We are downgrading our recommendation on China Life Insurance (LFC) to Underperform based on the constant decline in operating cash flow, which is affecting the financials. The gradual decline in premiums and increasing competition on the domestic front are the other downsides.
The company also faces substantial interest rate and currency risks, which limit upside. China Life also reported a net loss in the third quarter, due to a surge in operating expenses, which offset the operating income increases.
The company has a strong brand name, an extensive domestic distribution channel, strong investments and stable ratings. However, our six-month target price of $46.00 equates to 48.4x our earnings estimate for 2012. Combined with the $0.55 per ADR annual dividend, this target price implies an expected negative return of 9.4% over that period.
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