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China Life Revenue Growth Solid, Rising Costs Raise Concerns

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China Life Insurance Company Ltd.  shares have gained 24% outperforming the Zacks categorized Life Insurance industry’s gain of only 14%. The price appreciation has likely been driven by the company’s robust market position and organic growth initiatives that continued to solidify shareholders’ confidence on the stock. We expect the stock to retain its momentum owing to a number of positives.

The company recently reported strong first-quarter results, primarily driven by 17% year-over-year growth in earnings.

China Life has been witnessing consistent growth in revenues backed by a solid increase in premiums over the past few years. In the first quarter of 2017, net premiums earned grew 22% year over year to RMB 240.2 billion (US$ 36 billion). Also, net revenue from the insurance businesses reached RMB 246.2 billion (US$ 37 billion), up 22.1%  year  on  year.

The company’s regular product upgrades enable it to remain competitive in the international life insurance market. Following the launch of the upgraded Rui Xin insurance in 2013 and micro insurance program in 2015, the company promoted C-ROSS in 2016. C-ROSS is a risk management guidance that is expected to help the company maintain a robust risk control system, mitigate key risks, and ensure smooth business operations.

However, the company’s earnings have been adversely impacted by the slowdown in the Chinese economy over the last few years. Despite the brake in economic slowdown in 2017, there is no immediate development opportunity or scope for growth in the near future.

In addition, the stock seems to be overvalued. Its Price to Earnings Growth (PEG) ratio of 2.68 is above the industry level of 1.08. The Price to Book (P/B) ratio of 1.96 is also higher than the industry average of 1.10

Moreover, rising expenses raise concerns. Continuing the previous trend, operating expenses increased 23.4% year over year to RMB 263.9 billion (US$ 39.6 billion) in the first quarter of 2017.

The company’s operating cash flows have been pretty volatile. Operating cash flow declined in 2011, 2012 and 2013 owing to higher liquidity requirements. Although, it improved in 2014, the year 2015 witnessed cash outflow. In 2016, the company received an inflow of cash from operating activities amounting US$ 12.8 billion. The same, however, continued in the first quarter of 2017 with a cash inflow of US$16.1 billion. The volatile trend of cash flow raises concerns about the company’s operating efficiency as it might weaken its balance sheet and financial position.

Zacks Rank and Stocks to Consider

China Life has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here

Some better-ranked insurers are Cigna Corporation (CI - Free Report) , James River Group Holdings, Ltd. (JRVR - Free Report) and Old Republic International Corporation (ORI - Free Report) . All of the stocks carry a Zacks Rank #2 (Buy).

Cigna’s earnings beat estimates in three of the last four quarters with an average earnings surprise of 1.35%.

Another insurer, James River Group, delivered positive earnings surprise in the last four quarters with an average positive surprise of 9.47%.

Old Republic International surpassed expectations in two of the last four quarters with an average beat of 11.37%.

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