In our article titled WATCH CHINA LIFE posted on April 8th 2021 and in a subsequent Technical Analysis post dated April 29 2021, we highlighted the potential for China’s second largest life Insurance company to break out of a secular bear market that has seen its share price fall from HK$ 50 in 2005 and HK$40 in 2014 to the current levels of HK$ 16.
We also highlighted the complete disconnect between the evolution of China Life’s business, revenues and profit growth and the significant fall in its are price, reflecting a secular phenomenon of valuation contraction.
Today, China Life Broke out of its downtrend and we are of the view that it is about to start a new secular bull market with a significant valuation re-rating ahead.
BUY China Life Insurance 2628 HK @ HKD 16.4
Over the past few weeks, China Life’s stock price completed a rounding bottom, with tentative new highs and equal of higher testifying of the fact that the supply / demand for the share has been reversing from a constant excess of sellers since June 2020 to an exhaustion of sellers now.
Today’s advance of +2.75 % on high volume and large option volumes indicates that the trend has changed, giving a strong entry point for investors in this magnifying call for the Chinese economy and stock market.
The interesting part is that this breakout coincides with a signifiant breakout in the Chinese bellwether CSI300 Index, something we have been forecasting and implemented by adding the Index to our Model portfolio in the past week.
As China’s second largest Life insurance company and a major actor of the Pension and retirement eco-system, China Life’s profits and revenues are highly correlated with the behaviour of the local stock market and its is therefore not a coincidence if these two breakouts are happening at the same time.
Valuation re-rating ahead
China life went through rough patches over the past decade as increasing competition, new entrants and a migration of the business model to online distribution channels forced it to re-invent itself.
In 2018 and 2019, it went through the implementation of a major strategic plan to boost efficiency, reduce costs and rationale its distribution network. China Life has the largest network of in-house and third-party sales agents and remain s dominant ion the market for both Life and Health insurance and Asset Management.
This plan is now coming to fruition with increased efficiency and higher margins.
Since 2018, revenue growth and margins have increased substantially and the 2021 net profits are expected to reach RMB 65 Billion ( US$ 10 Billion ) a sixfold increase when compared to the 2018 through.
The strong improvement in China Life’s business model has not yet been reflected in its stock price.
As the following charts show, the stock is trading at levels comparable to where it was back in 2006 and at the lows reached in 2009, 2016 and March 2020, but revenues ( green line ) and net profits ( Red line ) have grown significantly since then.
It is interesting to note that the stock price was highly correlated to the evolution of net profits all along until 2018, and that a major gap has opened up since 2018
This phenomenon of valuation contraction is clearly reflected in the valuation metrics
Trading at 6.2x earnings, 0.82x book value and paying a dividend of 4.7 %, China Life is cheap in ABSOLUTE terms
But it is also trading AT THE LOWEST VALUATION metrics ever in its entire history.
As the following chart shows, China Life has been trading at an average PE ratio of 20x since 2005 ( against 6.2x today, and an average Price to book ratio of 2.7x against a current level of 0.82x.
The stock was trading at HK$ 50 in 2006 when its earnings per share were barely 0.51, it is now trading at HK$ 16 when its 2021 EPS should reach 2.07 and 2.27 in 2022.
China Life is today the world’s fourth largest Life insurance Company after United Health of the US, Ping And of China and Axa of France
United Health Group of the US trades at 23.4x earnings, 5.84x Book value and pays a paltry 1.2 % divided yield
Axa of France trades at 16.8x earnings, 0.83x book and pays a 6.4 % dividend yield
and when comparing China Life to its domestic competitor Ping Ang Insurance, the gap is also striking as Ping Ang trades at 8x earnings, 1.62x Book value and pays only 3.1 % dividend yield.
Analysts are positive
Analysts are unanimously bullish on the company with a target price at HKD 22, a 37.5 % increase from current levels, and even Morningstar that probably has a miscoded SELL rating has the highest target price at 26.54, a 59 % increase from current level.
We see today’s breakout in China Life as the BUY signal we had been awaiting.
This is a unique opportunity for investors to position themselves safely in one of the world’s largest Life Insurance Company ahead of a major re-rating phenomenon.
The coincident breakout in the Main Chinese index is an extremely good sign..
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