Zhongtai: Maintain Buy rating on PICC P&C (02328) as performance improvement is gaining momentum.

Zhongtai released a research report stating that it has slightly raised the net profit forecast for PICC P&C (02328) for the years 2026 to 2028 to be 416.60, 442.04, and 466.91 billion yuan respectively (originally forecasted to be 413.12, 438.91, and 463.36 billion yuan, updated based on underwriting profit and investment performance assumptions), with year-on-year growth rates of 3.2%, 6.1%, and 5.6%, and corresponding ROEs of 13.7%, 13.3%, and 13.0%. The report uses the PB-ROE valuation framework system for evaluation, based on the adjusted Gordon growth model, where PB=(ROE-g)/(r-g). The report assumes a long-term ROE of 12%, sustainable long-term growth rate of 1.5%, equity cost of 8.5%, and a target PB multiple of 1.5 times, maintaining a buy rating. Main points of Zhongtai's analysis: PICC P&C's stock price has fully rebounded in the past five years From "performance reversal" to "dividend recovery" to "improving industry fundamentals". The report divides the company's performance into four stages based on P/B ratio and dividend yield. In 1Q26, due to significant market volatility and high equity positions, the company's net profit decreased by 23.7% year-on-year, leading to a large drop in the company's stock price. The company's PB ratio has now fallen to 0.91 times (forecast by the end of 2026), with an expected dividend yield of 5.7% in 2026. With recent market style rebalancing, Hong Kong dividend stocks are expected to regain favor with market funds. The company's holdings through the Hong Kong Stock Connect system is at a historic high of 30.92%, indicating growing confidence. The company's dividend policy is stable and predictable As a rare target of pure property insurance companies, PICC P&C has inherent advantages in performance stability and dividend policy. This advantage is further highlighted after the implementation of new regulations. Under the old regulations, the dividend payout ratio for PICC P&C needed to be maintained above 40% (for the group, above 30%). Through stable long-term growth in DPS, the company aims to maintain a dividend yield in a reasonable and investor-friendly range, requiring stable cash dividends from PICC P&C as the group's profit base. The company's DPS for the full year 2025 was 0.68 yuan per share, a 25.9% increase year-on-year (with a 25.5% increase in net profit during the same period), and a cash payout ratio of 37.5%. Auto insurance business: In an era of stagnant markets, service capability is crucial, and under strict supervision, the company's economies of scale advantage is further reinforced The company's target for the comprehensive operating ratio (COR) of auto insurance business is to continue improving the COR if there are no major natural disasters or catastrophic events. Focus will be on enhancing the underwriting performance of new energy vehicle insurance. Looking back, from 1Q25 to 1Q26, the company's cumulative COR for auto insurance business over five quarters were 94.0%, 94.2%, 94.8%, 95.3%, and 93.5%. Since 2026, the slight decline in sales of new cars has slightly affected the growth of auto insurance premiums. The company's new energy vehicle insurance has already achieved underwriting profitability (with new energy household cars being profitable in 2024, and new energy car signings being profitable in 2025), demonstrating the company's risk pricing ability and business quality control as the industry leader. With the gradual decrease in accident rates for new energy vehicles, improvements in driving habits, advances in assisted driving technology, among other factors, the COR of new energy car insurance is expected to further decline. Non-auto business: The first year of the "report and underwrite together" policy, completing the underwriting profit landscape The company possesses six core capabilities including accurate and fast quotation ability, comprehensive channel expansion capability, rigorous underwriting operations, professional claims service capability, comprehensive reinsurance support capability, and cutting-edge risk reduction service capability. Fees for certain types of property insurance and employer liability insurances that have implemented "report and underwrite together" have already shown a significant decrease. The report assumes a decrease of approximately 2 percentage points in the overall expense ratio for the year, with the improvement in issuing fees benefiting the accumulation of investment assets. Considering the timing of insurance service revenue recognition and the coverage of the "report and underwrite together" policy on non-auto business, the impact on the overall non-auto insurance comprehensive operating ratio is expected to be less than 1 percentage point, and the report predicts a contribution of approximately 1.2 billion yuan to the company's 2026 full-year underwriting profit from non-auto business. Risk warnings: Continued decline in new car sales affecting the growth rate of auto insurance premiums, ongoing impact of the "report and underwrite together" policy on non-auto business exceeding expectations, persistently high occurrence of natural disasters affecting the level of claims payouts, significant market volatility impacting investment performance contributions to net profit, and a sharp rise in risk-free interest rates. Risks also include outdated information and calculation biases in the research report.