The demographic of China’s population which is urbanizing and aging will drive the earnings of China Life Insurance (NYSE: LFC). China Life Insurance is the biggest insurer in China and the largest in the world by market value. It’s also one of the biggest companies in China, with a market capitalization of $105 billion and sales of $24.4 billion a year.
China’s insurance industry is getting a huge boost from the rapid transition of China from a village based society to an urban society. The people who leave their villages also leave behind the traditional family roles that call for the family to stay together and the young to care for the aged. Once that tradition is broken, people who have left the village need to find new ways to full fill their obligations, and insurance is one popular answer. And China Life Insurance stands to be the beneficiary.
China Life Insurance began life in 1949 as the People’s Insurance Company of China (PICC), a state-owned enterprise that functioned as a virtual monopoly through the 1950s as the Revolution ran its capitalist competitors out of town. In the late 1980s, China actually allowed competitors to spring up, and PICC began to act like a real company, not a state service.
As a real company, China Life Insurance (the new name was part of its transformation into a for-profit entity) emerged as a joint stock company, established an asset management division (both in 2003) and worked hard to make it attractive to investors. It had a huge head start in infrastructure, and is adapting well to a world in which PingAn Insurance and China Pacific Insurance present increasingly competent competition. In 2008, the company had 102 million individual and group life, annuity and long-term health policies in force.
There is no doubt that increasing competition and the economic slowdown in China has affected China Life’s business. The company only reports earnings twice a year, and its last two semi-annual reports have shown declines—25% in the first half of 2008 and 63% in the second. Revenue declines have been much more muted, and the company still pays a 2.4% dividend. The company has also announced, after taking a beating on its 2008 investment earnings, that it will take a more cautious stance with its investment strategy.
Earnings estimates for 2009 point to a big rebound, and when the Chinese economy heats up, so will China Life. The big story behind China Life is still the demographic one. Not only is China still urbanizing it’s also aging fast. The single-child policy in place for years has reduced the youth cohort significantly and left a proportionally larger group of aging parents with only one child to support them.
LFC’s stock made a huge run from 2005 to 2007. From its peak at 107 in October 2007, the stock took exactly one year to hit its bottom at 33 in October 2008. After some ups and downs on moderate volume, LFC put in a nice five-week run beginning in mid-March, soaring from 40 to 57.40. LFC started to pullback on 5/5/09, there is over a one point gap that I would look to be filled down to $53.50. I possible solid entry point into LFC is between $53.50-54 right at the point where the gap will be filled and the support of the rising 20 day EMA comes in. LFC is a longer term long play; I would set a trading target of $65 which is 2 points below the May 2008 high. With a time frame of 6-12 months. I would set a stop loss for protection just below the recent swing low at about 50.20 or two closes below the 50 day EMA as a stop loss.
