China Life Insurance's (LFC) third-quarter earnings witnessed a steep decline from the comparable period of last year. High surrenders, low premium income and increased impairment losses led to a decline in the net income, while increased unrealized losses in the investment portfolio led to reduced shareholders equity.
Additionally, China Life inherently faces substantial interest rate, market and currency risk. Although the company has a strong brand name, it has to deal with considerable competition on the domestic front, which limits earnings growth. However, the debt issue is expected to improve solvency margin, while high liquidity will enable the company to take the high surrender rate in its stride.
Our six-month target price of $35.00 equates to 19.2x our earnings estimate for 2011. Combined with the $0.81 per ADR annual dividend, this target price implies an expected negative total return of 7.1% over that period. This is consistent with our Underperform recommendation on the ADRs.
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