CHINA_INSURANCE：SHARE_PRICE_DRIVERS_UNCOVERED-2012-10-11.ppt

,fig insurance equity china china insurance share price drivers uncovered valuation summary,abc global research we ran a comprehensive quant analysis on the chinese insurers, comprising 1,139 regressions and 40k data points life insurers have become proxies for wealth management and trust (wm/trust) sales,stock,bloomberg cur- hsbc ticker rency rating,current price,target potl price return*, outperformance of aia during results,aia china life h china pacific h china taiping ping an h new china life h china life a china pacific a ping an a new china life a,1299 hk 2628 hk 2601 hk 966 hk 2318 hk 1336 hk 601628 ch 601601 ch 601318 ch 601336 ch,hkd hkd hkd hkd hkd hkd rmb rmb rmb rmb,ow n(v) ow(v) ow(v) n(v) ow(v) n(v) ow(v) ow(v) n(v),30.0 22.9 23.5 12.4 60.2 25.5 18.9 20.2 41.9 24.5,32.0 24.0 35.0 16.0 71.0 36.0 18.9 28.0 56.0 28.0,7% 5% 49% 29% 18% 41% 0% 39% 34% 14%,season has become a crowded trade buy the chinese life insurers for outperformance when wm/trust m-o-m growth turns negative. we have found a statistically significant negative relationship between wm/trust sales lagged two months and relative share price performance. this should not be a major surprise, as,*potential return equals the percentage difference between the current share price and the target price source: bloomberg, hsbc estimates; priced at close of 5 october 2012 10 october 2012 james e garner*, cfa head of asian insurance research the hongkong and shanghai banking corporation limited +852 2822 4321 .hk grace q zhou* analyst the hongkong and shanghai banking corporation limited +852 2996 3053 .hk michael chang*, cfa analyst the hongkong and shanghai banking corporation limited,wm/trust products are perceived to compete with life insurance products. china taipings relative share price performance is 3x more geared than china lifes. investors should think twice about playing aia into the results, as it has become a crowded trade. our event analysis reveals that outperformance of aia shares over the periods five days before results and two days after has compressed to 1%. the market has caught onto the fact that aia carefully manages expectations. china taiping stock is primed for outperformance, as its p/ev multiple has de-rated significantly against the sector on a 1m and 3m basis. we found relative p/ev rating m-o-m lagged as a reliable predictor of relative share price performance for four out of five stocks we analysed. h-share investors should not pay too much attention to earnings revisions, pe, monthly premium growth or monthly market share changes. we found limited statistically significant relationships between absolute and,+852 2996 6555,.hk,relative share price performance of the chinese insurers and the aforementioned factors.,view hsbc global research at: *employed by a non-us affiliate of hsbc securities (usa) inc, and is not registered/qualified pursuant to finra regulations issuer of report: the hongkong and shanghai banking corporation limited disclaimer & disclosures this report must be read with the disclosures and the analyst certifications in the disclosure appendix, and with the disclaimer, which forms part of it,buy ping an and china taiping shares if you think the china bank shares will underperform the market. our regression analysis reveals that ping an and china taiping shares have consistently outperformed the market when bank sector shares have underperformed. fundamentally we find it odd that the market uses ping an to play the insurance/bank switch given its material banking exposure.,fig insurance 10 october 2012 share price drivers uncovered after a fruitless fieldtrip, we decided to dispense with another unchanged fundamental update and perform some painful quant analysis on the chinese insurance space we ran 1,139 regressions (both single and multi-factor) using 233 different variables and more than 40,000 data points in search of statistically significant relationships our regression and event-driven analysis found a handful of interesting results, some of which are counterintuitive,abc,executive summary after another fieldtrip that heralded few new insights into the chinese insurance space, we decided to dispense with another fundamental update (see our report of 4 july 2012, asian insurance: groundhog day, as little has changed since then) and perform some rather painful (understatement!) technical analysis our readers may find useful. in total we ran 1,139 regressions (both single and multi-factor) using 233 different variables and over 40,000 data points in search of statistically significant relationships (defined as t-stat 1.96 or -1.96) to help us predict future share price performance. 2,buy chinese life insurers for outperformance when wm/trust m-o-m growth turns negative. chinese life insurers have become proxies for wm/trust sales; we found a statistically significant negative relationship (t-stat -1.96) between wm/trust sales lagged two months and relative share price performance of china pacific, china life, ping an and china taiping. this should not be a major surprise as wm/trust products are perceived to compete with life insurance products. investors should buy insurance shares when m-o-m growth rate of wm/trust sales begins to turn negative. we are not there yet but m-o-m growth is beginning to slow as exhibit 1 illustrates.,sep-08,sep-09,sep-10,sep-11,sep-12,mar-08,mar-09,mar-10,mar-11,mar-12,200%,0%,-100%,0.01,fig insurance 10 october 2012 exhibit 1: historical wealth management/trust sales growth m-o-m 300% 100% wm/trust sales grow th rate source: hsbc investors should not play aia as a trading call going into the results as it has become a crowded trade. event analysis reveals that the outperformance of aia shares through results seasons has become a crowded trade. our event analysis reveals that outperformance of aia shares over the period 5 days before results day and two days after has compressed to 1%. exhibit 2: aia relative share price outperformed over results period: buy 5 days before and sell 2 days after results,as a key share price driver. we have long argued that it is impossible to forecast life insurers earnings for the following reasons: nonsensical earnings disclosure that does not show how low insurers make money. the impossibility of forecasting equity impairment charges, given no disclosure of either accounting policy or stock of unrealised losses on equities (having unrealised loss on afs investments only is useless) opaque non-traditional reserving policies whereby insurers have the ability to boost earnings by increasing their risk margins as much as 150bp. regression analysis indicates that china taiping stock is primed for outperformance as its p/ev has de-rated significantly against the sector on a 1m and 3m basis. we found that relative p/ev rating m-o-m lagged as a relatively reliable predictor of relative share price performance for four out of five stocks we analysed the outlier,abc,12% 10% 8%,7.9%,10.8%,was nearly significant, with a t-stat of -1.92. exhibit 3: relative p/ev lagged 3m and 1m for respective insurers,6% 4% 2% 0% source: hsbc,3.7% fy10 1h11 fy11 aia relativ e share price performance,1.0% 1h12,0.1 0.0 -0.1 -0.2 -0.3 -0.4 -0.5,0.12 china pacific,0.00 -0.02 ping an,-0.02 -0.11 china life,-0.23 -0.47 china,taiping,h-share investors should not focus on earnings.,relativ e p/ev lagged 3m,relativ e p/ev lagged 1m,analysis confirms that p/ev not earnings based metrics drives relative share price performance of h-share insurers. no two insurers have exhibited a statistically significant relationship between their share price performance and lagged pe or eps revision based metrics. in short, h-share investors should not focus on earnings estimates,source: hsbc buy ping an and china taiping shares when we expect china bank shares to underperform the market. our regression analysis reveals that ping an and china taiping shares tend to outperform the market when bank sector shares,3,sep-05,sep-06,sep-07,sep-08,sep-09,sep-10,sep-11,sep-12,1,2,3,-10%,-15%,fig insurance 10 october 2012 have underperformed i.e. they are chief proxies for the bank/insurance switch trade. we find it bizarre that ping an is used to play bank/insurance switch given that it is the one insurer with a material banking exposure. we think ping an is used to play switch for three reasons, some of which may become challenged over coming months: investors do not want to exit bank sector completely so hedge their exposure by going long the only insurer with meaningful banking exposure. market sees ping an as blue chip quality insurer and would rather take in some bank exposure than trade down into what some market participants view as lower-quality or less investment-savvy insurers. that said, it is interesting that our event analysis reveals that china pacific generates the same average 1.2ppt of outperformance during results season and has a better track record on beating new business value (nbv) expectations going into the results. market has not caught onto the fact that ping an has material exposure to china bank sector having increased its stake in ping an bank from 30% to 52% in july 2011. exhibit 4: historical china bank shares relative performance 15% 10% 5% 0% -5% china bank share relativ e performance source: hsbc,investors should not pay too much attention to monthly life premiums. we found no statistically significant relationship between monthly relative share price performance and monthly life premium growth lagged or life premium market share change lagged. quantitative analysis methodology after another fieldtrip which heralded few new insights into the chinese insurance space we decided to dispense with another fundamental update (see our report of 4 july, asian insurance: groundhog day, as little has changed) and perform some rather painful (understatement!) technical analysis our readers may find useful. we performed basic statistical analysis on a variety of macro economic, insurance industry and company specific data to identify share price correlations. in total we ran 1,139 regressions (both single and multi-factor) using 233 different variables and over 40,000 data points in search of statistically significant relationships (defined as t-stat 1.96 or -1.96) to help us predict future share price performance. many of the regressions pitted independent variables against absolute share price performance and more importantly relative share price performance against the hang seng index (hsi), which strips out general equity market gearing which pre-dominates most absolute share price performance analysis for insurers. we restricted our analysis to the h-shares of the major listed chinese insurers and regressed data on a monthly basis. each regression comprised anywhere between 30 to 104 observations. frustratingly, but predictably our quantitative,abc,analysis revealed only a few statistically significant regressions. 4,0.00,-0.02,2,3,17,2,1,069,1,134,41,fig insurance 10 october 2012 many of those statistically significant relationships that did exist would have been targeted by more able quants than ourselves. it was interesting that where we did find statistically significant relationships it was only applicable to one of the five insurers we ran the analysis for.,significant relationship between wm/trust sales and life premiums. exhibit 6: china taipings relative share price performance is 3x more sensitive to lagged wm/trust sales growth,abc,exhibit 5 shows that out of the 1,134 single factor,-0.04,-0.03,regressions we ran for the five companies, only seven were statistically significant for three or more of the companies.,-0.06 -0.08 -0.10 -0.12,-0.11,-0.06,-0.05,exhibit 5: summary of number of regressions which are statistically significant significant for,count,taiping,china pacific,ping an,china life,5 companies 4 companies 3 companies 2 companies 1 company none total number of single factor regressions source: hsbc key share price relationships wealth management (wm) and trust sales do influence relative share price performance (see exhibit 7). we found a negative relationship between wm/trust sales lagged two months and relative share price performance of china pacific, china life, ping an and china taiping. this makes sense as wm/trust products are perceived to compete with life insurance products that account for the bulk of chinese insurers valuations. this is further supported by the fact that the only insurer without a life business, is the one without a statistically significant relationship between its share price and wm/trust sales. we found that china taipings relative share price performance is 3x more sensitive to lagged wm/trust sales than china life. china taiping is the most dependent on bancassurance distribution coincidence? although there seems sensible rationale for the relationship it is interesting to note that there is no statistically,source: hsbc lagged earnings based metrics do not appear to drive insurance h-share insurance performance. no two insurers have exhibited a statistically significant relationship between their share price performance (both relative and absolute basis) and lagged pe or eps revision based metrics. this supports our belief that the market focuses on embedded value (particularly p/ev) based metrics where there are statistically significant relationships for two or more insurers. further, the one insurer that is appraised on an earnings- based methodology exhibits no statistically relationship between its share price performance and either eps revisions or pe ratios. insurers whose p/ev rating deteriorates relative to the sector tend to outperform over the coming months (see exhibit 8). we found a negative correlation between 12m forward p/ev relative to the sector lagged one month” and relative share price performance of china pacific and china taiping shares versus the hsi. the relationship is borderline significant for china life (-1.92 t-stat). we also found a statistically significant relationship between p/ev relative to the sector lagged three months and the relative,5,fig insurance 10 october 2012 share price performance of the two other major h-share listed insurers. it is very evident that relative p/ev rating is a reliable predictor of relative share price performance for four stocks (and nearly five). monthly share price performance does not appear to be not driven by either insurance premium growth or market share changes. we found no statistically significant relationship between monthly relative share price performance and either monthly premium growth lagged or premium market share change lagged. only china pacific exhibits any correlation and that is between absolute share price performance (which contains a lot of noise from broad equity market impact) and monthly life premium growth lagged one month. that is a little counter intuitive as china pacific derives a greater proportion of its business from non-life (c39% of gross premiums written) than life biased peers such as china life (100% of gpw). relative share price performance of ping an and taiping are negatively correlated to relative performance of china bank share price index (see exhibit 9). this supports our widely held belief that one of the biggest trades in the sector is the switching between china banks and china insurers. this switching undoubtedly benefited the chinese insurers during the 1h of this year, driving significant outperformance in a sector where fundamentals remain largely negative and unchanged. it is counter intuitive that ping an shares outperform the market when the chinese bank sector underperform given that ping an is the one chinese insurer which owns a bank. the market clearly views ping an as a blue chip insurer although we expect its insurance proxy status to be challenged over coming quarters. 6, dividend yield trailing change is not statistically significant to relative share price performance. this might be because chinese insurers dividend payout ratio is small and consequently they are not seen as yield plays. price to book value is only a good guide to absolute share price performance not relative share price performance. negative relationship between price to trailing book value lagged one month and absolute share price performance for china pacific and china taiping.,abc,dec-08,dec-09,dec-10,dec-11,sep-08,sep-09,sep-10,sep-11,mar-08,jun-08,mar-09,jun-09,mar-10,jun-10,mar-11,jun-11,mar-12,jun-12,oct-08,oct-09,oct-10,oct-11,apr-08,apr-09,apr-10,apr-11,apr-12,jul-08,jul-09,jul-10,jul-11,jan-08,jan-09,jan-10,jan-11,jan-12,jul-12,sep-05,sep-06,sep-07,sep-08,sep-09,sep-10,sep-11,sep-12,mar-06,mar-07,mar-08,mar-09,mar-10,mar-11,mar-12,fig insurance 10 october 2012 exhibit 7: strong negative relationship between relative share price performance of taiping versus hsi and wm/trust sales growth lagged 2m,abc,300% 250% 200% 150% 100% 50% 0% -50% -100%,wm/trust sales grow th lagged 2m (lhs),relativ e share price performance (rhs),60% 40% 20% 0% -20% -40% -60% -80%,source: hsbc exhibit 8: strong negative relationship relative share price performance of china pacific versus hsi and 12m forward p/ev relative to sector lagged 1m,1.0x 0.5x 0.0x -0.5x -1.0x,12 m forw ard p/ev relativ e to sector lagged 1m (lhs),relativ e share price performance (rhs),35% 25% 15% 5% -5% -15% -25%,source: hsbc exhibit 9: strong negative relationship between relative share price performance of ping an versus hsi and relative performance of china bank index versus market,25% 20% 15% 10% 5% 0% -5% -10% -15%,relativ e share price performance to hsi of ping an (lhs),relativ e bank index performance to marke