The commercial health insurance premium would exceed Rmb1.9 tn by 2025E, implying an 18% CAGR under our base case, driven by (1) continued growth of healthcare expenditure, (2) rising funding contribution from commercial health insurance to total healthcare expenditure, and (3) government policy direction to lower out-of-pocket healthcare expenses. Our bull case, based on accelerated growth of healthcare expenditure and health insurance funding, suggests that health insurance premium would amount to Rmb2.3 tn by 2025E, implying a 22% CAGR.

China’s healthcare expenditure could reach Rmb12 tn by 2025E, as we see rising demand for better healthcare, driven by (1) a demographic shift towards ageing population; (2)  growing household disposable income; (3) increasing supply of innovative therapies; (4) rising prevalence of chronic diseases. Post-COVID-19, however, the government is taking more measures to curb its rising healthcare spend, creating funding gap.

Looking ahead, we identify four secular trends that could drive growth for both the sectors: (1) vertical integration along the healthcare value chain by insurance companies, (2) partnerships between insurance providers and drug/device manufacturers, (3) hospitals to open up more and work with insurance providers, and (4) commercial health insurance gradually shifting towards a service-driven model, which could drive market concentration in the long term.

Ping An is likely to see the most VNB increment over the long term, reflecting the comprehensiveness of its business profile. On top of our estimated long-term VNB forecast, we revise up our current VNB multiple to capture valuation upside. We lift TP of Ping An (H/A) to HK$110/Rmb100 from HK$103/Rmb94. Based on our analysis of commercial insurance payout contribution to each healthcare subsector, we increase TP of Zai Lab (TP US$136) and New Frontier (TP US$11) as they benefit more from growth of commercial insurance. ZLAB’s partnerships with providers to increase coverage for innovative therapies and NFH’s collaboration with providers to offer hospital-led insurance could increase customer acquisition for both.