We’ve Raised AIA’s Fair Value Estimate

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.

©2021 Morningstar. All rights reserved. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided as of the date written, solely for informational purposes; and subject to change at any time without notice. This content is not an offer to buy or sell any particular security and is not warranted to be correct, complete or accurate. Past performance is not a guarantee of future results. The Morningstar name and logo are registered marks of Morningstar, Inc. This article includes proprietary materials of Morningstar; reproduction, transcription or other use, by any means, in whole or in part, without prior, written consent of Morningstar is prohibited. This article is intended for general circulation, and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Investors should consult a financial adviser regarding the suitability of any investment product, taking into account their specific investment objectives, financial situation or particular needs, before making any investment decisions. Morningstar Investment Management Asia Limited is licensed and regulated by the Hong Kong Securities and Futures Commission to provide investment research and investment advisory services to professional investors only. Morningstar Investment Adviser Singapore Pte. Limited is licensed by the Monetary Authority of Singapore to provide financial advisory services in Singapore. Either Morningstar Investment Management Asia Limited or Morningstar Investment Adviser Singapore Pte. Limited will be the entity responsible for the creation and distribution of the research services described in this article.