CHINA LIFE(2628.HK)：HIGHEST VNB GROWTH IN YEARS; NET PROFIT DECLINE NARROWED ON TRACK-格隆汇

机构：招银国际
研究员：Nika MA/Miao ZHANG

China Life announced 1Q24 results with the VNB YoY reaching the highest growth to 26.3% under new EV assumptions on a comparative basis, surpassing market consensus and our expectation of growth by low-to-mid teens. We see the ascending pattern attributable to 1) increased proportion of mid-to-long term regular-paid business given the 10yr+ FYRP +25.4% YoY to RMB25.2bn, taking 33.7% of total FYRP, +5.57pct compared to 1Q23 (Fig.2); 2) cost reductions on bancassurance; and 3) proactive contraction on products’ pricing interest rates. Despite a 4.4% YoY decline on first-year premiums, we estimate that the insurer’s VNB margin would sequentially improve over the 2Q-4Q24, thanks to an optimized structure of which the FYSP and total FYSP and short-term premiums were down by -74.9%/-18.6% YoY in 1Q24 (Fig.2). Once established, we expect the structure will be conducive to underwritings in 2Q-4Q24. On investment front, the insurer grew net investment results by +27.0% YoY to RMB16.1bn, a turnaround from loss since 3Q23. The narrowed A/L duration gap to 4.4yrs could be a hint. With rebounded equity market sentiment and limited downside for CN long-term interest rates, we expect better investment results in 2Q to drive growth in net profit.
Highest VNB growth w/ shortened liability duration. The +26.3% YoY uptick in first-quarter VNB implies an optimized mix with diverse product forms, durations and costs composition. The insurer controlled the durations of main underwriting products in 1Q24 to less than six years, lowering the avg. liability duration for reduced interest rate risk exposure. By end-23, avg. asset duration has dropped to 4.4yrs, from 4.7 yrs in FY22 and 5.2yrs in FY21. Despite an FYP decline, FYRP rose by 4.7% YoY to RMB74.8bn, of which the 10yr+ FYRP amounted to RMB25.2bn, +25.4% YoY proportioning to 33.67%, +5.57pct YoY. FYSP and total FYSP & ST premiums tumbled by -75%/19% YoY in 1Q24 due to the fall in bancassurance. Bancassurance FYSP largely contracted whereas 5yrs+ FYRP slightly up by 3.66% (VS FY23: +53.1%), as well indicating an optimized trend. Driven by better structure mix and cost reductions, we expect to see sequential margin expansion over 2Q-4Q24, paving way for VNB growth.
Net investment result turnaround. The insurer disclosed figures under IFRS9 since year-start of 2024. Net investment results in 1Q24 rose by 27.0% YoY to RMB16.1bn (Fig.1) implying a turnaround of loss since 2Q23. The strengthened investment results was driven by soared fair value gains on FICC-typed, +12.3x YoY vs 1Q23 given prolonged low interest rates. Total investment income grew by 7.2% YoY to RMB64.7bn, reflecting 3.23% annualized total investment yield, +0.24pct from 1Q23. With expanded investment asset scale to over RMB 5.9tn and prudent asset allocation striking balance b/w long-term bonds and high-yield stocks, we expect the equity rebound and limited downside on LT interest rates should boost the insurer’s investment results in 2Q24 benefiting net profit growth.
Valuation: The stock is now trading at FY24E 0.2x P/EV and 0.6xP/B. We expect the valuation to rebound once the investment results stabilize. Maintain BUY, with TP at HK$13.70 implying 0.3x FY24E P/EV and 0.7x FY24E P/B.