EUR 850.00 For Business Accounts Only

Morningstar | 02628 Updated Forecasts and Estimates from 16 Apr 2019

Following no-moat China Life’s investor conference held on March 29, we’re sticking to our HKD 23 and CNY 21 per share fair value estimate for H shares and A shares, respectively. The 65% drop in 2018 net profit is in line with the 50% to 70% decline as announced in its earlier earning alert, due to a 26% decline in investment income as total investment return fell sharply to 3.29% from 5.16%. While new business value or NBV performance was weaker than our expectation. NBV declined by 17.6%, dragged by an 8.6% decline in annualized new premium and 3.3 percentage point decrease in NBV margin, according to our estimate. H shares are trading at around 11% discount to our fair value estimate, which implies 0.6 times 2019 price/embedded value, or EV, assuming an 10% growth in EV. Although the shares look inexpensive at current valuation level, we recommend investors to get in with sufficient margin of safety given its higher-than-peer volatilities in both investment and premium income. Though, we acknowledged earlier, 2018 is likely to be a year earnings have bottomed and the expectation for next year is higher growth off a low base. We lack confidence that such growth is sustainable, as the implementation of the strategy needs time and consistent investment. New management’s execution remains untested.

The 8.3% growth in EV was in line with our expectation, which is lower than the 17% and 21% respective growths for CPIC and Ping An Insurance. Though China Life is the largest life insurers by premium income, its NBV merely contributed to 6.7% growth for EV, versus the 10% to 11% contribution for CPIC and Ping An, indicating lower quality of its new business. Growth from NBV was largely offset by a negative investment variance which reduced its EV by 6%, while its peers still posted positive investment variance despite challenging stock market in 2018.

Among the 17% decline in NBV, Agent NBV was hardest hit, recording a 10% decline in ANP and 5-percentage-point decrease in NBV margin. While NBV from bancassurance and group channels also declined by 7% and 6% respectively from 2017. After rapid headcount expansion over the past three years, China Life’s agent and bancassurance headcounts contracted by 9% and 28%, respectively, to 1.44 million and 250,000 in 2018. Business mix saw some improvement as shares of regular premium expanded by 26 percentage points to 90% of total new premium of long-term insurance products. This was primarily attributable to its efforts to scale back the sales of single premium by 82% to CNY 11.4 billion from CNY 63.7 billion. However, we’re a bit concerned about the quality of such product mix restructuring, as the sales of short-term insurance products with duration less than five years more than doubled to CNY 46.3 billion from CNY 22 billion. Such products tend to have higher surrender rate thus translate to higher earnings volatility. While sales of first-year premium for long-term contracts significantly declined by 36% from 2017. Given this, we retain our outlooks for a weaker-than-peer NBV growth for China Life in the near term.