PICC Group’s Net Profit Growth Lifted by Strong Investment Return

No-moat PICC Group’s first-half net profit grew 34% year on year. Due to slower sales in life insurance products following the new year sales campaign in the first quarter and weakening profitability of auto insurance, second-quarter net profit growth slowed to 24% from the 42% growth in the first quarter. Net profit growth exceeded our expectation, which was primarily attributable to a hike in investment return to 6.7% versus 5.5% in the year-ago period. Other aspects of the business were largely in line. The overall combined ratio of the P&C insurance business was 97.2% in the first half, increasing 1.5 percentage points from 95.7% in the first quarter. Embedded value, or EV, of the life and health insurance businesses grew 6.6% and 9.6%, respectively, from 2020. We lifted our investment return assumption for 2021 but it was not enough to change our valuation. Thus, we retain our fair value estimate at HKD 4 per share. Our valuation implies a forward price to book ratio of 0.8 times for P&C insurance, and 0.4 times respectively for the life insurance and health insurance businesses. The stock is undervalued and trading at 0.4 times forward price to book.