The Forgotten Billion Dollar Insurance Company

Having completed my sort of spring cleaning of my dividend stocks of $15 or under watchlist and my evaluation of them, I’m thinking about the potential of doing some sort of series on some of the ones I like the best. Regardless of if I commit to that idea or not, I wanted to share at least this one stock because it boggles my mind that this company is in the position it is. The title isn’t to be taken lightly. To some extent I think it might be something with me. Something I’m missing with this stock that I just am not seeing or haven’t found yet. China Life Insurance (LFC) is the largest insurance company in China, on par with US insurance companies like Metlife, Aflac, and Prudential in the US, it is the only Chinese insurance company publicly traded in the US markets, and yet it also seems to go completely unnoticed or at least notice to the level for a company of its size. To be fair, it isn’t till now I even noticed it. The company sat in one of the dusty bin of my long lists of watchlists I use as screeners.  The Company: China Life Insurance is an insurance company that sells coverage for individual and group life insurance, health insurance, individual and group accident insurance, and other business-related insurance products. Currently it sets with 20.4% of the market in China with its closest, and only real competition, being Ping An Life Insurance, which has 17.8% of the market. While China Life leads in Life Insurance, Ping An leads in accident and health insurance. Both are on the Hong Kong Exchange but only China Life is on NYSE. It should be noted as well that there is significant stake in ownership of the company by the Chinese government. Last known holdings was around a quarter of the company’s outstanding shares. That being said it is a significant reduction from around half and likely those shares are in the Hong Kong exchange not the ADRs offered state side (also to note the only source for this is Wikipedia so it could very well be less or not true. Felt it should be added either way to be conservative). Other institutional investment makes up 16.67 million shares or a paltry 0.9% compared to current float and an insignificant amount of the total outstanding shares. When I said this company is forgotten I wasn’t kidding. Most of the main institutional holders aren’t even big names and those that are hold small passing amounts. Institutional Holdings ETFs Even after the Chinese liberalization of its insurance market, China Life remains the dominate player in the market, though it does lean on its life insurance premiums for that lead. It is also likely given its age as a company and the Chinese government’s likely vested interest in China Life that it will continue to be a major player in spite of competition, which it has weathered since 2007. It also has remained the market leader in the nation in spite of no longer having a near monopoly on the market that it had heading into the 2000s. Recent News: China Life Insurance to buy US$2.7 billion of shares in affiliate Guangfa Bank There were other articles but mostly nothing news worthy. Just kind of puff pieces that you would normally find on financial sites. Though I do appreciate that at least one writer at the Nasdaq agrees with me that this stock is a good investment along with one more at Seeking Alpha, I wouldn't exactly call that news worthy material. Financials: Income Statement Revenue growth for China Life has remained steady, increasing by 17% from last year. On a five year period it is up 57%. On a quarterly basis, revenue for Q4 2020 was up from the same time last year by 29% though down from the previous reported quarter (Q2 2020) by 29%. Since it is an ADR there won’t be any clear view on 2021 till they report Q2, which likely wont come for several months. Net income is down from 2019 at $7.6 billion compared to $8.3 but it still far and away strips out the following three years ($1.6 billion for 2018, $4.8 billion for 2017, and $2.7 billion in 2016). To only be down 9% though in light of Covid I'd say is pretty damn good and something a lot of companies would kill for. In addition, despite the stiff competition in the insurance market, this doesn’t seem to faze China Life or its income statement. Balance Sheet As an insurance provider, China Life is going to have a lot of short- and long-term liabilities should they have to pay out on policies. That being said, attention should be drawn to comparing the company’s current cash and receivables against their accounts payable and debt. Assets in this case easily crushes liabilities, leaving the company plenty flexible to use the cash on hand as needed. Valuation: Methodology: The chief method I use for giving a rough estimate on valuation is Earnings Power Value calculation. I am by no means a financial professional so it is probably a quick and dirty run down. I also find WACC for the EPV calculation via a shorthand I had seen used. WACC is calculated by taking the average P/E ratio for three to four reasonable competitors that are publicly traded and dividing 1 by that average P/E ratio to get the WACC. Is it blunt? Yes. Is it simplistic and lazy? Yes. Does it save time and get the job done? Yes. China Life Insurance EPV: Low Bound: $21.51 Median: $27.22 High Bound: $28.62 To double check on the other end. I took the three prices in the range and then recalculated back out an P/E based on 2020 EPS. Low Bound: 15.9 Median: 20.16 High Bound: 21.2 Industry average P/E for the sector is 14.05 so the low bound seems most reasonable. The Median and High Bound aren’t unreasonable either given the P/E of similar companies in the Insurance market of its size. Even at the low bound of $21.51, assuming that as a reasonable fair price for a valuation, that would be double its current valuation. For me, given the financial health of the company and market size in China, the company is dirt cheap and a steal. The fact it has a $0.52 annual dividend is just icing on the cake. If I had maybe one complaint it would be the shares outstanding. That is what is weighing down a lot on the price. A share buyback would be nice, but that doesn't change the valuation above as the share at current outstanding was factored in. If I could dream though... My conclusion is the company is Undervalued at its current price and for sure a buy.

back
photo-url-https://api.utradea.com/profile_pictures/60aae2729b12641993e49e9f.jpeg

sunnycorax

May 27, 2021

-25.26%

Change % Since Posting

10.77

Price When Posted

-2.72

Change Since Posting

LFC

China Life Insurance Co - ADR

8.05

0.00
0.00%
Current Price

The Forgotten Billion Dollar Insurance Company

bullish

Having completed my sort of spring cleaning of my dividend stocks of $15 or under watchlist and my evaluation of them, I’m thinking about the potential of doing some sort of series on some of the ones I like the best. Regardless of if I commit to that idea or not, I wanted to share at least this one stock because it boggles my mind that this company is in the position it is. The title isn’t to be taken lightly. To some extent I think it might be something with me. Something I’m missing with this stock that I just am not seeing or haven’t found yet. China Life Insurance (LFC) is the largest insurance company in China, on par with US insurance companies like Metlife, Aflac, and Prudential in the US, it is the only Chinese insurance company publicly traded in the US markets, and yet it also seems to go completely unnoticed or at least notice to the level for a company of its size. To be fair, it isn’t till now I even noticed it. The company sat in one of the dusty bin of my long lists of watchlists I use as screeners. 

The Company:

China Life Insurance is an insurance company that sells coverage for individual and group life insurance, health insurance, individual and group accident insurance, and other business-related insurance products. Currently it sets with 20.4% of the market in China with its closest, and only real competition, being Ping An Life Insurance, which has 17.8% of the market. While China Life leads in Life Insurance, Ping An leads in accident and health insurance. Both are on the Hong Kong Exchange but only China Life is on NYSE.

It should be noted as well that there is significant stake in ownership of the company by the Chinese government. Last known holdings was around a quarter of the company’s outstanding shares. That being said it is a significant reduction from around half and likely those shares are in the Hong Kong exchange not the ADRs offered state side (also to note the only source for this is Wikipedia so it could very well be less or not true. Felt it should be added either way to be conservative). Other institutional investment makes up 16.67 million shares or a paltry 0.9% compared to current float and an insignificant amount of the total outstanding shares. When I said this company is forgotten I wasn’t kidding. Most of the main institutional holders aren’t even big names and those that are hold small passing amounts.

Institutional Holdings
ETFs

Even after the Chinese liberalization of its insurance market, China Life remains the dominate player in the market, though it does lean on its life insurance premiums for that lead. It is also likely given its age as a company and the Chinese government’s likely vested interest in China Life that it will continue to be a major player in spite of competition, which it has weathered since 2007. It also has remained the market leader in the nation in spite of no longer having a near monopoly on the market that it had heading into the 2000s.

Recent News:

China Life Insurance to buy US$2.7 billion of shares in affiliate Guangfa Bank

There were other articles but mostly nothing news worthy. Just kind of puff pieces that you would normally find on financial sites. Though I do appreciate that at least one writer at the Nasdaq agrees with me that this stock is a good investment along with one more at Seeking Alpha, I wouldn't exactly call that news worthy material.

Financials:

Income Statement

Revenue growth for China Life has remained steady, increasing by 17% from last year. On a five year period it is up 57%. On a quarterly basis, revenue for Q4 2020 was up from the same time last year by 29% though down from the previous reported quarter (Q2 2020) by 29%. Since it is an ADR there won’t be any clear view on 2021 till they report Q2, which likely wont come for several months.

Net income is down from 2019 at $7.6 billion compared to $8.3 but it still far and away strips out the following three years ($1.6 billion for 2018, $4.8 billion for 2017, and $2.7 billion in 2016). To only be down 9% though in light of Covid I'd say is pretty damn good and something a lot of companies would kill for. In addition, despite the stiff competition in the insurance market, this doesn’t seem to faze China Life or its income statement.

Balance Sheet

As an insurance provider, China Life is going to have a lot of short- and long-term liabilities should they have to pay out on policies. That being said, attention should be drawn to comparing the company’s current cash and receivables against their accounts payable and debt. Assets in this case easily crushes liabilities, leaving the company plenty flexible to use the cash on hand as needed.

Valuation:

Methodology: The chief method I use for giving a rough estimate on valuation is Earnings Power Value calculation. I am by no means a financial professional so it is probably a quick and dirty run down. I also find WACC for the EPV calculation via a shorthand I had seen used. WACC is calculated by taking the average P/E ratio for three to four reasonable competitors that are publicly traded and dividing 1 by that average P/E ratio to get the WACC. Is it blunt? Yes. Is it simplistic and lazy? Yes. Does it save time and get the job done? Yes.

China Life Insurance EPV:

Low Bound: $21.51

Median: $27.22
High Bound: $28.62

To double check on the other end. I took the three prices in the range and then recalculated back out an P/E based on 2020 EPS.

Low Bound: 15.9
Median: 20.16

High Bound: 21.2

Industry average P/E for the sector is 14.05 so the low bound seems most reasonable. The Median and High Bound aren’t unreasonable either given the P/E of similar companies in the Insurance market of its size. Even at the low bound of $21.51, assuming that as a reasonable fair price for a valuation, that would be double its current valuation. For me, given the financial health of the company and market size in China, the company is dirt cheap and a steal. The fact it has a $0.52 annual dividend is just icing on the cake. If I had maybe one complaint it would be the shares outstanding. That is what is weighing down a lot on the price. A share buyback would be nice, but that doesn't change the valuation above as the share at current outstanding was factored in. If I could dream though...

My conclusion is the company is Undervalued at its current price and for sure a buy.

Comments

Write your comment....

Sign in to comment

read-time
5 min

11.85

Target Price

9/ 10

Confidence

1-3 Years

Timeframe
catalyst icon
Earnings Per Share
catalyst icon
Financials
catalyst icon
Management
catalyst icon
Price to Earnings Ratio
catalyst icon
Dividend
catalyst icon
Other Catalyst

LFC Channel

Start new chat
aiodd-ad
next