We are maintaining our Neutral recommendation on China Life Insurance Co. Ltd based on its extensive domestic distribution channel, strong balance sheet, substantial cash flow and stable ratings. However, the company is inherently exposed to substantial interest rate and currency risks, which limit the upside. Moreover, despite a strong brand name, significant competition on the domestic front hinders earnings growth.
China Life posted earnings of RMB0.34 per share (81 cents per ADR) in the first half of 2012, down 26.1% from RMB0.46 per share (US$1.05 per ADR) in the first half of 2011.
China Life, which competes with ING Group NV (ING - Free Report) , Manulife Financial Corporation (MFC - Free Report) and Sun Life Financial Inc. (SLF - Free Report) , has the most extensive distribution and service network among all insurance companies operating in China. The company’s distribution network of exclusive agents, direct sales representatives, bancasurrance outlets, customer service managers and financial advisers is spread across the country, making it one of the largest brands with one of the biggest customer bases in China.
Moreover, China Life’s cash flow from operating activities has been growing substantially over the years. The proportion of cash and cash equivalents in the investment portfolio increased to 5.32% as of June 30, 2012, from 3.74% as of December 31, 2012. Higher cash flows augment the cash balance of the company, thereby strengthening its balance sheet and financial position.
However, China Life has been witnessing a gradual deterioration in net premiums over the past few quarters. Net premiums earned declined 5.2% year over year in the first half of 2012. Given that premiums are the main source of business for an insurance company, an increase in premium is essential for top-line growth in the long run. Lower premiums can severely dent the operating strength of the company.
Moreover, China Life faces intense competition from both domestic as well as foreign companies. New entrants in the life insurance market including pension companies as well as foreign companies, with greater access to higher capital and better technology than China Life, are putting substantial competitive pressure on the company.China Life’s results could be seriously affected if it is unable to deal with the rising competition.
China Life carries a Zacks #3 Rank, implying a short-term Hold rating.