Please refer to page 23 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures. CHINA Financial summary Source: Macquarie Research, May 2015, What’s changed Source: Macquarie Research, May 2015, Analyst(s) Scott Russell, FIAA +852 3922 3567 scott.russell@macquarie.com 8 May 2015 Macquarie Capital Securities Limited China insurance Where to from here? The case for further upside  Over the past 6 months, Chinese insurance stocks have re-rated sharply. Our sector thesis is subsequently moving on from one of deep value to growth-at-a-fair-price. Indeed the growth trajectory appears to be improving and we continue to expect acceleration in 2015. We refresh our forecasts and stock preferences and maintain a positive sector view. Life trends still improving  VNB growth still accelerating: Whilst little detail of new business trends was provided at 1Q15 results, we believe VNB momentum continues to rise. We also note a clear improvement in sales quality given the strongest growth is coming from the agent channel and the product mix is shifting towards longer terms and protection features.  Positive agent trends: The listed players lifted headcount by 16% during 2014. This is generally a lead indicator for sales, particularly given that productivity continues to rise across the board. We expect these trends to underpin sales momentum throughout this year.  VNB per agent rising: Whilst Ping An agents generally lead the market on most metrics, the most consistent increases in VNB per agent over the past 5 years have been China Life and NCI as these companies continue to lift agent quality from relatively low levels (refer Fig 7).  Capital positions very strong: Solvency ratios are back in very healthy territory and the upcoming switch to risk-based capital requirements seems unlikely to materially alter capital positions. As such, we believe the sector is well positioned to internally fund double-digit sales growth for many years.  Valuations still reasonable: Despite the recent rally, the sector average P/EV 1.6x is not demanding given high-teens ROEV outlook, in our view. We note the relatively smaller players Taiping and NCI trading at material discounts despite offering higher ROEV (refer p3). Stock implications: we favour H-shares and pure plays  We maintain a positive sector view. We expect the organic recovery of the life sector to gather pace whilst State Council initiatives to spur pensions and health insurance will further drive industry volumes. Our preferred stocks are PICC P&C, NCI-H, Taiping and China Life-H, the reasons for which are set out on p3-4.  Why favour a P&C company? We believe the market remains too cautious on the outlook for PICC’s margins. Rather, we highlight a strong growth outlook, a product mix tailwind, competent & disciplined management, numerous weakened competitors, sustainable high-teens ROE, double-digit 5Y EPSg and cheap valuation (11x PER) as reasons for our preference. We expect PICC P&C to offer investors greater alpha than its life peers.  Sector risks to the downside include: SHCOMP correction, lower-for-longer interest rates, disruptive regulatory changes (eg. par pricing, risk-based capital), potentially mispriced critical illness benefits, elevated surrender rates, diseconomies of scale in a shrinking bancassurance market. CompanyTickerRatingPriceTargetTSRH-sharesNCI1336O$49.25$65.0033%Taiping966O$29.20$35.0020%PICC P&C2328O$17.22$19.5016%China Life2628O$37.10$41.0012%Ping An2318O$107.30$118.0011%CPIC2601N$40.05$39.00-1%AIA1299U$50.55$42.00-16%PICC Group1339U$5.44$4.20-23%A-sharesPing An601318N¥86.15¥91.007%CPIC601601N¥34.86¥32.00-6%NCI601336U¥60.02¥52.00-13%China Life601628U¥38.63¥31.00-19%China LifeTarget price (H)Up 15% to HK$41.00Target price (A)Up 9% to Rmb31.00EPS FY15eUp 11% to Rmb1.50Ping AnTarget price (H)Up 18% to HK$118.00Target price (A)Up 14% to Rmb91.00EPS FY15eUp 13% to Rmb4.85CPICTarget price (H)Up 8% to HK$39.00Target price (A)Up 5% to Rmb32.00EPS FY15eUp 11% to Rmb1.52NCITarget price (H)Up 30% to HK$65.00Target price (A)Up 29% to Rmb52.00EPS FY15eUp 37% to Rmb3.37PICC P&CTarget priceUp 8% to HK$19.50EPS FY15eUp 14% to Rmb1.35PICC GroupTarget priceUp 35% to HK$4.20EPS FY15eUp 10% to Rmb0.33TaipingTarget priceUp 17% to HK$35.00EPS FY15eUp 3% to HK$1.54AIATarget priceUp 5% to HK$42.00EPS FY15eUp 7% to US$0.37 Macquarie Research China insurance 8 May 2015 2 Sector summary  Fig 1 sets out a summary of the China insurance sector. Fig 1 HK/China insurance: Financial summary Source: Bloomberg, Company data, Macquarie Research, May 2015, prices closed at May 5, 2015 Fig 2 P/EV vs. RoEV Fig 3 P/B vs. ROE Source: Bloomberg, Company data, Macquarie Research, May 2015, prices closed at May 5, 2015 Source: Bloomberg, Company data, Macquarie Research, May 2015, prices closed at May 5, 2015 SUBSECTOR PURE P&C CompanyAIAChina LifeNCIPing AnCPICTaipingPICC GroupPICC P&