Intrinsic value of China Life Insurance ADR - LFC

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$16.12

  Intrinsic Value

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  Rating & Target

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  Value-price divergence*

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$16.12

 
Intrinsic value

$39.48

 
Up/down potential

+145%

 
Rating

str. buy

 
Value-price divergence* premium content

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Our model is not good at valuating stocks of financial companies, such as LFC.

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of LFC stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 103.8

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  7.00
  7.00
  6.80
  6.62
  6.46
  6.31
  6.18
  6.06
  5.96
  5.86
  5.77
  5.70
  5.63
  5.56
  5.51
  5.46
  5.41
  5.37
  5.33
  5.30
  5.27
  5.24
  5.22
  5.20
  5.18
  5.16
  5.14
  5.13
  5.12
  5.10
  5.09
Revenue, $m
  0
  84,102
  89,821
  95,767
  101,952
  108,387
  115,087
  122,064
  129,335
  136,915
  144,822
  153,073
  161,687
  170,685
  180,087
  189,915
  200,193
  210,944
  222,195
  233,972
  246,303
  259,217
  272,745
  286,919
  301,774
  317,344
  333,667
  350,781
  368,728
  387,551
  407,293
Variable operating expenses, $m
 
  76,112
  81,288
  86,669
  92,266
  98,090
  104,153
  110,468
  117,048
  123,908
  131,064
  138,531
  146,327
  154,470
  162,979
  171,873
  181,175
  190,905
  201,087
  211,745
  222,904
  234,591
  246,834
  259,662
  273,105
  287,196
  301,968
  317,457
  333,699
  350,733
  368,600
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  75,308
  76,112
  81,288
  86,669
  92,266
  98,090
  104,153
  110,468
  117,048
  123,908
  131,064
  138,531
  146,327
  154,470
  162,979
  171,873
  181,175
  190,905
  201,087
  211,745
  222,904
  234,591
  246,834
  259,662
  273,105
  287,196
  301,968
  317,457
  333,699
  350,733
  368,600
Operating income, $m
  3,292
  7,990
  8,533
  9,098
  9,685
  10,297
  10,933
  11,596
  12,287
  13,007
  13,758
  14,542
  15,360
  16,215
  17,108
  18,042
  19,018
  20,040
  21,109
  22,227
  23,399
  24,626
  25,911
  27,257
  28,669
  30,148
  31,698
  33,324
  35,029
  36,817
  38,693
EBITDA, $m
  3,593
  8,308
  8,873
  9,460
  10,071
  10,707
  11,368
  12,058
  12,776
  13,525
  14,306
  15,121
  15,972
  16,860
  17,789
  18,760
  19,775
  20,837
  21,949
  23,112
  24,330
  25,606
  26,942
  28,342
  29,809
  31,347
  32,960
  34,650
  36,423
  38,282
  40,233
Interest expense (income), $m
  708
  626
  2,542
  4,486
  6,506
  8,608
  10,794
  13,071
  15,442
  17,912
  20,488
  23,175
  25,978
  28,906
  31,963
  35,158
  38,497
  41,990
  45,643
  49,466
  53,468
  57,658
  62,046
  66,643
  71,459
  76,506
  81,797
  87,344
  93,159
  99,257
  105,653
Earnings before tax, $m
  3,449
  7,364
  5,991
  4,612
  3,179
  1,689
  139
  -1,475
  -3,155
  -4,905
  -6,730
  -8,633
  -10,618
  -12,691
  -14,855
  -17,116
  -19,479
  -21,950
  -24,534
  -27,239
  -30,069
  -33,032
  -36,135
  -39,385
  -42,790
  -46,359
  -50,099
  -54,019
  -58,130
  -62,440
  -66,960
Tax expense, $m
  616
  1,988
  1,617
  1,245
  858
  456
  37
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Net income, $m
  2,767
  5,375
  4,373
  3,367
  2,321
  1,233
  101
  -1,475
  -3,155
  -4,905
  -6,730
  -8,633
  -10,618
  -12,691
  -14,855
  -17,116
  -19,479
  -21,950
  -24,534
  -27,239
  -30,069
  -33,032
  -36,135
  -39,385
  -42,790
  -46,359
  -50,099
  -54,019
  -58,130
  -62,440
  -66,960

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  390,174
  418,418
  446,870
  476,453
  507,222
  539,239
  572,570
  607,284
  643,457
  681,170
  720,506
  761,556
  804,414
  849,178
  895,954
  944,851
  995,984
  1,049,475
  1,105,449
  1,164,040
  1,225,387
  1,289,636
  1,356,940
  1,427,459
  1,501,362
  1,578,826
  1,660,034
  1,745,181
  1,834,469
  1,928,113
  2,026,335
Adjusted assets (=assets-cash), $m
  390,174
  418,418
  446,870
  476,453
  507,222
  539,239
  572,570
  607,284
  643,457
  681,170
  720,506
  761,556
  804,414
  849,178
  895,954
  944,851
  995,984
  1,049,475
  1,105,449
  1,164,040
  1,225,387
  1,289,636
  1,356,940
  1,427,459
  1,501,362
  1,578,826
  1,660,034
  1,745,181
  1,834,469
  1,928,113
  2,026,335
Revenue / Adjusted assets
  0.000
  0.201
  0.201
  0.201
  0.201
  0.201
  0.201
  0.201
  0.201
  0.201
  0.201
  0.201
  0.201
  0.201
  0.201
  0.201
  0.201
  0.201
  0.201
  0.201
  0.201
  0.201
  0.201
  0.201
  0.201
  0.201
  0.201
  0.201
  0.201
  0.201
  0.201
Average production assets, $m
  2,475
  2,607
  2,784
  2,969
  3,161
  3,360
  3,568
  3,784
  4,009
  4,244
  4,489
  4,745
  5,012
  5,291
  5,583
  5,887
  6,206
  6,539
  6,888
  7,253
  7,635
  8,036
  8,455
  8,894
  9,355
  9,838
  10,344
  10,874
  11,431
  12,014
  12,626
Working capital, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total debt, $m
  8,130
  33,019
  58,256
  84,496
  111,788
  140,187
  169,751
  200,543
  232,629
  266,080
  300,971
  337,382
  375,397
  415,103
  456,593
  499,965
  545,320
  592,766
  642,415
  694,385
  748,800
  805,789
  865,488
  928,038
  993,591
  1,062,300
  1,134,332
  1,209,857
  1,289,056
  1,372,118
  1,459,241
Total liabilities, $m
  346,248
  371,137
  396,374
  422,614
  449,906
  478,305
  507,869
  538,661
  570,747
  604,198
  639,089
  675,500
  713,515
  753,221
  794,711
  838,083
  883,438
  930,884
  980,533
  1,032,503
  1,086,918
  1,143,907
  1,203,606
  1,266,156
  1,331,709
  1,400,418
  1,472,450
  1,547,975
  1,627,174
  1,710,236
  1,797,359
Total equity, $m
  43,926
  47,281
  50,496
  53,839
  57,316
  60,934
  64,700
  68,623
  72,711
  76,972
  81,417
  86,056
  90,899
  95,957
  101,243
  106,768
  112,546
  118,591
  124,916
  131,537
  138,469
  145,729
  153,334
  161,303
  169,654
  178,407
  187,584
  197,205
  207,295
  217,877
  228,976
Total liabilities and equity, $m
  390,174
  418,418
  446,870
  476,453
  507,222
  539,239
  572,569
  607,284
  643,458
  681,170
  720,506
  761,556
  804,414
  849,178
  895,954
  944,851
  995,984
  1,049,475
  1,105,449
  1,164,040
  1,225,387
  1,289,636
  1,356,940
  1,427,459
  1,501,363
  1,578,825
  1,660,034
  1,745,180
  1,834,469
  1,928,113
  2,026,335
Debt-to-equity ratio
  0.185
  0.700
  1.150
  1.570
  1.950
  2.300
  2.620
  2.920
  3.200
  3.460
  3.700
  3.920
  4.130
  4.330
  4.510
  4.680
  4.850
  5.000
  5.140
  5.280
  5.410
  5.530
  5.640
  5.750
  5.860
  5.950
  6.050
  6.140
  6.220
  6.300
  6.370
Adjusted equity ratio
  0.113
  0.113
  0.113
  0.113
  0.113
  0.113
  0.113
  0.113
  0.113
  0.113
  0.113
  0.113
  0.113
  0.113
  0.113
  0.113
  0.113
  0.113
  0.113
  0.113
  0.113
  0.113
  0.113
  0.113
  0.113
  0.113
  0.113
  0.113
  0.113
  0.113
  0.113

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  2,767
  5,375
  4,373
  3,367
  2,321
  1,233
  101
  -1,475
  -3,155
  -4,905
  -6,730
  -8,633
  -10,618
  -12,691
  -14,855
  -17,116
  -19,479
  -21,950
  -24,534
  -27,239
  -30,069
  -33,032
  -36,135
  -39,385
  -42,790
  -46,359
  -50,099
  -54,019
  -58,130
  -62,440
  -66,960
Depreciation, amort., depletion, $m
  301
  318
  340
  362
  385
  410
  435
  461
  489
  518
  547
  579
  611
  645
  681
  718
  757
  797
  840
  885
  931
  980
  1,031
  1,085
  1,141
  1,200
  1,261
  1,326
  1,394
  1,465
  1,540
Funds from operations, $m
  19,748
  5,693
  4,713
  3,729
  2,706
  1,643
  536
  -1,013
  -2,666
  -4,388
  -6,183
  -8,054
  -10,007
  -12,045
  -14,174
  -16,398
  -18,722
  -21,152
  -23,694
  -26,354
  -29,138
  -32,052
  -35,104
  -38,301
  -41,650
  -45,159
  -48,837
  -52,693
  -56,736
  -60,975
  -65,420
Change in working capital, $m
  6,858
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from operations, $m
  12,890
  3,218
  4,713
  3,729
  2,706
  1,643
  536
  -1,013
  -2,666
  -4,388
  -6,183
  -8,054
  -10,007
  -12,045
  -14,174
  -16,398
  -18,722
  -21,152
  -23,694
  -26,354
  -29,138
  -32,052
  -35,104
  -38,301
  -41,650
  -45,159
  -48,837
  -52,693
  -56,736
  -60,975
  -65,420
Maintenance CAPEX, $m
  0
  -302
  -318
  -340
  -362
  -385
  -410
  -435
  -461
  -489
  -518
  -547
  -579
  -611
  -645
  -681
  -718
  -757
  -797
  -840
  -885
  -931
  -980
  -1,031
  -1,085
  -1,141
  -1,200
  -1,261
  -1,326
  -1,394
  -1,465
New CAPEX, $m
  -768
  -132
  -177
  -184
  -192
  -199
  -208
  -216
  -225
  -235
  -245
  -256
  -267
  -279
  -291
  -305
  -319
  -333
  -349
  -365
  -382
  -400
  -419
  -439
  -460
  -483
  -506
  -531
  -556
  -583
  -612
Cash from investing activities, $m
  -15,148
  -434
  -495
  -524
  -554
  -584
  -618
  -651
  -686
  -724
  -763
  -803
  -846
  -890
  -936
  -986
  -1,037
  -1,090
  -1,146
  -1,205
  -1,267
  -1,331
  -1,399
  -1,470
  -1,545
  -1,624
  -1,706
  -1,792
  -1,882
  -1,977
  -2,077
Free cash flow, $m
  -2,258
  2,784
  4,217
  3,205
  2,152
  1,058
  -81
  -1,665
  -3,353
  -5,112
  -6,945
  -8,857
  -10,853
  -12,935
  -15,111
  -17,383
  -19,759
  -22,243
  -24,841
  -27,559
  -30,405
  -33,384
  -36,503
  -39,771
  -43,195
  -46,783
  -50,543
  -54,485
  -58,618
  -62,952
  -67,498
Issuance/(repayment) of debt, $m
  4,894
  24,889
  25,237
  26,240
  27,292
  28,399
  29,564
  30,792
  32,086
  33,451
  34,891
  36,411
  38,015
  39,706
  41,490
  43,372
  45,355
  47,446
  49,649
  51,970
  54,415
  56,989
  59,699
  62,551
  65,552
  68,710
  72,032
  75,525
  79,199
  83,062
  87,123
Issuance/(repurchase) of shares, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  2,680
  24,889
  25,237
  26,240
  27,292
  28,399
  29,564
  30,792
  32,086
  33,451
  34,891
  36,411
  38,015
  39,706
  41,490
  43,372
  45,355
  47,446
  49,649
  51,970
  54,415
  56,989
  59,699
  62,551
  65,552
  68,710
  72,032
  75,525
  79,199
  83,062
  87,123
Total cash flow (excl. dividends), $m
  464
  27,673
  29,455
  29,445
  29,445
  29,457
  29,483
  29,127
  28,733
  28,339
  27,946
  27,554
  27,162
  26,771
  26,380
  25,988
  25,596
  25,203
  24,808
  24,411
  24,010
  23,605
  23,195
  22,780
  22,357
  21,927
  21,489
  21,040
  20,581
  20,110
  19,625
Retained Cash Flow (-), $m
  2,730
  -3,355
  -3,215
  -3,343
  -3,477
  -3,618
  -3,766
  -3,923
  -4,088
  -4,262
  -4,445
  -4,639
  -4,843
  -5,058
  -5,286
  -5,525
  -5,778
  -6,044
  -6,325
  -6,621
  -6,932
  -7,260
  -7,605
  -7,969
  -8,351
  -8,753
  -9,177
  -9,622
  -10,090
  -10,582
  -11,099
Prev. year cash balance distribution, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  24,318
  26,240
  26,102
  25,968
  25,839
  25,717
  25,204
  24,645
  24,078
  23,501
  22,915
  22,319
  21,712
  21,094
  20,463
  19,818
  19,159
  18,483
  17,790
  17,078
  16,345
  15,590
  14,811
  14,006
  13,174
  12,312
  11,418
  10,491
  9,528
  8,526
Discount rate, %
 
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
 
  23,315
  24,021
  22,716
  21,382
  20,028
  18,664
  17,028
  15,404
  13,831
  12,321
  10,882
  9,524
  8,255
  7,082
  6,008
  5,036
  4,169
  3,404
  2,739
  2,170
  1,691
  1,294
  971
  713
  512
  359
  245
  162
  104
  64
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

China Life Insurance Company Limited, together with its subsidiaries, operates as a life insurance company in the People’s Republic of China. The company operates in four segments: Life Insurance, Health Insurance, Accident Insurance, and Other. It offers individual and group life, annuity, accident, health, and pension insurance products, as well as related reinsurance products. The company also manages and utilizes proprietary funds, acts as agent or trustee for asset management business, and provides related consulting services; provides financial, and asset and fund management services; and invests in retirement properties. China Life Insurance Company Limited sells its products through agents, direct sales representatives, dedicated and non-dedicated agencies, and intermediary bancassurance outlets. The company was founded in 1949 and is based in Beijing, China. China Life Insurance Company Limited operates as a subsidiary of China Life Insurance (Group) Company.

FINANCIAL RATIOS  of  China Life Insurance ADR (LFC)

Valuation Ratios
P/E Ratio 164.7
Price to Sales 5.8
Price to Book 10.4
Price to Tangible Book
Price to Cash Flow 35.3
Price to Free Cash Flow 37.6
Growth Rates
Sales Growth Rate 7%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -36.7%
Cap. Spend. - 3 Yr. Gr. Rate 7.3%
Financial Strength
Quick Ratio NaN
Current Ratio NaN
LT Debt to Equity 18.5%
Total Debt to Equity 18.5%
Interest Coverage 6
Management Effectiveness
Return On Assets 0.9%
Ret/ On Assets - 3 Yr. Avg. 1.4%
Return On Total Capital 5.1%
Ret/ On T. Cap. - 3 Yr. Avg. 8.1%
Return On Equity 6.1%
Return On Equity - 3 Yr. Avg. 10.1%
Asset Turnover 0.2
Profitability Ratios
Gross Margin 0%
Gross Margin - 3 Yr. Avg. 0%
EBITDA Margin 5.7%
EBITDA Margin - 3 Yr. Avg. 8.9%
Operating Margin 4.2%
Oper. Margin - 3 Yr. Avg. 7.7%
Pre-Tax Margin 4.4%
Pre-Tax Margin - 3 Yr. Avg. 7.5%
Net Profit Margin 3.5%
Net Profit Margin - 3 Yr. Avg. 5.9%
Effective Tax Rate 17.9%
Eff/ Tax Rate - 3 Yr. Avg. 20.3%
Payout Ratio 64.1%

LFC stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the LFC stock intrinsic value calculation we used $78600 million for the last fiscal year's total revenue generated by China Life Insurance ADR. The default revenue input number comes from 2016 income statement of China Life Insurance ADR. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our LFC stock valuation model: a) initial revenue growth rate of 7% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for LFC is calculated based on our internal credit rating of China Life Insurance ADR, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of China Life Insurance ADR.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of LFC stock the variable cost ratio is equal to 90.5%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for LFC stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 7.7% for China Life Insurance ADR.

Corporate tax rate of 27% is the nominal tax rate for China Life Insurance ADR. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the LFC stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for LFC are equal to 3.1%.

Life of production assets of 8.2 years is the average useful life of capital assets used in China Life Insurance ADR operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for LFC is equal to 0%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $43926 million for China Life Insurance ADR - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 6437.7 million for China Life Insurance ADR is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of China Life Insurance ADR at the current share price and the inputted number of shares is $103.8 billion.


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COMPANY NEWS

▶ China Life posts 1Q profit   [Apr-28-17 02:30PM  Associated Press]
▶ 3 Chinese Stocks to Add to Your Portfolio Now   [Apr-18-17 09:09PM  Barrons.com]
▶ Why Is China Life Insurance Soaring?   [Feb-05-17 10:10PM  Barrons.com]
▶ Why Is China Life Insurance Soaring?   [10:10PM  at Barrons.com]
▶ [$$] Why Rent Office Space When You Can Buy a Whole Building?   [Sep-27-16 11:51PM  at The Wall Street Journal]
▶ Salad Days for China Insurers   [Apr-29-16 02:18AM  at Bloomberg]
▶ CHINA LIFE INSURANCE CO LTD Financials   [01:04PM  EDGAR Online Financials]
▶ [$$] Rates Down, Risk Up at China Life   [Mar-24-16 12:44AM  at The Wall Street Journal]
▶ Profit From These 4 Speculative China Trades   [Mar-15-16 07:13AM  at TheStreet]
▶ [$$] Citi to Sell 20% Stake in China Guangfa Bank for $3 Billion   [Feb-29-16 08:21PM  at The Wall Street Journal]
▶ China Life Insurance Stock: A Dividend Analysis (LFC)   [Feb-28-16 02:13AM  at Investopedia]
▶ China: As Central Bank Weakens Yuan, Can Stocks Rally?   [Feb-23-16 10:19AM  at Barrons.com]
▶ Investors Are Misinterpreting China's Moves: William Blair   [Jan-29-16 11:41AM  at Barrons.com]
Stock chart of LFC Financial statements of LFC Annual reports of LFC
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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