China Life Falls to Underperform

On Jan 17, 2013, we downgraded China’s leading life insurance company – China Life Insurance Co. Ltd. (LFC) to Underperform from Neutral, based on the constant decline in operating cash flow, which is affecting the financials. The gradual decline in premiums and increasing competition on the domestic front are the other downsides.

Why the Downgrade?
China Life carries a Zacks Rank #5 (Strong Sell). One out of the two analysts covering the company revised their 2012 earnings estimate downward over the past 30 days. As a result, the Zacks Consensus Estimate for 2012 fell to 95 cents per share, down 39% over 2011.

China Life reported net loss of RMB0.08 (US$0.18 per ADR) per share in the third quarter of 2012, declining substantially from net income per share of RMB0.13 (US$0.31 per ADR) in the comparable quarter of 2011.
China Life’s cash flow from operating activities is declining gradually. It reduced 15% year over year in the first nine months of 2012, mainly due to a substantial decrease in policyholder deposits along with increased cash paid for held-for-trading financial assets, and taxes and surcharges.

Moreover, China Life has been witnessing deterioration in net premiums over the past few quarters. Given that premiums are the main source of business for an insurance company, premium increase is essential for top-line growth in the long run.

Further, China Life faces intense competition from both domestic as well as foreign companies. The company is also exposed to significant foreign exchange risk.