Earnings Expected To Decline, But Long-Term Investments May Provide Stability

Key Takeaways

• Focus on traditional products may hinder innovation, impacting future revenue growth amid evolving market trends.
  
• Recruitment and training emphasis might boost operational costs, risking net margin compression without proportional productivity gains.
  
• Digital transformation and strategic investments in green finance enhance operational efficiency, boost investment income, and improve sales productivity for future revenue growth.

Catalysts

Provides life insurance products and services to individuals and institutions in China.

• The company’s focus on traditional products and its plan to maintain growth in regular premium business could lead to slower innovation and adaptation to new market trends, potentially impacting future revenue growth negatively.
  
• The emphasis on strengthening and expanding the agent team through recruitment and training may increase operational costs in the short term, potentially compressing net margins if productivity gains do not keep pace with these investments.
  
• The strategic shift towards long-term investments in fixed income and equities, while aligning with a value-oriented investment approach, may expose the company to increased market risk, particularly in a volatile equity market, potentially affecting future earnings stability.
  
• With regulatory changes and a product shift emphasizing traditional and participatory products, the company might face challenges in maintaining competitive pricing and benefits, which could affect customer acquisition and retention, impacting long-term revenues.
  
• The company’s extensive reform and restructuring initiatives, although designed to improve efficiency and service, may result in transitional inefficiencies and uncertainties, potentially affecting medium-term operating performance and net profits.

New China Life Insurance Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming New China Life Insurance's revenue will decrease by 11.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 32.1% today to 34.6% in 3 years time.
• Analysts expect earnings to reach CN¥15.0 billion (and earnings per share of CN¥6.58) by about February 2028, down from CN¥19.8 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CN¥25.8 billion in earnings, and the most bearish expecting CN¥11.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.7x on those 2028 earnings, up from 7.6x today. This future PE is greater than the current PE for the CN Insurance industry at 7.6x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.93%, as per the Simply Wall St company report.

New China Life Insurance Future Earnings Per Share Growth

Risks

• The company's investment performance has significantly improved, with investment income increasing by 43.3% and comprehensive investment income up by 51.8%. This strong investment growth could bolster overall earnings.
  
• New China Life Insurance has successfully embraced digital transformation, integrating technology with business development strategies. This tech empowerment and business model innovation can potentially increase operational efficiency, positively impacting net margins.
  
• The company has seen a notable increase in its New Business Value (NBV) by 57.7%, highlighting potential for higher future revenues as a result of optimized distribution channels and improved business structures.
  
• The company's focus on long-term strategic investments in sectors such as green finance and rural revitalization could lead to strengthened revenue streams and long-term income stability.
  
• The launch of new initiatives like the XIN generation plan aims to enhance high-performing team building, potentially leading to increased sales productivity and improved financial performance relative to earnings.

Valuation

• The analysts have a consensus price target of CN¥42.285 for New China Life Insurance based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CN¥60.0, and the most bearish reporting a price target of just CN¥21.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CN¥43.4 billion, earnings will come to CN¥15.0 billion, and it would be trading on a PE ratio of 11.7x, assuming you use a discount rate of 9.9%.
  
• Given the current share price of CN¥48.31, the analyst price target of CN¥42.29 is 14.2% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.