China Life reported strong 1H results with NBV +18.6% YoY on a like-for-like basis to RMB32.3bn, and EV back to double-digit growth by 11.4% to RMB 1.4tn from year start. Investment income soared 1.4x YoY to RMB56.7bn after the insurer fully adopted IFRS 9 for both A/H share reporting, driving the pre-tax profit to rise 27.6% YoY to RMB 47.9bn in 1H24, equivalent to 109.3% YoY surge in 2Q24 (CMBI est). We see outstanding margin expansion in bancasssurance, of which the NBV margin +13.4pct like-for-like to >17% as we estimate. Total investment assets reached an all-time high to RMB 6.1tn with incremental FVOCI stocks amounted to RMB34.1bn, jumping 1.31x from year start, which evidenced the insurer's strategy on high-yield stocks to anchor a long-run stable investment return, in our view. Looking ahead, we expect optimized product and channel mix would support reductions on cost of liability in an orderly manner, to ride on tailwinds of a new round of PIR cuts since this Sep; and investment income to rebound in 2H24 on a low comparative last year. Maintain BUY with 12M-forward TP revised to HK$15.5 implying 0.3x FY24E P/EV.
Evident margin expansion to underpin NBV beat. The insurer reported strong
NBV growth by 18.4% YoY to RMB32.3bn in 1H24 after reflecting the actuarial change in long-run investment return assumption to 4.5% by end-2023, beating market consensus. We see evident improvement on agency and bancassurance NBV margin by +5.4pct/+13.4pct YoY to 30.6%/>17% (CMBI est) despite softer premium growth. 10yr+ regular-paid first-year premium (FYRP) remained strong, rising 9.4% YoY to RMB42.6bn which comprised 43.8% of total FYRP in 1H24, mainly derived from the agency channel (99.95%). We regard banca NBV margin increase as a result of 1) shrunk single-paid premiums by -78.2% YoY to RMB 4.1bn, indicative of the insurer's proactive mgt. on low-margin biz; 2) effective expense control under regulatory limit imposed on commissions; and 3) restated effect of actuarial change on the long-run investment return assumption to 4.5%. Heading to Sep, we expect product mix to diversify with higher proportions of par, in face of the guaranteed pricing interest rate cut to 2.5% staring from 1 Sep. Mgt. mentioned in call that participating policies measured under VFA accounted for circa.40% of total reserves; and given a nature of measuring their cost of liability based on floating interest rate, mgt. supposed the share of par policies in terms of FYP would substantially increase after Sep 2024. By far, the average cost of liability for guaranteed policies has been controlled at ~3% with minimal spread loss risk, for which mgt. guided to see a progressive downtrend in next 2-3 years.
FVOCI stocks markedly increased to boost income. Despite low interest rate and fluctuated equity market returns, the insurer achieved better-than-expected investment income by +1.4x YoY to RMB56.7bn, boosting pre-tax profit by 27.6% YoY to RMB47.9bn in 1H24. We attribute this uptrend to 1) 46.1% YoY increase in dividend from FVOCI stocks; 2) 2.27x YoY surge in realized gains on FVOCI debt instruments; and 3) 2.81x YoY jump in fair value change of FVTPL assets. For insurance funds, net/total investment yield was 3.33%/3.59%, -0.28/+0.26pct YoY and mgt. guided that comprehensive investment yield reached >5% in 1H24, leading to a positive investment variance in EV by RMB6.7bn, the first time after 1H21. Total investment assets amounted to RMB6.1tn, up 12.5% from year start, with increased bonds and equity funds by 19.2%/32.2% while reduced cash by 33.2%. In 1H24, more than RMB400bn was invested in ultra-long term special treasury bonds and high-grade credit bonds, equivalent to 11.5% of total bond investments, indicative of the insurer's address on asset-liability duration match. Stocks in FVOCI +1.31x from year start to RMB34.1bn, making up 21.4% of total FVOCI equities or 7.7% of total stocks. Looking ahead, we expect the share of high-dividend stocks in FVOCI would continue to grow, given a long-run pursuit of achieving stable investment outcome amid prolonged low interest rate cycles, to support investment income to rebound in 2H24, against a low base last year.
Valuation: The stock is trading at FY24E 0.2x P/EV and 0.6x P/B. We believe the resilient 1H results could underpin a stock re-rating combined with the newly announced interim dividends at RMB0.2/share, implying a payout of 14.8%. Maintain BUY. We revised up our 12M-forward TP to HK$15.5 (prev. HK$13.7) based on P/EV vs ROEV approach to reflect better underwriting and investment outcomes that jointly lifted EV. Key assumptions remain consistent as 1) 3.0% risk-free rate; 2) 5.5% market risk premium; 3) COE calc. based on CAPM at 9.80%; 4) 3% terminal growth; and 5) 40% consolidated Group discount (Table). We rolled forward EV sensitivity results from FY23 to 1H24, assuming a stress situation that long-term investment return may further drop by 150bps to 3.0%, implying -1.46% change to Group EV, better than previous -1.53% test results. New TP implies 0.3x FY24E P/EV and 0.8x FY24E P/B.
