20160715-大和证券-友邦保险-01299.HK-Initiation_Upside_resides_in_Hong_KongChina_61页_2mb

AIA Group (1299 HK) Summary

Core Content

AIA Group is the largest listed Pan-Asia life insurance company, operating in 18 markets including Hong Kong, China, Thailand, Singapore, Malaysia, and Korea. The report initiates with an Outperform rating and a target price of HKD55.00, indicating a potential +14.5% upside from the current share price of HKD48.05 as of 15 July. The analysis emphasizes the growth potential of AIA's operations in Hong Kong and China, which are expected to significantly contribute to the company's Value of New Business (VNB) and valuation upside.

Main Points

• Growth Outlook: AIA is projected to achieve 27% YoY VNB growth in FY16, 21% in FY17, and 18% in FY18. This growth is attributed to a combination of geographic and product mix changes.
• Geographic Focus:
  • China and Hong Kong are expected to be the fastest-growing markets, with c.25-30% CAGR in VNB over FY16-18.
  • Thailand and Malaysia are anticipated to benefit from product mix optimization and margin improvements.
  • Korea is noted for an orderly retreat from a challenging market.
• Product Strategy:
  • AIA emphasizes protection products that enhance margins, such as critical illness products in China and Hong Kong, and unit-linked products with protection riders in Malaysia, Thailand, and Singapore.
  • The company aims to tap into the growing demand for health and pension products in developing and emerging markets due to low insurance penetration and lack of social safety nets.
• Valuation:
  • The target price of HKD55 is based on a blended 2017E P/EV of 2.0x.
  • AIA China is assigned the highest valuation multiple due to its strong growth momentum and positive margin trends.
• Dividend Upside:
  • AIA's dividend yield is forecasted to be more than double that of FY13-15, reaching 3.0% in FY18.
  • Factors supporting this include increased underwriting profit, improved expense ratio, moderate leverage, and predictable distributable profit from in-force business.
• Catalysts:
  • Key drivers include premium growth trends, VNB growth (CER), currency and equity market trends, and regulatory developments.
  • AIA's share price is primarily influenced by underwriting execution, while China insurers are more sensitive to short-term investment and premium trends.
• Risks:
  • Intensifying competition from China insurers and bank-led insurers in Thailand and Malaysia.
  • Currency and equity market volatility across Asia, which can impact AIA's Embedded Value (EV) and profitability.

Key Financial Metrics

Key Ratios and Sensitivities

• ROAE (adjusted): Expected to be 10.4% in FY16, 11.0% in FY17, and 10.0% in FY18.
• Solvency Ratio: Stabilized at c.438% in FY16, indicating a well-capitalized financial position.
• Sensitivity to Interest Rates: AIA's EV is less affected by low yields compared to China peers, with further rate declines likely to be positive for AIA's bottom line.
• Currency and Equity Market Volatility: These factors are key risks that can impact AIA's EV and profitability in key markets.

Summary of Company and Sector Catalysts

Strategic Overview

• Market Strategy: AIA's strategy is centered on developing Asia, where it has 42% of its ANP and VNB.
• Distribution Strategy: The company relies on a premier agency model, particularly in China, to drive high-margin product sales.
• Product Strategy: AIA's product mix includes protection products and unit-linked products with protection riders, which are designed to enhance margins and customer retention.

Conclusion

The report highlights AIA's growth potential in Hong Kong and China, supported by strong VNB growth, improved underwriting margins, and dividend upside. It also outlines the key risks and catalysts that could influence the company's performance, emphasizing the importance of market stability, product mix, and regulatory environment in the Asia-Pacific region.