China Stock Research  May 2007

We recommend buy rating on China Life Insurance Company Limited. The company holds an unrivaled position in the life insurance market in China. Thanks to the booming economy and imperative requirement to put an innovative social security system in place, the company achieved marvelous growth. With the effective cost control and widespread distribution channel, as well as unmatched investment advantage, there is no sign show that the company will cease growth in the near future.   Robust growth Over the last a couple of years, the company achieved substantial growth, with a total revenue increase of 50% in 2006 from 2005, and net profit up 114.4% from 2005. The EPS was RMB 0.27 in 2004, RMB 0.35 in 2005, and RMB 0.75 in 2006.   Solid leading position The life insurance market in China grows steadily. The market share of the company remained dominant, with 44.07% in 2005, 45.27% in 2006, and 47.74% during Jan-May 2007 respectively.   Cost efficiency The cost ratio of the company kept deceasing over the last three years based on the efficient management, while distribution channel has been consolidated.   Unique investment privilege Backed by the Chinese State Council, the company has an unparalleled advantage over its competitors in investment channel, which brings great potential profit to the company.       Summary We recommend buy rating on China Life Insurance Company Limited. LFC is the largest life insurer with a dominant market share based in China. Due to the fast economic growth and an aging population as well as the urgent requirement to improve the social security system in China, the company achieved rapid growth over the past years. At the same time, the effective cost control and unique investment privilege will further strengthen its solid leading position.   BUY rating   Robust growth The fast economic growth and increase in per capita income of China greatly improve demand for insurance in China. And also due to an aging population and further improvement in social security system, the Chinese State Council’s Opinions on Accelerating the Development of the Insurance Industry heralded unprecedented growth opportunities for insurance industry. Based on enhanced corporate governance, LFC achieved rapid growth over the last a couple of years.   The total revenue for 2006 was RMB 147,311 millions, representing an increase of 50% from 2005. Gross written premium and policy fees for 2006 were up 22.7% to RMB 99,417 millions, compared to that of RMB 80,122 millions in 2005. In the meantime, the company effectively captured the conditions in capital markets. The investment yield for 2006 was 4.27% compared to 3.86% in 2005, with an increase of net investment income to RMB 24,942 millions in 2006 from RMB 16,500 millions in 2005. As a result, the company achieved a substantial improvement in profitability. Net profit for 2006 reached RMB 20,051 millions, up 114.4% from 2005. And return on average equity was up 7.9% to 20.6% in 2006 from 12.7% in 2005. The EPS was RMB 0.27 in 2004, RMB 0.35 in 2005, and RMB 0.75 in 2006.     In addition, for the year of 2006, LFC’s cash flow from operation increased by RMB 48,252 millions to RMB 80,352 millions from 2005. This was mainly due to an increase of net profit (by RMB 10,347 millions), and a rise of cash flow from receivables and payables (by RMB 12,498 millions), as well as the expansion of long-term traditional insurance contracts (by RMB 10,155 millions). Moreover, the company issued 1.5 billion A shares in Shanghai Stock Exchange with net proceeds of RMB 27,810 millions. At the same time, the company put RMB 141,038 millions in investing activities, an increase of RMB 49,698 from 2005. Therefore, net cash inflow at the end of 2006 increased by RMB 22,162 millions to RMB 50,213 millions from 2005. Solid leading position According to the statistics of China Insurance Regulatory Commission (CIRC), as of May 2007, there are 46 companies involved in the life insurance business in China. However, facing the tough competition, the market share of LFC has been solidified. LFC’s major competitors are Ping An Insurance (listed on Shanghai Stock Exchange) and China Pacific Insurance (Privately held). The data from CIRC show total premiums and policy fees for life insurance in China were RMB 364.62 billions in 2005, LFC with 44.07%, followed by Ping An Insurance with 16.14% and China Pacific Insurance with 9.93%. In 2006, total premiums and policy fees reached RMB 406.11 billions, in which LFC accounted for 45.27%. Recent data indicate that total premium and policy fees for January – May 2007 were RMB 214.3 billions, in which LFC took up 47.74%.   Among its solid market position, LFC increased its individual life insurance premium for 2006 by 25.7% to RMB 86,587 millions from RMB 68,888 millions in 2005, and up 37.3% to RMB 1,740 millions in group life insurance. On one hand, LFC is continuing its market leadership in cities. On the other hand, LFC is taking positive measures to actively expand into rural areas, which is in line with Chinese governmental policy to establish pension and medical care system for the countryside population. Continuous enhancement in cost efficiency Due to strengthened oversight of budget execution, control over administrative expenses and centralized bulk procurement, LFC achieved consecutive enhancement in cost efficiency. The administrative and acquisition-related cost for 2006 was RMB 22,013 millions, representing a consolidated cost ratio of 14.9%, compared to that of 17.2% in 2005 and 18.8% in 2004. While LFC improves its cost efficiency, LFC continues to consolidate its distribution channels. The exclusive agents are LFC’s core distribution channel for its insurance products. As of the end of 2006, the number of exclusive agents increased by 10,000 to 852,000 from 2005. And also the number of field offices was up 3000 to 15,000 from 2005. The direct sales representatives were 12,000, same as 2005. Client service managers were up 15.5% to more than 15,000 to enhance intensive outlet management.   Unique investment privilege As a unique life insurer backed up by the Chinese State Council, LFC is the biggest institutional investor with unrivaled monopolistic and scale advantages over other life insurers, especially in terms of investment channel. Based on this characteristic privilege, LFC actively pursued strategic investment opportunities. In 2006, the company successfully subscribed for shares in CITIC Securities Company Limited (CITIC), Guangdong Development Bank Company Limited (GDB), China Construction Bank Limited (CCB), Bank of China Limited (BOC), and Industrial and Commercial Bank of China Limited (ICBC). All of these investments are unachievable to other life insurers in China.   LFC’s equity investments took up 13.9% of its investment portfolio in 2006, compared to 8% in 2005. Taking more equity investments means more risky. However, as shown in the above table, LFC put more assets in the subscription for IPO, which was facilitated by the Chinese government. This is much less risky than sheer speculation done by other life insurers in the stock market. Furthermore, LFC demonstrated solid financial strength in 2006. Total assets were up 36.7% to RMB 764,395 millions from RMB 2005. Shareholder’s equity totaled RMB 139,665 million, up 73.8% from 2005. As of Dec 31, 2006, required minimum solvency margin for LFC was RMB 27,548 million. However, its actual solvency margin was RMB 96,297 millions, with a solvency margin ratio of 350%.   Table  1: LFC.  - Annual Income Statement, 2003-2006 (CNY, in millions)     Table 2: LFC – Annual Balance Sheet, 2003-2006 (CNY, in millions)     Table 3: LFC – Annual Cash Flow Statement, 2003-2006 (CNY, in millions)   To access latest stock research and other research content, please register!