Zhongan International unveiled a presentation to boost EPS

Zhongan 2023 EPS RMB2.77 is slightly lower than our expectations of RMB2.88 compared to the previous year's reversal loss (2022: RMB-0.76). The company brought a one-time investment income of RMB3.78bn to its subsidiary Zhongan International in 2H23. Zhongan International owns Zhongan Bank, Zhongan Life Insurance, and ZA Tech operating in Hong Kong, China. EPS RMB0.2, which did not take into account one-time income, also reversed losses, mainly due to the year-on-year improvement in investment income in the insurance business. The total return on insurance investment in 2023 was 1.9% (2022:

-1%). The comprehensive cost ratio (COR) comparable caliber increased by 1 pct to 95.2% year over year, hampered by the deterioration of consumer finance underwriting, but the overall business was still able to maintain underwriting profits. Considering investment fluctuations, we expect the 2024-2026 EPS to be RMB0.29/0.34/0.41 (previous value: RMB0.45/0.55/-), lower the DCF-based target price to HKD20 (previous value: HKD29), and maintain the “buy” rating.

Health insurance coverage improvements

Total health and ecology premiums reached 9.806 billion yuan in 2023, up 9.2% year on year. The year-on-year growth rate was the lowest level since the company went public, showing that the growth momentum is weakening. However, it is worth mentioning that critical illness insurance premiums increased 131% year over year, showing impressive results. Self-operated channel premiums increased 45% compared to the same period in 2022, accounting for 44.5% of total health and ecology premiums. Health ecology coverage improved, and COR decreased slightly by 1.4 pct to 87.2% year over year (payout rate of 34.2% +fee rate of 53%), which is also better than 92.5% in the first half of the year. The payout rate decreased by 14.8 pct year over year, but this was partially offset by an increase in the fee rate of 13.4 pct. Health insurance is the company's best underwriting performance. It contributed one-third of the total premiums in 2023, but contributed more than 80% of the underwriting profit. We expect healthy ecology 2024 COR to be 89%, with a steady but slight increase.

Other sectors are growing faster

Digital lifestyle (e-commerce, air travel, innovation) accounts for more than 40% of total premiums, with a year-on-year growth rate of 42%. It is the company's fastest growing sector in 2023. The sector's underwriting profit was low, and the 2023 COR remained flat at 99.5% year over year. Consumer finance business COR increased 6.5 pct to 96.4% year over year. Consumer credit quality has deteriorated, but underwriting performance is still healthy. The consumer finance ecosystem contributed close to 20% of total premiums, with a year-on-year increase of 23%, but the second half of the year only increased 2% year over year, showing a more cautious growth strategy.

Auto insurance contributed only 5% of total premiums, an increase of 25% year-on-year in 2023. COR improved slightly by 2pct to 95.4%. We expect the non-health insurance sector to continue to grow faster than health insurance premiums in 2024.

Insurance business reverses losses

The main insurance business reversed losses in 2023, and we estimate the adjusted ROE to be 1.6% (2022: -6.8%).

The company has been able to maintain underwriting profits since 2021. Despite the announcement, Zhongan International's profit and loss will still influence the profit performance of listed entities through joint ventures and joint venture earnings according to Zhongan's shareholding ratio (45.04%). Zhongan International is not yet profitable, but we expect its losses to gradually narrow, and the profit pressure on Zhongan Insurance is expected to continue to decrease.

Risk warning: Health insurance growth has declined sharply, COR has deteriorated drastically, and investment has suffered significant losses.