Huachuang Securities: The long-term logic of the insurance industry looks at interest rates, and is optimistic about the long-term value of the current dividend sector configuration.

Huachuang Securities released a research report stating that the long-term logic is to look at interest rates. Long-term configuration should focus on bonds, as the downward interest rates bring reinvestment pressure. Increasing equity allocation can increase investment returns, while considering safety concerns may flow towards low volatility high yield assets. Meanwhile, from a cash flow perspective, dividend assets can partially compensate for interest income with dividend income, easing the pressure on net investment yield. In the short term, the logic is to look at market style rotation. Dividend callbacks open up dividend yield space, when high-quality dividend assets' dividend yields generally rise to 4-5% or higher, insurance funds, social security funds, pension funds, annuity funds, or similar long-term funds may increase their allocation to high dividend assets, and see the mid-to-long-term value of the current dividend sector allocation. Huachuang Securities' main points are as follows: Insurance funds: Continuous renewal drives cash flow, seeking "secure returns" under "redemption" pressure Funds from insurance funds mainly come from life insurance, with long-term characteristics providing stable cash flow through renewals. At the same time, with the increase in non-life insurance renewal rates, the stability of property insurance funds has also strengthened. As of 2024, the insurance industry's total funds reached 33.26 trillion, a 15% increase year-on-year. Insurance fund allocation is mainly fixed-income, with stocks and funds accounting for 12-14% in the long term. As of Q3 2024, insurance funds' heavy holdings of publicly traded stocks account for about a quarter of the total stock holdings, with bank stocks accounting for about half, and high-dividend stocks (above 3%) accounting for 66%. When viewed over a longer period, the proportion of high dividend stocks fluctuates upward, mainly driven by the decline in long-term interest rates. Social security funds: Relatively strong ability to withstand short-term fluctuations, leveraging advantages of long-term funds By the end of 2023, social security fund assets totaled 3.01 trillion, a 4.5% increase year-on-year. As of the end of 2023, social security funds' heavy holdings of publicly traded stocks accounted for 13.5% of total assets, with overall stock allocation expected to be in the 20-30% range. As of Q3 2024, in terms of industry distribution, social security funds are also concentrated in the banking sector, but after excluding social security funds as the main holding entity, the industry distribution is more diversified; both before and after excluding high dividend preferences are evident, with an overall high dividend ratio of 59%. Historically, the proportion of high dividend heavy holdings in publicly traded stocks has fluctuated upwards. Pension funds: Basic pension fund bias is minimal, annuity style is market-oriented By the end of 2023, China's basic pension/annuity funds reached 7.8/5.8 trillion respectively, with only 1.9 trillion of basic pension funds being entrusted for investment. Based on the first pillar orientation, basic pension fund bias is minimal, and as of the end of 2023, heavy holdings of publicly traded stocks in basic pension funds account for only 1.69% of the entrusted investment scale. Industry distribution is relatively diversified, and style preferences are relatively stable, with more layouts in industries such as pharmaceuticals, basic chemicals, automobiles, power equipment, and machinery equipment over the past five years. Although the proportion of high dividend stocks in heavy holdings of basic pension funds is relatively small (21%), their value-investment style preferences are still reflected. Annuity styles are stable and progressive, but due to the relatively small average fund size, the total market value of enterprise pension heavy holdings in publicly traded stocks is small. Longitudinally, enterprise pension style rotation is significant, with a noticeable fluctuation in the proportion of high dividend stocks in heavy holdings, showing a short-term upward trend since 2021. Dividend strategy from the perspective of "three funds" 1) From a fund perspective, changes in scale include incremental funds and market value fluctuations. Without considering positive policy influences, we estimate that the four types of long-term funds will increase by about 460 billion in the stock market in 2025, or flow towards the dividend sector by about 200 billion (rounded to the nearest hundred million). 2) From an asset perspective, using a 3% dividend yield as a standard, the total market capitalization of high dividend targets in the A-share market is 25.5 trillion, and in the H-share market is 18.7 trillion Hong Kong dollars, with high dividend stocks mainly concentrated in the banking sector. Looking at the banking sector, the dividend yield in the H-share market is more attractive, expected to mainly be influenced by the AH premium rate. 3) From a capital perspective, current profits of enterprises can be used for reproduction and dividends. We believe that enterprises with long-term investment value need to consider shareholder interests and reproduction, broadly defining quality dividend assets as enterprises with a long-term, sustainable dividend cash willingness and capability. Risk warning: Sample statistical differences, upward movement of long-term interest rates, increased volatility in equity markets, accelerated aging of the population.