Taiping:From zero to one tenth

Taiping, despite a profit drop in 2016, announced a final dividend thanksto the ease of capital risk under Solvency II in its life insurance operation.We prefer such tangible returns than EV, despite the payout of 10 centslooking only symbolic. On better cash remittance and recent bond yieldpickup, we raise target our price target to HK$17 from HK$14 butmaintain our SELL call seeing 11% downside to our target price.

A cash dividend

Against a set of disappointing results – net profit down by 26% in 2016 and aslowdown of full-year NBV growth to 29% - the company proposed a cashdividend of HK$359m in total, or HK$0.1 per share, marking it the first timepayout in the past decade. The support should have come from Taiping Life,the group’s dominating operating unit, which by our estimate paid aboutHK$1.7bn in dividends to the holding company last year.

Less capital risk

The group’s payout ratio, still at single digit, wasn’t high, but it set a goodstart from zero. EV, based on assumptions, is intangible. And only cash is areal return to shareholders. The change should at least take off someconcerns over capital. Taiping Life’s core surplus capital grew by 19% toRmb49.3bn YoY. Core solvency ratio also stood above 240%, thanks toSolvency II, which capitalises future profits of life policies at day 1.

Investment drive

The majority of life’s upstreamed dividend, however, appears having beenretained at group level. Taiping does operate outside life (in P&C andreinsurance) in both domestic and overseas markets. Yet, those businessesare still small. Domestic P&C in particular is struggling to breakeven atunderwriting level. Last year’s combined ratio came in at 99.8%, i.e. a marginof 0.2%. Its profitability hence relies on investment too.。

SELL on the life play。

On recent yield hikes and thus less reserve pressure, we raise our earningsforecast by 9% in 17CL. Valuation-wise, for a more realistic investment-returnassumption in EV (cut to 5% from 5.5%) and better cash remittance, weadjust up the EV multiple for life to 0.55x from 0.45x. Our SOTP target goesup to HK$17 from HK$14. But macro uncertainty remains an overhang forthis life play. We maintain SELL.