China Life disclosed full-year results with net profit attributable to shareholders amounted to RMB 46.2bn (-30.7% YoY), equivalent to RMB 10.6bn net profit in 4Q23 (-4.7% YoY), significantly narrowed from -103.8% YoY to a net loss of RMB 610mn in 3Q23 (IFRS-based). The contraction in 4Q net loss outpaced expectation given the equity market movements exacerbated in 4Q23, evidenced by the CSI 300/SHCOMP -7.0%/-4.4% YoY in 4Q23, vs -4.4%/-2.9% YoY in 3Q23 (Fig. 5). We regard the narrowing quarterly loss a mix of: 1) strong rebound in insurance revenue by +32.6% in 2H23 (+68.2% YoY in 4Q23), underpinned by RMB 44.1bn contractual service margin release (+103.4% YoY) in 2H23, and 2) contracted net investment loss to c.RMB3.7bn in 4Q23, from c.RMB18.2bn in 3Q23 (Semi-Q). Despite EV revisions, the insurer sustained low-teen VNB growth by +11.9% YoY to RMB36.9bn (vs old assumptions: +14.0% YoY to RMB 41.0bn), and EV by +5.6% to RMB1.26tn (vs old: +5.1% YoY to RMB1.29tn). We anticipate the one-off impact of EV assumptions change will not affect the insurer’s value generation, and expect net investment results to turn positive in 1H24 given better index performances in 1Q24 and increased fund proportions to bonds (55.8%), which is likely to yield for higher spread income within a low interest environment. Concerning pressured investment yield (<3%, Fig 8) and depressed sentiment, we derive our new target price under new IFRS standards at HK$13.7, implying 0.3x FY24E P/EV based on P/EV-RoEV, cross-checked with DDM. Maintain BUY. n Solid underwriting underpins insurance revenue. The life insurer sustained resilient operating growth given the first-year premium (FYP)/first-year regular premium (FYRP) and 10yrs+ FYRP +14.1%/+16.7%/+18.4% YoY in 2023. Of which, agency FYP/agency FYRP grew by +10.8%/+12.6% to RMB110.4bn/ RMB91.8bn, with the 10yrs+FYRP making up to 53.9% of the channel’s FYRP, reflecting an optimized structure tilting towards long-term protection policies. Agency VNB +10.4% to RMB34.6bn implying strengthened VNB margin (FYP basis) to 29.9% (vs FY22: 27.4%) by end-2023. Bancassurance accumulated growth with the channel’s FYP/FYRP/5yrs+FYRP +49.3%/+39.4%/+53.1% YoY. Other VNB, primarily contributed by bancassurance, jumped 42% YoY to RMB 2.21bn. With increased productivity to further unleash, we expect VNB to rise in the mid-teens in FY24, driven by both FYP and margin increases.
　　EV assumptions chg. left limited impact to VNB growth. China Life revised down key EV assumptions, in line with industry, with the long-term investment return -50bps to 4.5% and the risk discount rate (RDR) -200bps to 8%, landing at the low-end of the industry average (8%-10%). The refinements cut VNB by -10.2% to RMB36.86bn (+11.9% YoY), vs RMB41.04bn (+14.0% YoY) based on end-2022 assumptions, and EV by -2.5% to RMB 1.26tn (+5.6% YoY), vs RMB 1.29tn (+5.1%YoY). A write-off of RMB40.6bn was recorded to reflect the chg. (-3.3% to EV) and negative investment variances (-6.0% to EV), jointly resulted a FY23 ROEV at 3.4% (CMBI est). We expect the negative impact to be one-off and the revision allows better EV comprehension to macro exposure.
　　Pressured investment still a key concern to valuation. The insurer ended at 2.43% total investment yield and 3.70% net investment yield by end 2023, - 1.47pct / -0.26pct YoY to prior year under restated new IFRS basis. The stock is now trading at 0.2x FY24E P/EV and 0.5x FY24E P/B, reflecting continued depressed sentiment given a downward-trending 10-year govt. bond yield to less than 2.3% (Fig. 9). Despite a cross-sector guide-down on LT investment return to 4.5%, concerns on macro headwinds weigh on the insurer’s portfolio, of which 76% to fixed-income assets incl. cash, and contract H-share valuation. With respect to asset pressure and actuarial chg. on underlying assumptions, we adjust our target price based on P/EV-RoEV based on Gordon Growth and cross-check with the Dividend Discount Model (DDM). The new TP is HK$13.7, implying 0.3x FY24E P/EV, and 0.7x FY24E P/B (Fig. 5). Maintain BUY rating.