Decoding HK: Margin-driven growth
? AIA HK’s 2H21 record high VONB growth of 82% yoy has attracted significant
investor queries on sustainability, with 2H21 margins also at a record high.
? A key driver of HK’s 2H21 VONB margins was higher US rates. We see this
continuing in FY22F given the sharp rise in US 10-year bond yields (Fig 6).
? A key concern is falling HK agent numbers yoy (-5% for AIA in 2021). Industry
data show conditions in Mar 2022 (-9%) were the worst in 16 years (Fig 24).
? Reiterate Add rating. Trim TP to HK$100 on lower FY22F-24F VONB.
HK: Hitting multiple records in 2H21 & garnering significant interest
Follow ing AIA’s FY21 results, discussions with investors revealed significant surprise at
the strength of A IA’s HK operations, with 2H21’s HK value of new business (VONB)
growth of 82% the highest since at least its 2010 IPO (Fig 2). This was driven by a rise in
VONB margins, up in 2H21 by 81% yoy in percentage growth terms (Fig 3) and due
primarily to three factors: higher US long-duration bond yields, reduced expense overruns
and improved product mix.
Sharply higher US rates = sustained HK margin tailwinds
With US 10-year bond yields already up 119bp in 2022 YTD, much more than 2021’s
‘mere’ 60bp yoy rise (Fig 6), w e are thus very optimistic that AIA HK’s already record high
VONB margins can remain a tailwind for VONB growth in FY22F.
Further product mix improvements & reduced expense overruns
While A IA’s 2021 new business regular premiums mix with premium duration of ten years
and above improved by 10.3% pts yoy to 49.8% (Fig 27), well above industry average
and one of the highest in HK (Fig 30), it remains well below its 2014 peak of 68.5%. We
thus believe that more scope exists for improved product mix to drive higher margins. We
also see more scope for reduced expense overruns to boost AIA’s HK margins as its
annualised new premiums (ANP) in 2021 were still 66% below 2018’s levels (Fig 31).
Falling agent numbers are a key concern
The combination of HK protests in 2019 coupled with border controls at the start of the
pandemic in 2020 made HK agent growth extremely difficult. A IA saw HK agent numbers
fall 5% yoy in 2021 (Fig 22). Also, industry agent numbers saw Dec 2021’s 3% yoy fall
worsen to 9% in Mar 22, with this fall the worst in 16 years (Fig 24).
Reiterate Add with lower TP of HK$100; remains top sector pick
Our low er GGM-based TP is driven by slower FY22F V ONB growth (cut 3.9% pts) due to
mainland China’s Covid-19 outbreak. We estimate a quarter of its FY21 gross written
premiums (GWP) were in Shanghai and Shenzhen (Fig 37). Our 0.6-0.7% cuts to FY22F24F EPS are due to lower premium growth. Potential catalysts are higher bond yields , a
marked fall in Covid-19 cases and a HK-mainland border reopening. Downside risks
include currency volatility and a prolonged Covid-19 outbreak