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VNB down 19% yoy in 1H21


• 1H21 net profit grew 34% yoy to CNY41bn, driven by strong investment income.
• Value of new business and agency size shrank, reflecting ongoing industry-wide pain and continued challenges from the pandemic.
• Fair value reduced to HKD16.80, reflecting a discount for its lower than sector average ESG rating and lower estimates in view of the moderation in growth outlook, which should lead to a weaker VNB outlook for the full year.
• Undemanding valuations however has reflected much of the near-term industry headwinds, while the structural growth outlook remains positive.

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Investment thesis

With rising protection and wealth management needs of China’s rising middle class, China Life is one of the key beneficiaries of this medium term growth trend as a leading domestic life insurer with ~15-20% estimated market share. The regulatory shift towards more long-term and protection product mix is positive for future margins but transition to the new business model and
transformation process led by new management may be bumpy amidst the current challenging operating environment hampered by concerns from volatile equity markets and impact on face-to-face sales recovery following the Covid-19 outbreak. Dividend payout as of end FY20 was 36%. While we see value, we believe investors will need to be patient given a continued gradual recovery outlook for the sector as offline business takes time to normalize amid
intensifying competition, while the stabilization of China’s bond yield and better A-share equity market on the back of an improving macro backdrop should be supportive of investment income generation.