New China Life Insurance (NCI stock code 1336.hk) IPO Stock Analysis

New China Life Insurance Co. Ltd. (NCI stock codes: 1336.hk for H-shares and 601336.sh for A-shares), the fourth largest insurance company in China offering a wide range of life insurance products and services to both individual (through individual insurance agent channel, bancassurance channel or wealth management channel) and institutional group customers, is about to raise a maximum of HKD$ 16.244 billion by issuing up to 412.18 million of H-shares (if the over-allotment option can all be exercised) and 158.54 million of A-shares under the so-called 'A+H' shares IPO (Initial Public Offering) dual listing on the Hong Kong Stock Exchange (HKEx stock code: 388.hk) and the Shanghai Stock Exchange.

New China Life Insurance Co. Ltd. currently offers 6 main types of insurance products to individual and group customers. These 6 main products are:
(i) Traditional Life Insurance (whole life insurance, term life insurance, endowment life insurance annuities etc);
(ii) Participating Life Insurance (allows policyholders to benefit from distributable surplus and bonus);
(iii) Universal Life Insurance (allows policyholders to benefit from minimum guaranteed interest rates through investment contracts);
(iv) Investment-linked Insurance (allows policyholders to benefit from non-guaranteed returns through investment contracts);
(v) Health Insurance (offers critical illness, disease or medical insurance protection); and
(vi) Accidence Insurance (offers accidental death or disability protection).

New China Life Insurance Co. Ltd., headquartered in Beijing, will begin trading (NCI H-shares stock code: 1336.hk) on 15 December 2011 on the Hong Kong Stock Exchange and then one day later on 16 December 2011, will begin trading (NCI A-shares stock code: 601336.sh) on the Shanghai Stock Exchange. For the H-shares IPO listing, joint global sponsors are UBS AG and China International Capital Corporation Ltd. (CICC) H.K. Securities Ltd. Cornerstone investors, which will be subject to a lock-up period of 6 months for their holdings, are Great Eastern Insurance Holdings Limited from Singapore, Khazanah Telul Intan Investments Ltd from Malaysia Government, D. E. Shaw Valence Hedge Fund, and Longevity (MBK Partners) Equity Fund.

After the 'A+H' IPO dual listing, 65.6% of total registered capital will be A-shares and the remaining 34.4% will be H-shares. All the proceedings of this IPO will be used to boost NCI's capital strength to support its business growth. Below table shows our detailed stock analysis of NCI (New China Life Insurance Co. Ltd.):

	Attributable Profits (RMB million)	Total Number of Shares in issue (million)	Earnings (in HKD$) per Share	P/E (Price/Earnings) Ratio
*Notes	(1)	(2)	(3)	(4)
2008	649	1200	0.66	43.19
2009	2660	1200	2.704	10.54
2010	2249	1200	2.287	12.46
2011	2712	3170.7	1.044	27.31

(Source of New China Life Insurance IPO Prospectus: Hong Kong Stock Exchange)

RMB/HKD = 1.22

*Notes:

(1) In accordance with the IPO Prospectus, net profit attributable to New China Life Insurance (NCI) shareholders shall be no less than RMB 2712 million in 2011. However, we reserve that New China Life Insurance (NCI) may not reach this profit level because of its increasing costs in terms of insurance benefits, claims and expenses as shown on the Accountant's Report of the NCI's IPO Prospectus. In addition, solvency margin ratio (SMR), the ratio of actual-to-minimum capital, of New China Life Insurance (NCI) has reached only 86.6% (as of September 30, 2011), still less than its major competitors China Life Insurance (CLI stock codes: 2628.hk for H-shares and 601628.sh for A-shares) and Ping An Life Insurance Group (PALI stock codes: 2318.hk for H-shares and 601318.sh for A-shares). The relatively low solvency margin ratio (SMR) will unavoidably limit its ability to increase the amount of dividend distribution in the near future.

(2) The Stabilising Manager, UBS AG, is permitted to exercise an over-allotment option (the so-called the greenshoe) during the initial 30-day stock price stabilisation period to issue up to an extra 53.763 million of shares as agreed with the international underwriters. Once this over-allotment option can all be exercised, total number of ordinary shares in issue will reach 3170.7 million in 2011 (was 2600 million prior to the 'A+H' IPO).

(3) The calculated earnings of New China Life Insurance (NCI) will be HKD$1.044 (the calculated basic and dilutive earnings shall be the same) per share in 2011. This stock valuation, nevertheless, can be impaired by certain risk factors. New China Life Insurance (NCI) is essentially exposed to the possible risks of insufficient solvency margin ratio SMR (if NCI cannot satisfy the SMR-related regulatory requirements, the regulatory authority CIRC may impose limitations on its business operations), investment risks for its exposure to fluctuations of the PRC equity and fixed-income markets, and diversification risk of its investment portfolio (currently restricted by the applicable PRC laws) etc.

(4) Stock price of New China Life Insurance (NCI) is determined as HKD$28.5 per each H-share and RMB 23.25 per each A-share for this IPO listing, which are close to the minimum levels of its proposed offer price ranges. The 2011 forward P/E (Price-to-Earnings) ratio of New China Life Insurance (NCI) is calculated as 27.31 times.

Another common method of measuring value and profitability of a life insurance company, however, is Embedded value (EV). Embedded value (EV), by definition, measures interests of shareholders in the earning distributable from assets allocated to the in-force insurance business after allowance for the aggregate risks in that business. According to the IPO Prospectus, EV (Embedded value) and VNB (Value of New Business) of NCI (New China Life Insurance) are RMB 42323 million (equivalent to HKD$ 16.28 per share) and RMB 4710 million (equivalent to HKD$ 1.81 per share) respectively (as of June 30, 2011) at 11.5% risk discount rate (RDR). For your information, NCI applies a traditional deterministic discounted cash flow methodology to calculate its EV (Embedded value) and VNB (Value of New Business).

Table of calculated EV (Embedded value) and VNB (Value of New Business) for New China Life Insurance (1336.hk)

RDR = Risk Discount Rate = 10%, 11.5% or 13% as selected by NCI
ANW = Adjusted Net Worth
VIF = Value of In-force Business
CoC = Cost arising from holding of required Capital
EV = Embedded value = Sum of ANW and VIF
VNB = Value of New Business

Our Conclusion of NCI Stock Analysis: we decide not to recommend a buy for this New China Life Insurance (NCI stock code: 1336.hk) IPO based on the factors mentioned in the above paragraphs. Stock valuation of New China Life Insurance (NCI), in term of its expected 27.31 times P/E (price-to-earnings) ratio in 2011, is just too expensive. Don't forget the expected 2011 P/E ratios of NCI's major competitors China Life Insurance (CLI stock codes: 2628.hk for H-shares and 601628.sh for A-shares) and Ping An Life Insurance Group (PALI stock codes: 2318.hk for H-shares and 601318.sh for A-shares) are just at a range of 15-20 times. The relatively low solvency margin ratio (SMR) is also a concern as it may force NCI to raise more capitals soon after this IPO listing.


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