China Life Insurance (LFC): Underpinning its growth is the growth of China

By Timothy Lutts, Chief Investment Strategist and Editor of Cabot Stock of the Month Report

For Cabot Wealth Advisory, 12/17/07 Sign up for free Cabot Wealth Advisory e-newsletter

If I could buy any insurance company, I’d buy Geico. Unfortunately, it’s already owned by Warren Buffett’s Berkshire Hathaway.

My second choice? China Life Insurance (LFC).

China Life was a government entity until it was sold to the public in December 2003, in the biggest Chinese IPO to date. It’s the biggest life insurance company in China, by far, and it’s getting bigger faster; revenues in the past twelve months topped $22 billion!

Revenues at the company grew 30% in 2005, 55% in 2006, and are on track to grow perhaps 50% for 2007. Earnings have been mushrooming, from $0.64 per share in 2005 to $1.42 in 2006 to an estimated $2.53 in 2007. And after-tax profit margins appear almost criminal; they were 23% in the latest quarter!

Underpinning all this growth, of course, is the growth of China; as the middle class booms in China, the insurance industry booms along with it. And that’s especially true for this firm, as the middle class lives a more affluent, independent life in cities, away from the extended families that provided support in the rural countryside.

But I wouldn’t buy it just yet.

Editor Paul Goodwin of Cabot China & Emerging Markets Report owned LFC as recently as early November, but recommended selling after his China-Timer (a market-timing indicator) turned negative and the stock dipped below its 50-day moving average.

LFC performed worse than the market over the past two months and my guess is that it’s going to touch its 200-day moving average before it resumes its long-term uptrend. That 200-day average is now at 65, and I suggest you keep an eye on the stock in the weeks ahead, looking for the stock and its 200-day moving average to converge.

Editor’s Note: China Life Insurance could be recommended in any of several Cabot Publications, but by far the most likely is Cabot China & Emerging Markets Report. Editor Paul Goodwin continues to advise a cautious stance today, but as soon as the market strengthens, you can count on Paul to be recommending the most high-potential investments in his fast-growing universe…most recently he stepped outside his core zone of Brazil, Russia, India and China to recommend a stock in Turkey! Click here for more information.

Tim LuttsTimothy Lutts
President, Chief Investment Strategist, Editor of Cabot Stock of the Month

Timothy Lutts heads one of America’s most respected independent investment advisory services, publishing eight newsletters to more than 165,000 subscribers around the world. Tim leads a dedicated team of professionals who serve individual investors with high-quality investment advice based on time-tested Cabot systems. Under his leadership, Cabot has been honored numerous times by both Timer Digest and the Hulbert Financial Digest as among the top investment newsletters in the industry. Tim also edits Cabot Stock of the Month.