2628: Fair Value Will Remain Steady As Profitability Outlook Is Tempered

Key Takeaways

• Diversification into whole life and participating products may face challenges from shifting preferences and interest rate impacts on revenue growth.
  
• Managing sales force transformation and comprehensive liability costs could strain operational efficiency, potentially affecting profitability and net margins.
  
• Strong revenue growth, improved net margins via new business, increased productivity, substantial investment income, and high solvency indicate solid financial health and future earnings potential.

Catalysts

Operates as a life insurance company in the People’s Republic of China.

• The company's shift towards a diversified product portfolio, including increased focus on whole life and participating products, indicates potential challenges in adapting to changing customer preferences and interest rate environments, which could impact revenue growth.
  
• The need for substantial training and transformation of the large sales force may lead to increased operational costs and inefficiencies in the short term, potentially affecting net margins and earnings.
  
• The rapid rebound of the stock market has significantly boosted investment income, but future market volatility poses a risk to sustaining this growth, potentially impacting future earnings stability.
  
• The company's strategic focus on managing the comprehensive liability cost to ensure long-term sustainability requires careful balancing, which, if not managed well, could affect profitability margins.
  
• As interest rates stabilize, the company acknowledges potential challenges in maintaining the net investment return rate, which may not align with optimistic long-term investment assumptions, potentially leading to reassessments that could impact future net margins and earnings growth.

China Life Insurance Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming China Life Insurance's revenue will grow by 33.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 34.9% today to 9.1% in 3 years time.
• Analysts expect earnings to reach CN¥67.9 billion (and earnings per share of CN¥2.49) by about September 2028, down from CN¥109.6 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CN¥118.5 billion in earnings, and the most bearish expecting CN¥40.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.0x on those 2028 earnings, up from 5.5x today. This future PE is greater than the current PE for the US Insurance industry at 8.5x.
• 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 6.89%, as per the Simply Wall St company report.

China Life Insurance Future Earnings Per Share Growth

Risks

• The company achieved record high gross written premiums, totaling RMB 608.2 billion, with an increase of 5.1% year-on-year. This indicates strong revenue growth and suggests potential for sustained earnings growth in the future.
  
• The value of new business maintained rapid growth, increasing by 25.1% compared to restated results from 2023. This strong growth in new business value signifies potential for improved net margins and earnings.
  
• The size of the sales force was stabilized, with a focus on improving sales force quality and productivity, leading to a 17.7% increase in the monthly average first year regular premium per agent. Improved operational efficiency and productivity can result in higher net margins.
  
• Investment income significantly increased, with a gross investment income rise of 152% year-on-year and a robust net profit increase of 174% year-on-year. This substantial increase in investment income can enhance the company’s overall earnings and profitability.
  
• The company maintained a high solvency ratio, with a core solvency ratio of 154.58% and a comprehensive solvency ratio of 211.64%, indicating strong financial stability and risk management, which supports sustainable revenue and earnings growth.

Valuation

• The analysts have a consensus price target of HK$23.551 for 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 HK$31.01, and the most bearish reporting a price target of just HK$14.24.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CN¥746.6 billion, earnings will come to CN¥67.9 billion, and it would be trading on a PE ratio of 11.0x, assuming you use a discount rate of 6.9%.
• Given the current share price of HK$23.16, the analyst price target of HK$23.55 is 1.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.