China Life Insurance Summary
Core Content
China Life Insurance (CILJF / LFC / 2628 HK) reported a 9-month earnings decline, which was anticipated due to a profit warning issued the previous week. The earnings showed signs of recovery in the third quarter, primarily due to a low base effect, as the company had corrected 29% in the same quarter the previous year. The report did not disclose the value of new business (VNB) growth, but it remained confident in the forecast of 38% VNB growth, supported by a 21% year-over-year (YoY) increase in premium growth. The stock currently trades at a low valuation, with a P/EV of 0.8x for the full year 2016 estimates.
Key Financial Highlights
Earnings Performance
- 9M16 Net Profit: RMB21,779 million
- Net Profit Growth (YoY): -37.24%
- EPS (HKD): 0.88
- Book Value per Share (HKD): 13.56
- DPS (HKD): 0.30
- Solvency Margin (Core): 288%, down from 298% in 2Q
Investment Performance
- Net Investment Return (9M16): 4.43%, down from 6.88% in 9M15
- Recurring Investment Yield (9M16): 4.5%, up 10bp YoY
- Total Investment Income (9M16): RMB107,640 million
- Net Investment Income (9M16): RMB101,283 million
- Net Realized and Unrealized Gains (9M16): RMB6,357 million
Liquidity and Reserves
- Extra Reserve in 3Q16: RMB7.8 billion, due to a 9bp decline in 750-day CGB yield
- Total Extra Reserve (9M16): RMB18 billion
- No adjustment to liquidity premium to smooth reserve catch-up
Valuation Metrics
Valuation (Dec)
| Metric |
2014A |
2015A |
2016E |
2017E |
2018E |
| Price to Book Value |
1.72 |
1.51 |
1.45 |
1.40 |
1.34 |
| PER |
13.90 |
13.51 |
22.42 |
25.44 |
21.18 |
| Dividend Yield |
2.53% |
2.53% |
1.53% |
1.34% |
1.62% |
| P/EV |
0.98 |
0.84 |
0.79 |
0.68 |
0.60 |
| Implied New Business Multiplier |
-0.44 |
-2.91 |
-2.97 |
-4.26 |
-5.12 |
Valuation (A Share)
| Metric |
2014A |
2015A |
2016E |
2017E |
2018E |
| Price to Book Value |
2.15 |
1.89 |
1.81 |
1.75 |
1.67 |
| PER |
18.94 |
17.58 |
28.01 |
31.77 |
26.45 |
| Dividend Yield |
1.85% |
1.95% |
1.22% |
1.08% |
1.29% |
| P/EV |
1.34 |
1.09 |
0.98 |
0.87 |
0.77 |
| Implied New Business Multiplier |
6.67 |
1.58 |
-0.27 |
-1.76 |
-3.00 |
Investment Rationale
- VNB Growth: Expected to continue due to aggressive agency expansion and improved agent productivity
- Investment Strategy: More conservative, with lower exposure to A share market and non-standard assets
- Valuation: Undemanding, with P/EV below 1x FY16E
- Price Objective:
- H Share: HK$25.47
- A Share: CNY20.15
- ADR: US$16.33
Risks and Opportunities
Downside Risks
- Macro Trends: A correction in the equity market could hurt the insurance business and reduce profits and EV
- Execution Risk: Product mix and premium pricing could affect long-term profitability
Upside Risks
- Better-than-expected VNB Growth
- Strong Equity Market Rally
Key Income Statement Data (Dec)
| Metric |
2014A |
2015A |
2016E |
2017E |
2018E |
| Gross Written Premiums & Policy Fees (CNY Millions) |
331,010 |
363,971 |
415,812 |
481,519 |
560,148 |
| Net Earned Premiums (CNY Millions) |
330,105 |
362,301 |
413,904 |
479,310 |
557,578 |
| Net Investment Income (CNY Millions) |
93,548 |
97,582 |
101,283 |
104,987 |
106,537 |
| Net Profit (CNY Millions) |
32,211 |
34,699 |
21,779 |
19,199 |
23,057 |
Balance Sheet Analysis (Dec)
| Item |
2014A |
2015A |
2016E |
2017E |
2018E |
| Cash (CNY Millions) |
743,343 |
645,051 |
683,273 |
726,419 |
775,612 |
| Fixed Maturity Investments (CNY Millions) |
1,120,214 |
1,229,728 |
1,302,595 |
1,384,848 |
1,478,630 |
| Equity Investments (CNY Millions) |
236,030 |
411,623 |
436,014 |
463,546 |
494,937 |
| Investment Portfolio (CNY Millions) |
2,100,870 |
2,287,639 |
2,423,193 |
2,576,206 |
2,750,667 |
| Total Assets (CNY Millions) |
2,245,284 |
2,447,078 |
2,598,757 |
2,769,681 |
2,964,037 |
| Shareholders' Equity (CNY Millions) |
284,121 |
322,492 |
336,820 |
349,450 |
364,619 |
Capital Adequacy
| Metric |
2016E |
| Equity / Net Premiums |
82.21% |
| Net Tech. Reserves / Net Premiums |
467% |
| Embedded Value / Share (HK$) |
25.03 |
| Value of New Business / Share (HK$) |
1.76 |
| Appraisal Value / Share (HK$) |
42.38 |
| Price / Embedded Value |
0.79 |
| Implicit New Business Multiplier |
-2.97 |
Company Description
China Life is one of the five state-owned insurers in China. It was previously part of PICC, established in 1949 as the state-owned monopoly insurer. The company underwent restructuring on 30 June 2003, with the listed company taking up the business after 10 June 1999, while the business before that date belonged to the parent company, CLIC.
Key Ratios
| Ratio |
3Q15 |
3Q16 |
9M15 |
9M16 |
| Surrender / Net Premiums |
20.6 |
9.9 |
28.7 |
17.2 |
| Claims / Net Premiums |
39.6 |
56.1 |
33.8 |
43.6 |
| Claims + Surrenders / Net Premiums |
60.3 |
66.0 |
62.4 |
60.8 |
| Reserves / Net Premiums |
36.0 |
34.6 |
34.3 |
35.4 |
| Reserves + Benefit / Net Premiums |
96.3 |
100.7 |
96.7 |
96.2 |
| Reserves + Benefit + Dividend / Net Premiums |
93.1 |
106.1 |
105.6 |
99.0 |
| Commissions / Net Premiums |
10.4 |
13.4 |
9.0 |
11.2 |
| Other Expenses / Net Premiums |
11.6 |
12.1 |
9.7 |
8.5 |
Market Data
| Metric |
Value |
| Rating (H Share) |
BUY |
| Rating (A Share) |
UNDERPERFORM |
| Rating (ADR) |
BUY |
| Price (H Share / A Share / ADR) |
19.80 HKD / 21.58 CNY / 12.85 USD |
| Price Objective |
25.47 HKD / 20.15 CNY / 16.33 USD |
| Date Established |
12-Sep-2016 |
| Investment Opinion |
C-1-8 / C-3-8 / C-1-8 |
| 52-Week Range (H Share) |
16.00 HKD - 30.90 HKD |
| 52-Week Range (A Share) |
19.03 CNY - 31.50 CNY |
| Market Value (mn) |
604,865 HKD |
| Average Daily Value (mn) |
124.34 USD |
| Free Float |
31.6% |
| BofAML Ticker / Exchange |
CILJF / HKG |
| BofAML Ticker / Exchange |
XCNNF / SHH |
| BofAML Ticker / Exchange |
LFC / NYS |
| Bloomberg / Reuters |
2628 HK / 2628.HK |
| Bloomberg / Reuters |
601628 CH / 601628.SS |
| ROE (2016E) |
6.5% |
| Net Dbt to Equity (Dec-2015A) |
NA |
Additional Notes
- The company's 9M16 life premiums amounted to RMB376.3 billion, a 21.2% YoY increase
- September 2016 life premiums: RMB34.5 billion, up 4.5% YoY and 18.2% MoM
- The report mentions that the analysts are employed by a non-US affiliate of MLPF&S and are not registered/qualified as research analysts under FINRA rules
- Important disclosures are referenced on pages 9 to 12
