China Life Insurance -A:Reasonable valuation;stronger investment performance likely
Investment yield likely to rise on increasing risk profile.
China Life's net investment yields were even lower than the yield for bank deposits in2015, suggesting the company was too conservative in its asset allocation. However, ithas improved its investment portfolio since 4Q15 by replacing term deposits with other,better-yielding (eg, non-standard) investments. Net investment yield improved to 5.0%in 1Q16 from 4.4% in 2015. With an increasing investment risk profile, we believe thecompany's 1H16 investment yield could rise and surprise the market positively.
GWP growth to decelerate going forward.
The company's gross written premium (GWP) growth eased to 8.1%/18.4% YoY inMay/June from 31.4% YoY in 1Q. Meanwhile, the company cut its crediting rates formost universal life products to 4.0% in June from 5.05% in January. We believe thecompany's GWP growth could decelerate, as it has shifted away from volume business.
We think cautious product pricing is positive for continued improvement in thecompany's long-term value. Given its large sales force, we believe the company canpass on investment pressure to policyholders.
Cutting 2016 earnings estimate due to impact of reserve charges.
The CIRC requires insurers to discount the future liability of traditional fixed-rateproducts by using a benchmark yield curve of the 750-day moving average governmentbond yield. Since the 750-day 10-year government bond yield could fall over 20bps in2016 (vs. 5bps in 4Q15), we are lowering our 2016E EPS 20%, as well as adjustingreserve charges. However, importantly, reserve charges change according to discountrates and do not affect the company's solvency, embedded value and new businessvalue.
Valuation: Maintain price target and Neutral rating.
Our DCF-based price target of Rmb23.16 (COE 14.5%; A/H premium 20%) implies1.40x 2016E P/EV, around the A-share peer average. We view the current valuation asreasonable and maintain our Neutral rating.