New China Life Insurance:Profit alert first of many

Event

NCI has issued a profit alert after market close this evening. 1H18NPAT isexpected to rise by “around 80%”.

Impact

The announcement implies 1H18NPAT of Rmb5.8bn, which is 15-20% aheadof where we understand consensus to be. Earnings growth has accelerated in2Q18to 130% yoy (vs 42% in 1Q18).

The main reason for the earnings rebound is the reversal of reserves due tochanges in discount rates. In 1H18, reserve discount rates increased (as per750-day avg bond yields) vs a decrease in 1H17. Whilst this is a low qualityitem, it weighed heavily on the sector during the down-draft in 2016-17and socan reasonably be expected to produce a sector tailwind during 2018-19, inour view. Unfortunately the company has not disclosed the magnitude of thisimpact.

The other interesting comment in the announcement is the reference to 1H18investment income “almost unchanged” from 1H17. This is reassuring giventhe 14% decline in the SHCOMP index YTD.

The main read-through for peers is that the earnings recovery is well underwayand likely to be more profound than consensus currently anticipates. Our EPSforecasts are generally well ahead of the street. We expect to see numerousmore positive profit alerts from insurers this year.

Separately, we note new business trends sequentially improving across thesector. In the agent channel, Ping An’s June FYP rose by 20% yoy (afterdeclining by 9% in the prior 5months), whilst CPIC APE rose by 4% in 2Q18(after declining by 30% in 1Q18). Whilst we expect NCI to deliver some of theweakest 1H18VNB numbers next month, new business trends are clearlyimproving as the year progresses.

Action and recommendation

Whilst NCI’s performance metrics continue to lag peers in a number of areas,we maintain an Outperform rating on valuation grounds (0.5x P/EV).