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LFC: Buy on Valuation at Chinavestor

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LFC_2011Q2_thumb September, 2011 (Dawei Wu) We recommend a buy rating on China Life Insurance (NYSE:LFC) based on its current financial valuation and relatively low price. Revenue increased by 5.6% year-on-year of the first half year of 2011 and the company managed to gain more market share (43%) of the Chinese insurance industry. We expect the company to further increase market share and enhance profitability.

 

Strong earnings growth and financial position

China Life Insurance Q2 2011 results indicate that, on a year-on-year basis, revenues increased by 5.6% and net income decreased by 28.1%.  But the company is guiding for further increases in revenues for the future.

Dominance of the Chinese Insurance Market

China Life Insurance managed to increase its market share to 43% of Chinese insurance industry. The other three main insurance companies, Ping An Insurance, China Pacific Insurance and PICC share the rest of the market. We think the share of China Life Insurance is expected to grow as it expended its business to non-life insurance.

Growth Prospect

China Life Insurance commitment to the diversification of non-life insurance business suggests that the company got more opportunities for further growth.

LFC_2011Q2_DW_1

LFC_2011Q2_DW_2

  1. Earnings Growth and Financial Position

First half year results for 2011 show strong revenues and earnings growth as compared to the same period last year.  Revenues increased by 5.6% from year-on-year. Tracking historical data, China Life Insurance (NYSE: LFC) revenue growth remained at around 13%, and it is estimated that total revenues of 2011 will reach more than RMB 400,000 million. However, in the past five months the total revenues steadily went down. China Life Insurance (NYSE: LFC) revenue generation is under pressure.

In past 2010, total revenue of China Life Insurance reduced from RMB 128,733 million in first quarter to only RMB 86,658 million in second quarters, almost 33% decrease. It remained RMB 86,658 million and RMB 81,540 million in 3rd quarters and 4th quarters respectively, much lower than expectation compared to 1st quarter revenue. Although its first five months revenue in 2011 reached RMB 166,500 million, the month revenue kept going down. Total revenue in first five months in 2011 was pretty much lower than the revenue achieved at the same period in 2010, which was approximately RMB 186,505 million.

LFC_2011july_premsincome

China Life Insurance reported net profit of RMB 19,274 million, RMB 33,036 million and RMB 33,811 during 2008 and 2010. Although both total profit and net profit increased, its profit margin went down by 1% in 2010. Due to the limited revenue growth and increased cost, China Life Insurance’s profit margin will be go down in 2011 (Estimated) to about 8.31%.

Revenue Growth and Profit Margin Growth,
China Life Insurance (NYSE: LFC)

LFC_2011Q2_DW_3

On the other hand, Cash Flow from operation of LFC cut off on 2nd quarter, 2011, and it remained relatively low at RMB 42,120 million and RMB 32,115 million in 3rd and 4th quarter, respectively. The cash inflow was under pressure, due to the possible reason that the operating incomes were relatively low during that period.

Cash Flows from Operation, China Life Insurance (NYSE: LFC)

LFC_2011Q2_DW_4

In the first half year of 2011, China Life Insurance (NYSE: LFC) achieved net increase of cash and cash equivalents to RMB 31,677 million from RMB 8,521 million in 2010 year-to-year. China Life Insurance established a cash flow testing system, and conducted regular tests to monitor the cash inflow and outflows under various changing circumstances and adjust accordingly the asset portfolio to ensure sufficient sources of liquidity. During the Reporting Period, Net cash outflow from investment activities increased by 5.3% year-on-year. However, net cash inflow from operating activities decreased by 13.7% year-on-year. This was primarily due to an increase in maturity benefits. Net cash inflow from operating activities is below the expectation, and we think this reflected that the company revenue realization is under pressure.

LFC_2011Q2_DW_5

Dominance of the Chinese Insurance Market

China Life Insurance managed to gain 43% of the total market share. As the largest commercial insurance group in China, China Life Insurance (NYSE:LFC) holds around USD 80.06 billion market cap, approximately 43% of the total Chinese Insurance industry market cap. The other three main competitors, Ping An Insurance, China Pacific Insurance and PICC shared the rest of the market cap.

Market Share based on Total Revenues

LFC_2011Q2_DW_6

China Life Insurance (NYSE: LFC) profitability ratio in 2010 performed better than industry average, however poorer than the sector performance and S&P 500 performance. China life Insurance showed a good condition in profit-making in the long term.


2010


Company

Industry

Sector

S&P 500

EBITD Margin (TTM)

63.52

--

--

--

Operating Margin (TTM)

10.17

5.21

28.99

--

Pre-Tax Margin (TTM)

10.63

4.94

31.03

16

Net Profit Margin (TTM)

8.76

4.04

22.85

11.9

Data collected from Reuters.com

Compared with other competitors, China Life Insurance (NYSE: LFC) ROA, ROE and net profit margin all perform well in the market. China Life Insurance is the leading insurance company in Chinese Insurance industry, however, its management effectiveness and its profitability maintained at the average. The other three major insurance companies, Ping An Insurance, China Pacific Insurance and PICC, are still quite competitive to the LFC.

Four Main Companies Ratio Comparison

Return on Asset

Return on Equity

Net Profit Margin

China Life Insurance

2.56

16.02

8.76

Ping An Insurance

1.7

17.57

9.16

China Pacific Insurance

1.99

11.04

6.13

PICC

2.84

22.37

4.07

Average

2.27

16.75

7.03

Return on Assets Comparison

LFC_2011Q2_DW_7

LFC_2011Q2_DW_8

LFC_2011Q2_DW_9

China Life Insurance Stock Performance

LFC_2011Q2_DW_10

Looking back the historical data in previous year, China Life Insurance (NYSE: LFC) returns is significantly correlated with the market returns. T-stat is 20.85 and P-value is 5.02928E-66, which are in the perfect range under 95% confidence reliability. China Life Insurance holding-period-returns technically followed the trend of Market returns. The BETA of China Life Insurance (NYSE: LFC) is 0.994, pretty close to the fluctuation of the market, while other three competitors have higher BETA than China Life Insurance, which are much risky in the market. On August 6th 2011, stock market sharply cut 15%, and it maintained fluctuated at the bottom line.

With the recovery of the stock market, I think the China Life Insurance (NYSE: LFC) price will recover right follow the market.


2. Growth Prospect

July 5, 2011 Company announced capital injection to China Life Property and Casualty Insurance Co., Ltd. P&C Company). The total amount of capital to be injected by LFC and CLIC into P&C Company is RMB1.6 billion and RMB2.4 billion by the subscription of 1.6 billion shares and 2.4 billion shares at RMB1.00 per share, respectively. Upon completion of the capital injection, P&C Company will continue to be held as to 60% and 40% by CLIC and the China Life Insurance, respectively.

China Life Insurance’s capital injection to P&C Company enables the company to benefit from the non-life insurance market. More importantly, it enables the company to diversify its business operation and expand its profit drivers in the long term. But in the short term, it just has limited revenue effect of the China Life Insurance.


Table 1: China Life Insurance. – Quarterly Income Statement (USD, in millions)

Q1 2010

Q2 2010

Q3 2010

Q4 2010

Total Premiums Earned

219,980.00

-36,391.00

145,088.00

-10,589.00

Net Investment Income

18,415.00

5,931.00

-57,107.00

81,913.00

Realized Gains (Losses)

--


--


Other Revenue, Total

109,662

110,852

926

641.00

Total Revenue

128,733.00

86,658.00

88,907.00

81,540.00

Losses, Benefits, Total

22,394.00

32,340.00

18,706.00

33,793.00

Admin. Expenses, Total

9,260.00

5,340.00

7,393.00

11,516.00

Unusual Expense (Income)

13


637


Other Operating Expenses, Total

84,692.00

39,770.00

53,654.00

25,793.00

Total Operating Expense

116,359.00

78,499.00

80,390.00

71,353.00

Operating Income

12,374.00

8,159.00

8,517.00

10,187.00

Gain (Loss) on Sale of Assets

--


--


Other, Net

1


2


Net Income Before Taxes

12,375.00

9,228.00

8,519.00

10,886.00

Provision for Income Taxes

2,123.00

1,365.00

1,548.00

2,161.00

Net Income After Taxes

10,252.00

7,863.00

6,971.00

8,725.00


Table 2: China Life Insurance Quarterly Balance Sheet (USD. in millions)


Q4 2010

Q3 2010

Q2 2010

Q1 2010

Cash

--

--

--

--

Cash & Equivalents

47,854

39,275

44,718

55,632

Receivables - Other

--

32,142

--

19,856

Total Receivables, Net

--

32,142

--

19,856

Prepaid Expenses

--

--

--

--

Total Current Assets

--

--

--

--

Accu Depr., Total

--

--

--

--

PPE - Net

18,946

17,728

17,908

17,213

Intangibles, Net

--

3,715

--

3,371

Long Term Investments

1,266,590

1,237,430

1,179,470

1,148,710

Insurance Receivables

7,274

12,075

12,484

12,971

Note Receivable - Long Term

--

--

--

--

Other Long Term Assets, Total

6,153

6,153

6,153

6,154

Other Assets, Total

63,765

24,217

59,622

17,532

Total Assets

1,410,580

1,372,740

1,320,350

1,281,440

Accounts Payable

1,008,900

972,264

931,769

882,372

Payable/Accrued

--

--

--

--

Accrued Expenses

--

--

--

--

Policy Liabilities

11,313

19,580

10,915

18,090

Notes Payable/Short Term Debt

0

--

0

--

Current Port. of LT Debt/Capital Leases

--

--

--

--

Other Current liabilities, Total

154,373

155,180

156,631

144,098

Total Current Liabilities

--

--

--

--

Total Long Term Debt

0

--

0

--

Total Debt

0

--

0

--

Deferred Income Tax

11,776

14,010

11,565

14,657

Minority Interest

1,765

1,726

1,660

1,742

Other Liabilities, Total

13,746

3,377

16,075

3,055

Total Liabilities

1,201,870

1,166,140

1,128,620

1,064,010

Total Equity

208,710

206,598

191,739

217,424

Total Liabilities & Shareholders' Equity

1,410,580

1,372,740

1,320,350

1,281,440


Analyst Certification

I, Dawei Wu, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or view expressed in this research report.

Copyright, user agreement and other general information related to this report:

Copyright 2010 Chinavestor.com. All rights reserved. This research report is prepared for the use of Chinavestor.com clients and may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of Chinavestor.com.

This research report provides general information only. It is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice. Past performance is not necessarily a guide to future performance.

Fundamental equity reports are produced on a regular basis as necessary to keep the investment recommendation current.



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