China Life issues profit warning

Net profit for 9M11 is forecast to decrease by around 55% YoY.

Kim Eng noted:

China Life issued a profit warning after market closed yesterday, stating that its 9M11 net profit may decrease by around 55% YoY. Note that China Life’s 1H12 net profit fell only 26% YoY.

Company stated that the decline is mainly due to the fall in investment yield and impairment losses, resulting from the weak capital market. We believe that the profit warning is unexpected by the market.

According to the profit warning, the implied 9M12 net profit would be around CNY7.5b, 33/30% of market consensus/our FY12E earning. Thus a substantial downward revision in earning is inevitable, though a big downgrade in TP is not likely. The profit warning also implied that China Life made a loss of CNY2.1b, which is unexpected by the market (and ourselves).

As we mentioned in similar cases before, the profit warning itself would not directly affect the fundamental value and our valuation on the company. After all the earnings of insurers are highly volatile and subject to company’s own accounting policies, and thus is not a good basis of valuating life insurers.

For the other life insurers, it is unlikely for Ping An (2318) to issue profit warning (1H12 net profit rose 9% YoY, 3Q11 was a low base, and its earnings are less volatile than peers). On the other hand, CPIC (2601) may issue profit warning, but this should be well expected by the market given that its 1H12 net profit already fell by 55% YoY.