EUR 850.00 For Business Accounts Only

Morningstar | China Life’s 3Q Net Profits Saw Sharp Decline on Volatile Capital Market

Following no-moat China Life's disappointing third-quarter results, we have reduced our fair value estimate to CNY 21 from CNY 23 per share for the A shares and to HKD 23 from HKD 26 per share for the H shares to factor in our dimmer outlooks for both premium growth and investment returns over the next two years. The H shares dropped 6.3% and are trading at a 30% discount to our new fair value estimate on the day after the results announcement. We believe China Life’s stock is undervalued, as the disappointing results were largely attributable to volatile capital markets and we expect premium growth will gradually improve in the coming quarter, in light of steady growth in agent headcount qualified for long-term protection product sales. The current stock price implies a 0.5 times price/forward embedded value ratio, assuming conservative 5% growth in embedded value in 2018 versus the average of 21% enterprise value growth over the past five years. This metric is at a historic low, compared with an average of 1 time during 2012-18.

Contrary to 35% year-on-year net profit growth for the first half, net profit for the first three quarters declined 26% from the year-ago period to CNY 19.9 billion, indicating a 76% drop in the third quarter. This was primarily driven by a 43% decline in investment income on a total investment yield at 3.3% versus 5.1% in the year-ago period, given the volatile capital market in 2018. Recovery in life premium growth was slightly slower than our expectation, with premium growth increasing to 5.5% in the past quarter from 4.2% in the first half as the company continued to clamp down on sales of short-term single-premium products. We expect full-year premium growth to improve to around 8%, owing to a low base, as the stricter rules on product sales took effect in the fourth quarter of 2017. However, relatively high returns on investment in fourth-quarter 2017 will continue to weigh on total revenue growth.

Compared with the high fluctuation in investment return, overall underwriting business was relatively stable for the first three quarters, growing 4.2% versus 3.8% for the first half. Renewable premium grew 29% and accounted for two thirds of total premium, while first-year premium dropped 25% on a decline in single-premium sales. We expect that full-year new business value, or NBV, growth remained negative, while this should gradually improve in the coming quarter, though at a slower-than-peer pace. Management hinted that agent headcount has stabilized and they expect slower but healthy growth in the near term. This was supported by the structural optimization in agent compensation, with rising contribution from the sales of higher-commission long-term protection products. We remain positive about the long-term growth of China’s life insurance market, as we expect the latest personal tax reform and upcoming corporate tax reforms should bode well for further expansion of China’s middle- to high-income groups, which are key customers for insurance products.