EUR 850.00 For Business Accounts Only

Morningstar | China Life’s Investor Day Revealed New Strategy, our FVE Still Holds

Following no-moat China Life’s investor conference held on Friday, we’re sticking to our HKD 23 and CNY 21 per share fair value estimate for H shares and A shares, respectively. The new management team revealed a strategic transformation plan over the next three to five years. We are encouraged by its revamped management incentive program and efforts to beef up sales capacity for protection type products in bancassurance and group insurance channels. The stock is fairly valued, trading at 0.7 times 2018 price/embedded value, or EV, assuming an 8% growth in EV. We believe the market over-reacted to this event with share price up nearly 8%. Though we acknowledged earlier, 2018 is likely to be a year earnings have bottomed and expect higher growth off a low base, the implementation of the strategy needs time and consistent investment. Further, new management’s execution remains untested. Management hinted that value growth related indicators including new business value and EV represent over 70% of total weights for the incentive program, while the remainder includes metrics such as growth in premium income and agent force. Facing intensifying competition, it has lost nearly 20% market share from 40% in 2008, while its 11% CAGR growth in EV was well below the about 20% level of listed life insurers. This was due to swaying focus between value and scale. Given heavy contribution from low-margin bancassurance channel, it faces greater-than-peer challenges to transform to the high-margin agent-driven growth without losing market shares. Under its new strategy, China Life will focus on enhancing capacity to sell high-value protection type products in bancassurance channel by leveraging its strong tie with banks and its huge bancassurance sales agents, instead of simply ceasing the sales of single premium products. We expect this strategy will enable the company to achieve a better balance between value and scale, and less volatilities in premium income going forward.

The company’s 2018 shareholder’s net profits are expected to drop 50% to 70% from 2019 according to their earlier announced earnings alert. This was mostly attributable to impairment loss as domestic market slumped by about 25% in the past year. We expect the company is likely to recognise 13% to 36% losses to its equity portfolio which accounted for 10% of its total investment or CNY 28 billion. Management explained its higher-than-peer volatility in investment return was partly due to stricter impairment standard, which include share price falls persistently below 20% of initial cost for six months, in addition to the commonly-used standard for share price falls below 50% of initial cost or falls persistently below initial costs for one year. Management hinted that they will enhance its equity investment strategy by emphasising on dividend-stocks and long-term holdings to fit in with long-term macro trend. We believe the change in investment strategy for life insurers is not easy, as it needs to match future cash needs of its underlying portfolio. Thus, we are not overly optimistic about this and will keep track of ongoing transition of its product mix.