EUR 850.00 For Business Accounts Only

Morningstar | China Life’s First Half Saw Weaker-Than-Peer Growth in New Business Value and Embedded Value

No-moat China Life's first-half 2018 34.6% year-on-year net profit growth was in line with our expectation, representing 52% of our full-year forecast. The results also highlighted strong business mix improvement as single-premium product shrank by CNY 52 billion from 2017, representing 3% of total premium, versus 18% in 2017. However, growth in new business value, or NBV, and embedded value were weaker than we expected. Given no changes to our key assumption, we retain our CNY 23 per share fair value estimate for the firm's A shares and lower our fair value estimate for the H shares to HKD 26 from HKD 28 per share to reflect the latest CNY/HKD exchange rate. We expect tailwinds of reserve expenses to mitigate in the second half and growth in net profits will slow to around 27% in 2018. With shares trading at a 26% discount to H-share fair value estimate, China Life’s stocks are undervalued, as the market is overly concerned about the negative impact of tighter regulations and stock market volatility. The current stock price implies a 0.6 times forward price/embedded value ratio, assuming 8% growth in embedded value in 2018, which is the lowest among Chinese peers under our coverage.

The strong net profit growth was boosted by the release of insurance reserve expenses as the 720-day moving average 10-year government bond yield fell, reducing this item by about CNY 26 billion. Excluding this impact, operating profits before tax grew 18% from the year-ago period, versus 35% growth as reported. NBV contracted 24% as a result of shrinking NBV per agent and agent headcount contraction. Embedded value increased just 4.8% due to contraction in NBV and negative investment return variance during the period. These growth rates were weak relative to close peer Ping An, which recorded the 0.2% and 12% respective growth rates. We expect China Life’s NBV and embedded value growth to remain weak in the near term, as the firm still lags leading peers in business transformation.

Premium grew 4% from the year-ago period, a strong rebound from a 19% contraction in the first two months. Though this growth rate was weaker than peers, it outperformed industry which registered a 9% contraction in the first half. Helped by increasing industry consolidation as regulation tightened, China Life’s market share expanded 2 percentage points to 22% from 2017. China Life’s agent channel is experiencing a difficult transformation, with NBV contracting 28% on a 2% agent premium contraction and a 12-percentage-point decline in NBV margin to 32% from 44% in the year-ago period. Management attributed this to negative growth in long-term saving insurance products, given increasing competition from other savings alternatives as interest rates climbed. Unlike Ping An, which recorded positive headcount growth from 2017, China Life’s agent headcount contracted 9% from 2017 due to lower agent compensation. Still, we are not overly concerned about the headcount decline and expect the company can achieve low-single-digit growth in headcount in the near term, as evidenced by its steady agent productivity, which indicated the company’s ability to improve agent quality during the current period of difficulty.