China Life Insurance Co. Ltd.

Transcription

1 December 05, 2014 China Life Insurance Co. Ltd. Current Recommendation Prior Recommendation Neutral Date of Last Change 12/05/2014 Current Price (12/04/14) $55.15 Target Price $66.00 OUTPERFORM SUMMARY (LFC-NYSE) We are upgrading our recommendation on China life to Outperform based on improved third-quarter results and strong ratings. The company s strength lies in its robust market position and business development initiatives. Its third-quarter earnings increased year over year banking on higher investment income. The product upgrade and higher life insurance sales also remain impressive. However, the new entrants in the China market will likely raise competitive pressure for the company, going forward, as its operations are largely concentrated on the domestic front. Alongside, substantial interest rate and currency risks pose direct threat to long-term growth. Nevertheless, superior brand name and core growth potential are likely to provide new business opportunities to the company. SUMMARY DATA 52-Week High $ Week Low $38.59 One-Year Return (%) Beta 1.03 Average Daily Volume (sh) 204,367 Shares Outstanding (mil) 1,884 Market Capitalization ($mil) $103,903 Short Interest Ratio (days) 3.58 Institutional Ownership (%) 0 Insider Ownership (%) N/A Annual Cash Dividend $0.64 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 9.6 Earnings Per Share (%) N/A Dividend (%) using TTM EPS N/A using 2014 Estimate 19.1 using 2015 Estimate 16.8 Zacks Rank *: Short Term 1 3 months outlook 1 - Strong Buy * Definition / Disclosure on last page Risk Level * Average, Type of Stock Large-Blend Industry Ins-Life Zacks Industry Rank * 101 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) ,955 A ,298 A ,803 E ,117 E Earnings Per ADR Estimates (EPADR is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2012 $0.06 A 2013 $0.14 A 2014 $2.88 E 2015 $3.29 E 2012 results translated at US$1=RMB , 2014 and 2015 results translated at US$1=RMB6.24 1ADR = 15 H Shares. Quarterly earnings and revenue figures are N/A. Projected EPADR Growth - Next 5 Years % Zacks Investment Research, All Rights reserved North Canal Street, Chicago IL 60606

2 OVERVIEW Headquartered in Beijing, China, China Life Insurance Company Ltd. is China s leading life insurance company. It is a subsidiary of China Life Insurance (Group) Company (CLIC), which is a Fortune Global 500 company. China Life is a leading provider of annuity products and life, accident and health insurance in China. It is also involved in short-term health insurance and other insurance-related services for individuals and groups. China Life was established on Jun 30, 2003 as part of the restructuring process of CLIC, which was formed in Oct 1949 and was the first insurance company to be set up in China. Additionally, China Life is the first Chinese company to be listed on three stock exchanges. The initial public offering (IPO) of China Life was the world s largest IPO in It was listed on the New York Stock Exchange, the Hong Kong Stock Exchange and the Shanghai Stock Exchange on Dec 17, 2003, Dec 18, 2003 and Jan 9, 2007, respectively. Additionally, China Life is the solitary company listed on the Hong Kong Stock Exchange that is a constituent stock in each of the three indices of the Hang Seng Sustainable Development Enterprises Indexes Series. China Life is the holding company of China Life Pension Co. Ltd. and China Life Insurance Assets Management Co. Ltd. (AMC) with 87.3% and 60% ownership, respectively. The company also owns a 40% stake in China Life Property and Casualty Insurance Co. Ltd. (P&C company). Through its controlling ownership in the AMC, China Life became China s largest insurance asset management company and one of the largest institutional investors. China Life has the most widespread distribution network in China. It had over 653,000 exclusive agents and 17,000 direct sales representatives as of Dec 31, China Life had about 177 million individual and group life policies, annuities and long-term health insurance policies in force at the end of Dec 31, The company s extensive distribution network enabled it to develop a huge customer base, which is managed by numerous sales outlets and customer service counters. China Life provides its products and services through the following main business segments: Individual life insurance (93% of the total premiums earned in 2013): This segment primarily relates to the sale of insurance contracts and investment contracts to individuals and comprises participating and non-participating life insurance, health insurance, accident insurance and annuity businesses. All products in this segment are issued for the long term. Group life insurance (1%): This segment primarily deals with the sale of long-term insurance contracts and investment contracts to group entities and comprises participating and non-participating business. Short-term insurance (5%): This segment relates to the sale of short-term accident and health insurance to both individuals and groups. Short-term products are issued for a period of 1 year or less. Corporate and other (1%): This segment covers incomes and expenses of subsidiaries and insurance agency business related to the provision of services to CLIC. Additionally, it includes unallocated income and expenses of CLIC and share of results of associates. China Life has received various honors for the strong brand name it possesses. It has been enlisted in the Fortune 500 companies for 10 consecutive years, the Global Top 500 Most Valuable Brands for 5 consecutive years and Forbes Global 2000 companies for 9 consecutive years. It also occupied the 129 th place in the FT Global Top 500 companies on the basis of market valuation and held the 106 th place in Equity Research LFC Page 2

3 the Forbes Global 2000 list in Further, it is placed fifth in the list of China s Top 500 Most Valuable Brands and is the top-ranked insurance company in the nation. REASONS TO BUY China Life has been witnessing upward estimate revisions owing to strong third-quarter earnings. Over the last 60 days the Zacks Consensus Estimate for 2014 increased 5.1% to $2.88 per share as one out of two estimates moved north. Over the same period, the Zacks Consensus Estimate for 2015 also increased 4.8% to $3.29 per share as all the estimates moved up. Rising estimates also reflect improved market confidence in the stock. China Life has the most extensive distribution and service network among all insurance companies operating in China. The company s distribution complex of exclusive agents, direct sales representatives, bancasurrance outlets, customer service managers and financial advisers is extended across the country, making it one of the largest brands with one of the biggest customer base in China. Additionally, to take care of its huge clientele, the company has established a strong customer service network with dedicated customer service representatives operating its innumerable sales outlets along with its customer service counters and help-lines that operate in every major city of China. Also, the company constantly upgrades its existing services. In Jul 2013, the company launched an upgraded version of the existing China Life Rui Xin Endowment Insurance, Rui Xin. The upgrade is providing an extended protection period, speedy annuity income and critical illness protection, thereby expanding the scale of services of China Life. The company also undertook a number of initiatives in Mar 2014 to accelerate its claims settlement process and thereby improve customer service. Additionally, the launch of the micro insurance program for the borderers of the Chongzuo City, Guangxi Province in Aug 2014 gives China Life a competitive advantage over others as this is the first program of its kind in the region. In the first nine months of 2014, the company maintained the business development momentum, and optimized the premium structure, thereby witnessing steady growth. Going ahead, the company intends to enhance its individual agent channel and business mix to accelerate growth. These developmental factors are expected to enable China Life to reach out to potential clients and help in generating new businesses while effectively managing its existing clients at the same time. The investment income of China Life has shown substantial improvement over the past few years. Investment income surged 26.1% in the first nine months of 2014 and 13.1% in Previously, it had increased 20.6%, 24% and 26% in 2012, 2011 and 2010, respectively, after declining 14% in Moreover, net investment yield remained positive over the years and increased 8 basis points (bps) to 4.83% at the end of the first nine months of 2014 from 4.75% at Jun-end As well, investment income from bank deposits also registered increases of 7.1%, 22.2%, 52.6% and 51% in 2013, 2012, 2011 and 2010, respectively, due to augmented deposit volumes, after declining 5% in Investment income from held-to-maturity securities and loans had also increased 63.2%, 42.1%, and 48.7% in 2011, 2012 and 2013 respectively, with consistent rise in 2013 of 48.7%, primarily due to increased volumes. With the improvement in the economic scenario, investment income is expected to improve further. China Life has a solid brand value, impressive market standing, well-established franchise widespread domestic distribution network, strong risk-based capitalization and liquidity in investment portfolio, which allows it to retain the confidence of rating agencies. In Oct 2014, Fitch Ratings affirmed an A+ IFS rating with a stable outlook owing to the aforementioned factors. In Feb 2012, the company had received an AA- long-term local currency counterparty credit and IFS rating from S&P, with a stable outlook. Although solvency ratio deteriorated 4187 bps to % in 2011, the subordinated debt issued in Jul and Nov 2012 improved China Life s solvency ratio in 2012 by 6546 bps to %. Although, solvency ratio decreased 936 bps in 2013, it is expected to improve again Equity Research LFC Page 3

4 given higher comprehensive income and business development initiatives of the company. An improvement in the solvency ratio implies an enhanced supplementary capital, strengthening the balance sheet of the company further. China Life was the first Chinese insurance company to obtain a private equity fund license and enter the private equity business in Aug As the leading life insurance company with a strong enterprise value, China Life is benefiting from this opportunity. The company s strong brand name and goodwill have enabled it to achieve success in the new field easily compared to other lesserknown insurance companies. Moreover, diversification of business has reduced the operational risks. As well, the private equity business can lead to high profits if managed properly. China Life has been witnessing an increase in net premiums over the past few years. Net premiums earned increased 3.7% year over year in 2009 and 15.6% in 2010, aided by strong premium growth in the Individual Life insurance business and remained almost flat in However, it again improved by 1.2% in 2012 and 0.8% in Although net premiums earned decreased in the first nine months of 2014, optimization of the premium structure by increasing the share of mid-to-long term regular premiums is expected to help the company recover this metric going forward. Given that premiums are the main source of business for an insurance company, premium increase is essential for topline growth in the long run. Thus, an increasing trend in premiums is likely to bolster company growth going forward. RISKS China Life s cash flow from operating activities is gradually declining. It plunged 23.1% in the first nine months of 2014 and 48.3% year over year in 2013 owing to higher liquidity requirements. Previously, operating cash flow fell 1.3% in 2012, mainly due to an increase in insurance benefits. It recorded a year-over-year decline in 2011 as well, primarily due to higher claims payments as well as an increase in cash outflow from the allocation of securities at fair value through profit or loss. This trend of reducing operating cash flow indicates the company s waning operating efficiency. Earlier, in 2010 and 2009, China Life s operating cash flow increased 19.3% and 18.7%, respectively, mainly due to higher premiums. A continued trend of lower cash flows can deteriorate the cash balance of the company, thereby weakening its balance sheet and financial position. Additionally, claims payable as of Sep 30, 2014 was RMB25.2 million (US$4.1 million), higher than RMB23.2 million (US$3.8 million) as of Dec 31, These claims when paid are likely to affect cash flows adversely. Moreover, despite the affirmation of the A1 IFS rating, a change in the Aa3 government bond rating of China led to a downward revision in Moody s rating outlook to stable from positive in Apr 2013, signaling risks. China Life is substantially exposed to market risks as majority of the company s investments is limited to China, making it highly vulnerable to a downturn in the Chinese economy. Further, the investments outside China are exposed to foreign exchange risks along with volatility in the concerned markets. Moreover, China Life faces intense competition from both domestic as well as foreign companies. New entrants in the life insurance market, including pension companies as well as foreign companies, with greater access to higher capital and better technology than China Life, are also putting substantial competitive pressure on the company. China Life occupies a nearly 50% market share but faces intense competition from the remaining 50%. Further, with the Chinese government encouraging the establishment of new health insurance companies to improve healthcare in the country, competitive pressure for China Life from potential new entrants is likely to increase. If it is unable to deal with the rising competition and market share declines or if it does not undertake significant growth strategies, China Life s financials might be affected adversely. China Life has been incurring higher-than-expected benefits and expenses owing to increased expenses in its individual, group and short-term insurance businesses. Total benefits and expenses Equity Research LFC Page 4

5 have continuously increased since Expenses rose year over year at the rate of 6.4% in 2009, 16.2% in 2010, 1.7% in 2011, 3.1% in 2012, and 7.7% in 2013 and 5.2% in the third quarter of 2014 mainly due to higher surrenders, policyholders dividends, underwriting and policy acquisition costs, administrative expenses and impairment losses. China Life needs to strengthen its cost management to avoid the negative impact of rising expenses on its financials in the long term due to capital erosion. Moreover, ongoing complexities in the economic development of China are making it very difficult for the life insurance industry and may weigh on future numbers. RECENT NEWS China Life s Q3 Earnings Improve Y/Y China Life reported third-quarter 2014 net earnings of RMB0.97 per share (US$0.16 per ADR) that improved from the third-quarter 2013 earnings of RMB0.84 per share (US$0.14 per ADR). Net premium earned during the third quarter increased to RMB103.6 billion (US$16.8 billion) from RMB96.8 billion (US$15.7 billion) in the year-ago quarter. Investment income stood at RMB28.9 billion (US$4.7 billion), up from RMB22.9 billion (US$3.7 billion) in the prior-year quarter. Financial Update Operating cash flow in the first nine months of 2014 totaled RMB41.3 billion (US$6.7 billion), down from RMB53.7 billion (US$8.7 billion) in the year-ago period. As of Sep 30, 2014, China Life had total assets worth RMB billion (US$348.4 billion), up from RMB billion (US$322.8 billion) as of Dec 31, China Life s shareholders equity totaled RMB257.9 billion (US$41.9 billion) as of Sep 30, 2014, up from RMB220.3 billion (US$36.04 billion) as on Dec 31, Equity Research LFC Page 5

6 VALUATION The ADRs of China Life currently trade at 19.1x our 2014 earnings estimate, at a 3% premium to the 18.5x industry average. On a price-to-book basis, the ADRs trade at 2.3x, at 109% premium to the 1.1x industry average. The price-to-book valuation looks attractive, given the ROE of 12% that is above the industry average of 7.8%. Our six-month target price of $66.00 equates to 22.9x our earnings estimate for Combined with the $0.64 per ADR annual dividend, this target price implies an expected return of 20.3% over that period. This is consistent with our Outperform recommendation on the ADR. Additionally, the quantitative Zacks Rank for China Life is currently 1, indicating clear upward directional pressure on the ADRs over the near term. Short interest is currently 3.6 days. Key Indicators F1 F2 Est. 5-Yr EPADR Gr% P/CF 5-Yr High 5-Yr Low China Life Insurance Co. Ltd. (LFC) NA Industry Average S&P Sony Financial Holdings Inc. (SNYFY) NA 17.0 NA NA NA The Phoenix Companies Inc. (PNX) NA 7.1 ING Groep N.V. (ING) Manulife Financial Corporation (MFC) NA 7.1 TTM is trailing 12 months; F1 is 2014 and F2 is 2015, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA China Life Insurance Co. Ltd. (LFC) Industry Average S&P NA 1.9 NA Equity Research LFC Page 6

7 Earnings Surprise and Estimate Revision History DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of LFC. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1137 companies covered: Outperform %, Neutral %, Underperform 6.5%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Research Analyst Copy Editor Content Ed. Lead Analyst QCA Rageshree Bose Parijat Sen Meenakshi Sharma Meenakshi Sharma Tanuka De Equity Research LFC Page 7