EUR 850.00 For Business Accounts Only

Morningstar | China Life’s 1Q Net Profit Grew 93% on Low Base and Strong Investment Return

No-moat China Life’s first-quarter results reported a 93% year-on-year growth in net profits and 28% growth in new business value, or NBV. Such growth was higher than our prior expectation. However, after taking a deeper look into the underlying drivers, we believe the company is unlikely to maintain such strong momentum in the following quarters. The glittering net profit growth was attributable to a strong year-on-year recovery in both investment income and premium income, which surging 93% and 9.3%, respectively, in sharp contrast to a 9% and 2% respective decline in the year-ago period. Thus, we are sticking to our HKD 23 and CNY 21 per share fair value estimate for H shares and A shares, respectively. H shares are currently fairly valued, trading at 5% 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.

We expect China Life’s revenue growth will no longer be compared against a low base as it did in 2018, as premium income growth gradually picked up to 5% in 2018 versus a negative 2% contraction in the first quarter of 2018. And we expect to see China’s domestic stock market cool off a bit after a 29% surge in the past quarter. The above-mentioned factors are likely to result in a slowing growth in coming quarters.

More importantly, we have yet to observe improvement in underwriting profitability. The combined amount of surrender expense and insurance liability reserve expense rose to 74% of net earned premium, versus a 65% in the year-ago period. Commission expense ratio climbed two percentage points to 10% of net earned premium, indicating higher earning uncertainties during the periods of aggressive change in product mix.

Growth in first-quarter gross premium income reached to 12% in the first quarter, surpassing the 8% and 4%, respective growth rates for Ping An Insurance and CPIC. However, we believe such growth rates are not comparable among these insurers, given the different strategy in their New-year Opening Campaign in the first quarter, which traditionally contributed over 40% of full-year premium. China Life has continued to focus on sales growth in the new-year sales via the introduction of annuity insurance product with 4.025% promised yield. However, its competitors claimed they have de-emphasized the aggressive New-year Opening Sales due to changing regulatory and market conditions.

The 28% surge in NBV from the year-ago period exceeded our expectation when compared with a 6% growth in new premium. Agent headcount rose 7% from 2018 to 1.43 million while bancassurance consultants increased 13% to 245,000. Contrary to market consensus, we believe it’s still early to conclude that such strong NBV growth indicates the firm’s success in business transformation, given a lack of further disclosure regarding NBV margin and NBV growth by channel. We suspect the growth was primarily due to low base in the year-ago period. Hurt by tightening regulations, China Life saw 33% decline in first-year premium in the first-quarter 2018. The company didn’t disclose NBV growth in that quarter, but we suspect it should be around 30% decline if referring to the correlation between NBV growth and first-year premium growth in the first half of 2018. Given such high fluctuation in NBV growth, we’re not impressed about its robust NBV growth in the past quarter.