A welcome diversion

■ Insurance purchases by mainland Chinese visitors have diverted to Macau from HK, comprising a high 51% of Macau’s system ANP in 2Q21 (3Q: 33%).

■ We see this diversion continuing, given delays in reopening HK’s border with the mainland, and AIA well placed to benefit given its large market share.

■ We think Omicron concerns may already be priced-in for AIA, given its stable share prices a month after WHO declares a new Covid-19 VOI/VOC (Fig 25).

■ Reiterate Add, with a slight cut in TP to HK$108. Remains top sector pick. We continue to see AIA as a key beneficiary of higher inflation and bond yields.

Insurance purchases are being diverted to Macau

Data that only became available in 2021 indicate that the closure of the border between HK and the mainland has significantly benefitted Macau’s life insurance market. Insurance purchases by mainland Chinese visitors (MCV) rose to a high of 51% of Macau’s system annualised new premiums (ANP) in 2Q21 (Fig 3), before falling to 33% in 3Q21. We think this mix could rebound in 4Q21F, given that MCV arrivals to Macau was back to positive yoy growth in Nov 2021 to 741,226, the highest since May 2021 (Fig 6).

MCV ANP growth could see additional tailwinds if the Rmb weakens

Macau’s MCV ANP growth could accelerate even faster, especially if the Rmb shows any weakness against the US$, which we think could be possible as the interest rate gap between United States and China widens. Exchange rate movements have historically been a very strong predictor of MCV ANP growth, at least in HK (correlation co-efficient over 90%, Fig 7).

AIA well placed to benefit given its no.2 market share in Macau

AIA’s no.2 market share position in Macau in 2020 and 9M21 (Fig 11) sees it well placed to benefit as MCV continue to shift their insurance purchases from Macau to HK.

Analysis suggests Omicron concerns may already be priced-in

We argue that Omicron concerns may already be priced-in for AIA, based on event study analysis of AIA’s absolute and market-relative (to the Hang Seng Index) share price performances following the World Health Organisation (WHO) declaring a Covid-19 variant of interest or variant of concern (Fig 19). AIA’s underperformance typically happens only in the first month after, with no clear trend in subsequent months.

Reiterate Add rating; AIA remains our top pick for the sector

Our GGM-based TP is cut to HK$108 from HK$119, as we mark-to-market our investment income estimates given AIA’s weak investment market performance in 2H21. We also more conservatively assume virtually zero MCV business in HK for FY22F, and only a slight recovery in FY23F. We continue to see AIA as a key beneficiary of higher inflation. Potential catalysts are higher bond yields and a re-opening of the border between HK and the mainland. Downside risks include currency volatility and a prolonged Covid-19 outbreak.