China Life Insurance: Fundamentals Remain Intact (NYSE:LFC)

Investment thesis

My last article on China Life Insurance Company Limited (NYSE:LFC) back in March this year came with a Buy call on the company, as I concluded that it offered good value at that time.

If you had bought the shares at that time, you could take some comfort in knowing that your book value would now be down by just roughly 3% against a backdrop of the S&P500 going down more than 16%

Alpha is alpha – even if the return is negative, which brings me to my last article on Blackrock’s China A-share ETF (CNYA), where I pointed out that it looks to me that China at this moment offers better prospects of improved return as opposed to Europe and to a lesser extent also the U.S. The reason for this you will find in that article.

Back to China Life, perhaps as an alternative to buying the ETF CNYA one could use China Life as a good proxy for exposure to China.

Recent development

We will only get the interim financial report for 2022 around the 25th of August this year.

However, we do have an indication of how some of the top lines for the first half of this year have fared, as they have reported accumulated premium income from 1st January to 30st June of 2022 and it came in at RMB 439.7 billion.

This is slightly lower than the first half of 2020 when they recorded RMB 442.3 billion in premium.

It should be expected, as the lockdown in the first half of this year may have put a damper on growth in premiums. More and more of their customers do now sign on for insurance online, but there are still those that prefer to sit down with a person in a branch office. Something which was hard to do due to Covid-19 restrictions.

In the last few weeks, the central government has reduced quarantine times and eased some Covid-19 prevention measures. However, we do see that in different parts of China there has been a rise in new cases.

But things are hopefully changing for the better.

Consultancy firm Oliver Wyman predicted in a report published in March this year that China’s life insurance premiums are expected to surpass the U.S. market and become the world’s largest market by 2030.

Annuity and endowment products presently only cover about RMB 30 trillion, which is much lower than the population’s expected pension needs. This highlights the gap and opportunities for insurers like LFC.

A side note on investor activism

LFC is among the largest shareholders in two of the largest position in my portfolio.

These are HSBC (HSBC) and Hui Xian REIT, which is listed in Hong Kong under 8700.HK and controlled by CK Asset Holding (OTCPK:CHKGF).

With regards to Hui Xian REIT, I have recently written to the board of directors and explained to them that it is not in the shareholder’s interest that the company issues new units to settle distribution and management fees now that they are trading at a discount to NAV of 75%.

Over the last ten years, they have added more than one billion new units, diluting the share count with 22.3% additional units without adding any productive assets to the balance sheet.

As a matter of fact, they should be buying back and canceling shares at this point in time.

So far, I have not received any response from Hui Xian REIT.

My next step will be to reach out to LFC, and other shareholders, with the aim of getting their support for my request to Hui Xian REIT of terminating the issuance of new units at this moment.

Hopefully, they can see the merits of my request and will want to take action.

Risk to the thesis

Under the leadership of Xi Jinping, China wants to make sure that the difference between the rich and poor, which is huge in China, should be addressed. That is not a bad thing.

How much the government will intervene in terms of what margins the large state-owned companies should have is unclear.

Conclusion

Although I gave LFC a Buy stance, it did not mean that I rushed out and bought some shares in it. I have a portfolio that is heavily tilted towards financials and real estate and try to practice a discipline in terms of balancing the portfolio.

Before making any investment you should also consider the whole picture before you start to look more at which company you want to add.

If you are looking for exposure to China and to financials in general, it is still a buy for me personally.

Fundamentally, China Life is strong and the industry and the country they operate in should offer investors decent returns many years into the future.