20171114-Maybank_KERPL-友邦保险-01299.HK-Assessing_China_Opportunities_13页_311kb

AIA Group (1299 HK) - Assessing China Opportunities Summary

Core Content

AIA Group (1299 HK) is maintaining a BUY rating and has raised its 12-month price target to HKD 73.00 (+12% from the previous target of HKD 71.00). The stock price surged by 6% yesterday due to the Chinese government's decision to gradually relax the foreign ownership cap of life insurers to 51% in three years and fully remove the cap after five years. This policy shift is seen as a positive development for AIA's expansion in China, although the company's nationwide presence may take several years to materialize.

Main Points

• Price Target: The new 12-month price target is HKD 73.00, implying a 14.0x 2018E VNB and 2.0x P/EV.
• Policy Impact: The relaxation of the foreign ownership cap in China could lead to increased opportunities for AIA, especially in lower-tier cities with strong growth potential.
• Expansion Strategy: AIA is expected to adopt a gradual and disciplined approach to its geographical expansion, prioritizing high-income tier-1/tier-2 cities before moving to lower-tier ones.
• Valuation Potential: The potential policy relaxation could add an extra USD15.6b valuation for AIA China, with a 20% probability of this scenario.
• VNB Growth: AIA China's potential VNB could increase by CNY595m in FY27E compared to USD536m from existing regions in FY16.

Key Information

Current Share Price

• HKD 65.30

Market Position

• AIA is the only listed life insurer with pure and well-diversified exposure to the Asia ex-Japan market.
• It relies on high-quality tied agents to sell highly-profitable long-term protection products targeting the affluent and mass affluent population.

Financial Highlights

Expansion Roadmap

1. Phase #1 (2022E): Expand to 6 regions (Tianjin, Fujian, Zhejiang, Hebei, Shandong, Chongqing), which account for ~22% of China's 2016 GDP.
2. Phase #2 (2025E): Expand into 9 additional regions (Anhui, Henan, Hunan, Sichuan, Hubei, Liaoning, Shanxi, Shaanxi, Jiangxi), accounting for ~30% of China's 2016 GDP.
3. Phase #3 (2028E): Expand into lowest-tier cities, but only if the affluent/mass affluent customer base is sufficient.

VNB Potential

Financial Assumptions

• Discount Rate: 12.6%
• Terminal Growth Rate: 4%
• Agent Productivity: Gradually improves from USD14k in year 1 to USD24k in year 4.
• VNB Margin: Starts at 40% and improves to 80% by year 8.
• Agent Turnover Rate: Drops from 40% in year 1 to 20% in year 6.
• Capital Allocation: AIA Group has deployed USD2.6b into AIA China as of FY15, with an expected USD6.5b consumption for expansion.
• Fair Value: USD15.579b, implying HKD10.00 per share.

Market Capitalization

• HKD788.4B or USD101.1B

Major Shareholders

• JPMorgan Chase & Co.: 9.0%
• The Capital Group Companies, Inc.: 8.2%
• BlackRock, Inc.: 5.0%

Conclusion

AIA Group is well-positioned to benefit from the gradual relaxation of the foreign ownership cap in China. The company's disciplined expansion strategy and high-quality tied agents suggest a gradual and controlled growth in its Chinese operations. While the full impact of the policy may not be seen in the short term, the potential valuation uplift from the expansion is significant, and the stock is expected to benefit from near-term catalysts such as further policy details and potential China JV formation. Investors are advised to maintain patience as the company rolls out its expansion plan over several years.