We are downgrading our recommendation on China Life Insurance Co., Ltd. (LFC) to Underperform from Neutral due to the lack of any significant growth catalyst amid the prevailing interest rate, market and currency risks. China Life's full year 2011 earnings declined steeply from the prior year, due to low premium income and increased impairment losses.
Operating cash flow also declined substantially due to increased claim expenses and adverse changes in the fair values of securities. Despite a strong brand name, significant competition on the domestic front limits earnings growth.
Our six-month target price of $36.00 equates to 25.9x our earnings estimate for 2012. Combined with the $0.81 per ADR annual dividend, this target price implies an expected total return of a negative 8.7% over that period. This is consistent with our Underperform recommendation on the ADRs.
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