Here’s why mainland China could be an even bigger market for AIA Group Ltd (SEHK: 1299) than what it is now. –
Although it isn’t Chinese, one area of strength for AIA Group Ltd (SEHK: 1299) has been its mainland China operations.
For 2019, AIA reported value of new business (VONB) of US$1.167 billion for mainland China, roughly a quarter of its total VONB.
VONB in the region grew around 21% year-on-year in terms of actual exchange rates and 27% year-on-year in terms of constant exchange rates, making mainland China one of AIA’s fastest growth markets last year.
In terms of the future, AIA’s mainland China operations could become even bigger due to a recent consequential development. Here’s what long-term investors need to know.
Mainland China growth
Over the past few years, AIA has grown its mainland China operations substantially as the company has benefited from secular tailwinds such as rising incomes.
For the 12 months ended 30 November 2015 (AIA used to have a fiscal year ending 30 November), AIA’s mainland China VONB was just US$366 million. In the 12 months ended 31 December 2019, AIA’s mainland China VONB had grown to US$1.167 billion.
Although AIA has grown quickly over the past five years, the company’s growth slowed in 2018 and 2019 as the company was limited to a few big cities in China. If AIA wanted to expand in the life insurance sector, it would have had to gain approval first.
One big reason to be bullish
Due to a government decision in June, however, AIA’s potential growth outlook in mainland China arguably became more attractive.
In terms of the decision, China’s government has recently allowed AIA to convert its Shanghai branch into an entirely-owned life insurance subsidiary incorporated in the city.
This is important, according to the South China Morning Post, because:
“Incorporation acknowledges that a foreign financial entity is allowed to do businesses all over China. Otherwise, it is regarded as only a branch that can only do business in designated areas.”
Due to the ruling, AIA now has a much larger potential market. With AIA’s good history of execution in the past, the company’s market share (and VONB) in the mainland could increase.
Future “Insurance Connect”?
In terms of expansion into China, there could be even more growth opportunities if additional regulations go AIA’s way.
According to the South China Morning Post, the Chinese government has considered an “Insurance Connect” in the past.
Under the past Insurance Connect proposal, there would be a first stage where Hong Kong insurers establish service branches in the Greater Bay Area to help their mainland Chinese customers file claims and settle renewal premiums.
There would also be a second stage where the government “would expand the service into a full-scale insurance connect scheme to allow mainlanders to buy policies from Hong Kong companies – without having to leave the mainland,” according to the proposal described by the South China Morning Post.
Although the Insurance Connect isn’t policy currently, many AIA executives are optimistic that China could potentially implement it at some point and that the programme would help AIA’s long-term growth.
First-rate company at a discount
In terms of its valuation, AIA stock is trading at an attractive price due to headwinds such as Covid-19 and the Hong Kong anti-government protests.
Currently, AIA is trading at a discount to its five-year average in terms of its price-to-book (PB) ratio.
According to Morningstar, AIA trades for a PB ratio of 2.08x currently, versus its five-year average PB of 2.45x.
Although headwinds have caused AIA’s stock to decline in 2020, many of those headwinds (such as the coronavirus outbreak, the protests, and recession) are likely temporary.
Given AIA’s past growth in mainland China and its future potential in the country, there is definitely reason for long-term investors to be bullish on AIA shares.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Jay Yao doesn’t own shares in any companies mentioned.
The Motley Fool Hong Kong Limited(www.fool.hk) 2020