China Life’s H2 NBV Growth Was Weaker Than Expected; Dividend Payment Missed

We lower our fair value estimate for China Life 601628 to HKD 20 per H-share after its 2022 results, reflecting lower projections for new business value growth and investment returns in 2023. The results were weaker than expected, with full-year 2022 total revenue and net profit growth declining 3.8% and 37% respectively from 2021. The profit decline was mainly driven by sharply lower realized investment gains. NBV declined 20% from 2021. The contraction was smaller than peers including Ping An and CPIC, but still misses our expectation for negative 20% growth. Decelerating NBV growth in the fourth quarter was due to heightened coronavirus restrictions and shifting focus to preparations for its 2023 New Year sales campaign. The fourth quarter also saw a wider quarter-on-quarter contraction in agent headcount to 7% from about 5% in the first three quarters of 2022.

China Life’s H-shares reacted negatively to its wider-than-peer net profit contraction on March 30. We suspect investors are disappointed over the 25% reduction in the 2022 dividend payment. By contrast, Ping An and CPIC increased dividends per share by about 2% despite net profits declining 18% and 8% respectively from 2021. The market has long been concerned about China Life’s higher-than-peer earnings volatility as a pure life insurer. We would prefer China Life to base its dividend payout on operating profit, which is what its major peers do, rather than more volatile net profit.

H-shares remain significantly undervalued, trading near the historical trough valuation of 0.2 times 2023 price/embedded value. We think the risks are more than priced in. We think agent headcount has bottomed as it has shrunk by nearly 60% from its peak in 2019. Our estimated NBV per agent increased 19% year on year in 2022. Management hinted the firm saw a strong pickup in March sales against the first two months of 2023. We expect 2023 NBV to grow at a mid-single-digit pace in 2023, but the first quarter should remain sluggish.