2023 net profit was better than we expected

Taibao announced its 2023 results: Assuming that the new business value (NBV) of the previous life insurance was +30.8%; the comprehensive cost ratio (CoR) of financial insurance was +0.8ppt to 97.7% year over year; and net profit -27.1% year over year to 27.257 billion yuan, all better than our expectations, mainly due to improvements in the company's operating quality. Life insurance/group operating profit was +0.4%/-0.4%, respectively. The dividend per share was 1.02 yuan, the same as the previous year, in line with our expectations.

Development trends

The results of the life insurance reform are beginning to show. Under the deepening transformation of “Changhang”, the company assumed that the NBV before the adjustment was +30.8% YoY (assuming an actual growth rate of +19.1% after adjustment), which is at the leading level in the industry; the 13/25-month insurance policy continuation rate for personal life insurance customers was +7.7/+10.6ppt to 95.7%/84.0%, respectively. In terms of agent channels, NBV (assuming actual growth rate after adjustment, same below) was +9% year-on-year. The average monthly performance rate of insurance marketers was +4.5ppt to 67.9%; the monthly premium/commission income of core employees per month was +26.6%/46.3% year-on-year to 43,503/6,051 yuan, respectively; in terms of banking insurance channels, NBV was +116% year-on-year. The new single instalment premium was +170% year-on-year, driving the NBV value ratio of Bank Insurance +2.9ppt year over year (assuming adjustments).

Financial insurance growth and profit performance were impressive. In 2023, Taibaocai's overall /auto insurance/non-car insurance premiums were +11.4%/+5.6%/+19.3% (industry growth rate was +6.7%/+5.6%/+8.1%, respectively). Affected by post-pandemic travel recovery and natural disasters, etc., the overall financial insurance CoR was +0.8ppt to 97.7% year-on-year, and the deterioration was lower than that of the listed industry. Among them, car insurance/non-car insurance CoR remained flat at 97.6%/97.7%, respectively.

Under rapid growth, non-auto insurance still maintained a good profit level. Health insurance/agricultural insurance CoR was -3.3/-0.4ppt to 99.2%/98.8%, respectively; corporate financial insurance CoR was 97.2%, and liability insurance CoR was still under pressure at 100.6%.

Taking into account changes in the economic situation, the company lowered the return on investment/risk discount rate assuming 50 bps/ 200 bps to 4.5%/9.0%, assuming that the effect of the adjustment on the value of the new business was -9%. The actual growth rate of adjusted life insurance/group implied value is assumed to be 1.0%/1.9%.

Steady progress in the midst of challenges. Life insurance/group operating profit in 2023 was +0.4%/-0.4%, respectively; the Group's net profit was -27.1%, mainly affected by investment fluctuations. The net/total/comprehensive return on investment under the new standard was -0.3pp/ -1.5pp/+0.4ppt to 4.0%/2.6%/2.7% year over year. Profit and loss from securities trading and profit and loss from changes in fair value affected total investment income of about 230 billion yuan. The company declared that the dividend per share is flat at 1.02 yuan, and the current stock price corresponds to Taibao-A/H 2023a dividend rate of 4.5%/8.2%, respectively. Although insurance company operations are currently facing many challenges, we still believe that the increase in operating capacity brought about by Taibao's various business reforms will gradually be realized as improvements in profits and shareholder returns, thus driving valuation repair and reaffirming optimism.

Profit forecasting and valuation

We kept our 2024e EPS unchanged at 3.8 yuan per share, and introduced 2025e EPS at 4.1 yuan.

China Taibao-A/H is currently trading at 0.4x/0.2x 2024e P/EV respectively. We maintain China's Taibao-A/H outperforming industry rating and target price of 38.3 RMB/22.7 HKD unchanged, corresponding to 0.7x/0.3x2024e P/EV, respectively, with 69%/66% upside compared to the current stock price.

risks

The increase in premiums for new orders fell short of expectations; long-term interest rates fell sharply; capital markets fluctuated greatly; and policy and regulatory uncertainty.