We’ve Raised AIA’s Fair Value Estimate

The new estimate of HK$ 107 reflects its investment in a mainland peer.

Kate Lin, CAIA 07.07.2021
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Hong Kong-headquartered AIA Group (01299) inked a deal with China Post Group for wider collaboration with its subsidiary China Post Life. The agreement aligns with AIA’s strategy to tap into China’s underpenetrated mass insurance market. AIA also announced its plans to invest CNY 12 billion for about a 25% equity stake in CPL.

Iris Tan, senior equity analyst at Morningstar, says: “Though the near-term impact is not material, this investment potentially enables AIA’s access to Postal Savings Bank of China’s huge distribution network, which covers mass and emerging mass-affluent customers in China.”

China Post Group is the parent company to the Hong Kong-listed Postal Savings Bank of China (01658).

Widening Leadership

According to Tan, the access will be complementary to AIA’s strategic positioning in China as the agent-driven differentiated life insurer covering wealthy customers in affluent areas. Tan has increased her fair value estimate to HK$ 107 from HK$ 95 per share. Based on its last close of HK$ 96.75, AIA is trading at a 10% discount to its new fair value estimate.

Compared to its major peers, AIA has a valuation premium. Tan explains that, despite a no-moat rating, AIA’s powerful distribution networks, strong product offerings, and diversified geographic mix in Asia enable it to capitalize on resilient insurance demand in the region, which will translate to a relatively steady future revenue stream and will justify the premium.

She adds that AIA was able to leverage its leading position in selective markets to further widen its lead against local peers in new business value growth. This is despite the challenges the industry is facing as a result of changing customer behavior, the fading population dividends and tightened regulations.

 

3 Upside Catalysts

Looking ahead, surprises in new business value growth from a low base in 2020 will be a near-term upside catalyst for AIA. Also, as a reopening of the Hong Kong-China border is anticipated, the influx of mainland visitors would unmute much of the cross-border businesses.

Another major catalyst will be the Insurance Connect, an impending cross-border insurance scheme in the Greater Bay Area that will also buoy the optimism for AIA and peers as the program enables much easier insurance sale activity across Hong Kong, Macau and the Guangdong province.

Lastly, the onshore China business will have a growing impact on AIA’s profitability. For the longer term, viewing its ambition in acquiring a stake in CPL, AIA’s better-than-expected progress in China expansion will be another surprise to the upside. “This is given that AIA is already a leading player in mainland China and has demonstrated full preparation for China expansion,” Tan adds.

The market as a whole has been contributing over one-third of AIA’s total new business value. In comparison, the contribution from its home market Hong Kong contracted about half to 20% as of late.

That said, both Hong Kong and mainland markets continue to be important geographic locations to capture growing Chinese wealth. Tan concludes, in mature markets like Hong Kong, AIA can sell high-margin medical, health, and annuities products. China’s younger demographics would bode well for long-term savings products and growth potential in the bancassurance channel.

Lastly, Tan named some risks exposed to AIA and the whole industry. The increasing insurance awareness in the region, along with rising household wealth and an aging population will partly be canceled off by weaker demand due to an economic slowdown. Challenges also come from intensifying competition against domestic providers.

 

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
AIA Group Ltd77.20 HKD-1.15Rating
Postal Savings Bank Of China Co Ltd H5.74 HKD-0.35Rating

About Author

Kate Lin, CAIA

Kate Lin, CAIA  is a Data Journalist for Morningstar Asia, and is based in Hong Kong

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