HIGH CONVICTION Company Note Insurance - Life │ Hong Kong │ July 10, 2020 Insert Insert Hong Kong AIA Group ADD (no change) Consensus ratings*: Buy 25 Hold 3 Sell 1 The importance of being connected Current price: HK$75.10 ■ We think one of AIA’s next share price triggers could be a near-term Target price: HK$84.00 announcement of an Insurance Connect as part of the GBA project. Previous target: HK$80.00 ■ We believe the first stage of this connect is likely to be sales and service Up/downside: 11.9% centres in the GBA, which could help persistency ratios and raise mindshare. CGS-CIMB / Consensus: -1.7% ■ The second stage, which we think will be much later, could see customers Reuters: 1299.HK being permitted to buy cross-border insurance within their own regions. Bloomberg: 1299 HK ■ Reiterate Add. Our TP is raised slightly to HK$84 as we roll forward our Market cap: US$117,160m valuation and factor in the changes to EPS, EV and VONB. HK$908,004m Average daily turnover: US$272.5m HK$2,109m The fourth of the ‘Connect’ programmes Current shares o/s: 12,089m Following the implementation of Stock Connect and Bond Connect, and the recent Free float: 100.0% announcement of a Wealth Management Connect programme, we expect a near-term *Source: Bloomberg announcement of an Insurance Connect programme within the Greater Bay Area (GBA). We see this as benefitting HK insurers such as AIA. Key changes in this note FY20F EPS raised by 11.3%. Insurance Connect: Implementation in two stages FY21F EPS cut by 2.4% We expect the first stage to be the setting up of post-sales service centres, and in the FY22F EPS cut by 1.2%. second stage (to be implemented later in the future) customers would be permitted to buy cross-border insurance policies within their own regions. A key benefit of the first stage is Price Close Relative to HSI (RHS) that there is less chance of lapses of insurance policies bought previously by mainland 87.0 104.0 Chinese visitors (MCV) in HK, as the ratio of policyholders paying by methods other than 77.0 100.0 bank transfer has picked up in recent years. Another key benefit is a potential increase in 67.0 96.0 mindshare and awareness of the HK insurance policies among GBA residents; this could 57.0 92.0 100 set the stage for a rebound in MCV insurance sales in HK in a post Covid-19 era. 50 Two other potential re-rating triggers Vol m Vol Jul-19 Oct-19 Jan-20 Apr-20 1. The announcement of regulatory approval for AIA to open in new provinces within Source: Bloomberg mainland China (we think up to two new provinces a year). We continue to believe that AIA’s new CEO could help facilitate greater expansion into mainland China, historically its Price performance 1M 3M 12M fastest growth market for value of new business (VONB) and also its largest market by Absolute (%) 2.2 4.9 -9.9 Relative (%) -0.5 -1 -1.1 VONB, given his deep experience and understanding of this region. This should be easier as it is subsidiarising its China operations. 2. When a travel bubble is eventually Major shareholders % held announced between HK, Guangdong and Macau, it could be the start of a pickup of MCV Citigroup 9.0 buying insurance in HK. This segment accounted for half of AIA’s HK VONB in 1H19. Changes made to EPS, EV and VONB; TP raised slightly to HK$84 Insert We adjust our FY20-22F EPS, embedded value (EV) and VONB to reflect recent strong equity markets. The Covid-19 outbreak has also lasted longer than initially expected. We roll forward our valuation by half a year to compute target prices based on 1H21F EV. Potential re-rating catalysts are a VONB growth turnaround and future China expansion. Risks: currency volatility and a prolonged Covid-19 outbreak that is worse than expected. Financial Summary Dec-18A Dec-19A Dec-20F Dec-21F Dec-22F Analyst(s) Gross Premium (US$m) 38,455 38,368 39,414 44,655 50,491 Investment And Other Income (US$m) Net Premium (US$m) 32,222 32,896 33,792 38,286 43,290 Net Profit (US$m) 3,163 6,648 4,116 7,045 8,066 Normalised EPS (US$) 0.26 0.55 0.34 0.58 0.67 Normalised EPS Growth (48%) 110% (38%) 71% 14% FD Normalised P/E (x) 36.99 17.61 28.47 16.65 14.56 P/NB (x) 15.37 13.28 16.49 11.27 7.82 Michael CHANG, CFA DPS (US$) 0.16 0.16 0.17 0.20 0.23 Dividend Yield 1.63% 1.67% 1.80% 2.06% 2.35% T (852) 2539 1323 P/EV (x) 2.15 1.89 1.91 1.71 1.54 E [email protected] P/BV (x) 3.00 2.04 1.96 1.82 1.67 Jasmine CHIN ROE 7.8% 13.8% 7.0% 11.3% 12.0% T (852) 2539 1127 % Change In Normalised EPS Estimates 11.3% (2.4%) (1.2%) E [email protected] Normalised EPS/consensus EPS (x) 0.81 0.96 1.00 SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. IF THIS REPORT IS DISTRIBUTED IN Powered by the THE UNITED STATES IT IS DISTRIBUTED BY CGS-CIMB SECURITIES (USA), INC. AND IS CONSIDERED THIRD-PARTY AFFILIATED RESEARCH. EFA Platform Insurance - Life │ Hong Kong AIA Group │ July 10, 2020 The importance of being connected We expect an announcement of an Insurance Connect programme in the GBA soon We believe a near-term trigger for AIA’s share price could be an announcement by policymakers about the introduction of an Insurance Connect programme in the Greater Bay Area (GBA), the region encompassing Hong Kong, Guangdong and Macau. We expect the first stage to be the setting up of post-sales service centres, and that the second stage, to be implemented sometime in the future, would enable customers to buy cross-border insurance policies within their own regions. A key benefit of the first stage is that there would be less chance of lapses of insurance policies bought previously by mainland Chinese visitors (MCV), given that the ratio of policyholders paying by options other than bank transfer seemed to have picked up in recent years (we believe it was over 90% in mid-to-late 2016). Another key benefit is a potential increase in mindshare and awareness of HK insurance policies among GBA residents, which could set the stage for a rebound in MCV insurance sales in HK, in a post Covid-19 era This Insurance Connect would follow the previous implementation of Stock Connect and Bond Connect, and the recent announcement of a Wealth Management Connect programme. We do not believe the Wealth Management Connect programme would involve the full array of insurance products, at least not likely the participating insurance products that seem to be popular among MCV that buy insurance in HK. At most, we think there is a possibility that the only life insurance products that Wealth Management Connect could include are investment-linked products, which are a type of products that are not that popular in either mainland China or in Hong Kong. More details on the Insurance Connect in the GBA The Insurance Connect in the Greater Bay Area (GBA), which includes Guangdong, Macau and Hong Kong, has been under discussion since early- 2019. The Insurance Connect is expected by the authorities to be another critical part of the financial connection mechanism within the GBA under the national plan of the GBA development. We believe the most likely implementation of the Insurance Connect in the near term will be the setting up of an insurance post- sales service centre in the Qianhai district of Shenzhen, which will allow brokers to provide insurance services. We think policyholders will also be able to file claims as well as pay renewal premiums at this location. We use the Stock Connect, the Bond Connect and the most recent Wealth Management Connect as benchmarks to estimate that an official announcement of the Insurance Connect with detailed designing can be expected in late-2020F or early-2021F, following the official launch of the Wealth Management Connect. In addition, the CEO of Hong Kong Insurance Authority (HKIA), Clement Cheung during an interview with Hong Kong Economic Times on 29 Jun 2020 said that some positive news on the Insurance Connect can be expected soon. He also stated that a successful launch of the Wealth Management Connect will help to accelerate the launch of the Insurance Connect. Some investors have expressed concerned to us that AIA’s China business could be under threat, if it becomes easier to buy HK insurance products within mainland China via the Insurance Connect. We are not concerned as we see little threat of such a substitution effect for AIA China and AIA HK. This is because we believe that customers from mainland China have different needs, and reach out to AIA China and AIA HK for different reasons. This can be seen from the fact that the mainland China business of AIA sells a high proportion of critical illness products. On the other hand, 2 Insurance - Life │ Hong Kong AIA Group │ July 10, 2020 participating insurance products (which have a higher savings component and generate lower margins) tend to comprise a larger proportion of AIA HK’s business.