Analyst Note| Iris Tan, CFA |
AIA recently announced its plans to invest CNY 12 billion for about a 25% equity stake in China Post Life, or CPL. AIA and CPL’s parent China Post Group are expected to sign a business cooperation framework agreement to explore additional areas of collaboration. Though the near-term impact is not material, we expect the investment enables AIA’s potential access to Postal Savings Bank of China, or PSBC’s, huge distribution network, which covers mass and emerging mass-affluent customers in China. This is complementary to AIA China’s strategic positioning as the agent-driven differentiated life insurer covering wealthy customers in affluent areas. In addition, we lower our cost of equity assumption to 10% from 12% after reviewing the systematic risk premium for AIA. The new cost of equity for AIA is now more aligned to our existing ex-China Asian financial coverage, which ranges from 9% to 10%. The positive impact on the valuation was partly offset by a lower stage growth assumption of 8% from 12%, in line with the expectation of slowing credit growth to stabilize the financial leverage in China. Thus, our fair value estimate is increased to HKD 107 from HKD 95 per share. Trading at 2.1 times forward price to embedded value, the stock is fairly valued. In 2021, AIA has further widened its lead against local peers in new business value growth amid ongoing industrywide challenges caused by changing customer behavior, the fading population dividends and tightened regulations. We expect upside catalysts include surprises in new business value growth from a low base in the second quarter of 2020, better-than-expected progress in China expansion, the reopening of the Hong Kong-China border and progress in the Greater Bay Area Insurance Connect.