PICC Group Earnings: Stronger-Than-Expected New Business Growth on Product Mix Improvement

We retain our fair value estimate for PICC Group at HKD 3.8 per share following its 6% and 4% year-on-year growth in insurance revenue and net profit. These results are in line with our full-year forecast of 6.5% and 17% growth for these metrics. The first-half growth in value of new business, or VNB, for life and health insurance exceeded our expectations, surging 91% and 159% year on year. Life VNB growth accelerated from the 82% growth in the first quarter, despite a high base in the second quarter of 2023 driven by last-batch sales of 3.5% pricing insurance products. The bancassurance channel was the key growth driver, with a 250% increase and contributing 49% of life VNB, compared with 33% growth and 50% VNB contribution from the agent channel. Although we expect this strong momentum to continue into 2024, future growth is likely to gradually normalize to levels more in line with peers, as the one-off VNB margin boost from the regulatory commission rate cut in late 2023 will diminish and further rapid growth from a larger base will be challenging. PICC Life and Health's total VNB reached nearly CNY 7 billion, about 1.8 times that of New China Life and 77% of China Pacific Insurance's VNB. We maintain our view that PICC Group's past strong performance was driven by expanding bancassurance sales and favorable change in product mix from a low base, while its agent sales channel still needs time to improve productivity. The stock is undervalued, trading at 0.5 times 2024 book value and offering nearly a 6% dividend yield. Future upward re-rating will depend on whether the company's life VNB can continue to exceed market expectations.