Key points of investment
Incident: Ping An of China disclosed its 2023 annual report: The Group achieved operating profit (OPAT) of 117.989 billion yuan, a year-on-year decrease of 19.7%; net profit to mother was 85.665 billion yuan, a year-on-year decrease of 22.8%. The profit performance fell short of expectations, mainly due to large losses in the asset management business. Specifically, operating profit attributable to parent in the life insurance/industrial insurance/banking/asset management/technology sector grew by -3.2%, -11.4%, and +2.1%, respectively, reversing losses to 20.747 billion yuan and -65.1%, respectively. The company's annual dividend was 2.43 yuan in cash per share (we expect 2.39 yuan), up 0.4% year on year, and the OPAT dividend rate reached 37.3%, slightly exceeding expectations.
A summary of the various assumptions and base adjustments. 1) OPAT changes. The company lowered the long-term return on investment assumption to 4.5% (previously 5.0%) and retrospectively adjusted the OPAT data under the old standard assumptions for the same period of 2022 (-1% reduction). Notably, this OPAT adjustment includes the combined effects of IFRS 17 (positive, +2.6%) and return on investment assumptions (negative, -3.49%). 2) EV economic assumption adjustments. The company lowered the long-term return on investment assumption to 4.5% (previously 5.0%) and the risk discount rate to 9.5% (previously 11.0%). Based on the old economic assumptions, NBV grew by 36.2% on a comparable scale in 2023, while life insurance and group EVs increased 6.3% and 4.6% compared to the beginning of the year. Based on the new economic assumptions, the 2023 NBV decreased by 20.8% compared to the old 2022 assumption, the year-end 2023 life insurance and group EV decreased by 10.7% and 6.7% compared to the old assumptions, and adjusted value credibility increased.
The inflection point of life insurance value was established, and in 2024, it was proposed that life insurance agents increase staff processes with high quality. In 2023, NBV increased 36.2% year on year (1Q23 to 4Q23 year-on-year growth rates were 21.1%, 86.1%, 28.6%, and 13.9%, respectively; the impact of speculation on scheduled interest rates has been basically digested). In terms of attribution, NBV new orders increased 38.9% year over year, and NBV Margin dropped slightly by 0.4 pct to 23.7%; from a channel perspective, agent channel and banking insurance channel NBV grew 40.3% and 77.7%, respectively, thanks to NBV growth rates for all agents The year-on-year increase of 89.5% and per capita income of 39.2% offset the 22.0% drop in the year-end team compared to the beginning of the year to 347,000 people. Notably, the pre-tax operating profit of the life insurance and health insurance business increased 0.6% year on year in 2023. Thanks to non-financial risk adjustment changes and operating deviations and other negative effects that offset the 7.2% year-on-year decline in marginal amortization of contract services, it was mainly due to continued improvement in business quality. The 13-month insurance policy continuation rate increased 2.5 pct. To 92.8% year over year. Looking ahead to 2024, the company's key projects propose a continuous optimization model to stabilize scale, increase performance, increase production capacity, and implement high-quality development of the agent team. We expect the current inflection point of channel value to be clear.
In 2023, Ping An Insurance's service revenue increased 6.5% year-on-year; the overall cost ratio (COR) for the car insurance business was 100.7% and 97.7%, respectively. If the impact of guarantee insurance is excluded, the overall COR is 98.4%, mainly due to changes in the macroeconomic environment. The repayment pressure on small and micro enterprise customers is still high. The company suspended the financial guarantee insurance business in 4Q23. As risk exposure quickly settled, the extent of its impact on the company's overall business quality will be greatly reduced in the future. Excluding the impact of natural disasters, the comprehensive cost rate for car insurance in 2023 is 96.6%.
At the end of the period, the company's insurance capital portfolio exceeded 4.72 trillion yuan, an increase of 9.0% over the beginning of the year. The net, total, and comprehensive return on investment achieved in 2023 was 4.2%/3.0%/3.6%, respectively, -0.5pct./+0.6pct./+0.9pct. For the asset management sector, operating profit loss increased by 15.981 billion yuan in a single quarter in 4Q23, and the cumulative loss for the whole year reached 19.522 billion yuan, dragging down OPAT's growth rate by 13.8%. The company announcement actively manages risks, makes proactive and prudent plans, and re-values some projects, and it is expected that the operating pressure on the asset management business will ease in 2024.
Profit forecast and investment rating: The core business OPAT performed steadily, and cash dividends slightly exceeded expectations. Due to the company's adjustment of economic assumptions, we estimate that the current stock price corresponds to a static PEV of 0.55 times in 2023, but the credibility and stability of the valuation have improved, and the “buy” rating has been maintained. Due to the disclosure of annual reports and adjustments to economic assumptions, we lowered our profit forecast. We expect net profit to be 1204, 1541, and 162.2 billion yuan in 2024-26 (original forecasts were 1496 billion yuan and 159.4 billion yuan, with additional 26 additional forecasts), with year-on-year growth rates of 40.5%, 28.0%, and 5.2%, maintaining a “buy” rating.
Risk warning: long-term interest rates continue to decline, and the cash dividend ratio is lower than expected