019 results were mixed, reflecting both achievements and uncertainties. Net profit +83.8% YoY, NBV -19.9% and EV +18.4%. 2019 is a year of reflection and preparation for NCI. Setting off again in 2020, the Company will continue to face challenges executing new strategic missions, which aims for balanced growth of volume and quality. Nevertheless, current low valuation offers cushion.

 

  • Result highlights.1) Net profit increased 83.8% YoY to RMB 14.56bn, thanks primarily to increase in investment income and tax deductions; 2) Agent headcount rose 37% YoY/31.3% HoH to 507,000 at YE19. Team expansion laid foundation for premium and business growth. 3) Underwriting quality improved, underpinned by declining surrender rate and increasing 25-month persistency ratio. 4) Total investment yield edged up 0.3ppt to 4.9%, boosting investment assets to grow 20%. Proportion of common stocks and funds reached 12.2% at YE19, up 1.5ppt YoY. 

 

  • Result negatives. 1) NBV -19.9% YoY (-8.7%/-32.5% in 1H/2H).  Not only FYRP decreased (-6.7%), but also NBV margin shrank 11.6ppt to 36.5% on standardized premium basis. 2) Agent qualified rate declined 5.7ppt to 33.1%, which foreshadows difficulties in 2020 to solidify agent team and boost productivity. 3) Net investment yield inched down 0.2ppt to 4.8%, though total investment yield edged up 0.3ppt to 4.9%. As interest rate goes down and previous high-yield investment matures, the Company’s NIY may be under pressure. 4) EV increased 19.8% primary due to positive investment experience variances and other adjustment, instead of more “organic” new business growth.

 

  • Risks. 1) NBV margin pressure; 2) FYRP growth despite above-peers GWP growth in Jan-Feb; 3) Investment yield decline.

 

  • Trim TP to HK$ 37.30. Reiterate BUY. We revise up CoR assumption to reflect market volatilities and lower NBV/EV forecast to reflect margin pressure. We thereby trim TP to HK$ 37.3. The Company’s H-share is now trading at merely 0.31x FY20E P/EV. Too much concerns have been priced in.
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