Zhongtai: Market investors will reprice earnings quality; focus on non-bank defensive opportunities with a favorable shareholding structure

Zhongtai: Market investors will reprice earnings quality; focus on non-bank defensive opportunities with a favorable shareholding structure Zhongtai released a research report stating: focus on non-bank defensive opportunities with a favorable shareholding structure. The newly disclosed standards achieve a shift from net profit to operating profit, and market investors will reprice earnings quality. Currently, the PEV valuation of insurance stocks has returned to historical lows, with relatively large pessimistic expectations; focus on layout opportunities after the third-quarter report is finalized. It is recommended to focus on leading large-cap heavyweight targets. Zhongtai's main views are as follows: From net profit to operating profit: the new IFRS18 disclosure standards do not change net profit data, but the mandatory new indicator "operating profit" will restructure the market's ranking of insurers' earnings quality In July 2026, the Ministry of Finance issued the revised CAS 30 (Cai Kuai [2026] No. 11). A+H listed insurers will implement it first on January 1, 2027, and will need to present comparative data for the same period of 2026 in 1Q27; the 2026 annual report has in fact already become a "shadow comparison period." The new standards divide current-period profit or loss into five categories: operating, investing, financing, income tax expense, and discontinued operations, and add two intermediate indicators, "operating profit" and "operating and investment profit." The main impact is on the presentation of investment income from associates and joint ventures accounted for under the equity method for long-term equity investments. From net profit to operating profit: repricing of earnings quality Because insurers have investment in specific assets as one of their main businesses, the returns generated by most investment assets are still included in "operating investment income"; only gains and losses on specific assets such as long-term equity investments and investment properties are separated into investment profit or loss items. On the financing side, "underwriting finance profit or loss is classified as operating, interest on sold repurchase is classified as financing, and interest on lease liabilities must be presented separately." After stripping out financing expenses, "operating and investment profit" eliminates differences in capital structure and is more comparable than the current "operating profit." The report constructs listed insurers' long-term equity investment contribution ratio, operating profit and investment profit contribution ratio, insurance service revenue contribution ratio, and operating profit leakage ratio. Pay attention to presentation differences for long-term equity investments First, equity-method income from associates and joint ventures is classified as investment. Second, CAS 22 tightens the requirements for recognizing long-term equity investments under the equity method: shareholdings below 20% must simultaneously meet four conditionsstrategic purpose, continuous board seat, substantive participation in decision-making, and access to financial informationand small synergistic equity stakes in banks, asset management companies, and others face pressure to be remeasured at FVTPL. Third, bargain purchase gains must be presented separately. In New China Life Insurance's 2025 non-operating income, "the net impact arising from the investment cost of acquiring associates being less than the fair value of the identifiable net assets of the investee that should be enjoyed at the time of acquisition" reached RMB3.404 billion (which falls under this difference). Analysis of impact changes on A-share listed insurers 1) China Life Insurance: investment income supports the operating base, and in recent years the performance contribution from joint ventures and associates has contracted. 2) New China Life Insurance: operating profit is highly dependent on investment income, and fair value fluctuations have a sensitive impact on profit or loss. 3) China Pacific Insurance: the profit structure is balanced, investment profit or loss disturbance is relatively small, and the impact difference from long-term equity investment presentation is almost negligible. 4) The People's Insurance: insurance service revenue accounts for the highest proportion of total operating revenue, long-term equity investment contributes relatively large gains, and investment properties are measured at fair value. Analysis of impact on insurance company valuations 1) "Operating profit" will replace "operating profit" as the comparable metric for insurer performance; China Pacific Insurance, with stronger operating profit stability, may be favored for valuation improvement. 2) Operating profit after tax (OPAT) must disclose calculation details and reconciliation tables in the notes in accordance with MPM requirements; CPIC and China Life's detailed OPAT metrics are expected to be forced into public disclosure, which is a plus for the credibility of the dividend anchor. Risk warning: The calculations in this article are based on manual breakdown of notes to the 2025 annual reports; some items are not disclosed, and the classification of "specific assets" involves subjective judgment, so there may be deviations from insurers' future formal disclosures; the accompanying income statement format is a draft for comments; risks include a trend decline in long-end interest rates, volatility in the equity market, and delays in research report calculations and updates.