China Life May Have Reached Bottom

06/08/2011 11:30 am EST


Jim Trippon

Editor-in-Chief, China Stock Digest

The Red Dragon’s largest insurer is now too cheap to ignore, given the potential of its annuity business, writes Jim Trippon in China Stock Digest.

We have avoided China Life Insurance (LFC) for years, due to high valuation and exposure to China’s weak internal stock markets. We believe we are now picking a bottom for this institutional giant.

China Life is China’s largest insurance company, providing annuity products, life insurance, and accident and casualty insurance for both individuals and groups.

It has written more than 48 million individual and group policies, and has a huge sales force of 640,000 agents operating in 9,300 field offices throughout the world’s most populous country. No other company has such a vast agent network.

China Life first caught our attention as a potentially huge growth engine way back in 2005, when it announced that it had been given the go-ahead by the China Insurance Regulatory Commission (CIRC) to set up a pension business.

This move to expand into the fast-growing corporate annuities sector was a major breakthrough in a nation of 1.3 billion prospects, none of whom can rely any longer on the government for their pensions. Because China dismantled its cradle-to-grave welfare system in the 1990s, the Chinese government encourages domestic companies to set up additional pension schemes to complement the remaining state-run framework.

The CIRC expects the country’s corporate-annuity net premiums to grow by 100 billion yuan ($12.4 billion) annually for the next several years. The volume of enterprise annuities could ultimately reach $1.8 trillion by 2030, according to the World Bank. This is the kind of large-volume potential that investors seek in China.

China Life will compete with Ping An Insurance Group (Hong Kong:2318, OTC: PIAIF), the mainland’s second-largest insurer, and Taiping Life Insurance (OTC: CINSF), which have also received permission to sell enterprise annuities, or supplementary pensions contributed by employers and employees together.

But China Life is much larger than the competition, and has the deepest penetration into the mainland market.

The company will step up marketing efforts in bigger mainland cities this year, to bolster a declining market share as competition increases. The Beijing-based insurer won’t make “massive” forays into the nation’s rural areas, because costs are higher there.

China Life produces a solid 1.8% dividend, with a profit margin of 8.76%. The firm’s forward P/E multiple is an attractive 14.37.

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