Summary

The profit growth of China Life (or the Group) has slowed down obviously since 2010 due to the higher increase of expenses than premium incomes. As at the end of 2010, net earned premiums of China Life increased by 15.6% yoy to RMB318.1 billion, and total expenses grew 16.2% yoy during the same period where insurance benefits and claims recorded 18% of year-on-year growth rate. The Group's profits before tax decreased slightly by 1.8% yoy, and net profits only increase by 2.3% yoy to RMB33.626 billion, equivalent to RMB1.19 of EPS.

In 2010, there was large volatility of A Shares, which caused the growth rate of the Group's investment income to slow down. As at the end of 2011Q1, net investment income of China Life decreased by 6.37% yoy, and its net profit dropped 22% yoy significantly, far below our estimation.

Overall, insurance premiums of China Life grow slowly, and investment return decrease obviously. However, the valuation of China Life now is quite attractive due to its stock price has decreased to the bottom of the year recently. Therefore, we upgrade China Life to Buy rating but reduce its 12-month target price to HK$34.70, around 30% higher than its last closing price.

Decrease of the growth of premiums and market share maintained stable

In 2010, premium incomes of China Life have decreased, and the growth of premium income was still in the bottom among the five largest domestic life insurance companies due to its large base.

However, it is worthy of noting that China Life still owns leading position in the market due to its strong band effect and large sales channel, and has quite strong ability to resisting systematic risks from the market and policies.

According to the data from CIRC, as at the end of 2011Q1, the Group's accumulative life insurance premiums increased by 5.19% yoy to RMB122.978 billion, which was the highest growth rate among the five largest insurance companies while the remaining three of them recorded obvious decrease rates compared with the same period of 2010 except CPIC whom gained 4% of year-on-year growth rate. Taikan Life owned the largest year-on-year decrease rate as 28%.

General speaking, the Growth of China Life's premiums has slowed down since 2010, and we believe it would continue to maintain on quite low level in the next two quarters.

On the other hand, the operating strategies of China Life are more conservative than the peers, and its market share has reduced in recent years. Especially in tier-2 and tier-3 cities, its business is not expanding as aggressive as the competitors have done such as China Pingan. Meanwhile, some small-and-middle-sized insurance companies hit the market with new products that have higher investment returns such as universals, which swallow China Life's market share. Overall, market shares of the five largest insurers have reduced.

As at the end of 2010, market share of China Life dropped from 36.23% in 2009 to 31.72% and the Big-5's market share reduced to 72.80% from 77.2% during the same period.

Fortunately, in 2011Q1, the Group's market share rebounded to 35.73%, representing it still has quite strong competitive advantages to resisting market risks.

Obvious decrease of investments

We noted that China Life's investment incomes dropped obviously recently due to the large volatility of stock market last year, which cumbered its profit growth. As at the end of 2010, the Group's investment incomes achieved to RMB48.872 billion, increased approximately by 26% yoy, and by the end of 2011Q1, such incomes decreased by 6.37% yoy to RMB 17.171 billion. During the same period, net profits of China Life dropped significantly 22% yoy to RMB7.971 billion, equivalent to RMB0.28 of EPS, decreased by RMB0.08 compared with that of the same period of 2010.

Additionally, investment assets of China Life amounted to RMB1.33 trillion in 2010, increased by 14% yoy, and total investment return rate was 5.11%. In 2011Q1, its investment assets achieved to RMB1.43 trillion, increased by 6.77% compared with the end of 2010, but its total investment return rate reduced to 1.11%, equivalent to 4.50% annually, the lowest after 2009Q1.

Embedded value increased consistently

China Life's embedded value recorded to RMB298.099 billion in 2010, 4.8% lower than our expectation, but total valuation was only 0.5% lower than our estimation. Therefore we still assume that total stock capital unchanged, and change the new business multiplying as 25 times, then embedded value of China Life would maintain the stable growth, and its embedded value per share would increase to RMB11.66 in 2011 as we expected.

Risk

Market share reduces continually due to the slow-down of the growth of premiums;

Domestic stock market subjects to large volatility in the near future, leads investment returns to decrease.

Valuation

In all, China Life's performance was worse than our expectation and the profit growth has slowed down. We use the average price between our embedded value estimation and sum-part method, and reduce China Life's 12-month target price to HK$34.70, around 30% higher than its last closing price, equivalent to 20.4xP/E, 3.3xP/B and 2.2xP/EV in 2012 respectively. Upgrade it to “Buy” rating.

Financial data

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