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AIA Group Limited Summary

Core Content

AIA Group Limited is a leading insurer in the Asia-Pacific region with a long history and strong presence in key markets such as Hong Kong, Singapore, Thailand, and South Korea. The document outlines the company's expected financial performance, valuation methods, and key factors influencing its growth.

Main Points

• Expected Performance: AIA is expected to report strong full-year results for 2014, with a revised forecast for VNB growth of 21.4% for 2014, 20% for 2015, and 18% for 2016.
• Price Objective (PO): The PO has been raised to HK$52.00 by rolling over to 2016E, based on the company's strong performance and growth prospects.
• Premium Growth: The company has shown strong premium growth in the second half of 2014 in several markets, including 12% in China, 6.6% in Thailand, 19% in South Korea, and 19% in Hong Kong.
• VNB Growth Drivers: Key drivers for continued VNB growth include synergy from the ING Malaysia acquisition, long-term savings and pension product opportunities in China, agent productivity improvements in Thailand and Singapore, and a turnaround in South Korea.
• Forex Impact: The strengthening of the US dollar is a headwind, with an estimated impact of 3ppt on VNB growth and 2ppt on EV growth. However, the forecasted VNB growth is expected to have enough buffer to absorb potential forex headwinds.
• Valuation: The document presents two valuation approaches:
  • RoEV Approach: Based on the Gordon Growth Model, with a required return of 10.50%, a cost of equity of 8.2%, and a terminal growth rate of 4.5%, leading to a fair value of HK$51.85.
  • Appraisal Value Approach: Based on the embedded value and a new business multiplier of 14.7x, resulting in a fair value of HK$53.98.
• Financial Performance (Estimates - Nov):
  • Reported Net Profit: HK$3,193 million in 2014E.
  • Net Profit Growth: 13.1% in 2014E.
  • EPS: HK$2.057 in 2014E.
  • Book Value per Share: HK$17.50 in 2014E.
  • DPS: HK$0.473 in 2014E.
  • ROE (2014E): 12.3%.
• Valuation Metrics (Nov):
  • Price to Book Value: 2.57x.
  • PER: 21.86x.
  • Dividend Yield: 1.05%.
  • P/EV: 1.90x.
  • Implied New Business Multiplier: 18.21x for 2014E.

Key Information by Market

• China (14% of VNB):
  • Premium growth in 2H14 was 12%, outperforming the industry's 7%.
  • VNB growth is expected to continue, with a shift in product mix to long-term savings.
• Thailand (19% of VNB):
  • FYP APE growth increased from 1.2% in 1H14 to 6.6% in 2H14.
  • Agent productivity and new products are expected to drive further growth.
• South Korea (4% of VNB):
  • FYP APE growth improved from 12.8% in 1H14 to 18.9% in 2H14.
  • However, the FYP mix structure remains unchanged.
• Hong Kong (30% of VNB):
  • FYP APE growth was 53.4% YoY in 9M14, outperforming the market's 10%.
  • Agent productivity and mainland China clients are contributing to strong growth.
• Malaysia (8% of VNB):
  • VNB growth is expected to continue due to synergy from ING Malaysia acquisition.
  • Margin upside may be capped due to a high base from new product launches.

Investment Thesis

AIA's ability to balance sustainable value creation with new business growth is expected to continue outperforming its peers. The company is positioned to deliver the strongest VNB growth among Asian insurers, supported by strong premium momentum and strategic initiatives.

Stock Data

• Price: HK$44.95
• Price Objective (PO): HK$52.00
• Date Established: 23-Jan-2015
• Investment Opinion: C-1-8
• Volatility Risk: HIGH
• 52-Week Range: HK$34.65-HK$45.65
• Market Value (mn): HK$541,378
• Average Daily Volume: 22,951,110
• ROE (2014E): 12.3%
• Est. 5-Yr EPS / DPS Growth: 13.0% / 0%
• Free Float: 100.0%

Key Changes

• Price Objective: Raised from HK$47.00 to HK$52.00.

Risk and Disclosure

• The report is prepared by a non-US affiliate of MLPF&S and is not registered/qualified as a research analyst under FINRA rules.
• There may be a conflict of interest due to BofA Merrill Lynch's business relationship with the company.
• Important disclosures are referenced on pages 19 to 21, including analyst certification and the basis of the price objective.

Summary of Financial Highlights

• Premium & Fee Income: Expected to grow from US$13,816 million in 2012A to US$18,833 million in 2014E.
• Net Profit After Tax: Expected to grow from HK$3,019 million in 2012A to HK$4,076 million in 2016E.
• Total Revenue: Projected to increase from US$20,387 million in 2012A to US$31,250 million in 2016E.
• Total Assets: Projected to grow from HK$134,439 million in 2012A to HK$200,346 million in 2016E.
• Shareholders' Equity: Expected to rise from HK$26,697 million in 2012A to HK$32,913 million in 2016E.

Conclusion

AIA is expected to maintain strong VNB growth and deliver robust performance in 2014 and beyond. Despite forex headwinds, the company's growth is anticipated to be resilient, supported by strategic initiatives and strong market positions. The raised price objective reflects confidence in the company's long-term value creation potential.