Omicron resilience
? AIA’s share price has outperformed strongly in the past week despite HK’s fifth wave of Covid-19, suggesting such concerns may have been priced in.
? Another reason for the outperformance is AIA benefits from higher interest rates, with bond yields rising markedly across almost all of its major markets.
? We see high probability of an announcement near term that AIA China is entering into another new region, with this positive to its share price.
? Reiterate Add. AIA remains our sector top pick. Our TP dips to HK$107 on reduced FY21F-FY23F VONB and EPS due to HK’s Covid-19 outbreak.
Strong recent share price performance defies Covid-19 concerns
AIA’s share price is up 9% YTD, and 7% over the past week (Fig 2), despite the sharp rise of Covid-19 cases amidst HK’s fifth wave. We see this as consistent with our earlier argument that investor concerns over Covid-19 and the Omicron variant could be well in the price (see A welcome diversion, dated 6 Jan 2022), especially given its initial underperformance (Fig 3) when Omicron was first announced as a variant of concern by the World Health Organisation (WHO).
Higher bond yields directly benefit AIA’s VONB
Bond yields are rising markedly across almost all of AIA’s major markets (Fig 4), setting the stage for it to raise its actuarial investment return assumption at its upcoming FY21 results announcement. We estimate AIA’s value of new business (VONB) could rise 7% for every 50bp rise in bond yields (Fig 10), based on the actuarial sensitivities it disclosed at its FY20 results.
Time for an announcement of entering another new region in China
AIA has outperformed the Hang Seng Index (HSI) in the month after it announced it has received regulatory approval to begin preparations to enter a new region in mainland China. Such outperformance ranged from 5% to 12% pts. Based on the time between previous announcements (Fig 17), we see high probability of it announcing in the near term that it has obtained approval to enter yet another new region. This should see it continue to deliver much better-than-peer agent growth in mainland China, as well as a nine-fold growth of its China VONB by 2030F, in our view (see our report Reassessing long-term growth potential dated 15 Jan 2021).
Reiterate Add; AIA remains our top pick for the sector
Our GGM-based TP dips to HK$107 from HK$108, as we factor in slower premium growth due to HK’s fifth Covid-19 outbreak. We now forecast VONB growth of 17.9%, 10.3% and 19% in FY21F, FY22F and FY23F respectively. We continue to see AIA as a key beneficiary of diverted demand of insurance policies to Macau, especially given the benign Covid-19 environment there (see A welcome diversion, dated 6 Jan 2022). Potential catalysts are higher bond yields and a marked fall in Covid-19 cases, which could lead investors expecting a reopening of the HK-mainland borders. Downside risks include currency volatility and a prolonged Covid-19 outbreak.