Stands to gain most from the US rate hike
- We estimate the increase in US 10-year bond yield spot rate will push up AIA’s long-term investment return curve by 26bps h-o-h and enhances its interest rate sensitivity
- Outperformed most of its insurers/banking peers in previous US rate cycles, and we expect déjà vu
- AIA China to see moderate start in 1Q22F on a high base, while HK and Thailand to see continuous growth from domestic segment and protection product migration
- Revise up FY21/22 VONB growth assumption by 3%-4% to +17%/+15% y-o-y, and lift TP to HK$127. Reiterate BUY
Investment Thesis
Well positioned for next expansion. Targeting 12 new provinces/municipalities by FY30F with an addressable market 4x larger than the current footprint offers a grand secular opportunity. The recent investment in China Post Life (non-listed) also helps to capture growth from the mass market segment.
VONB to expand fivefold by FY30F. The additional value of new business (VONB) contribution from the China expansion, under a 10-year view, is estimated to result in a 5x and 27% increase in VONB and EV, respectively. The value of China Post Life’s investment is equivalent to US$3.9bn.
Embrace the next US interest rate upcycle. The mounting US rate hike and tapering expectation has led the US 10-year bond yield to reach 1.9% in February 2022, the highest level since 2019. The market currently expects the US Fed to start raising its rate in March and anticipates three interest rate hikes in FY22F. The upward shift in the US bond yield is considered a positive for AIA.
Valuation:
Our TP is based on a two-stage EV growth model, with a) the first stage to factor in existing organic growth and b) the second stage to include the present value (PV) of the additional VONB from the
China expansion by FY30F and terminal value. This is pegged to a 2.1x FY22F P/EV multiple. We also included a US$3.9bn valuation from the China Post Life investment.
Where we differ:
We believe the street has yet to factor in the additional value from the China Post Life investment, where we estimate the investment will bring in an additional HK$5/share to AIA.
Key Risks to Our View:
Slower VONB growth, sharp deterioration of investment performance, slower economic growth in China, and any interest rate downcycle.