Despite shares more than tripling since 2010, AIA Group Ltd (SEHK: 1299) has a lot more upside in the future. Here’s why. –
In the years following its spin-off from AIG, AIA Group Ltd (SEHK: 1299) has met many of investors’ bullish expectations.
AIA shares have more than tripled since it debuted in Hong Kong in 2010 and both its Enterprise Value (EV) and profits have soared.
Due to the coronavirus outbreak, however, AIA has recently had to deal with numerous operational challenges such as a soft macroeconomic backdrop, travel restrictions, mandatory quarantines, and difficulty conducting face-to-face meetings.
As a result, AIA’s stock hasn’t performed as well as it has in the past. But there’s still hope. The race to the coronavirus vaccine is nearing the finish line as many analysts expect a vaccine approval in the US or China before the end of the year.
AIA management is also fairly optimistic for the future according to the company’s first-half earnings transcript. Here are some key takeaways from the report.
Interim results and dividend increase
For the six months ended 30 June 2020, AIA’s value of new business (VONB) fell 37% year-on-year as the Covid-19 headwinds facing the company were strong.
Despite the challenges, however, AIA’s operating profit after tax rose 5% year-on-year.
Management also saw “very strong month-on-month VONB growth in markets as they emerged from Covid-19 restrictions”.
Due to this confidence and AIA’s strong financial position, the company’s increased its interim dividend by 5% to HK$0.35 per share.
As a result of the increase, AIA has increased its interim dividend every year since 2011, illustrating the company’s strength and resilience amid challenging economic conditions.
China growth in the second quarter and beyond
Given China was the first big country that successfully contained Covid-19, economic conditions have rebounded fairly quickly in the nation.
AIA’s mainland China business reflected the recovery, with the unit having achieved positive year-on-year growth in the second quarter.
Due to the growth and Covid-19’s negative impact on other regions, mainland China became AIA’s largest contributor to group VONB for the first time.
AIA expects a lot more growth in the country in the future. Despite AIA’s immense growth in the country in the past decade, it notes that “our customers make up less than 2% of the middle class population available to us today leaving significant upside in our existing footprint.”
Due to the Chinese government allowing AIA to convert a branch into a wholly-owned life insurance subsidiary in the country earlier in the year, and AIA targeting additional provinces, it believes its potential market in mainland China quadruples as well.
Given the larger potential market and AIA’s strong record of expansion in China in the past, the insurer has a lot of future growth potential.
Continued focus on Asia
Speaking of the future, AIA plans to continue to focus exclusively on Asia for the time being.
Despite Asia’s past wealth growth, life insurance penetration remains “incredibly low and the protection gap only gets wider” according to AIA.
As a result of the continued expected economic growth in Asia and the increasing life insurance penetration, AIA has a lot of growth potential left, especially given its leading position in many markets.
Due to the rapid growth in incomes, AIA expects its target customer base in the region to double over the next decade, growing around seven times faster than the rest of the world.
Given China’s fast economic rebound after the country successfully contained Covid-19, there’s hope that other Asian countries could rebound fairly rapidly too once they contain the coronavirus.
If that happens, demand for AIA’s VONB outside of China could rebound rather quickly.
Despite Covid-19 and macroeconomic headwinds, AIA remains every bit the crown jewel it was 10 years ago.
The company has numerous competitive advantages, a great brand, and cutting-edge technology.
Given the larger potential market in mainland China and the future growth potential in other Asian countries, AIA has a lot of potential growth ahead.
Given its previous track record of execution, there is reason to believe AIA will capture a lot of the opportunity and continue to grow its dividend and stock price for years to come.
- AIA’s Latest Earnings: Low Valuation is a Buying Opportunity
- 4 Tailwinds Powering AIA’s Dividend
- Does AIA’s Approval as a Wholly-Owned Subsidiary in China Really Matter?
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