Insights

AIA’s Latest Earnings: Low Valuation is a Buying Opportunity

AIA Group Ltd (SEHK: 1299) reported first-half results last week and its share price fell in response. Is it a buying opportunity for investors? – Buy stock

Last week, pan-Asian insurance giant AIA Group Ltd (SEHK: 1299) reported its first-half results, which led to a 3% drop in its share price the following day.

In this article, I’ll take a look at the results and the implications for the investors.

Overview of first-half results

As expected by the market, due to the impact of Covid-19, AIA reported disappointing results.

Its first-half top line (total weighted premium income) grew by only 3% year-on-year, which was the slowest growth in the past five years.

Similarly, the first-half net profit also increased by just 3% year-on-year. This was also the smallest increase in the past five years for the company.

Its value of new business (VNB) in the first half of 2020 dropped by almost 40% year-on-year.

Among the three key markets for AIA – Hong Kong, mainland China, and Southeast Asia (Thailand, Singapore, and Malaysia), China had the smallest drop in its first-half VNB (down 15% year-on-year), while Hong Kong had the biggest decline (down almost 70% year-on-year).

As a result of the much milder drop, China became the biggest contributor to the company’s VNB in the first half of 2020.

Will lockdown restrictions last forever?

Give the disappointing results and the share price correction that followed, AIA is currently trading at 2.0x price-to-book value (PBV).

Not taking into account this year, the last time AIA was trading below 2x PBV was back in December 2016.

Investors may wonder if such a low valuation provides a good entry window for them to buy into the stock.

In my opinion, the disappointing financial figures were not a result of deteriorating fundamentals or the core competence of AIA.

Given the large ticket size of life insurance policies and their complexities, the sales process of life insurance is still very traditional where customers prefer to interact with an agent in person.

The global pandemic gave rise to social distancing restrictions and has hindered insurance sales agents from meeting clients and generating new business.

Two scenarios could arise in the future from now on. Either there will be a successful vaccine soon, and we can carry out our lives like we used to, or it takes a much longer time to develop the vaccine.

Business to rebound

If it’s the latter case, we will have to learn to live with Covid-19 and carry out our lives like before.

Either way, governments can’t have their countries lock down forever. As such, it’s only a matter of time before AIA’s business starts picking up again.

We have already seen a similar trend in AIA’s first-half results since different countries and cities in Asia have different lockdown schedules.

For example, in mainland China where most of the business activities resumed in the second quarter, the drop in the first-half VNB was much milder than that in Hong Kong and the key Southeast Asian markets.

Obviously, the border control between China and Hong Kong has also contributed to such a significant drop as one of the main revenue sources for AIA’s Hong Kong business is mainland Chinese customers.

The lockdown and the border control won’t last forever, and the drop in AIA’s business won’t either.

Foolish takeaway

Unlike the technology stocks which have been a key beneficiary of Covid-19, AIA, similar to many other life insurance companies, is a victim.

But given its intact business fundamentals and unique positioning to tap into the growth of the emerging markets in the region, the current cheap valuation does seem like an opportune buying window.

More reading

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 Alec Tseung doesn’t own shares of any companies mentioned.

The Motley Fool Hong Kong Limited(www.fool.hk) 2020

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