China Insurance Sector:Beneficiaries of insurers’participation in Shanghai Stock Connect

What’s new: We use five quantitative metrics to screen out likely candidates for China insurers’ southbound stock investments and to judge which stocks are China insurers’ favourites. Given the long-term nature and low volatility requirement of insurance funds, and considering the backdrop of low interest rates in China, our metrics are: market cap, H-share discount to A-share, dividend yield, proportion of shareholding by insurers, and valuation.

    What’s the impact: Financial stocks that cater to China insurers. Based on their weighted average score for these 5 metrics, we have compiled a list of top-20 stocks that cater the most to China insurers’ investment appetite in the HK equity market (see P2). Among the financial stocks, we think Ping An (2318 HK, HKD40.7, Buy [1]), CMB (3968HK, HKD19.74, Buy [1]), and BoCom (3328 HK, HKD5.97, Buy [1]) are likely to be the popular candidates, considering their strong fundamentals.

    Insurers’ utilisation of Shanghai Connect Channel should be around 16% of the total Connect utilisation. We note that as of end-2015, only 1.96% (or c.USD36bn) of China insurers’ assets were allocated overseas. Given the sector’s c.CNY3.0tn in new premiums in 2016E and the maturity of c.15% of the existing portfolio (c.CNY1.9tn), it is entirely possible for the sector’s overseas stock allocation to be significant to the market, in our view. Assuming that the China insurance sector’s overseas assets allocation rises 1.0pp each year, 30% of the incremental funds goes to stock markets, and half of such “stock markets allocation” is through the newly opened Shanghai Stock Connect channel to the HK market, it will bring c.CNY29bn of funds into the stock market annually, equivalent to c.16% of the net buying amount brought by southbound trades at the Shanghai Stock Connect.

    What we recommend: We understand that most China insurers will target to increase their overseas asset allocation ahead. We see the opening up of Shanghai Connect as positive for them as they can now: 1) invest in most of the large-cap stocks in the Hong Kong equity market freely without quota/timing limitations, and 2) free up their QDII quota to invest in other markets/asset classes. We reiterate our Positive view on the sector. Key risk: over-paying in M&As when insurers increase overseas investments. Also, we think CPIC (2601 HK, HKD29.45, Buy [1]), China Life (2628 HK, HKD20.25, Hold [3]), and NCI (1336 HK, HKD34.7, Outperform [2]) are laggards in overseas assets exposure and should benefit from this theme.

    How we differ: We argue that China insurers’ participation in Shanghai Stock Connect will not only facilitate Hong Kong equity investments, but will also free-up QDII quotas for overseas investments in other markets/asset classes.