Finding ‘Life’ in China
10/13/2006 12:00 am EST
Nicholas Vardy scours the globe for recommendations that help investors achieve diversification and maximize returns. Here, he finds a company whose fortunes are set to grow as the Chinese government relaxes investment restrictions in the country's insurance industry.
"As we enter the fourth quarter, it's time to start re-jigging our portfolio toward stocks that benefit the most from what has traditionally been the strongest time of the year for global bull markets. With the Chinese stock market having emerged from its five-year funk this year, China certainly is one of the hottest investment themes around. This week's pick, China Life (LFC NYSE), is the best and safest bet on this sizzling market.
"Here are three reasons why we think China Life will generate big profits between now and the end of the year:
"First, with a market share of 49.3%, China Life is the dominant player in China's underdeveloped life insurance market. "Underdeveloped" is the key word here. Insurance premiums per capita in China are $27.30, while the global average for premiums per capita stands at $292.20. That spells enormous growth potential.
"Secondly, China Life has developed the pleasant habit of surprising on the upside. For the six months ended June 30, 2006, revenue grew an impressive 47%, to $9.1 billion. Net profits leaped ahead even more dramatically to $1.13 billion, a 72% jump, compared to the same period a year ago. These results were 23% above Standard & Poor's original forecast. China Life also is becoming more efficient at its business. Tight expense control saw net margins climb to 12.4%, up from 10.8% during first half of 2005.
"Third, thanks to the government's recent easing of restrictions on the types of investments that Chinese insurers are allowed to make, China Life's investment yield rose to 4.24% (4.54%, if you exclude cash), compared with a 3.9% return in 2005. That's well ahead of its maximum guaranteed payout rate of 2.5% on new policies.
"Finally, China Life is working hard to establish a higher profile among investors, both domestic and foreign. It plans to list its Class A shares in Shanghai later this year and domestic pension funds will respond by making China Life a core holding. And China Life recently has established a working group to attract strategic investors. Global investors go gaga over such news, and any announcement of such a link up would send the stock soaring.
"With a PEG ratio (Price Earnings to Growth) of only 0.83, China Life still is cheap relative to its future growth. So buy China Life at market today. For potentially bigger gains, play the January $80 call options B (LFCAP.X)."