The Actuarial Society of Hong Kong Valuation from a banker s perspective

Transcription

1 The Actuarial Society of Hong Kong Valuation from a banker s perspective Arjan van Veen, Equity Research, Credit Suisse 7 November 2012

2 Agenda 1. Role of equity analysts 2. What is listed in Asia? 3. Valuation approaches used by investment markets 4. What are the key drivers of market valuations? 5. Pros and cons of various approaches 6. More EV consistency / disclosure standards needed 2

3 1. Role of Equity analysts - Conduit between funds managers and companies - Analysts specialize in sectors - Fund managers more generalists (multiple sectors / countries) - Digest information releases (publicly available only) - Fundamental research - Compare / contrast (regional / global) 3

4 2. What is listed in Asia? ASIA INSURANCE - market capitalisation (US$mn) South East Asia 3% Korea 10% Taiwan 6% Australia 12% Japan 16% China (A-share) 25% India 1% Hong Kong 10% China (H-share) 17% Source: Reuters 4

5 NJA INSURANCE - market capitalisation (US$mn) Source: Reuters South East Asia 5% Korea 16% India 1% Hon g Kong 17% Taiwan 11 % Au stralia 19% China (H-share) 31 % Key NJA sectors are: (stock > US$5bn mkt cap) China (China Life, Ping An, CPIC, PICC) Australia (QBE, IAG, SUN, AMP) Hong Kong (AIA) Korea (Samsung Life/ Samsung F&M) Taiwan (Cathay / Fubon) = 13 key stocks (plus a further 6 stocks in Japan) 5

6 3. Valuation approaches used by investment markets a) Price to earnings b) Price to book value (vs. return on equity) c) Price to assets (vs. return on assets) d) Price to embedded value (vs. ROEV) e) Implied value of 1yr new business value 6

7 4. What are the key drivers of market valuations? - Growth profile - Current margin / ROE and sustainability - Market structure key (competition / product / distribution) - Regulatory / macro risk - Diversification - Capital (risk of equity raisings) - Management - Corporate governance - Disclosure => Key focus on value creation 7

8 - Focus on margins not necessarily volume (e.g. low margin bancassurance / high g tees, single premiums) - Focus on sustainability business (e.g. invest in agent training, alignment of partners with profitability of insurers) - Focus on distribution (e.g. is there a competitive advantage / avoid commoditisation) - Focus on cashflow generation (e.g. payback periods, self sustaining growth) - Focus on insurance (e.g. primary role of the company to provide insurance less cyclical and often better margin). 8

9 5. Pros and cons of various approaches a) Price to earnings measure of growth Premium growth rates (5yr, 10yr, 20yr CAGR %pa) 20% 15% 10% 5% 0% 5yr 10yr 20yr Asia Europe US Source: Swiss Re 9

10 Price to earnings superior Asian growth leads to higher PE Price to earnings (x) - 12mth forward forecasts 17.5x 15.0x 12.5x 10.0x 7.5x 5.0x 2.5x 0.0x Oct-10 Oct-11 Oct-12 Asia Europe US Source: Reuters, IBES consensus estimates 10

11 CHINA INSURANCE (H-shares) - PE ratio (x) std dev PE (x) 25.0 NB slowdown from Jan 2011 Average std dev Global Financial Crisis 10.0 Sep-12ý b # Jun-12ý b # Mar-12ý b # Dec-11ý b # Sep-11ý b # Jun-11ý b # Mar-11ý b # Dec-10ý b # Sep-10ý b # Jun-10ý b # Mar-10ý b # Dec-09ý b # Sep-09ý b # Jun-09ý b # Mar-09ý b # Dec-08ý b # Sep-08ý b # Jun-08ý b # Mar-08ý b # Dec-07ý b # Sep-07ý b # Jun-07ý b # Mar-07ý b # Dec-06ý b # Sep-06ý b # Jun-06ý b # Mar-06ý b # Dec-05ý b # Sep-05ý b # Jun-05ý b # Mar-05ý b # Dec-04ý b # Source: Reuters, IBES consensus (12mth forward) 11

12 CHINA INSURANCE - PE (x) premium to market (HSI) 180% 160% 140% 120% PE premium (%) 1 100% 80% 60% + 1 std dev - 1 std dev Average 40% 20% 0% Sep-05ý b # Jun-05ý b # Mar-05ý b # Dec-04ý b # Source: Reuters, IBES (12mth forward) Jun-07ý b # Mar-07ý b # Dec-06ý b # Sep-06ý b # Jun-06ý b # Mar-06ý b # Dec-05ý b # Sep-07ý b # Mar-08ý b # Dec-07ý b # Jun-08ý b # Sep-08ý b # Mar-09ý b # Dec-08ý b # Sep-12ý b # Jun-12ý b # Mar-12ý b # Dec-11ý b # Sep-11ý b # Jun-11ý b # Mar-11ý b # Dec-10ý b # Sep-10ý b # Jun-10ý b # Mar-10ý b # Dec-09ý b # Sep-09ý b # Jun-09ý b # 12

13 Disadvantage of PE metrics earnings are volatile for insurers AIA - pre-tax earnings composition 3,000 F'casts 30.0% 2, % after tax (NPAT r US$mn) Net profit )h 1, % 7.5% 0.0% -7.5% NPAT growth (%pa)h -1,500 FY07 FY08 FY09 FY10 FY11 FY12F FY13F -15.0% 'Normalised' operating NPAT Mark to market Norm NPAT growth Source: Company data, Credit Suisse estimates 13

14 Disadvantage of PE metrics earnings are volatile for insurers China Life quarterly NPAT (Rmb mn) 12,000 60% 10,000 50% NPAT (Rmb mn) 8,000 6,000 4,000 2, % 30% 20% 10% 0% % change Shanghai Index (QoQ) -2,000-10% -4,000-20% 1Q09% 2Q09% 3Q09% 4Q09% 1Q10% 2Q10% 3Q10% NPAT (Rmb mn) 4Q10% 1Q11% 2Q11% 3Q11% 4Q11% 1Q12% Shanghai index %chg 2Q12% 3Q12% Source: Company data, Credit Suisse estimates 14

15 5. Pros and cons of various approaches b) Price to book sustainability of ROE CHINA P&C INSURANCE - return on equity (%pa) by company 50.0% F'casts ----> 40.0% China Pacific 30.0% 20.0% Ping An 10.0% PICC 0.0% China Taiping -10.0% Jun-05ý b # Dec-05ý b # Jun-06ý b # Dec-06ý b # Jun-07ý b # Source: Company data, Credit Suisse estimates Dec-07ý b # Jun-08ý b # Dec-08ý b # Jun-09ý b # Dec-09ý b # Jun-10ý b # Dec-10ý b # Jun-11ý b # Dec-11ý b # Jun-12ý b # Dec-12ý b # Jun-13ý b # Dec-13ý b # 15

16 Asia insurance - Credit Suisse PER analysis - P/BV (x) vs ROE (%pa) 2.5x 2.3x 2.1x 1.9x Expensive P P E - = - / - E BV BV PER = 20x Ping An (H) AIA New China Life (A) China Life (H) China Life (A) IAG Prudential plc PER = 13.9x Bangkok Life PICC P&C PER = 10x Price / Book Value (P / BV) 1.7x 1.5x 1.3x 1.1x 0.9x 0.7x Dai-Ichi Life NKSJ Holdings Cathay FHC Max India Tokio Marine China Pacific (H) AMP New China Life (H) China Pacific (A) Ping An (A) Sony Financial Great Eastern China Life TW China Taiping QBE Samsung F&M Manulife Fubon FHC Tower NZ Samsung Life Hanwha Life Tong Yang Life Suncorp Reliance Capital T&D Holdings Shin Kong FHC MS&AD Insurance Hyundai M&F Dongbu LIG Insurance Meritz F&M Inexpensive 0.5x 0.0% 2.5% 5.0% 7.5% 10.0% 12.5% 15.0% 17.5% 20.0% 22.5% 25.0% Return on Equity (% EPS / BV) Source: Reuters, Credit Suisse 12mth forward earnings forecasts (IBES for non-rated stocks) 16

17 CHINA LIFE INSURANCE - return on equity (%pa) by company 50.0% F'casts ----> 40.0% Ping An 30.0% China Pacific 20.0% China Life 10.0% China Taiping 0.0% New China Life -10.0% Jun-05ý b # Dec-05ý b # Jun-06ý b # Dec-06ý b # Jun-07ý b # Source: Company data, Credit Suisse estimates Dec-07ý b # Jun-08ý b # Dec-08ý b # Jun-09ý b # Dec-09ý b # Jun-10ý b # Dec-10ý b # Jun-11ý b # Dec-11ý b # Jun-12ý b # Dec-12ý b # Jun-13ý b # Dec-13ý b # 17

18 CHINA INSURANCE - Price to book (x) ratio std dev P/BV (x) 2ý b # Average std dev Mar-05ý b # Dec-04ý b # Source: Reuters, IBES (12mth forward) Sep-07ý b # Jun-07ý b # Mar-07ý b # Dec-06ý b # Sep-06ý b # Jun-06ý b # Mar-06ý b # Dec-05ý b # Sep-05ý b # Jun-05ý b # Mar-10ý b # Dec-09ý b # Sep-09ý b # Jun-09ý b # Mar-09ý b # Dec-08ý b # Sep-08ý b # Jun-08ý b # Mar-08ý b # Dec-07ý b # Sep-12ý b # Jun-12ý b # Mar-12ý b # Dec-11ý b # Sep-11ý b # Jun-11ý b # Mar-11ý b # Dec-10ý b # Sep-10ý b # Jun-10ý b # 18

19 5. Pros and cons of various approaches d) Price to embedded value Asia Insurance - price to embedded value 1.75x 1.50x 1.25x 1.00x 0.75x 0.50x 0.25x 0.00x AMP Max India China Life (A) Ping An (H) China Life (H) AIA Bangkok Lifekok b # China Pacific (H) Shin c b # New ic b # Ping An ic (A) b # China c b # China c b # Life TW c b # Pacific (A) China Life c b # (A) c b # Kong FHC c b # Cathay FHC b # Fubon FHC b # Source: Reuters, Credit Suisse 12mth forward earnings forecasts New n b # China b # Life b # China b # Taiping b # Great g b # Eastern b # Dongbun b # Reliance Capital b # Prudential plc Samsung al F&M Hyundai al M&F Korea i b # Lifea i b # Samsung al Lifeung b # Sony ng b # Financiall Tower NZ g b # T&D r g b # Holdingsll Dai-Ichi l Lifeingsb # 19

20 Asia Insurance - Credit Suisse - P/EV vs ROEV 2.00x Expensive 1.75x 1.50x AIA (P / EV x) 1.25x P ing An (H) China Life (A) Pru Asia China Life (H) AMP China Pacific (H) Bangkok Life Price / Embedded Value 1.00x 0.75x 0.50x China Pacific (A) New China Life (A) Ping An (A) Cathay FHC Great Eastern Prudential plc China Taiping New China Life (H) Sam sung F& M Hanwha Life Manulife Sony Financial Tower NZ LIG Insurance China Life TW Fubon FHC Dongbu Hyundai M&F Shin Kong FHC T&D Holdings 0.25x Inexpensive 0.00x 2.5% 5.0% 7.5% 10.0% 12.5% 15.0% Return on EV (EPS / EV %) Source: Reuters, Credit Suisse 12mth forward earnings forecasts 20

21 Financials - Credit Suisse - P/EV (x) vs EV growth (%pa) 1.6x Expensive Price / ý b # Embedded Value (P ý b # / EV x) 1.4x 1.2x 1.0x 0.8x 0.6x 0.4x AIA Ping An (H) Bangkok Life China Life (H) AMP China Life (A) Pru Asia China Pacific (H) China Pacific (A) Ping An (A) China Life TW New China Life (A) Fubon FHC Cathay FHC Great Eastern Samsung F&M Prudential plc China Taiping New China Life (H) Dongbu Hyundai M&F Hanwha Life Sony Financial Tower NZ LIG Insurance T&D Holdings Dai-Ichi Life 0.2x Inexpensive 0.0x 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% EV growth (%pa) Source: Reuters, Credit Suisse 12mth forward earnings forecasts 21

22 Investment yield, rdr assumptions (and net rdr) 12.0% 10.0% 8.0% 5.5% 5.5% 6.0% 6.3% 7.0% 6.0% 4.0% 2.0% 0.0% China Life Ping An New China Life China Pacific China Taiping Investment return Discount rate Source: Company data, Credit Suisse estimates 22

23 Sensitivity to 25bp change in Investment yield assumption 12.5% 10.0% 7.5% 5.0% 2.5% 0.0% China Life Ping An China Pacific New China Life China Taiping Source: Company data, Credit Suisse estimates VNB - inv+25bps VIF - inv+25bps VNB - rdr-25bps VIF - rdr-25bps 23

24 China life insurers - implied PBV multiple at 1x embedded value 5.00x 4.50x 4.00x 3.50x 3.00x 2.50x 2.00x 1.50x 1.00x 0.50x 0.00x Ping An China Life China Pacific New China Life China Taiping Source: Company data, Credit Suisse estimates 24

25 PING AN - implied PBV multiple at 1x embedded value 6.00x 5.00x 4.00x 3.00x 2.00x 1.00x 0.00x Jun-06ý b # Dec-06ý b # Jun-07ý b # Dec-07ý b # Source: Company data, Credit Suisse estimates Jun-08ý b # Dec-08ý b # Jun-09ý b # Dec-09ý b # Jun-10ý b # Dec-10ý b # Jun-11ý b # Dec-11ý b # Jun-12ý b # 25

26 5. Pros and cons of various approaches e) Implied value of 1yr new business multiple Asia Insurance - implied value of 1yr new business multiplier (x) 12.5x 10.0x 7.5x 5.0x 2.5x 0.0x -2.5x -5.0x Bangkok x Lifekok b # AIA AMP China Life (H) Ping An (H) China Life (A) China Pacific x (H) China c b # Pacific x (A) Ping An ic (A) b # China Life c b # TW c b # Cathay FHC b # Shin Kong y b # FHC y b # Source: Reuters, Credit Suisse 12mth forward earnings forecasts Fubon FHC b # Reliance Capital b # Max tal b # Indiaal b # Prudential plc New China aal b # Life l b # (H) l b # China l b # Taiping b # Great g b # Eastern b # Dongbun b # Hyundai b M&F Samsung b F&M 26

27 China life insurers - market value composition (current share price) 100% 80% VNB multiple 7.8x 7.6x 4.8x 0.4x 14.9x 60% 40% 20% 0% China Life Ping An China Pacific New China Life China Taiping AIA Life NTA Non-life NTA Life VIF Goodwill / VNB Source: Company data, Credit Suisse estimates 27

28 China life insurers - market value composition (current share price) 100% 80% VNB multiple 7.8x 7.6x 4.8x 0.4x 14.9x 60% 40% 20% 0% China Life Ping An China Pacific New China Life China Taiping AIA Life NTA Non-life NTA Life VIF Goodwill / VNB Source: Company data, Credit Suisse estimates 28

29 China / HK insurance - implied value of 1yr new businesses (VNB) multiple (x) 20.0x VNB (x) VNB (x)* H-shares A-share discount (%) 15.0x 10.0x 5.0x -3% -23% -6% 11% 0.0x -5.0x -10.0x -15.0x China Life (H) Ping An (H) China New China Pacific (H) Life (H) China Taiping AIA China Life (A) Ping An (A) China New China Pacific (A) Life (A) Source: Reuters, Company data, Credit Suisse estimates, *P&C at 1.7x and Bank at 1x book value 29

30 Agency NB growth (5yr CAGR % p.a.) Agency VNB Agents Productivity NB APE % VNB multiple China Pacific 7.9% 15.7% 24.8% 88% 2.1x New China Life 5.5% 13.0% 19.2% 86% 0.4x Ping An 14.2% 3.8% 18.6% 91% 6.2x China Taiping 5.7% 9.5% 15.8% 68% -13.4x China Life 1.0% 3.3% 4.3% 85% 7.8x Value of new business (VNB) growth (compound from Dec 06) 500 CAGR 450 China Taiping 37% 400 (31 Dec th 2006 th =1) h China Pacific Ping An 26% VNB growth China Life 18% Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun Source: Company data, Credit Suisse estimates

31 Example China What are the key drivers of market valuations? - Growth profile - slowing - Current margin / ROE and sustainability - falling - Market structure key (competition / product / distribution) - Regulatory / macro risk recent changes - Diversification - low - Capital (risk of equity raisings) - high - Management little confidence - Corporate governance - poor - Disclosure - poor => Key focus on value creation low focus 31

32 6. More EV consistency / disclosure standards needed - more standardization of assumptions - risk discount rate, govt bond yield (spot vs. average) - consistency with treatment of asset values - minimum capital level - more focus on standardization of disclosure - minimum sensitivity disclosure - some segment disclosure (channel / product) - frequency of disclosure 32