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Equity Bottom-Up

People's Insurance (PICC) / Equity Bottom-Up

PICC Group has announced that the company plans to apply for an IPO on the Shanghai Stock Exchange, which is now pending shareholder and regulatory approval. The total new issuance will not exceed 4.6 billion shares, or 10.8% of current outstanding shares. The IPO is expected to complete within 12 months once shareholder approval is obtained. As no detailed plan has yet been disclosed, we retain our HKD 3.50 fair value estimate. The upcoming A-share IPO will boost the company’s capital position, especially for its life insurance business, which was suffering from low profitability due to its unfavorable product mix. This business has been lagging behind major peers in its transformation toward agent-focused and long-term product-oriented operations over the past few years, as evidenced by its far lower-than-peer agency force, agent premium contribution, and new business margin. We expect the capital injection to speed up its business transformation and beef up its agency force.Shares are currently trading at 1 time 2016 price/book value on the Hong Kong Stock Exchange, with an 11.8% return on equity in 2016. This valuation is lower than the 1.7-2 times price/book ratio for the other four Hong Kong-listed Chinese insurers, and their 1.8-2.5 times A-share counterparts. These four listed peers recorded a return on equity ranging from 6% to 17% in 2016. We think PICC's A-shares are likely to be priced at 1-1.5 times 2016 price/book value, resulting in CNY 13.7 billion-CNY 20.5 billion in gross proceeds. We also assume 50%, 40%, and 10% of the gross proceeds are injected into life, property-casualty, and health insurance, respectively. The group’s core solvency ratio will be boosted to a range of 237%-264%, versus 220% in 2016. P&amp;C, life, and health insurance will see their core ratios improve to respective ranges of 243%-260% (versus 232% in 2016), 175%-214% (versus 149% in 2016), and 244%-310% (versus 200% in 2016).Analyst: Iris Tan, CFA

PICC Group has announced that the company plans to apply for an IPO on the Shanghai Stock Exchange, which is now pending shareholder and regulatory approval. The total new issuance will not exceed 4.6 billion shares, or 10.8% of current outstanding shares. The IPO is expected to complete within 12 months once shareholder approval is obtained. As no detailed plan has yet been disclosed, we retain our HKD 3.50 fair value estimate. The upcoming A-share IPO will boost the company’s capital position, especially for its life insurance business, which was suffering from low profitability due to its unfavorable product mix. This business has been lagging behind major peers in its transformation toward agent-focused and long-term product-oriented operations over the past few years, as evidenced by its far lower-than-peer agency force, agent premium contribution, and new business margin. We expect the capital injection to speed up its business transformation and beef up its agency force.Shares are currently trading at 1 time 2016 price/book value on the Hong Kong Stock Exchange, with an 11.8% return on equity in 2016. This valuation is lower than the 1.7-2 times price/book ratio for the other four Hong Kong-listed Chinese insurers, and their 1.8-2.5 times A-share counterparts. These four listed peers recorded a return on equity ranging from 6% to 17% in 2016. We think PICC's A-shares are likely to be priced at 1-1.5 times 2016 price/book value, resulting in CNY 13.7 billion-CNY 20.5 billion in gross proceeds. We also assume 50%, 40%, and 10% of the gross proceeds are injected into life, property-casualty, and health insurance, respectively. The group’s core solvency ratio will be boosted to a range of 237%-264%, versus 220% in 2016. P&amp;C, life, and health insurance will see their core ratios improve to respective ranges of 243%-260% (versus 232% in 2016), 175%-214% (versus 149% in 2016), and 244%-310% (versus 200% in 2016).Analyst: Iris Tan, CFA

PICC Group's A-Share IPO Will Boost Capital Position for Its Life Business