HK difficulties to persist
- We see HK going from a tailwind to headwind for both VONB (due to margins and agent difficulties) and net profits (due to non-operating items) in 2H22F.
- HK VONB headwinds are driven by increased competition, shorter duration products, a difficult time for agents, a high base and Macau lockdowns.
- Reiterate Add rating. Slight TP cut to HK$83 due to lower FY22-24F VONB.
HK moving from a tailwind to headwind for VONB growth
This is due to a few reasons, primarily relating to 2H22F HK value of new business (VONB) margins. We see increased competition (with a peer looking to list in HK), more aggressive product promotions from AIA (Fig 1) coupled with a short-payment-duration product push (see HK’s fifth wave- Damaged worsened in 2Q22 dated 1 Sep 2022), in part to help its HK agent force amidst rapidly falling system agent numbers (which fell mom in 17 of the last 18 months; Fig 5), and a higher base. Macau’s Covid-19 lockdowns in 3Q22F also hurt, with Jul mainland tourist arrivals at -99% yoy (Fig 12). Importantly, we believe that VONB growth for HK gets even more difficult in 4Q22F due to a very high base, where we think 4Q21 HK VONB may have doubled yoy (Fig 14), due to a significant margin improvement (see Decoding HK: Margin-driven growth, dated 11 Apr 2022).
Worst year for net profits since at least 2007; DPS not at risk
This is because of sizable FY22F non-operating investment losses (relating to much weaker-than-expected equity markets, especially HK) and derivative losses (relating to interest rate hedges pertaining to US interest rates, though we believe FY22F accounting losses could be reversed in FY23F). Consequently, we expect AIA to report yet another period of losses in 2H22F, after reporting a net loss in 1H22. Dividends are not at risk, in our view, with AIA still committed to paying dividends that are progressive, prudent and sustainable, rather than being based on a payout ratio of net profits.
Singapore and Malaysia the best performers for 3Q22F VONB
We expect Singapore and Malaysia to continue 2Q22’s strong VONB growth momentum and remain the fastest-growing regions for AIA in 3Q22F (we expect >25% yoy growth). This is both due to a low base, with both regions reporting a double-digit fall in VONB in 3Q21, in our view (Fig 14), coupled with a sequential 3Q22F recovery in those regions.
Currency headwinds to get worse yoy, especially 4Q22F & 1Q23F
We expect currency headwinds to drag down 3Q22F VONB growth by 5.3% pts. Assuming no change in current exchange rates, we view 4Q22F and 1Q23F to be the worst for currency headwinds to VONB growth, at 8.8%-pt and 9.1%-pt drag respectively (Fig 27).
Reiterate Add rating; GGM-based TP cut to HK$83 from HK$88
Our TP cut is driven by slightly lower FY22F-24F VONB (Fig 16). We expect 3Q22F VONB to fall 3.3% yoy. Potential re-rating catalysts: reopened borders and mainland China expansion. Downside risks: currency volatility, weak equity markets, Covid-19 outbreaks.