AIA’s Value of New Business Returns to Growth in H2, but Embedded Value Down on Investment Losses

We maintain our HKD 96 per share fair value estimate following AIA Group’s 01299 2022 results. Value of new business, or VONB and operating profit after tax, or OPAT, were slightly below our expectation, but our major assumptions remain unchanged. 2022 VONB contracted 8% year on year, or by 5% in constant currency. OPAT recorded slower but nonetheless resilient growth of 3% in constant currency terms, versus 6% growth in 2021. As expected, embedded value, or EV, declined on investment losses and the effect of AIA’s share buyback. These reduced opening EV by 7% and 5%, respectively, leading to a 5.5% year-on-year decline. On a per-share basis, EV was down 2%.

A bright spot in the results was the 6% year-on-year VONB growth in the second half after a 13% contraction in the first half as the effects of the initial omicron wave subsided. According to AIA management, all five of the largest markets delivered positive VONB growth in the second half.

AIA’s share price fell 4.6% on March 10 on investor concerns that increasing market volatility may add risk to AIA’s insurance underwriting. We see the stock as undervalued at 1.6 times 2023 year-end EV, assuming 8% growth in EV per share. The stock has underperformed peers with a 6% decline year to date as the market worried about the contraction in EV and slowing growth in OPAT, which directly linked dividend payment to shareholders. However, for both China and Hong Kong markets, management noted the business development in February and early March has been very encouraging, as China recovered from the coronavirus infection peak and cross-border travel reopened in late January. We also expect a gradual recovery in mainland Chinese visitors or MCV sales over the next three to four years. MCV arrivals have recovered to about 23% of the average level during the first quarter of 2019 in February. Our DCF model factors in the recovery of AIA Hong Kong’s MCV VONB to 25% of 2019′s level in 2023.