Margin tailwinds, currency headwinds
? We see sharply higher HK margins as AIA’s key 1H22F VONB driver, with
this more than offsetting agency sales weakness.
? The recent adverse currency movements lead us to expect a 4%-pts drag on
VONB growth in 2Q22F, 3Q22F and 4Q22F.
? Outside of HK, we see Singapore and to a lesser extent Thailand as the
better performing regions for AIA.
? Reiterate Add. Our TP is raised slightly to HK$96 as we mark-to-market for
equity markets. AIA remains our top pick of the insurance sector.
HK remains well placed to benefit from higher margins in 1H22F
AIA Hong Kong’s (HK) rapidly improving value of new business (VONB) margins appears
to be the main driver of AIA’s VONB growth in 1H22F, driven by the sharp rise in US 10-
year treasury yields (+150bp hoh in 1H22F) (Fig 1), coupled with a shift towards
protection products. We see this offsetting the falls in HK annualised new premiums
(ANP) driven by falling agency sales (Fig 12) amidst HK’s fifth Covid-19 wave and
weakening system agent numbers (down 11% yoy in May 2022), with the rate of fall of
system agent numbers yoy the worst in at least eighteen years (Fig 18).
But currency movements are headwinds to growth outside HK
US$ strength against Asian currencies (excluding HK$) leads us to expect a drag on
VONB growth of 4%-pts yoy in 2Q22F – 4Q22F (Fig 20). We estimate a 10% depreciation
of Asian currencies against the US$ leads to 7%-pts drag on VONB growth yoy (Fig 57).
Within ASEAN, we see Singapore as better placed to perform
While the number of new Covid-19 cases fell qoq in most markets in 2Q22F (apart from
mainland China), we think they still remain at a relatively elevated level (Figs 22 & 23)
and are still a drag on VONB growth yoy. Nevertheless, with most of AIA’s markets
having changed their approach (apart from HK/China) to ‘living with the virus’, the worst
has passed in our view, with certain markets in ASEAN performing better than others.
Specifically, our channel checks suggest Singapore and to a lesser extent Thailand
(AIA’s May 2022 YTD Thailand ANP was up 5% yoy in Fig 24) are better placed to
perform in 1H22F compared to other ASEAN countries. As 42% of AIA China’s 2020
gross written premiums are from Shanghai and Beijing (Fig 35) (two regions that were
relatively worse hit by Covid-19 in 2Q22F), we see China’s growth lagging other regions.
Reiterate Add with a higher TP of HK$96; remains sector top pick
Our P/EV GGM-based TP rises slightly to HK$96 (from HK$94), as we mark-to-market
for an improvement in investment markets since our last mark-to-market in Apr 2022
(1Q22F preview: Can margins save the day, dated 27 Apr 2022). Potential re-rating
catalysts: higher bond yields, borders reopening and further approval to expand in
mainland China (see Five down, nine to go, dated 30 May 2022). Downside risks include
currency volatility, weak equity markets and prolonged Covid-19 outbreaks.