Expect strong pent-up demand in FY23F
- Revise down FY22/23F VONB by 11%/9% to reflect 1) impact from China’s 2Q lockdown measures and 2) as HK/China border reopening more likely in FY23F
- Strong pent-up demand expected from HK market once HK-China border reopens
- Concerns overdone on recent sharp US interest rate hike and MTM impact to bond portfolio, given low EV sensitivity to interest rates
- Revise down FY22/23F earnings by 6%/2% to reflect slower investment income growth. Roll over valuation base to FY23F and lower TP to HK$124 on lower multiple
Investment Thesis
Well positioned for next expansion.
Targeting 10 new provinces/municipalities upon existing establishment by FY30F, there will be an addressable market 5x larger than the current footprint and 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 FY31F.
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 embedded value (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 hikes and tapering expectations have led the US 10-year bond yield to reach nearly 3% in July 2022. DBS Econ team is forecasting the US 10-year bond yield to reach 3.5% by end-FY22. 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 FY32F, and terminal value. This is pegged to a 1.8x FY23F P/EV multiple (2.1x FY22F P/EV previously). 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.