1H22 VONB in line with our expectation
Value of New business (VONB) at China Life fell 13.8% YoY in 1H22, largely in line with market and our expectation. Attributable net profit declined 38% YoY, largely in line with our expectation, missing market expectation by 12%. Embedded value (EV) rose 4% vs. early 2022, in line with our forecast and beating the market estimate by 1%.
Trends to watch
Operation resilient amid life insurance reform; select key indicators stabilizing and improving. VONB fell 13.8% YoY in 1H22, in line with market and our forecasts, and the VONB of agent channels declined 16.5% YoY. VONB margin fell 4.7ppt and 3.8ppt YoY measured by annualized premium and first-year premium (FYP) and residual margin fell 0.1% vs. end-2021. The surrender rate improved 0.2ppt YoY to 0.51%, and the 14-month policy persistence rate improved 3.9ppt YoY to 85.10%.
Agent quality significantly improving; agent channel transformation gradually paying off. The agent headcount fell 9% HoH at end-1H22 to 746,000, in line with the sector trend. The quality of agents significantly improved, with monthly FYP, APE, and VONB per agent rising 62.1%, 62.0%, and 34.8% YoY. We think that agent channel transformation has gradually paid off.
Sharp fluctuations in equity market weighing on profit; recovery likely ahead along with improving market. Net profit fell 38% YoY in 1H22, as sharp fluctuations in the equity market weighed on investment income. The firm’s annualized gross investment yield fell 1.5ppt YoY to 4.21%, and total investment income declined 16% YoY to Rmb98.5bn. We foresee profit recovery but only if the market improves. Adjustment in reserve assumption cut pre-tax profit Rmb21bn in 1H22 vs. Rmb46.1bn in 1H21.
EV rose 4% HoH as expected. EV growth decelerated amid falling contributions from investment variance and VONB.
VONB growth to lead the sector in 2022; high-beta name for sector valuation repair. Valuations are at the lower end of historical range for both China Life and the life insurance sector. We expect stabilizing and improving sector fundamentals to catalyze sector valuation repairs. Given the quality and scale of agents, we expect China Life to lead sector VONB growth in 2022 and be a high-beta name for sector valuation repair.
Financials and valuation
We maintain our 2022 and 2023 earnings forecast. A-shares are trading at 0.63x and 0.57x 2022 and 2023e P/EV, and H-shares at 0.21x and 0.19x P/EV. We maintain OUTPERFORM for A- and H-shares with our TPs at Rmb40.60 (0.88x and 0.79x 2022-2023e P/EV) offering 39% upside and HK$18.00 (0.33x and 0.30x 2022-2023e P/EV) offering 57% upside.
Risks
Disappointing FYP growth; sharp declines in long-term interest rates; sharp fluctuations in A-share market.