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China Life Earnings: Does Its Low Valuation Mean the Stock is a Buy?

China Life Insurance Co Ltd (SEHK: 2628) recently reported first-half earnings. Here’s what investors should know. –

The Chinese life insurance leader, China Life Insurance Co Ltd (SEHK: 2628), announced its first-half results on 26 August.

Its share price had a slight correction the next day in response to its half-year results.

In this article, I’ll take a look at China Life’s latest earnings and whether the company is a buy on its low valuation.

Overview of results

In the first half of 2020, China Life reported a 13% year-on-year increase in its top line (gross written premiums), mainly driven by renewal premiums.

The top line growth was surprisingly strong given the pandemic and as the company usually posted around 5% annual growth from 2017 to 2019.

It’s first-half value of new business (VNB) increased by 7% year-on-year. Although it fell short of the 19% VNB growth in 2019, the company proved to be resilient by delivering high single-digit growth.

Its new business margin has slightly dropped from 39.7% in the first half of 2019 to 39.3% in the first half this year.

This was likely due to a higher contribution of single premium products to its new businesses as a result of Covid-19.

How does that compare to its competitors?

Looking at the results above, given that the insurance sector has been a victim of Covid-19, unlike the technology sector, China Life has actually been holding up quite well.

Investors can do a comparison analysis with its major competitor in the Chinese life insurance sector, the life insurance subsidiary of Ping An Insurance Group Co of China Ltd (SEHK: 2318).

Ping An Life’s first-half gross written premiums slightly dropped by 4% compared to the same period in 2019. However, its first-half VNB dropped by 24% year-on-year.

China Life clearly outperformed Ping An Life in the arena of new business growth. As a matter of fact, since 2015, China Life’s VNB has been catching up with that of Ping An Life.

From 2015 to 2019, China Life’s VNB grew by 17% per annum (p.a.) while that of Ping An Life grew by 19% p.a.

China Life’s new business growth was slightly less than Ping An Life because it went through a strategic transformation in 2018 and had a sharp drop in VNB that year.

But it has managed to catch up with Ping An Life and surpassed its VNB, both in terms of growth and absolute amount in 2020.

In my opinion, this is a solid affirmation of China Life’s transformation initiative in 2018 to regain the market-leading position, both in terms of scale and quality of growth.

Cheap valuation

China Life is currently trading at around 1.2x price-to-book (PB). And Ping An is trading at 1.9x PB.

It’s not ideal to compare the valuation of China Life with Ping An directly since Ping An is a group holding company with businesses ranging from insurance to banking and technology services.

Investors could argue that Ping An’s higher PB multiple is due to the technology element it has tried so hard to infuse into the group in recent years.

But, Ping An Life contributed around 70% of the group’s earnings and the insurance business, as a whole, contributed almost 85% of the group’s earnings. In essence, Ping An is still an insurance-oriented company.

From this perspective, the 40% discount to China Life’s valuation as compared to Ping An seems unjustifiable.

This is especially true given the strong improvement in China Life’s fundamentals the market has witnessed since it embarked on the strategic transformation in 2018.

Foolish takeaway

In my opinion, China Life’s first-half results showed that it continued to reap the benefits of its strategic transformation despite Covid-19.

In terms of VNB, it has even surpassed that of Ping An, which is a key milestone for the company and is encouraging for the investors. It’s only a matter of time before the market should recognise and reward this.

More reading

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Alec Tseung doesn’t own shares of any companies mentioned.

The Motley Fool Hong Kong Limited(www.fool.hk) 2020

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