1Q22F preview: Can margins save the day?
? We view 1Q22F to be the toughest quarter for value of new business (VONB)
yoy at -18%, versus 2Q22F’s -12.4%, 3Q22F’s +9.2% and 4Q22F’s +11.2%.
? While we see weak HK annualised new premium (ANP) volumes, we see a
strong HK margin performance helping cushion the impact of Covid-19.
? We see China as the worst performing market for VONB growth, due to
falling margins, a high base and Covid-19 outbreaks.
? Reiterate Add; TP cut to HK$94 as we mark-to-market for weak equity
markets, with cuts to our FY22F-24F EPS, EV & VONB.
The toughest quarter
We expect 1Q22F to the toughest quarter for value of new business (VONB) growth yoy,
and forecast VONB to fall 18% yoy. We then forecast VONB to fall 12.4% in 2Q22F,
before rebounding 9.2% yoy in 3Q22F and 11.2% yoy in 4Q22F (Fig 1). This incorporates
VONB weakness in mainland China in both 1Q22F (-32% yoy) and 2Q22F (-32% yoy),
with Shenzhen, Shanghai and Beijing accounting for 7%, 17.6% and 24.5% of AIA’s
2020’s gross written premiums respectively (Fig 2). AIA reports 1Q22 results before
market on 29 Apr 2022.
Margins could be a swing factor, in HK as well as Thailand
We had pointed out in Decoding HK: Margin-driven growth, dated 11 Apr 2022 that
VONB margin strength for AIA’s Hong Kong (HK) business was likely to persist and trend
even higher into 1Q22F, given the sharp rise in US 10-year treasury yields (Fig 5), even if
reduced premium volumes from Covid-19 lockdowns result in increased expense
overruns. Thailand is another market where we see a notable increase in bond yields
positively impacting VONB margins.
Net profit more sensitive to equity markets movements vs. peers
This is mainly due to AIA’s accounting classification of all its equity portfolio as fair-value through-profit-and-loss (FVTPL), which results in equity market volatility directly
impacting net profits. In contrast, peers classify a sizable portion of their equity portfolio
as available-for-sale (AFS), where equity market volatility primarily impacts shareholders’
equity in the balance sheet. Accordingly, given 1H22F equity market weakness, we cut
FY22F EPS by 20%. We point out AIA bases its dividends on operating profits and not
net profits. We also see VONB as a bigger driver of share price than EPS.
Reiterate Add with lower TP of HK$94; remains top sector pick
Our lower GGM-based TP is mainly driven by slower FY22F VONB growth (cut 3.9% pts)
due to mainland China’s Covid-19 outbreak. We see AIA as a stock with minimal
regulatory risk and thus attractive to investors looking to obtain some China exposure
without the policy risks. Potential catalysts are higher bond yields, a marked fall in Covid19 cases and a HK-mainland border reopening. Downside risks include currency
volatility, weak equity markets and a prolonged Covid-19 outbreak.