With the release of savings demand, premiums for the main life insurance business are growing rapidly, and it is necessary to focus on business quality over the long term; the transformation of trust business is beginning to bear fruit, and profitability continues to improve; and the futures business is greatly affected by the capital market. The company's profit has been rising steadily since this year, but its long-term profitability still needs to be improved to maintain its “hold” rating.
Earnings in the first three quarters improved markedly year-on-year, but the month-on-month performance in the third quarter was weak due to fluctuations in the capital market. In the first three quarters of 2023, the company achieved operating income of 17.23 billion yuan, an increase of 35.3% over the previous year, of which it had earned 12.25 billion yuan in premiums, an increase of 49.4% over the previous year, mainly affected by the high growth in savings products in the life insurance industry; net profit of 940 million yuan was realized in the first three quarters, an increase of 195% over the same period in 2022, but still down 6% from the same period in 2021. Affected by fluctuations in the capital market, the company achieved net profit of 130 million yuan in the third quarter of 2023, a sharp decline over the previous month.
The company's profit in the life insurance and trust business sector improved dramatically in the first half of 2023, and the futures business remained basically the same:
Sino-British Life: Short-term demand boosts growth, and long-term attention needs to be paid to business quality and profitability. In the first half of 2023, Sino-British Life achieved net profit of 509 million yuan, an increase of 218% over the previous year. The first half of the year achieved a new annual premium income of 3.43 billion yuan, an increase of 113% over the previous year. We expect that savings products will continue to be the main driving force for the growth of the industry. As the industry faces downward pressure on long-term return on investment, we need to focus on the cost and value ratio of insurance policy debt in the future.
COFCO Futures: The brokerage-oriented business model is correlated with strong capital market trends. In the first half of 2023, COFCO Futures achieved a net profit of 157 million yuan, which was basically the same as the previous year. Client equity increased 19% from the beginning of the year, and operating income, mainly brokerage income, was greatly affected by fluctuations in the commodity market. The company proposed a “one, two wings” strategy for futures development, that is, a development pattern with brokerage business as “one” and risk management business and wealth management business as “two wings”. In the first half of 2023, COFCO futures AUM reached 5.7 billion yuan, and the nominal principal amount of OTC derivatives increased nearly 3 times over the same period last year. Expanding and strengthening risk management and wealth management businesses can help reduce the impact of market fluctuations on futures performance.
COFCO Trust: “Two pressures and one drop” has seen results, and profits have entered a cycle of improvement. In the first half of 2023, COFCO Trust achieved operating income of 61 million yuan, an increase of 2.4% over the previous year; achieved net profit of 360 million yuan, an increase of 49.5% over the previous year; and the trust business revenue and net profit increased for the same period for three consecutive years, and the business transformation has already paid off.
Since 2018, the trust industry has entered a transformation stage of business restructuring and risk mitigation. COFCO Trust has achieved significant results in terms of channel and financing business pressure, as well as the clean-up of financial subsidiaries and offsite institutions. The scale of trust assets has steadily rebounded. As of the end of 2022, the company's trust assets were 159.5 billion yuan, an increase of 9.2% over the previous year.
Risk factors: large fluctuations in the capital market; life insurance sales falling short of expectations; declining long-term interest rates; exposure to credit risk; increased competition in the industry.
Profit forecasting, valuation and ratings: Profitability improved year-on-year in the first three quarters of 2023, but was greatly affected by fluctuations in the capital market and maintained a “hold” rating. Referring to the company's 2023 financial report, we adjusted the company's 2023E, maintained the 2024E BPS forecast to 8.4/9.0 yuan (the previous value forecast was 8.6/9.0 yuan), and introduced the 2025 BPS forecast of 9.41 yuan. Referring to the company's average valuation of 1.0x PB over the past three years, the company was given a valuation of 2023E 1.0xPB, corresponding to the target price of 8.4 yuan, maintaining the “hold” rating.