Intrinsic value of China Life Insurance ADR - LFC

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$15.63

  Intrinsic Value

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  Rating & Target

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  Value-price divergence*

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$15.63

 
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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 102.1

 

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
  14.90
  13.91
  13.02
  12.22
  11.50
  10.85
  10.26
  9.74
  9.26
  8.84
  8.45
  8.11
  7.80
  7.52
  7.26
  7.04
  6.83
  6.65
  6.49
  6.34
  6.20
  6.08
  5.97
  5.88
  5.79
  5.71
  5.64
  5.58
  5.52
  5.47
Revenue, $m
  0
  583,428
  664,583
  751,105
  842,868
  939,759
  1,041,683
  1,148,573
  1,260,389
  1,377,121
  1,498,796
  1,625,473
  1,757,246
  1,894,242
  2,036,621
  2,184,578
  2,338,335
  2,498,149
  2,664,301
  2,837,106
  3,016,904
  3,204,060
  3,398,971
  3,602,057
  3,813,766
  4,034,571
  4,264,974
  4,505,503
  4,756,716
  5,019,197
  5,293,561
Variable operating expenses, $m
 
  521,001
  593,472
  670,736
  752,681
  839,204
  930,223
  1,025,676
  1,125,527
  1,229,769
  1,338,425
  1,451,547
  1,569,220
  1,691,558
  1,818,703
  1,950,828
  2,088,133
  2,230,847
  2,379,221
  2,533,536
  2,694,095
  2,861,226
  3,035,281
  3,216,637
  3,405,693
  3,602,872
  3,808,622
  4,023,415
  4,247,747
  4,482,143
  4,727,150
Fixed operating expenses, $m
 
  6,471
  6,633
  6,798
  6,968
  7,143
  7,321
  7,504
  7,692
  7,884
  8,081
  8,283
  8,490
  8,703
  8,920
  9,143
  9,372
  9,606
  9,846
  10,092
  10,345
  10,603
  10,868
  11,140
  11,418
  11,704
  11,997
  12,296
  12,604
  12,919
  13,242
Total operating expenses, $m
  75,308
  527,472
  600,105
  677,534
  759,649
  846,347
  937,544
  1,033,180
  1,133,219
  1,237,653
  1,346,506
  1,459,830
  1,577,710
  1,700,261
  1,827,623
  1,959,971
  2,097,505
  2,240,453
  2,389,067
  2,543,628
  2,704,440
  2,871,829
  3,046,149
  3,227,777
  3,417,111
  3,614,576
  3,820,619
  4,035,711
  4,260,351
  4,495,062
  4,740,392
Operating income, $m
  3,292
  55,956
  64,478
  73,570
  83,218
  93,412
  104,139
  115,393
  127,170
  139,468
  152,290
  165,642
  179,535
  193,981
  208,998
  224,607
  240,830
  257,696
  275,234
  293,478
  312,464
  332,231
  352,822
  374,280
  396,654
  419,995
  444,356
  469,792
  496,365
  524,135
  553,169
EBITDA, $m
  3,593
  58,290
  67,136
  76,574
  86,590
  97,171
  108,306
  119,987
  132,211
  144,976
  158,285
  172,144
  186,564
  201,558
  217,145
  233,345
  250,184
  267,689
  285,891
  304,827
  324,532
  345,048
  366,418
  388,688
  411,910
  436,133
  461,416
  487,814
  515,392
  544,212
  574,343
Interest expense (income), $m
  708
  4,504
  24,704
  46,143
  68,999
  93,241
  118,837
  145,763
  174,000
  203,539
  234,377
  266,520
  299,985
  334,796
  370,986
  408,599
  447,686
  488,304
  530,523
  574,416
  620,067
  667,564
  717,006
  768,497
  822,147
  878,075
  936,406
  997,272
  1,060,814
  1,127,177
  1,196,518
Earnings before tax, $m
  3,449
  51,452
  39,774
  27,427
  14,219
  171
  -14,698
  -30,370
  -46,831
  -64,071
  -82,087
  -100,878
  -120,450
  -140,814
  -161,988
  -183,993
  -206,855
  -230,608
  -255,289
  -280,938
  -307,603
  -335,333
  -364,185
  -394,217
  -425,492
  -458,079
  -492,050
  -527,480
  -564,449
  -603,042
  -643,349
Tax expense, $m
  616
  13,892
  10,739
  7,405
  3,839
  46
  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
Net income, $m
  2,767
  37,560
  29,035
  20,022
  10,380
  125
  -14,698
  -30,370
  -46,831
  -64,071
  -82,087
  -100,878
  -120,450
  -140,814
  -161,988
  -183,993
  -206,855
  -230,608
  -255,289
  -280,938
  -307,603
  -335,333
  -364,185
  -394,217
  -425,492
  -458,079
  -492,050
  -527,480
  -564,449
  -603,042
  -643,349

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
  2,818,491
  3,210,544
  3,628,524
  4,071,825
  4,539,897
  5,032,287
  5,548,664
  6,088,834
  6,652,759
  7,240,561
  7,852,527
  8,489,110
  9,150,925
  9,838,750
  10,553,515
  11,296,306
  12,068,351
  12,871,022
  13,705,828
  14,574,413
  15,478,553
  16,420,152
  17,401,243
  18,423,989
  19,490,681
  20,603,739
  21,765,717
  22,979,304
  24,247,328
  25,572,761
Adjusted assets (=assets-cash), $m
  390,174
  2,818,491
  3,210,544
  3,628,524
  4,071,825
  4,539,897
  5,032,287
  5,548,664
  6,088,834
  6,652,759
  7,240,561
  7,852,527
  8,489,110
  9,150,925
  9,838,750
  10,553,515
  11,296,306
  12,068,351
  12,871,022
  13,705,828
  14,574,413
  15,478,553
  16,420,152
  17,401,243
  18,423,989
  19,490,681
  20,603,739
  21,765,717
  22,979,304
  24,247,328
  25,572,761
Revenue / Adjusted assets
  0.000
  0.207
  0.207
  0.207
  0.207
  0.207
  0.207
  0.207
  0.207
  0.207
  0.207
  0.207
  0.207
  0.207
  0.207
  0.207
  0.207
  0.207
  0.207
  0.207
  0.207
  0.207
  0.207
  0.207
  0.207
  0.207
  0.207
  0.207
  0.207
  0.207
  0.207
Average production assets, $m
  2,475
  31,505
  35,887
  40,560
  45,515
  50,747
  56,251
  62,023
  68,061
  74,365
  80,935
  87,776
  94,891
  102,289
  109,978
  117,967
  126,270
  134,900
  143,872
  153,204
  162,913
  173,019
  183,544
  194,511
  205,943
  217,867
  230,309
  243,297
  256,863
  271,037
  285,852
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
  392,121
  732,422
  1,095,229
  1,480,014
  1,886,300
  2,313,695
  2,761,910
  3,230,778
  3,720,265
  4,230,477
  4,761,663
  5,314,217
  5,888,673
  6,485,705
  7,106,121
  7,750,863
  8,420,998
  9,117,717
  9,842,329
  10,596,261
  11,381,054
  12,198,362
  13,049,949
  13,937,693
  14,863,581
  15,829,715
  16,838,312
  17,891,706
  18,992,351
  20,142,826
Total liabilities, $m
  346,248
  2,446,451
  2,786,752
  3,149,559
  3,534,344
  3,940,630
  4,368,025
  4,816,240
  5,285,108
  5,774,595
  6,284,807
  6,815,993
  7,368,547
  7,943,003
  8,540,035
  9,160,451
  9,805,193
  10,475,328
  11,172,047
  11,896,659
  12,650,591
  13,435,384
  14,252,692
  15,104,279
  15,992,023
  16,917,911
  17,884,045
  18,892,642
  19,946,036
  21,046,681
  22,197,156
Total equity, $m
  43,926
  372,041
  423,792
  478,965
  537,481
  599,266
  664,262
  732,424
  803,726
  878,164
  955,754
  1,036,534
  1,120,562
  1,207,922
  1,298,715
  1,393,064
  1,491,112
  1,593,022
  1,698,975
  1,809,169
  1,923,823
  2,043,169
  2,167,460
  2,296,964
  2,431,967
  2,572,770
  2,719,694
  2,873,075
  3,033,268
  3,200,647
  3,375,604
Total liabilities and equity, $m
  390,174
  2,818,492
  3,210,544
  3,628,524
  4,071,825
  4,539,896
  5,032,287
  5,548,664
  6,088,834
  6,652,759
  7,240,561
  7,852,527
  8,489,109
  9,150,925
  9,838,750
  10,553,515
  11,296,305
  12,068,350
  12,871,022
  13,705,828
  14,574,414
  15,478,553
  16,420,152
  17,401,243
  18,423,990
  19,490,681
  20,603,739
  21,765,717
  22,979,304
  24,247,328
  25,572,760
Debt-to-equity ratio
  0.185
  1.050
  1.730
  2.290
  2.750
  3.150
  3.480
  3.770
  4.020
  4.240
  4.430
  4.590
  4.740
  4.880
  4.990
  5.100
  5.200
  5.290
  5.370
  5.440
  5.510
  5.570
  5.630
  5.680
  5.730
  5.780
  5.820
  5.860
  5.900
  5.930
  5.970
Adjusted equity ratio
  0.113
  0.132
  0.132
  0.132
  0.132
  0.132
  0.132
  0.132
  0.132
  0.132
  0.132
  0.132
  0.132
  0.132
  0.132
  0.132
  0.132
  0.132
  0.132
  0.132
  0.132
  0.132
  0.132
  0.132
  0.132
  0.132
  0.132
  0.132
  0.132
  0.132
  0.132

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  2,767
  37,560
  29,035
  20,022
  10,380
  125
  -14,698
  -30,370
  -46,831
  -64,071
  -82,087
  -100,878
  -120,450
  -140,814
  -161,988
  -183,993
  -206,855
  -230,608
  -255,289
  -280,938
  -307,603
  -335,333
  -364,185
  -394,217
  -425,492
  -458,079
  -492,050
  -527,480
  -564,449
  -603,042
  -643,349
Depreciation, amort., depletion, $m
  301
  2,334
  2,658
  3,004
  3,371
  3,759
  4,167
  4,594
  5,042
  5,508
  5,995
  6,502
  7,029
  7,577
  8,146
  8,738
  9,353
  9,993
  10,657
  11,348
  12,068
  12,816
  13,596
  14,408
  15,255
  16,138
  17,060
  18,022
  19,027
  20,077
  21,174
Funds from operations, $m
  19,748
  39,894
  31,693
  23,026
  13,751
  3,884
  -10,531
  -25,775
  -41,789
  -58,563
  -76,091
  -94,376
  -113,421
  -133,237
  -153,842
  -175,254
  -197,502
  -220,616
  -244,632
  -269,590
  -295,535
  -322,517
  -350,589
  -379,808
  -410,237
  -441,941
  -474,990
  -509,458
  -545,422
  -582,966
  -622,175
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
  40,684
  31,693
  23,026
  13,751
  3,884
  -10,531
  -25,775
  -41,789
  -58,563
  -76,091
  -94,376
  -113,421
  -133,237
  -153,842
  -175,254
  -197,502
  -220,616
  -244,632
  -269,590
  -295,535
  -322,517
  -350,589
  -379,808
  -410,237
  -441,941
  -474,990
  -509,458
  -545,422
  -582,966
  -622,175
Maintenance CAPEX, $m
  0
  -2,031
  -2,334
  -2,658
  -3,004
  -3,371
  -3,759
  -4,167
  -4,594
  -5,042
  -5,508
  -5,995
  -6,502
  -7,029
  -7,577
  -8,146
  -8,738
  -9,353
  -9,993
  -10,657
  -11,348
  -12,068
  -12,816
  -13,596
  -14,408
  -15,255
  -16,138
  -17,060
  -18,022
  -19,027
  -20,077
New CAPEX, $m
  -768
  -4,084
  -4,382
  -4,672
  -4,955
  -5,232
  -5,504
  -5,772
  -6,038
  -6,304
  -6,570
  -6,841
  -7,116
  -7,398
  -7,689
  -7,990
  -8,303
  -8,630
  -8,972
  -9,331
  -9,709
  -10,106
  -10,525
  -10,967
  -11,432
  -11,923
  -12,442
  -12,989
  -13,565
  -14,174
  -14,816
Cash from investing activities, $m
  -15,148
  -6,115
  -6,716
  -7,330
  -7,959
  -8,603
  -9,263
  -9,939
  -10,632
  -11,346
  -12,078
  -12,836
  -13,618
  -14,427
  -15,266
  -16,136
  -17,041
  -17,983
  -18,965
  -19,988
  -21,057
  -22,174
  -23,341
  -24,563
  -25,840
  -27,178
  -28,580
  -30,049
  -31,587
  -33,201
  -34,893
Free cash flow, $m
  -2,258
  34,568
  24,977
  15,696
  5,792
  -4,720
  -19,794
  -35,714
  -52,421
  -69,908
  -88,170
  -107,211
  -127,038
  -147,664
  -169,107
  -191,391
  -214,543
  -238,599
  -263,596
  -289,578
  -316,592
  -344,691
  -373,930
  -404,371
  -436,078
  -469,120
  -503,570
  -539,506
  -577,010
  -616,166
  -657,067
Issuance/(repayment) of debt, $m
  4,894
  320,628
  340,301
  362,807
  384,785
  406,287
  427,395
  448,215
  468,868
  489,487
  510,212
  531,187
  552,554
  574,456
  597,032
  620,417
  644,742
  670,135
  696,718
  724,612
  753,932
  784,793
  817,308
  851,587
  887,744
  925,888
  966,134
  1,008,597
  1,053,394
  1,100,645
  1,150,475
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
  320,628
  340,301
  362,807
  384,785
  406,287
  427,395
  448,215
  468,868
  489,487
  510,212
  531,187
  552,554
  574,456
  597,032
  620,417
  644,742
  670,135
  696,718
  724,612
  753,932
  784,793
  817,308
  851,587
  887,744
  925,888
  966,134
  1,008,597
  1,053,394
  1,100,645
  1,150,475
Total cash flow (excl. dividends), $m
  464
  355,196
  365,279
  378,503
  390,577
  401,567
  407,601
  412,501
  416,446
  419,579
  422,042
  423,975
  425,515
  426,792
  427,925
  429,026
  430,199
  431,536
  433,122
  435,034
  437,340
  440,102
  443,377
  447,216
  451,666
  456,768
  462,564
  469,091
  476,384
  484,479
  493,408
Retained Cash Flow (-), $m
  2,730
  -49,549
  -51,751
  -55,173
  -58,516
  -61,786
  -64,996
  -68,162
  -71,302
  -74,438
  -77,590
  -80,780
  -84,029
  -87,360
  -90,793
  -94,349
  -98,048
  -101,910
  -105,953
  -110,194
  -114,653
  -119,346
  -124,291
  -129,504
  -135,002
  -140,803
  -146,924
  -153,381
  -160,194
  -167,379
  -174,957
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
 
  305,647
  313,528
  323,330
  332,061
  339,781
  342,605
  344,339
  345,144
  345,141
  344,452
  343,196
  341,486
  339,432
  337,132
  334,677
  332,150
  329,626
  327,169
  324,839
  322,686
  320,756
  319,086
  317,712
  316,663
  315,965
  315,641
  315,710
  316,191
  317,099
  318,451
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
 
  293,046
  287,024
  281,383
  273,419
  263,372
  248,642
  232,631
  215,723
  198,265
  180,583
  162,979
  145,724
  129,058
  113,181
  98,256
  84,406
  71,721
  60,251
  50,016
  41,004
  33,177
  26,476
  20,823
  16,128
  12,291
  9,209
  6,776
  4,892
  3,461
  2,398
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 159.7
Price to Sales 5.6
Price to Book 10.1
Price to Tangible Book
Price to Cash Flow 34.3
Price to Free Cash Flow 36.4
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 $507770 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 14.9% 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 89.3%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $6313 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 6.3% 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 5.4%.

Life of production assets of 13.5 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 - $322492 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 6532.08 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 $102.1 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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