Expect messy FY21F results
? We expect FY21F NBV to again be adversely impacted by negative actuarial assumption changes, which would lead to a worse yoy decline in 4Q21F.
? We also see FY21F net profit adversely impacted by further revaluation losses on its Lufax convertible bonds.
? We expect Ping An Bank to report the best performance of the group, with the worst performer being the life insurance division.
? Reiterate Add rating. Slight cut in our TP to HK$81 on marginally lower FY21F-23F EPS and NBV estimates.
Adverse actuarial assumptions to weigh on 4Q21F NBV growth
We believe that for the second consecutive year, adverse actuarial assumption changes (relating to persistency) could worsen 4Q’s new business value (NBV), with 4Q21F NBV growth yoy at -36% (3Q21: -34%; 2Q21: -42%; 4Q20: -61%) (Fig 3). Adverse assumption changes had lowered 4Q20 NBV by 20%. 1H21 persistency ratio fell to near multi-year lows (Fig 1) and Ping An had booked a Rmb6.1bn negative operating variance when reporting its 1H21 embedded value. Ping An reports its FY21 results on 17 Mar 2022.
Net profits hurt by revaluation losses on Lufax convertible bonds
We expect Ping An’s FY21F net profit to be hurt by revaluation losses on its Lufax convertible bonds totaling Rmb11.4bn (9M21: -Rmb8.8bn; 1H21: -Rmb3.6bn). This follows Lufax’s 19% qoq share price fall in 4Q21 (3Q21 qoq: -38%; 1H21 hoh: -20%). As Ping An classifies this item as a non-operating item, this revaluation loss would not adversely impact its dividends, which is based on operating profit. FY21F net profit is also adversely impacted by other non-operating items, including negative investment variances (largely relating to its exposure to China Fortune Land Development) as well as a negative impact to reserving expenses from declines in the life insurance discount rate stemming from a lower 750-day moving average bond yield (Fig 6).
Ping An Bank again likely to be the star performer
Ping An Bank had previously announced preliminary FY21 figures, with net profit up 25.6% yoy, and ROE rising yoy for the first time since FY14 (see Moving onto the start of a new era, dated 26 Jan 2022). Similar to past results (e.g. Life’s troubles hurt strength elsewhere dated 26 Aug 2021), we see the banking division as the star performer of its upcoming FY21F results, with life insurance likely to be the worst performer, in our view.
Reiterate Add; SOP-based TP falls slightly to HK$81
Maintain Add as it trades at more than 2 s.d. below its post Dec 2016 mean for P/EV and P/BV (Figs 8 & 9). Our slightly lower TP is driven by 3-4% cuts in FY21F-23F EPS due to lower investment income and higher reserving expenses. Potential re-rating catalysts: signs of premium growth bottoming or agent numbers stabilising. Key downside risks: tech valuation multiple de-rating and longer-than-expected impact from Covid-19.