2Q17 earnings increased 183% y-o-y from a low base as profit from the lifebusiness was helped by higher gains on securities investments (up 39% y-o-y) andlower commission expenses (-42% y-o-y).    Hedging costs remain a concern for Shin Kong. While annualized hedging costsfell from 2.86% in 1Q17 to 2.05% in 1H17 (which implies 159bp q-o-q improvementbased on our estimate), we believe it will still be hard for Shin Kong to achieve therevised guidance of 120-140bp (up from 120bp in 1Q17) as Shin Kong still has a thinFX volatility reserve buffer (0.14% of FX investments net of policies) partly due to itslower-than-peer FX policy mix at 16% vs 30% at Cathay (2882 TT, TWD49.25, Buy,TP TWD56.00) and Fubon (2881 TT, TWD48.40, Hold, TP TWD50). In fact, ShinKong raised its mid- to long-term hedging ratio target range to 80%-100% this quarterfrom 70%-95% previously and the actual hedging ratio by 0.6ppt q-o-q to 83.7%.    But 16% growth in 1H17 Value of New Business (VNB) was a positive surprise.    While growth slowed to 16% y-o-y in 1H17 from 60% y-o-y in 1Q17, it was still muchbetter than the 39% y-o-y decline reported by Cathay and Fubon. Traditionalproducts’ first year premium (FYP) only edged down by c.1% given strong sales ofFX savings products. While first year premium equivalent (FYPE) still dropped 24%y-o-y as a larger portion of the FX products are single paid, it was still better than the33% industry average decrease. Shin Kong is aiming for 3-5% VNB growth in 2017(lower growth in 2H17 due to high base in 2H16) and will continue to increase shareof FX policy sales for hedging cost management (which will take time to have ameaningful impact, in our view).    Banking business performance was on balance stable. While the net interest margin(NIM) declined by 2bp q-o-q, management explained that it was due to growth of FXdeposits that led to a lower loan-deposit ratio. The pre-provision profit was up 9.5% in1H17, but net income was down 11% on higher provisions despite the stable NPL ratio.    Maintain Hold with 8% higher target price of TWD9.4. Although we cut our 2017eearnings by 28%, owing to 10bp higher hedging cost assumption (to 1.6%), we raiseour life embedded value (EV) multiple on better margin assumptions given the 1Q17improvement sustained into 2Q17.

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