China / Hong Kong Company Guide
AIA Group Version 1 | Bloomberg: 1299 HK Equity | Reuters: 1299.HK Refer to important disclosures at the end of this report
DBS Group Research . Equity 1 Nov 2017
BUY (Initiating coverage) 3X since IPO…but still far from ceiling Last Traded Price ( 30 Oct 2017): HK$59.40 (HSI : 28,336) Initiate with BUY; Unique pure Asia focus offers the best opportunity Price Target 12-mth: HK$75.00 (26% upside) AIA's share price has tripled since its IPO in October 2010. Yet we
Analyst believe AIA is still at the beginning of a multi-year growth story across Keith TSANG CFA, +852 2971 1935 different regions in Asia owing to comparatively low insurance [email protected] penetration. In fact, there is no another listco that can offer 100% Asia Ken SHIH +852 2820 4920 focus, the highest growth region in the world. Given its pure Asia focus, [email protected] the growth potential can be fully realized via its extensive presence (18 markets) in Asia Pacific. Particularly, China is set to be the core Value of What’s New New Business (VONB) growth driver. Plus, its strong track record of • China arising to be strongest VONB driver from increasing Return of embedded value (ROEV), rising from 12.5% in
early stage development FY11 to 15.4% in FY16 and expected to reach 17.5% in FY18E, can • Potential to accelerate dividend payout hike from support its premium valuation. Buying opportunities may arise from
strong free surplus generation short-term poor investor sentiment towards its HK sales normalization.
• Strong ROEV improvement supporting its Where we differ:
premium valuation Our sensitivity analysis indicates AIA’s ability for dividend payout hike • Initiate coverage with BUY and TP of HK$75 AIA has demonstrated very strong free surplus(FS) generation in recent
(+26%upside) years, thanks to strong VONB growth and lower new business strain (less cost generated from new business value) due to efficiency
enhancement. Thus, AIA has accumulated an abundant FS balance to
Price Relative increase dividend payout. Our sensitivity analysis indicates that the HK$ Relative Index increase in payout has limited impact on AIA’s solvency and its strong 221 64.6 201 free surplus balance. 59.6 181 54.6 161 49.6 Valuation: 141 Our target price of HK$75 is based on price to embedded value P/EV of 44.6
39.6 121 2.2x, the high-end compared with 5-year historical trend, supported by 34.6 101 its strong ROEV generation (12.5% in FY11 to 15.4% in FY16). The TP 29.6 81 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 implies FY18F PB of 2.8x.
AIA Group (LHS) Relative HSI (RHS) Key Risks to Our View: Forecasts and Valuation Slower-than-expected value of new business growth, sharp FY Nov (US$ m) 2016A 2017F 2018F 2019F Net earned premiums 20,641 23,070 26,707 31,549 deterioration of investment performance, slower-than-expected China Net investment income 6,424 6,874 7,770 8,792 economic growth, weaker-than-expected contribution from MCV to Operating Profit After HK 3,933 4,677 5,469 6,259 Tax EPS (US$) 0.35 0.45 0.46 0.52
EPS (HK$) 2.71 3.49 3.56 4.08 EPS Gth (%) 53 28.7 2.0 14.5
PE (X) 21.9 17.0 16.7 14.6 At A Glance DPS (HK$) 0.86 1.10 1.39 1.72 Issued Capital (m shrs) 12,074 Net Div Yield (%) 1.4 1.9 2.3 2.9 Mkt. Cap (HK$m/US$m) 717,210 / 91,922 BV Per Share (HK$) 22.64 24.98 27.12 29.46 Major Shareholders P/Book Value (X) 2.6 2.4 2.2 2.0 JPMorgan Chase & Co. (%) 9.0 P/EV (X) 2.2 2.0 1.7 1.5 The Capital Group Companies, Inc. (%) 8.2 ROAE (%) 12.6 14.6 13.6 14.3 BlackRock, Inc. (%) 5.0
77.8 Earnings Rev (%): New New New Free Float (%) Consensus EPS (US$) 0.426 0.443 0.493 3m Avg. Daily Val. (US$m) 136.9 Other Broker Recs: B: 17 S: 2 H: 4 ICB Industry : Financials / Life Insurance
Source of all data on this page: Company, DBSV, Thomson Reuters, HKEX
ed-TH / sa- AH
Company Guide
AIA Group
ASIA INSURANCE INDUSTRY OFFERS MULTI-YEAR GROWTH
Crown jewel spin-off caused by liquidity strain in AIG but Fig 1: Strong GDP growth in Asia ex-Japan offered a good buying opportunity for public investors
During the second half of 2008, AIG experienced liquidity strain caused by demand for the return of cash collateral under AIG’s US securities lending programme and collateral calls on AIG Financial Product super senior multisector CDO credit default swap portfolio. The downgrades by S&P, Moody’s and Fitch also further deteriorated the credit and liquidity situation. As a result, the public offering of AIA came about as a last resort for recapitalising AIG’s troubled financial structure.
Pure Asia focus => Right place at the right time Source: IMF, World Bank, Government websites, Company Data, DBS AIA is a leading life insurance organisation in Asia ex-Japan Vickers providing insurance, protection, savings, investment and retirement needs in 18 geographical markets in the region. The cumulative GDP growth in 2015-2020E Asia ex-Japan is Fig 2: Low penetration means huge growth potential 5x that of the US (Figure 1). The wealth effect driven by strong GDP growth in Asia in turn raises the importance of protection needs against unexpected accidents or even death. Thus, we can see the demand for insurance products is simply a natural consequence of Asia’s wealth effect.
As a pure Asia-focused insurer, AIA can fully capture the unprecedented growth opportunity. The currently low penetration compared with developed countries means that Asia life insurance presents a US$ 10tr opportunity, 7x that of developed G7 countries (Figure 2). We believe improving livelihood, therefore increasing GDP/capita, is the core driver for the penetration ratio, along with large and growing Source: IMF, World Bank, ACLI, A.M. Best, McKinsey, Swiss Re, mortality protection gap (figure 3). Company Data, DBS Vickers
Asia ex-Japan becoming the biggest market in 2025 Fig 3: Growing Mortality Protection Gap in Asia According to McKinsey and company's estimate, with ongoing penetration catch-up, Asia-ex Japan is set to exceed $trn Large and Growing Mortality Protection Gap Europe (currently highest gross premium in the world) and 120 Asia ex-J apan become the world’s largest, posting gross premium of 100 US$1,555bn. And the annualised new premium (ANP) contributed from Asia will make up more than half of the 80 2.2x world’s ANP. 60
40
20
0 2010 2020 Total sum assured Total savings
Source: IMF, World Bank, ACLI, A.M. Best, McKinsey, Swiss Re, Company Data, DBS Vickers
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Company Guide AIA Group
EMBEDDED VALUE (EV) AND VALUE OF NEW BUSINESS first half of 2017. Hong Kong is the largest VONB driver, (VONB) contributing 45% of the group’s VONB followed by China with 23% of group’s total VONB. The importance of these As a pure life insurer, AIA’s business can be analysed by two regions have increased significantly since 1H12, rising looking at two components: 1) Embedded Value (mix) and 2) from 12% in China and 27% in Hong Kong to 23% in China Value of New Business (mix and growth). AIA’s embedded and 45% in Hong Kong. Hong Kong’s sales normalisation is value is tilted to four main countries (79% of group’s total EV), expected to take place in the second half of 2017 in view of namely Hong Kong (36% of EV) followed by Thailand (17% tightening measures towards offshore customers, especially of EV), China (14% of EV), and Singapore (12% of EV) in towards demand from Mainland Chinese Visitors (MCV). figure 4. We expect the embedded value to grow at However, strong growth in China (VONB growth at 56%/44% 11%/12%/13% in FY17F/18F/19F (Figure 5). in FY17F/18F (Figure 8)) is able to be offset the sales normalization in HK, resulting in group VONB CAGR of FY16- However, what also matters to AIA’s share price/embedded 19F CAGR of 25%. Going forward, we believe China is set to value is the value of new business (VONB) growth. Looking at become the biggest VONB growth driver owing to very low the VONB mix (Figure 6), Hong Kong and China together penetration and small presence. contributed 68% of the group’s value of new business in the
Fig 4: Embedded value breakdown Fig 5: Embedded value growth
70,000 18% 16% Other 60,000 14% Markets 50,000 12% 16% Hong 40,000 10% Malaysia Kong 8% 5% 36% 30,000 6% 20,000 China 4% 14% 10,000 2% 0 0%
Singapore 12% Thailand 17% Embedded Value (EV US$ Mil) EV growth
Source: Company Data, DBS Vickers Source: Company Data, DBS Vickers
Fig 7: Value of New Business (VONB) growth in major Fig 6: Value of New Business (VONB) breakdown markets
70% Other 60% Markets Malaysia 50% 10% 6% 40% Hong 30% Kong 20% China 45% 10% 23% 0% -10%
Singapore -20% FY14 FY15 FY16 FY17E FY18E FY19E 7% Thailand 9% HK Thailand Singapore China
Source: Company Data, DBS Vickers Source: Company Data, DBS Vickers
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Company Guide
AIA Group
Figure 8: Annualised New Premium (ANP) and Value of New Business (VONB) trend
ANP (US Mil) FY13 FY14 FY15 FY16 FY17E FY18E HK 781 952 1263 2294 2824 3097 y-o-y growth 22% 33% 82% 23% 10% Thailand 565 572 520 471 492 519 y-o-y growth 1% -9% -9% 4% 5% Singapore 400 489 471 427 418 440 y-o-y growth 22% -4% -9% -2% 5% China 249 311 438 621 938 1368 y-o-y growth 25% 41% 42% 51% 46% Group 3341 3700 3991 5123 5954 6766 y-o-y growth 11% 8% 28% 16% 14%
VONB (US Mil) FY13 FY14 FY15 FY16 FY17E FY18E HK 468 619 820 1161 1531 1936 y-o-y growth 32% 32% 42% 32% 26% Thailand 319 361 395 384 369 384 y-o-y growth 13% 9% -3% -4% 4% Singapore 269 299 341 316 305 323 y-o-y growth 11% 14% -7% -3% 6% China 166 258 366 536 835 1203 y-o-y growth 55% 42% 46% 56% 44% Group 1490 1845 2198 2750 3455 4262 y-o-y growth 24% 19% 25% 26% 23%
VONB Mix FY13 FY14 FY15 FY16 FY17E FY18E HK 31% 34% 37% 42% 44% 45% Thailand 21% 20% 18% 14% 11% 9% Singapore 18% 16% 16% 11% 9% 8% China 11% 14% 17% 19% 24% 28%
New business margin FY13 FY14 FY15 FY16 FY17E FY18E HK 60% 65% 65% 51% 54% 63% Thailand 56% 63% 76% 82% 75% 74% Singapore 67% 61% 72% 74% 73% 74% China 67% 83% 84% 86% 89% 88%
Source: Company Data, DBS Vickers
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Company Guide AIA Group
BUSINESS SEGMENT AT A GLANCE Fig 9: Premium growth from the cities that AIA operates
AIA CHINA (12% OF EV, 23% OF VONB) – LOW MARKET 60% SHARE REPRESENTS HUGE GROWTH POTENTIAL 50%
40% Unlike most foreign peers required to form a joint venture with local partners, AIA fully owns its China subsidiary, thanks 30% to its early presence. In fact, the company was the first wholly- 20% owned non-mainland Chinese life insurer to receive an 10% operating licence in China. 0%
AIA China currently holds nine insurance business permits and -10% nine business licences in different regions of China. AIA has a -20% branch each in Beijing, Guangdong, Shanghai, Shenzhen and 2012 2013 2014 2015 2016 Jiangsu. These cities alone that AIA China is operating in Beijing Guangdong Jiangsu generated life premium of Rmb556bn in 2016, representing Shanghai Shenzhen Industry one-third of China’s total life premium. Source: Company Data, DBS Vickers 1/3 China market already bigger than major ASEAN markets We believe AIA’s move of shifting focus towards China is strategically correct because of 1. much sizable market and 2. Fig 10: 1/3 China > sum of major ASEAN markets robust life premium growth compared to other major markets AIA is operating in. Even China’s one-third of life premium volume (approx. the regions AIA China is operating in) is 40% bigger than the sum of major ASEAN markets (Singapore + Thailand + Indonesia + Philippines + Malaysia + Vietnam) (Figure 10). At the same time, according to Swiss Re, China has also demonstrated robust premium growth (2014-2016 CAGR 22%), higher than most ASEAN market except Vietnam (24%). In figure 11, we compare the penetration (life premium as a % of GDP) across different markets, including the five provinces in China, indicating that China penetration (2.3%) is far lower than relatively mature markets Hong Kong (16.2%), Singapore (5.5%) and Thailand (3.7%). Taking all the factors together (sizable market, strong premium growth Source: Swiss Re, DBS Vickers and low penetration), moving the focus to China is strategically correct for AIA. Fig 11: Penetration in major markets
Source: Swiss Re, Wind Data, CIRC, DBS Vickers
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Company Guide
AIA Group
China will be the multi-year driver for AIA Fig 13: VONB from agency channel in Guangdong
Despite limitations on operating regions, AIA delivered robust VONB growth (FY13-16 CAGR of 48%). The opportunity from each individual city is lucrative. For example, Jiangsu is the second largest economy in China at US$1.1tr with GDP/capita rising by 75% from 2010 to US$14,000. The rising number of middle class, along with low insurance penetration, will drive huge insurance demand going forward. Jiangsu alone has a population of 80m, roughly ten times of Hong Kong’s population. The significant VONB growth are illustrated in Figure 12 and Figure 13. Given AIA China’s current market shares in these five regions are merely 1-3% and its initiative Source: Company Data, DBS Vickers to penetrate to lower-tier cities within its existing regions, we believe the strong VONB momentum is sustainable in the long term even without the deregulation of operations in other Fig 14: Rising VONB contribution from China regions. 50% Within AIA’s value of new business(VONB) mix, Hong Kong 45% has been the largest contributor in recent years, owing to the 40% company’s aggressive expansion boosting its market share 35% from 11% in 2014 to 20% in 2017H1. We believe China will 30% be AIA’s key development focus as its presence in China 25% remains relatively small compared with the whole insurance market in China. In fact, China has emerged as the second 20% largest contributor to the group’s VONB owing to its strongest 15% VONB growth and highest VONB margin among AIA’s 10% operating countries. 5% 0% Fig 12: VONB from agency channel in Jiangsu FY13 FY14 FY15 FY16 FY17E FY18E FY19E HK Thailand Singapore China
Source: Company Data, DBS Vickers
Fig 15: China consistently offers the highest VONB margin
100% 90% 80% 70% 60% Source: Company Data, DBS Vickers 50% 40% 30% 20% 10% 0% FY13 FY14 FY15 FY16 FY17E FY18E FY19E
HK Thailand Singapore China
Source: Company Data, DBS Vickers
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Company Guide AIA Group
AIA’s solid agency force also applies to China agency channel (Note: AIA's disclosed agency channel accounts for more than 90% of VONB in China) and 30,000 AIA is well known for its strong agency force, being ranked agency headcounts in financial year 2016. No.1 in the world for Million Dollar Round Table (MDRT) members for three consecutive years. MDRT status is a global Despite the fact that VONB does not reflect the product-mix industry benchmark and members are required to among different insurers, the result is in fact quite surprising demonstrate professional knowledge and customer that its VONB / agent (RMB 109,344) is even much better than engagement. In 2017, AIA recorded 47% growth in leading insurer Ping An's (RMB 41,783). In fact, the “quality” registered members in the world. of its workforce is the one of factors that differentiates itself from peers in China, therefore justifying its valuation premium. While no official data is available for agency productivity The productivity of its workforce is still improving with the among insurers, we try to compare AIA’s one-year value of number of active agents increasing by 40% y-o-y and new business per agent with major insurance peers in China. productivity increasing 28% in the first half of 2017. We assume that 90% of AIA China’s VONB comes from its
Fig 16: AIA China vs Chinese Insurer Peers
Source: Company Data, DBS Vickers
Fig 17: Productivity comparison with major insurers environment. AIA has a high quality product mix with traditional protection representing 86% of VONB in 1H17.
120,000 109,344 C-ROSS regime is positive to AIA 100,000 What’s more with C-ROSS regime (Solvency II) introduced in 80,000 late 2016, the insurers with more protection exposure are 60,000 41,783 29,580 generally able to report higher value of new business (VoNB) 40,000 30,987 27,458 29,558 17,980 going forward. In fact, the regime encourages insurers to shift 20,000 from saving products to more protection products. We believe 0 this is one of the reasons AIA reported higher value of new business margin in 1H17 (91.6% in 1H17 vs 86.6% in 1H16).
CPIC PICC Taiping Ping An Ultimate driver – relaxation of foreign investment in China China Life AIA China In August 2017, China’s State Council published the Notice
Peers' Average on Promotion of Foreign Investment Growth (Guo Fa[2017] VoNB / agency headcounts (RMB per head) No.39) which indicates its intention to liberalize foreign investments in China, reduce entry barriers for foreign Source: Company Data, DBS Vickers investments and further opening of markets to foreign players in industry such as auto, ship design, gas station, banking and CIRC’s clamp-down on low-margin products is positive to AIA insurance etc, all of which currently have joint venture or CIRC has taken several initiatives to clamp down low-margin Chinese majority equity control requirements. Unlike majority products, for example lowering the maximum guarantee rate of foreign insurers, AIA China is 100% owned by AIA with and limiting the sales proportion of short- and medium-term operations limited to five markets (Beijing, Shanghai, products. Some insurers like Foresea Insurance and Anbang Guangdong, Shenzhen and Jiangsu). While the timing of Insurance were banned or penalised for breaching the rules relaxation is unclear, we believe geographical relaxation will via suspension of new product issuance. The tougher stance be the ultimate share price driver for AIA given that the five from CIRC is indeed positive to disciplined insurers like AIA as markets only represent 1/3 of country’s total premium. they can recover market share under a reasonable pricing
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Company Guide
AIA Group
Fig 18: China ANP growth trend
2,500 60% 2,000 50% 40% 1,500 30% 1,000 20%
500 10%
0 0% FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E China ANP (US$ Mil) ANP - yoy growth
Source: Company Data, DBS Vickers
Fig 19: China VONB growth trend
2,000 70% 1,800 60% 1,600 1,400 50% 1,200 40% 1,000 800 30% 600 20% 400 10% 200 0 0% FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E China VoNB (US$ Mil) VoNB - yoy growth
Source: Company Data, DBS Vickers
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Company Guide AIA Group
AIA HONG KONG (31% OF EV, 45% OF VONB) – SALES AIA’s major peer Prudential HK mentioned in their 2017 NORMALISATION AHEAD BUT BENEFIT FROM BETTER interim report that they felt the sales momentum in Hong NEW BUSINESS MARGIN Kong was slowing. With offshore customers accounting for ~50% of Hong Kong’s APE, we believe the tightening control Hong Kong performance remained solid with APE and VONB will start taking a hit in the second half of 2017. AIA growth of 72% and 54% respectively in the first half of 2017. mentioned Hong Kong business delivering strong double-digit The decline in Value of New business margin (VONBM) was VONB growth in the third quarter which is better than market caused by sales dependency on savings products (featured expectation given the high-base from Mainland Chinese with high cash value), therefore lowering new business Visitors (MCV). We factor in the moderation by assuming -14% margin (lower margin than traditional products). These y-o-y ANP and +13% y-o-y VONB growth for 2H17F in Hong products (AIA: 充裕未來, Prudential: 雋升) were particularly Kong. The slowdown in ANP will be alleviated in recovering welcomed by mainlanders in last few years because this is value of new business margin (figure 22) regarded as a way to move capital offshore, triggered by yuan depreciation. Fig 22: AIA Hong Kong new business margin trend
AIA and Pru more exposed to offshore customers Per the APE disclosure from HKOCI, we can see that AIA and Prudential were more welcome by offshore customers. In the first nine months of 2016, APE contribution from offshore customers accounted for 72% and 68% of Pru and AIAs’ APE in HK respectively (figure 20). With multiple tightening measures taken under capital control by Chinese regulators, lessening yuan depreciation (RMB/USD up 5% YTD-August) and stabilising foreign reserve in China, we believe insurance sales will normalise in 2H17 given weakening demand from offshore customers (figure 21)
Fig 20: Offshore exposure of insurers in 9M16
72% 70% Source: Company Data, DBS Vickers 68% 62% 53% 51% 45% 40% 38% 37% VONB growth of +26%/+16% for FY18F/FY19F are expected 33% 33% 31% 27% as we see strong agency expansion in Hong Kong (new recruits +17% y-o-y). We believe the value of new business margin (VONBM) will recover from slowing demand of mainlanders (VONB expected to recover from 50.6%/48.8% in FY16/FY1H17) as they usually prefer to purchase saving products which have lower new business margin than traditional products. Source: Bloomberg Finance L.P., HKOCI, DBS Vickers
Fig 21: APE moderation seen in 2Q17 (AIA and Pru)
35000 140%
120% 30000 100% 25000 80%
20000 60%
15000 40% 20% 10000 0% 5000 ‐20%
0 ‐40% 2011 2011 2011 2011 2012 2012 2012 2012 2013 2013 2013 2013 2014 2014 2014 2014 2015 2015 2015 2015 2016 2016 2016 2016 2017 2017 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 AIA Pru Industry AIA growth Pru growth Industry growth
Source: Company data, HKOCI, DBS Vickers
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Company Guide
AIA Group
Fig 23: AIA Hong Kong ANP growth trend Hong Kong insurance regulatory regime (HK not adopting Solvency II yet). Whether the competition is going to be fiercer 4,000 90% remains to be seen (e.g. more aggressive guarantee rate), we 3,500 80% believe AIA’s strong presence, e.g. agency force being ranked 3,000 70% #1 in MDRT, provides certain margin of safety in case of more 60% heated competition as well-trained and robust agency force is 2,500 50% not easily replicable. 2,000 40% 1,500 30% Fig 25: Recent M&A deals in HK 1,000 20% 500 10% 0 0% FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E Hong Kong ANP (US$ Mil) ANP - yoy growth Source: Company Data, DBS Vickers
Source: Company Data, DBS Vickers
Fig 24: AIA Hong Kong VONB growth trend
2,500 45% 40% 2,000 35% 30% 1,500 25% 20% 1,000 15% 500 10% 5% 0 0% FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E Hong Kong VoNB (US$ Mil) VoNB - yoy growth
Source: Company Data, DBS Vickers The insurance market is attracting interest from Chinese Players Hong Kong banks have long been linked as M&A targets but in fact the insurance industry is no different. From our record, the last four completed deals were all linked to Chinese background players acquiring HK based insurance companies (Ageas HK, Dah Sing Life, Hong Kong Life and MassMutual Asia). The pending sale of AXA’s wealth management unit was reported to attract interest from a number of buyers including China Taiping (966.HK, BUY) and Country Garden (2007.HK, BUY). The strong interest can be reflected in their high-end acquisition multiple (historical P/EV: 2.2x, close to what premier insurer AIA is currently trading) for Dah Sing Life Assurance (HK) which only had limited presence in HK.
We believe the strong interest could be 1) intention to hedge RMB deprecation risk (insurance assets are mostly USD/HKD), 2) strong APE growth in HK and 3) relatively more relaxed
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Company Guide AIA Group
AIA SINGAPORE (10% OF EV, 7% OF VONB) AIA THAILAND (15% OF EV, 9% OF VONB)
AIA Singapore is top ranked for protection in terms of new Ranked by size of EV, Thailand is the second most important business sums. Its strong agency force is evidenced by its top market to AIA. AIA has put value as the top priority with ranking in Singapore MDRT. Its Singapore operations regular-premium business accounting for 96% of ANP and experienced growth in regular premium protection business protection business comprising the majority of VONB but this was offset by the weakness in continued reduction in generation. However, with moderating VONB growth in single-premium sales in the first half of 2017. This is the recent years, the value of new business contribution declined strategy for AIA to focus on more profitable and quality long- from 26% in 1H12 to merely 9% in 1H17. While insurance term growth (regular-premium products instead of single- penetration in Thailand remains low, headwinds for AIA are premium products). Not pursuing single-premium products expected with some signs of increase in single-premium however resulted in sluggish ANP and VONB in Singapore. products sales, thus putting some pressure on AIA’s business in Thailand.
In the first half of 2017, VONB contracted by 7% and we factor in slowdown moderation in 2H17 considering low base Bancassurance and agency are the major channels for insurance sales in Thailand, consistently accounting for over in 2H16 (-18% y-o-y). We conservatively factor in a relatively 90% of new business premium. AIA has the strongest agency flattish VONB trend (FY17F/18F/19F: -3%/+6%/+6%) going franchise in Thailand with its new business premium forward. accounting for 32% of the country total, being the #1 in Thailand. New business premium from agency accounted for Fig 26: AIA Singapore ANP growth trend 74% of the company’s total. However, in the last few years, AIA has been losing market share from 18% in 2012 to 14.7% in 2015 while all three major players, KrungThai (from 9% to 600 25% 20% 10.5%), Thai Life (from 10.9% to 12.6%)and Muang Thai 500 Life(from 16.5% to 23.1%) have been getting market share 15% by different degree (Figure 28). We believe this is partly 400 10% affected by more aggressively expansion in bancassurance 300 5% channel of market players (new business premium from banca in Thailand rose from 54% in 2012 to 57% in 2017 H1) 0% 200 which is however not what AIA focuses on. -5% 100 -10% In fact, we see AIA Thai reversing the trend of multi-quarters 0 -15% of ANP yoy contraction, reporting +13%/+1 yoy in Q1/Jul-Aug (figure 96). Going into second half, we believe AIA Thai is unlikely to go back to contraction due to low base effect FY12 FY13 FY14 FY15 FY16
FY17E FY18E FY19E (Note: AIA Thai recorded reduction close to FY16 year-end Singapore ANP (US$ Mil) ANP - yoy growth during the mourning period following the passing of King Bhumibol Adulyadej).
Source: Company Data, DBS Vickers Fig 28: insurance market share (%) in Thailand
Fig 27: AIA Singapore VONB growth trend AIA Krungthai‐ Thai Life Muang Thai Life
400 25% 350 20% 23.1% 18.6% 22.1% 20.9% 300 15% 16.5% 20.7% 250 10% 10.9% 10.0% 8.8% 10.3% 14.3% 12.6% 200 9.8% 5% 9.0% 11.4% 150 10.7% 9.2% 10.5% 0% 100 18.0% 18.1% 15.3% 15.3% 15.1% 14.7% 50 -5% 2012 2013 2014 2015 2016 2017 H1
0 -10% Source: Thai Life Association, DBS Vickers
FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E Singapore VoNB (US$ Mil) VoNB - yoy growth
Source: Company Data, DBS Vickers
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Company Guide
AIA Group
Fig 29: AIA Thai’s ANP showing sign of rebound (yoy Fig 30: AIA Thailand ANP growth trend growth) 700 15% 600 10% 500 5% 400 0% 300 -5% 200
100 -10%
0 -15% FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E Thailand ANP (US$ Mil) ANP - yoy growth Source: Thai Life Association, DBS Vickers
AIA is the leader in unit linked products (a better product in Source: Company Data, DBS Vickers low rate environment) Low interest rate environment is always a threat to insurer as they are exposed to negative spread risk. Unit-linked products Fig 31: AIA Thailand VONB growth trend on the other hand offer flexibility to insurer to avoid the risk as the products do not have “guarantee rate”. AIA has been 450 16% expanding its unit-linked product, increasing its number of 400 14% licensed AIA agents qualified to distribute unit-linked products 12% 350 by 43% in 2016. This represented 90% of unit-linked 10% insurance market in Thailand based on reported premium. 300 8% 250 6% Recent bancassurance agreement to reignite the growth 200 4% engine 150 2% AIA recently announced a 15-year bancassurance agreement 0% 100 with Bangkok Bank which will distribute AIA Thailand’s -2% protection and long-term savings products on an exclusive 50 -4% basis (not exclusive for certain endowment savings and credit 0 -6% life products). The payment structure, with no upfront but depends on new business, incentives Bangkok bank for FY12 FY13 FY14 FY15 FY16 driving new business sales for AIA in Thailand. We believe the FY17E FY18E FY19E deal helps AIA access the strong customer base (more than Thailand VoNB (US$ Mil) VoNB - yoy growth 16mil customer accounts and around 1200 branches) that Bangkok Bank possesses. The partnership will become Source: Company Data, DBS Vickers effective in the first half of 2018.
Bangkok Bank has deposit size of THB 2,298bn as of Jun 17. If we assume conservatively 1% penetration (USD 696mil), that would be comparable to first year premium inflow (first-year regular premium + single premium) of FY16 USD 602m for AIA Thailand business. While the profit-sharing agreement (therefore the VONB margin not easily estimated) is not disclosed, the sizable deposits implies high possibility to turn its AIA Thai business into growth trajectory.
In the first half of 2017, VONB contracted by 1% along with VONBM contracting by 6ppts. y-o-y to 75%. The sluggish performance continued in the third quarter with VONB reported to contract in yoy basis. Going forward, We forecast mild recovery in VONB growth (FY17F/18F/19F: - 4%/+4%/+9%) going forward given the bancassurance agreement with Bankgkok Bank starting in second half of 2018
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Company Guide AIA Group
IN-DEPTH LOOK AT DIVIDEND PAYOUT UPSIDE Fig 33: AIA’s Robust Solvency Position
Dividend yield has long been regarded as one of the key 450% criteria of stock selection for many Long-only (LO) investors. 400% AIA’s dividend yield may not be particularly attractive under 350% this methodology. Free surplus (FS) is one of the most 300% important measurements for dividend payout ability. It 250% represents an insurer’s adjusted net worth in excess of the 200% required capital. AIA has accumulated abundant free surplus 150% balance from strong VONB generation. Driven by AIA’s 100% superb free surplus (FS) generation ability, we think AIA is 50% able to hike its dividend payout in the coming years. 0%
Driven by its strong underlying free surplus generation, AIA 1H17 FY17 FY12 FY13 FY14 FY15 FY16 FY18 FY19 increased its dividend payout starting from 27% in FY14 to FY11
33% in FY16. We view this a positive step from the company Regulatory requirement as dividend payment is the most direct and explicit way of returning to shareholders. Considering its strong free surplus Source: Company Data, DBS Vickers generation, we believe there are still upside to AIA’s dividend payout, therefore enabling AIA to increase dividend payout to 36%/39%/42% in FY17E/18E/19E (Figure 32). Fig 34: Adjusted net worth (ANW) composition
Plus, AIA managed to maintain a solid solvency position over 20,000 60% the past few years. The solvency position reached 18,000 58% 16,000 56% 404%/427%, much above the HKICO regulatory 14,000 requirement (150% of required minimum solvency margin). 12,000 54% We believe the strong solvency position can support AIA to 10,000 52% increase its dividend payout going forward. (Figure 33). 8,000 50% 6,000 48% 4,000 The abundant free surplus can also be reflected by its 2,000 46% composition of adjusted net worth, sum of required capital 0 44% and free surplus. In fact, AIA’s proportion of free surplus (FS) over adjusted net worth increased from its usual 50-51% in FY11 FY12 FY13 FY14 FY15 FY16 FY12-15 to 59% in FY16/17H1, reinforcing our view on FY17H1 Free-surplus Required Capital AIA’s ability to continuously increase its dividend payout. Free-surplus / ANW
We illustrate AIA’s free surplus generation flow in figure 35. Source: Company Data, DBS Vickers
Fig 32: Dividend payout on the rise
45
40
35
30
25
20 FY11 FY12 FY13 FY14 FY15 FY16
FY17E FY18E FY19E Source: Company Data, DBS Vickers
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Company Guide
AIA Group
Figure 35: Free Surplus Generation and Scenario Analysis
11,000 9,000 Strong FS generation ‐> abundant FS balance ‐> enhance ability to raise 7,000 dividend payout 5,000
3,000
1,000
(1,000)
(3,000)
(5,000) FY11 FY12 FY13 FY14 FY15 FY16 FY17H1 FY11 FY12 FY13 FY14 FY15 FY16 FY17H1
Underlying free surplus generated (1) Free surplus used to Fund New Business (2) Others (3) Dividend (4) Free surplus (end balance)
Source: Company Data, DBS Vickers
SECNARIO ANALYSIS - DIVDEND PAYOUT strong solvency position and abundant free surplus (FS) AIA has consistently managed to generate strong free position. surplus over the last few years. Driven by strong Value of new business (VONB) growth (FY11-16 CAGR of 22%) Our model factors in a progressive increase in dividend which outgrew the free surplus used to fund new business payouts (FY17F/18F/19F: 36%/39%/42%) going forward, (FY11-16 CAGR of 4%), AIA has shown strong execution by implying FY17F/18F/19F solvency ratios of reducing new business strain (New business funded/VONB) 408%/403%/393%, which are still highly sufficient over the last few years, declining from 122% in FY11 to compared to regulatory requirement of 150%. With 50% in FY16. New business strain can be described as the accelerating pace of dividend payout hikes under Case 2 initial outgoings from new policy written. AIA managed to (more bullish) and Case 3 (even more bullish), the solvency lower new business strain / VONB, an indication of its position and free surplus impact are limited. capability to achieve high efficiency. Thus, it has enhanced AIA’s ability to consider a higher dividend payout, in our Case-2: FY17F/18F/19F: Solvency: 407%/400%/389%; FS view. balance: -0%, -1%, -2% (compared with base case)
While AIA has been actively increasing its dividend payout Case-3: FY17F/18F/19F: Solvency: 406%/399%/387%; FS progressively in the past few years (from 27% in FY14 to balance: -1%, -2%, -3% (compared with base case) 33% in FY16), we believe that there is still upside given its
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Company Guide AIA Group
Figure 36: Scenarios on Free Surplus generation and Solvency vs dividend payout
US mil - Nov end FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E Free Surplus (BGN) 4,992 5,930 5,177 5,927 7,794 7,528 9,782 10,905 12,026 Underlying free surplus generated (1) 2,485 2,845 3,786 3,552 3,719 4,024 4,568 5,229 6,042 y-o-y growth 14% 33% -6% 5% 8% 14% 14% 16% Free surplus used to Fund New Business (2) (1,140) (1,412) (1,510) (1,655) (1,488) (1,374) (1,721) (1,987) (2,316) y-o-y growth 24% 7% 10% -10% -8% 25% 15% 17% Others (3) (237) (190) (131) 659 (1,683) 728 (277) (277) (277) Dividend (4) (170) (530) (595) (689) (814) (1,124) (1,447) (1,845) (2,311) Free Surplus (END) 5,930 6,643 6,727 7,794 7,528 9,782 10,905 12,026 13,163 y-o-y growth 12% 1% 16% -3% 30% 11% 10% 9% V alue of New Business (V ONB) (5) 932 1,188 1,490 1,845 2,198 2,750 3,455 4,262 5,333 y-o-y growth 27% 25% 24% 19% 25% 26% 23% 25% New business strain* (2) / (5) 122% 119% 101% 90% 68% 50% 50% 47% 43% *New business funded / V alue of new business (V ONB)
Dividend declared 510 571 658 774 1,080 1,323 1,694 2,145 2,643 y-o-y growth 12% 15% 18% 39% 22% 28% 27% 23% Dividend payout 27 26 26 27 30 33 36 39 42 y-o-y growth 0% 0% 4% 3% 3% 3% 3%
Price (HKD) as of 30-Oct, 2017 59.4
Base Case FY17E FY18E FY19E Dividend payout % 36 39 42 Dividend declared (US$) 1,694 2,145 2,643 DPS (cents HK$) 1.10 1.4 1.7 Dividend yield 1.9% 2.3% 2.9% Solv ency 408% 402% 392% Free Surplus (End Balance) 10,905 12,026 13,163
Case - 2 FY17E FY18E FY19E Dividend payout % 38 43 48 Dividend declared (US$) 1,777 2,352 3,004 DPS (cents HK$) 1.2 1.5 2.0 Dividend yield 1.9% 2.6% 3.3% Solv ency 407% 400% 389% <- Increase in dividend payout does not have severe impact on solvency position Free Surplus (End Balance) 10,878 11,901 12,905 change compared to Base Case 0% -1% -2% <- minimal impact on Fres surplus balance
Case - 3 FY17E FY18E FY19E Dividend payout % 40 46 52 Dividend declared (US$) 1,871 2,516 3,255 DPS (cents HK$) 1.2 1.6 2.1 Dividend yield 2.0% 2.8% 3.6% Solv ency 406% 399% 387% <- Increase in dividend payout does not have severe impact Free Surplus (End Balance) 10,847 11,784 12,712 change compared to Base Case -1% -2% -3% <- minimal impact on Fres surplus balance
Source: Company Data, DBS Vickers
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Company Guide
AIA Group
VALUATION ANALYSIS process in our view. We believe AIA’s abundant free surplus balance (figure 35) allows the company to explore lucrative We derive our valuation based on price to embedded value M&A going forward if not aggressively increasing dividend multiple of 2.2x, high-end of historical trend. Our target price payout. valuation is higher than the historical mean but purely looking at historical PEV would under-appreciate its strong ROEV We forecast ROEV will reach 17.5% in FY18E. At its current generation, which increased from 12.5% in FY11 to 15.4% in share price, our TP implies 26% upside (Figure 37), supported FY16 (Figure 39) and therefore justifying its ongoing re-rating by strong VoNB growth (FY17F/18F: 20% / 20%).
Figure 37: Valuation analysis
USD (mil) FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E V IF 18,238 20,356 21,802 23,009 25,569 28,004 31,679 36,255 ANW 13,170 13,462 15,351 15,189 16,544 18,878 20,995 23,298 EV 31,408 33,818 37,153 38,198 42,113 46,882 52,674 59,553 EV growth 15% 8% 10% 3% 10% 11% 12% 13% VoNB 1,188 1,490 1,845 2,198 2,750 3,455 4,262 5,333 V oNB growth 25% 24% 19% 25% 26% 23% 25% Total v aluation 49,228 56,168 64,828 71,168 83,363 98,713 115,882 139,548 Price to embedded value multiple (x) 2.2x No. of shares 12,044 12,044 12,045 12,048 12,056 12,074 12,074 USD / HKD 7.8 7.8 7.8 7.8 7.8 7.8 7.8 Target price 75 Closing price (HK$) 59 upside 26%
Source: Company Data, DBS Vickers
Figure 38: Price to Embedded Value – forward 12 months Figure 39: Return of Embedded Value (%) trend
PEV (x) 18 2.2 17
2.0 16 +2 SD 15 1.8 +1 SD 14 13 1.6 5yr avg 12 -1 SD 1.4 11 -2 SD 10 1.2 9
1.0 8 2012 2013 2014 2015 2016 2017
FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E Source: Bloomberg Finance L.P., DBS Vickers Source: Bloomberg Finance L.P., DBS Vickers
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Company Guide AIA Group
Appendix:
Investment performance is a key metrics for AIA’s investment performance. We keep track of major equity index and 10- year government bond yields here:
Figure 40: Equity market movement in major markets (QoQ % change)
3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 15%
10%
5%
0%
‐5%
‐10%
‐15%
‐20% Favourable market movement ‐25%
‐30%
‐35%
HK (HSI) TH (SET) SG (STI) MY (MY Bursa) CH (SHEX) KR (KOSPI)
Source: Company Data, DBS Vickers
Figure 41: 10-year government bond yield movements in major markets
5.5 5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17
US TH SG CH MY KR PH
Source: Company Data, DBS Vickers
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Company Guide
AIA Group
CRITICAL FACTORS TO WATCH Value of new business
US$ m 71.0% Critical Factors 4,000 Value of new business (VONB) 3,500 Value of new business is the major share price driver. AIA has 3,000 66.0% 2,500 shown strong track record of delivering robust VONB growth in 2,000 61.0% the past few years. Correlation between VONB and share price 1,500 1,000 56.0% has been strong, reaching 0.85 since 2012. 500 0 51.0% 2015A 2016A 2017F 2018F 2019F Hong Kong and China together contributed 68% of the group’s Value of new business Value of new business margin value of new business in the first half of 2017. Hong Kong is the largest VONB driver, contributing 45% of the group’s VONB Net Investment return followed by China with 23% of group’s total VONB. The 6.0% importance of these two regions have increased significantly since 5.5% 1H12, rising from 12% in China and 27% in Hong Kong to 23% 5.0% in China and 45% in Hong Kong. Hong Kong’s sales 4.5% normalisation is expected to take place in the second half of 2017 in view of tightening measures towards offshore customers, 4.0% especially towards demand from Mainland Chinese Visitors (MCV). 3.5% 3.0% 2015A 2016A 2017F 2018F 2019F Value of new business margin (VONBM) Net investment return Total investment return While AIA has continued to deliver robust VONB growth in the past few years, VONBM is critical as it determines the VONB Group embedded value US$ m created from any new business. We believe the growing business 20% 18% 50,000 in China is the crux for maintaining a high VONBM as its figure is 16% higher than the group's. 40,000 14% 12% 30,000 10% 8% 20,000 6% 10,000 4% 2% 0 0% 2015A 2016A 2017F 2018F 2019F Group embedded value (mn) (LHS) yoy growht (%) (RHS)
Source: Company, DBS Vickers
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Company Guide AIA Group
Appendix 1: A look at Company's listed history – what drives its share price?
Share Price History
HK$ UnionPay capping 70 45,000 asian currency overseas insurance weakened by purcahses at US$ 5K 40,000 60 AIG sold 5% stake tapering in AIA 35,000 50 30,000
40 25,000
30 CIRC c rit iz ed the 20,000 risk in purchasing Mark Tucker to 15,000 20 Signed insurance by retire as AIA CEO. bancassurance mainlanders Mr. Ng Keng 10,000 acquired 92.3% in acquired ING agreement with Hooi becomes 10 Av iv a NDB Insurance Malay sia CIT IBA NK f or the new chirman 5,000 mark et s 0 0 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 AIA share price (LHS) HSF (RHS)
Source: Company Data, DBS Vickers
Share price performance vs Value of New Business (VONB) Remarks
When comparing AIA’s share price HK 70 1000 and value of new business starting from 2012, a strong correlation of 900 60 0.85 is observed. 800 50 700 AIA delivered strong VONB growth over the last few years (FY13-16 40 600 500 CAGR of 23%) thanks to robust VONB growth from HK (FY13-16 30 400 CAGR of 35%) and China (FY13-16 20 300 CAGR of 48%). We believe the 200 group’s VONB growth will be 10 Correlation since 2012 = 0.85 100 supported by China going forward 0 0 given its low density and penetration into lower-tier cities. Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 AIA share price (LHS) AIA's VNB (RHS)
Source: Bloomberg Finance L.P., DBS Vickers
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Company Guide
AIA Group
Share price performance vs Value of New Business Margin (VONBM) Remarks
HK$ AIA’s share price has strong 70 65% correlation of 0.88 with VONBM.
60 60% AIA managed to enhance its VONBM from 45% in FY13 to 54% in FY16, 50 55% driven by major operating countries 40 50% including Thailand, Singapore and China. With China increasing 30 45% contribution to VONB, we believe it can lift VONBM further. 20 40%
10 Correlation since 2012 = 0.88 35% 0 30% Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 AIA share price (LHS) AIA's VNB margin
Source: Bloomberg Finance L.P., DBS Vickers
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Company Guide AIA Group
Balance Sheet: Solvency ratio Solvency: AIA managed to increase its solvency ratio from 404% in FY16 to 427% in FY1H17, which is substantially higher than the minimum solvency margin of 150% required by Hong Kong 410.0% Insurance Authority (HKIA). 360.0% 310.0% Leverage: The company’s leverage level, measured in total asset/ 260.0% total equity, reached 5.2x, similar to the level in end-FY16. 210.0% 160.0% 2015A 2016A 2017F 2018F 2019F Share Price Drivers: Value of new business (VONB) is the major share price driver. AIA has shown strong track record of delivering robust VONB growth ROE in the past few years which has increased. Correlation between 14.0% VONB and share price has been strong, reaching 0.85 since 2012. 12.0% 10.0% Value of new business margin (VONBM) is critical to AIA. While 8.0% AIA continues to deliver robust VONB growth for the past few 6.0% 4.0% years, VONBM is critical as it determines the VONB created from 2.0% any new business. We believe the growing business in China is the 0.0% crux for maintaining a high VONBM as the business in China 2015A 2016A 2017F 2018F 2019F delivers higher than the group's VONBM. PEV Band Key Risks: Increase in pricing competition would affect the company’s new business margin. Severe economic slowdown in China
Company Background AIA was established in Shanghai in 1919. It was listed on HKEX in 2010 after the reorganisation caused by AIG's liquidity crisis in 2008. AIA focuses on Asia Pacific with presence in 18 markets. At end-16, its total assets and equity were at US$185bn and US$35bn respectively. PB Band
Source: Company, DBS Vickers
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AIA Group
Key Assumptions FY Nov 2015A 2016A 2017F 2018F 2019F
Total weighted premium growth 3.5 11.4 14.3 16.3 18.6 VNB growth 19.1 25.1 25.7 23.4 25.1 VNB margin 55.1 53.7 58.0 63.0 65.6 Net investment return 4.9 4.9 5.0 5.0 5.0 Total investment return 3.6 5.7 5.0 5.0 5.0 EV growth 2.8 10.2 11.3 13.1 12.4 Solvency ratio 428.2 403.8 408.0 402.2 392.3
Source: Company, DBS Vickers
Income Statement (US$ m) FY Nov 2015A 2016A 2017F 2018F 2019F
Total weighted premium income 19,876 22,133 25,287 29,403 34,859 Net earned premium 18,812 20,641 23,070 26,707 31,549 Investment income 6,143 6,424 6,874 7,770 8,792 Other operating income 0 0 0 0 0 Total income 24,955 27,065 29,944 34,477 40,342
Benefits and claims (16,232) (17,512) (19,099) (22,127) (26,286) Underwriting and policy acquisition costs (2,468) (2,686) (3,021) (3,400) (3,898) Finance cost (297) (334) (342) (357) (375) Other expenses (1,638) (1,951) (1,822) (1,974) (2,178) Total expenses (20,635) (22,483) (24,284) (27,858) (32,736)
Share of profit of associated and JVs 0 (5) (5) (5) (5) Profit before tax 4,320 4,776 5,655 6,614 7,601 Income tax expense (735) (763) (916) (1,082) (1,269) Minority interest (29) (80) (62) (63) (72) Preferred dividend 0 0 0 0 0 Net income attributable to shareholders 3,556 3,933 4,677 5,469 6,259
Source: Company, DBS Vickers
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Company Guide AIA Group
Balance Sheet (US$ m) FY Nov 2015A 2016A 2017F 2018F 2019F
Total Investment 126,435 137,479 155,408 175,846 200,558 Property, plant and equipment 579 1,132 1,132 1,132 1,132 Other assets 42,744 46,463 46,525 46,588 46,660 Total assets 169,758 185,074 203,065 223,565 248,350
Net life reserves - traditional 115,969 128,186 142,451 159,564 180,661 Net life reserves - investment contracts 7,116 7,028 7,028 7,028 7,028 Other Liabilities 15,251 14,550 14,550 14,550 14,550 Total liabilities 138,336 149,764 164,029 181,142 202,239
Shareholder's equity 31,119 34,984 38,649 41,972 45,589 Minority interest 303 326 388 451 523 Total equity 31,422 35,310 39,036 42,423 46,112
Source: Company, DBS Vickers
Key Financials & Ratios FY Nov 2015A 2016A 2017F 2018F 2019F
Du Pont analysis (%) Net profit / premium income 14.7 20.2 23.2 20.5 19.8 Premium income / total asset 11.1 11.2 11.4 11.9 12.7 Total asset / total equity 5 5 5 5 5 Return on equity 8.9 12.6 14.6 13.6 14.3
Embedded value (US$ m) Book value 31,119 34,984 38,649 41,972 45,589 Adjusted items (15,930) (18,440) (19,771) (20,978) (22,291) Adjusted book value 15,189 16,544 18,878 20,995 23,298 Value-in-force 23,009 25,569 28,004 31,679 36,255 Adjustment (if any) 0 0 0 0 0 Group embedded value 38,198 42,113 46,882 52,674 59,553
Per share analysis (US$) EPS 0.23 0.35 0.45 0.46 0.52 BPS 2.58 2.90 3.20 3.48 3.78 DPS 0.09 0.11 0.14 0.18 0.22 EVPS 3.17 3.49 3.88 4.36 4.93
Capital Strength (%) 5 5 5 5 5 Leverage ratio Solvency ratio 428.2 403.8 408.0 402.2 392.3
Source: Company, DBS Vickers
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Company Guide
AIA Group
DBSVHK recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends
Completed Date: 1 Nov 2017 07:47:19 (HKT) Dissemination Date: 1 Nov 2017 16:06:21 (HKT)
Sources for all charts and tables are DBS Vickers unless otherwise specified.
GENERAL DISCLOSURE/DISCLAIMER
This report is prepared by DBS Vickers (Hong Kong) Limited (“DBSV HK”). This report is solely intended for the clients of DBS Bank Ltd., DBS Bank (Hong Kong) Limited (DBS HK), DBSV HK, and DBS Vickers Securities (Singapore) Pte Ltd. (“DBSVS”), its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSV HK.
The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd., DBS HK, DBSV HK, DBSVS, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies.
Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to update the information in this report.
This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned schedule or frequency for updating research publication relating to any issuer.
The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein.
Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report.
DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making.
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Company Guide AIA Group
ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s) primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate1 does not serve as an officer of the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or his associate does not have financial interests2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the DBS Group.
COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd, DBS HK, DBSVS, DBSV HK or their subsidiaries and/or other affiliates have a proprietary position in Aia Group Limited (1299 HK) recommended in this report as of 30 Oct 2017.
2. Neither DBS Bank Ltd, DBS HK nor DBSV HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.
Compensation for investment banking services: 3. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.
4. Disclosure of previous investment recommendation produced: DBS Bank Ltd, DBSVS, DBSVHK, their subsidiaries and/or other affiliates of DBSVUSA may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBSVHK, their subsidiaries and/or other affiliates of DBSVUSA in the preceding 12 months.
1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst.
2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.
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Company Guide
AIA Group
RESTRICTIONS ON DISTRIBUTION General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. Australia This report is being distributed in Australia by DBS Bank Ltd. (“DBS”) or DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”). DBS holds Australian Financial Services Licence no. 475946. DBSVS is exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. Both DBS and DBSVS are regulated by the Monetary Authority of Singapore under the laws of Singapore, and DBSVHK is regulated by the Securities and Futures Commission of Hong Kong under the laws of Hong Kong, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.
Hong Kong This report is being distributed in Hong Kong by DBS Bank Ltd, DBS Bank (Hong Kong) Limited and DBS Vickers (Hong Kong) Limited, all of which are registered with or licensed by the Hong Kong Securities and Futures Commission to carry out the regulated activity of advising on securities. Indonesia This report is being distributed in Indonesia by PT DBS Vickers Sekuritas Indonesia. Malaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.
Wong Ming Tek, Executive Director, ADBSR Singapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report. Thailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. Research reports distributed are only intended for institutional clients only and no other person may act upon it. United This report is produced by DBSVHK which is regulated by the Hong Kong Securities and Futures Commission
Kingdom This report is disseminated in the United Kingdom by DBS Vickers Securities (UK) Ltd (“DBSVUK”). DBSVUK is authorised and regulated by the Financial Conduct Authority in the United Kingdom.
In respect of the United Kingdom, this report is solely intended for the clients of DBSVUK, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVUK. This communication is directed at persons having professional experience in matters relating to investments. Any investment activity following from this communication will only be engaged in with such persons. Persons who do not have professional experience in matters relating to investments should not rely on this communication. Dubai This research report is being distributed by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3rd Floor, International Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Financial Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for Centre professional clients (as defined in the DFSA rulebook) and no other person may act upon it. United Arab This report is provided by DBS Bank Ltd (Company Regn. No. 196800306E) which is an Exempt Financial Adviser as defined Emirates in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. This report is for information purposes only and should not be relied upon or acted on by the recipient or considered as a solicitation or inducement to buy or sell any financial product. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situation, or needs of individual clients. You should contact your relationship manager or investment adviser if you need advice on the merits of buying, selling or holding a particular investment. You should note that the information in this report may be out of date and it is not represented or warranted to be accurate, timely or complete. This report or any portion thereof may not be reprinted, sold or redistributed without our written consent.
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Company Guide AIA Group
United States This report was prepared by DBSVHK. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should
contact DBSVUSA directly and not its affiliate. Other In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, jurisdictions professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions. DBS Vickers (Hong Kong) Limited 18th Floor Man Yee building, 68 Des Voeux Road Central, Central, Hong Kong Tel: (852) 2820-4888, Fax: (852) 2868-1523 Company Regn. No. 31758
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Company Guide
AIA Group
DBS Regional Research Offices
HONG KONG MALAYSIA SINGAPORE DBS Vickers (Hong Kong) Ltd AllianceDBS Research Sdn Bhd DBS Bank Ltd Contact: Carol Wu Contact: Wong Ming Tek (128540 U) Contact: Janice Chua 18th Floor Man Yee Building 19th Floor, Menara Multi-Purpose, 12 Marina Boulevard, 68 Des Voeux Road Central Capital Square, Marina Bay Financial Centre Tower 3 Central, Hong Kong 8 Jalan Munshi Abdullah 50100 Singapore 018982 Tel: 852 2820 4888 Kuala Lumpur, Malaysia. Tel: 65 6878 8888 Fax: 852 2863 1523 Tel.: 603 2604 3333 Fax: 65 65353 418 e-mail: [email protected] Fax: 603 2604 3921 e-mail: [email protected] Participant of the Stock Exchange of Hong Kong Ltd e-mail: [email protected] Company Regn. No. 196800306E
INDONESIA THAILAND PT DBS Vickers Sekuritas (Indonesia) DBS Vickers Securities (Thailand) Co Ltd Contact: Maynard Priajaya Arif Contact: Chanpen Sirithanarattanakul DBS Bank Tower 989 Siam Piwat Tower Building, Ciputra World 1, 32/F 9th, 14th-15th Floor Jl. Prof. Dr. Satrio Kav. 3-5 Rama 1 Road, Pathumwan, Jakarta 12940, Indonesia Bangkok Thailand 10330 Tel: 62 21 3003 4900 Tel. 66 2 657 7831 Fax: 6221 3003 4943 Fax: 66 2 658 1269 e-mail: [email protected] e-mail: [email protected] Company Regn. No 0105539127012 Securities and Exchange Commission, Thailand
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