1、Asia Pacific Equity Research 21 June 2010 Corrected Note (first published on 18 June 2010) China Life Insurance 2628.HK, 2628 HK Underweight HK$34.85 Price Target: HK$33.00 Slow and steady, but expensive 601628.SS, 601628 CH Neutral Rmb23.94 Price Target: Rmb24.00 China Insurance Bao Ling ChanAC (85
2、2) 2800-8592 Sunil Garg (852) 2800-8518 ited See page 12 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, invhave a conflict of interest that could affec
3、t the objectivity of this report. Investors should consider this repoinvestment decision. We initiate coverage with an UW rating and Dec-10 PT of HK$33 for the H-share, and a Neutral rating and Dec-10 PT of Rmb24 for the A-share: As the No.1 player, China Life has an unrivalled brand name and distri
4、bution reach in China and it is the only pure-play Chinese life insurer. We like its conservatism but prefer other insurers for better growth prospects and cheaper valuations. Slowing reform momentum and inevitable market share decline: The strong 2.7ppt rise in new business margin in 2009coming fro
5、m the lengthening of payment duration of policies sold by agents and the rise in bancassurance regular-premium salesis unlikely to continue throughout 2010, given difficulties in pushing through these reforms. We expect the insurer to report weaker-than-peer NBV growth in the absence of strong volum
6、e growth. Over the longer term, we see a decline in its premium market share as inevitable. The decline in its market share, while modest, has been across all geographies. Its strongholds, i.e. the fast-growing tier-2 and tier-3 cities, have been targeted strongly by other domestic insurers. Weaker
7、NBV growth should drive de-rating: Its 23x implied NBM vs. Ping Ans 13x and CPICs 16x should de-rate as China Life reports weaker-than-peer NBV growth. At the same time, close rivals are likely to produce stronger earnings growth in 1H10 given the low base effect in 1H09. Price target, valuation and
8、 key risks: Our Dec-10 price target of HK$33 (for the H-share) is based on 2.6x implied P/EV and 20x implied NBM. Key risks to our PTs are: (1) investors stick with China Life as a defensive play in a volatile market; (2) securing stronger distribution agreements with a major bank; (3) any possible
9、change of strategy to refocus on growth. Bloomberg: 2628 HK, 601628 CH; Reuters: 2628.HK, 601628.SS Rmb in millions, year-end December 2008 2009 2010E 2011E 2012E 6/17/2010Net profit (Rmbmn) 19,137 32,881 34,736 40,519 47,970 Share price (HK$/Rmb)EPS (Rmb) 0.68 1.16 1.23 1.43 1.70 52 week range (HK$
10、,RmbEPS growth (%) -50.8 71.8 5.6 16.6 18.4 Local mkt cap (HK$mn,RBVPS (Rmb) 6.15 7.47 8.21 9.05 10.05 Total mkt cap (US$mn)DPS (Rmb) 0.23 0.70 0.50 0.60 0.70 Avg daily value (US$mn)EV per share (Rmb) 8.49 10.09 10.80 11.97 13.28 Avg daily volume (mn)P/E (x) - H-share 45.2 26.3 24.9 21.3 18.0 Shares
11、 outstanding (mn)P/E (x) - A-share 35.4 20.6 19.5 16.7 14.1 Hang Seng Index/ShanghP/BV (x) - H-share 5.0 4.1 3.7 3.4 3.0 Free floatP/BV (x) - A-share 3.9 3.2 2.9 2.6 2.4 Exchange rate (HK$/US$Div. yield (%) - H-share 0.8 2.3 1.6 2.0 2.3 Fiscal year end P/EV (x) - H-share 3.6 3.0 2.8 2.6 2.3ROE (%) 1
12、0.1 17.1 15.5 16.5 17.6Source: Bloomberg, company reports, J.P. Morgan estimates. Note: Share price and valuations are as of 17 June 2010 J.P. Morgan Securities (Asia Pacific) LimPrice Performanceestors should be aware that the firm may rt as only a single factor in making their 263238HK$Jun-09 Sep-
13、09 Dec-09 Mar-10 Jun-102628.HK share price (HK$HSI (rebased)222834RmbJun-09 Sep-09 Dec-09 Mar-10 Jun-10Price Performance601628.SS share price (RmbSSEA (rebased)H-share A-share34.85 23.94) 27.15 - 41.45 22.82 - 34.68mbmn) 259,325 498,515106,331 106,331174.2 45.738.4 11.97,441 20,824ai C. Index 20,116
14、 2,56095% 7%, Rmb/US$) 7.79 6.83Dec DecIn this note, we correct PT which should be Rmb24.2 Asia Pacific Equity Research 21 June 2010Bao Ling Chan (852) 2800-8592 P (2) securing stronger distribution agreements with a major bank; (3) any possible change of strategy to refocus on growth. Key downside
15、 risks for China Life-A are (1) weaker-than-peer 1H10 results, (2) continued weak premium growt trend. Peer group comparison Bberg Price PT P/E P/BV P/EV Implied Rating Upside Ccy code 17-Jun-10 Dec-10 FY10E FY11E FY10E FY11E FY10E FY11E NBM Pot China Life-H HK$ 2628 HK 34.85 33.00 24.9 21.3 3.7 3.4
16、 2.8 2.6 23.1 UW -5% China Life-A Rmb 602628 CH 23.94 24.00 19.5 16.7 2.9 2.6 2.2 2.0 15.3 N 0% Ping An-H HK$ 2318 HK 62.70 82.00 26.7 21.4 3.7 3.2 2.1 1.8 13.0 OW 31% Ping An-A Rmb 601318 CH 45.04 59.00 21.9 17.5 3.0 2.6 1.7 1.5 8.6 OW 31% CPIC-H HK$ 2601 HK 30.55 35.00 25.1 20.5 2.7 2.5 2.0 1.9 15
17、.8 N 15% CPIC-A Rmb 601601 CH 21.08 25.00 19.8 16.1 2.1 1.9 1.6 1.5 9.2 N 19% PICC HK$ 2328 HK 7.70 5.50 26.0 20.4 3.0 2.6 n.a. n.a. n.a. UW -29% CTIH HK$ 966 HK 26.20 29.00 42.4 28.8 4.0 3.5 3.0 2.4 24.5 N 11% CNinsure US$ CISG US 27.25 30.00 20.1 14.6 3.6 3.0 n.a. n.a. n.a. OW 10% Source: Bloomber
18、g, company data, J.P. Morgan estimates. Share price are as of 17 June 2010 except for CNinsure (16 June 2010). Company description China Life is the largest life insurance company in China. The restructuring of the group has removed all the loss-marking legacy insurance policies from China Life. It
19、has an extensive distribution network and it sells mostly participating products. The company was listed in both Hong Kong and Shanghai, in 2003 and 2007, respectively. Premium breakdown (2009) 94.8%0.1%5.1%Indiv idual Group A (2) 1Q10 results showed weaker growth than close peers which benefited fr
20、om low base effect; and (3) its use of more aggressive investment yield assumptions amid a challenging investment environment in 2010. Figure 10: China LifeShare price movement 020406080Jan-07 Jan-08 Jan-09 Jan-10China Life-H (HK$) China Life-A (Rmb)Source: Bloomberg, J.P. Morgan. A-share listing Ja
21、n-07 A-share market peaked Sep-07 Part of HSI Mar-07 Sichuan earthquake May-08 Guidelines on new accounting standard Dec-09 1H09 NBV +38% YoY Aug-09 8 Asia Pacific Equity Research 21 June 2010Bao Ling Chan (852) 2800-8592 Catalysts supporting our Underweight call We expect the following catalysts w
22、ill drive China Life share price down in the next 3-12 months: 1) reporting substantially weaker-than-peer premium growth, 2) 1H10 results reveal little or no margin improvement, 3) further pullback in A-share markets, 4) investment return on negotiable deposits remain weak in view of delay in depos
23、it rate hikes. Upside risks to our Underweight call Upside risks include: 1) gradual pick up in premium income growth momentum, 2) China Life taking a strategic stake in one of the major state-owned banks to secure distribution and 3) faster-than-expected increase in number of agents. Company overvi
24、ew China Life is the largest life insurer in China with a 36% premium market share in 2009. The restructuring of the group prior to the listing of China Life has removed all loss-making legacy insurance policies from China Life. The company is ultimately 68%-owned by the Chinese government and it st
25、ill lacks a strategic investor. China Life sells predominantly participating products, which account for about 75% of its 2009 premium income. Bancassurance sales, consists mainly of single premium policies, accounted for 70% of its first-year premiums in 2009 based on our estimation. China Life has
26、 a truly nationwide distribution network, with an unrivalled agency network of 770,000 individuals. 9 Asia Pacific Equity Research 21 June 2010Bao Ling Chan (852) 2800-8592 SWOT analysis Strengths Unrivalled scale. China Life is the clear No.1 life insurer with 36% premium market share in China. It
27、 has an unrivalled brand name and distribution reach. It has 770,000 agents operating throughout China. Conservatively managed. It has a very conservative management approach driven by the fact that it is majority government owned and it is the largest life insurer. It is less aggressive in pursuing
28、 investment-type insurance policies (e.g. unit-linked) and it weathered the 2008 downturn better than most. Weaknesses Limited access to higher-yielding assets. Given its sheer size, it is very difficult for China Life to have sizeable investments in some of the higher yielding assets such as long d
29、uration government bonds, corporate bonds and infrastructure investments. Slow in changing. Given its conservative management style, it appears slow in embracing new products, distribution channels and investment channels. Challenges in managing a large sale force. The task of managing a large sale
30、force of 770,000 agents could prove to be difficult. This partially explains why it has been slow in adding new agents, in our view. Opportunities Government led reform. China Life, being majority government owned, should benefit from government led pension or health reform. Strategic investments. I
31、ts intention to take strategic stake in a major Chinese bank should help to secure distribution. Strong insurance demand in Tier-2 and Tier-3 cities. The Tier-2 and Tier-3 cities have shown very strong demand for insurance as China moves its economic development westward. Consumers are generally les
32、s savvy in these regions and demand simple insurance products which China Life sells best. Threats Competition imposed by Chinese banks. Chinese banks are very keen to expand into the insurance space and given that the banks own the customers and hence it is very difficult for China Life to compete
33、with the banks. Market share decline. It has seen steady decline in market share since listing and the decline appears across all geographies. Its strongholds, i.e. tier 2 and tier 3 cities, are increasingly being encroached on by other domestic players. Financial analysis We expect net income to im
34、prove only moderately in 2010. With continued focus on business mix restructuring, we do not expect China Life to expand its business aggressively. It will continue to report weaker than sector premium income growth despite at a much faster rate compared to last year. We expect a slight increase in
35、expenses given stronger premium growth and see downward pressure on investment yield. New business value expansion likely to lag peers but unlike its peers, we continue to see margin improvement for China Life. We expect China Life to maintain its generous dividend payout policy in 2010. Premium gro
36、wth: We expect China Lifes premium income growth to be weaker than peers at 12% despite being much faster than the 5% originally 10 Asia Pacific Equity Research 21 June 2010Bao Ling Chan (852) 2800-8592 targeted by management. We expect first-year premium growth of 9% and there will be a continued
37、rise in regular-premium contribution. Bancassurance will nonetheless remain an important channel for the insurer. Investment performance: China Life has fewer equity investments classified as trading and thereby has less earnings volatility. It had weathered the last equity market downturn better th
38、an others. As China Life did not add bond investment as much as others in 2009, it is actively exploring negotiable deposits to enhance yield. New business value: NBV expansion in 2010 will be driven by a combination of first-year premium growth and new business margin improvement. The calculation i
39、n annualized first-year premiums should benefit from a continued increase in regular-premium business. Embedded value: We expect EV to expand at 7% driven by steady increase in NBV barring any significant market value fluctuations in both equity and bond investments. We see limited room for the comp
40、any to revise upward its investment yield assumptions in 2010. Capital position: The insurers financial position is in good shape with a solvency ratio of 304% at the end of 2009. We estimate that the insurer has approximately Rmb75 billion of excess capital, so it is unlikely that it will raise any
41、 new equity in the foreseeable future. 11 Asia Pacific Equity Research 21 June 2010Bao Ling Chan (852) 2800-8592 China Life Insurance: Summary of financials Income statement (RMB in millions) 2008 2009 2010E 2011E 2012E Capital strength 2008 2009 2010E 2011E 2012EIndividual life GWP and policy fees
42、 252,130 261,715 292,201 331,988 378,788 GWP to shareholders funds 152% 130% 132% 136% 140%Other GWP and policy fees 13,526 14,255 15,916 18,083 20,632 Shareholders funds to total asset 17.7% 17.4% 16.2% 15.2% 14.3%GWP and (2) no part of any of the research analysts compensation was, is, or will be
43、directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. Important Disclosures Client of the Firm: China Life Insurance - A is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company
44、non-investment banking securities-related services. China Life Insurance - H is or was in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking securities-related services. Non-Investment Banking Compensation: JPMSI has received compens
45、ation in the past 12 months for products or services other than investment banking from China Life Insurance - A, China Life Insurance - H. 022446688110132Price(Rmb)May07Aug07Nov07Feb08May08Aug08Nov08Feb09May09Aug09Nov09Feb10May10China Life Insurance - A (601628.SS) Price ChartN Rmb24Source: Bloombe
46、rg and J.P. Morgan; price data adjusted for stock splits and dividends.Initiated coverage Jun 18, 2010. This chart shows J.P. Morgans continuing coverage of this stock; the current analystmay or may not have covered it over the entire period.J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Un
47、derweight.Date Rating Share Price (Rmb) Price Target (Rmb) 18-Jun-10 N 24.00 24.00 13 Asia Pacific Equity Research 21 June 2010Bao Ling Chan (852) 2800-8592 01632486480Price(HK$)Oct06Jul07Apr08Jan09Oct09China Life Insurance - H (2628.HK) Price ChartOW HK$45OW HK$28.4 OW HK$35.1 UW HK$3UW HK$17UW HK
48、$23.2UW HK$33 N HK$31.1N HK$29.6OW HK$29.6 OW HK$34.9 OW Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.Break in coverage May 03, 2005 - Feb 08, 2006, and Apr 14, 2010 - Jun 18, 2010. This chart shows J.P. Morganscontinuing coverage of this stock; the current a
49、nalyst may or may not have covered it over the entire period.J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.Date Rating Share Price (HK$) Price Target (HK$) 05-Jan-07 UW 27.00 17.00 17-Apr-07 UW 25.15 23.20 28-Aug-07 UW 35.15 33.00 17-Mar-08 N 25.70 31.10 26-Jun-08 N 28.00 29.60 28-Oct-08 OW 16.70 29.60 16-Jan-09 OW
