China Life: Briefing Affirms Focus on Shareholder Returns; Positive but No Change to Valuation

We retain our China Life 601628 earnings forecast and fair value estimates at HKD 20 for the H-shares, and CNY 19 for the A-shares, following the insurer’s briefing on the impact of the new accounting standards. We think the key messages confirm our expectations. China Life’s H-shares are trading at an attractive 0.3 times 2023 price/embedded value ratio versus 0.8 times for A-shares. We would buy the H-shares over the A-shares.

Additional details from the insurer affirm moves to better align performance with common shareholder interest. Metrics including new business value, or NBV, growth; agent team performance; net profit; and market value management are key performance indicators for China Life’s management team. We think this is positive and an important move of the ongoing state-owned enterprise, or SOE, reform, which focuses management on common shareholders’ interests. However, we think investors have generally overreacted to the boost to net profit under the new accounting rules, which is a noncash adjustment. It mainly is the result of a change in discount rate and fair value gains on equity investments. Management believes the change in accounting rules should have no material impact on its management and dividend payment. The insurer will continue reporting A-share financials under the old accounting rules from 2023-25, which will remain as a primary basis for management and dividend payment before 2026.

At this stage we expect China Life to stick to existing dividend policy of about 35% of core net profit, unless it gets approvals from its supervision department and the Ministry of Finance for certain investor-friendly activities, including share buyback and greater flexibility in dividend payout ratio. However, it appears the government is keen to promote shareholder returns, so we think shareholder-centric proposals may be approved as long as the company is financially healthy. This expectation may support SOE share prices at current low valuation levels.