AIA Group Ltd：Wait and see

February 01, 2011 AIA Group Ltd (1299 HK) This report has been prepared by Samsung Securities (Asia) Limited. ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES BEGIN ON PAGE 23  COMPANY INSIGHTS Wait and see Initiating with a HOLD– AIA faces significant challenges, with no turnaround plan, yet Figure 1: Hong Kong market- Total individual life new business (APE basis) Source: OCI; Samsung Securities We are initiating coverage of AIA with a HOLD rating and 12-month target price of HK$21.50. We believe AIA’s declining fortunes in its core Hong Kong market is emblematic of the challenges it faces in other core markets. As AIA stuck to agent distribution, it was late to join in the growth in bancassurance. The resulting loss of market share in new business contrasts with AIA’s strong in-force book. Since the ‘AIG events,’ the rank-and-file at AIA has weathered a great deal. Management and agents defected, and new business declined. After the aborted Prudential sale, Mark Tucker became CEO in July. Even as the new senior management team came on board through 2H10, the company rushed to IPO. As a result, we think the management team is still grasping with the difficult situation at AIA, and has not yet articulated a turnaround strategy. Investors will learn more details at the earnings announcement in late February. Faced with deep challenges and a fresh management team, a turnaround may take a longer than expected to deliver results.  SUMMARY FINANCIAL DATA 11-09 11-10E 11-11E 11-12E Gross written premiums (USD m) 10,433 11,581 12,854 14,268 Net profit 1,754 1,887 2,163 2,267 Embedded value 20,966 22,903 25,321 27,476 Value of new business 545 665 725 797 EPS (HKD) 1.14 1.22 1.40 1.47 ROE 14.7% 11.9% 12.2% 11.6% P/E 19.0x 17.7x 15.5x 14.8x P/B 2.2x 2.0x 1.8x 1.6x Source: Company data, Samsung Securities estimates1.41.92.63.12.93.34.02.92.61.71.805101520252001200220032004200520062007200820092009 9mos2010 9mosOthersHang SengChina LifePrudentialBank of ChinaHSBCAIA Target price HK$21.50 (-1%) Current price HK$21.65 Bloomberg code 1299 HK Edward Jen Analyst edward.jen@samsungfn.com +852 3411 3729  SAMSUNG vs THE STREET Turnaround in 2011? No. of I/B/E/S estimates 17 Target price vs I/B/E/S mean -12% Estimates up/down (4 weeks) 0/1 1yr fwd EPS vs I/B/E/S mean - Estimates up/down (4 weeks) 1/0 I/B/E/S recommendation Hold (2.50)  Despite ‘Pan-Asia’ branding, AIA’s business is concentrated in the 3 core markets of Hong Kong, Singapore and Thailand.  We show AIA’s long-term declining market share in new business for each key market. Data from Thai market shows AIA’s under-penetration of bancassurance led to underperformance in revenue growth.  The ‘AIG events’ disrupted new business generation. Although ANP appears to have stabilized, this was due to strong local currency appreciation. Recovery to pre-crisis levels remains in the future.  CEO Tucker will need to formulate a turnaround plan. Yet, his senior management team was rolling on-board through the end of 2010. It may be a while before a turnaround begins. HK$ billions  THE PITCH After a decade of declining market share in its core markets, AIA’s need for a turnaround seems evident. Agents are still reeling from the ‘AIG events,’ with productivity down 40% from pre-crisis levels in developed markets. Bancassurance distribution remains weak. Although ANP appears to have stabilized in USD terms, the situation has been helped by local currency appreciation and one-off acquisition expense overruns. The new management team under Tucker has been in place for only a few months, and little has been announced on a strategic plan. Investors have to wait until earnings results in late February to hear what the management team proposes. In the meantime, although Asian markets offer tremendous potential, AIA’s turnaround could take some time, and conservatism, we believe, is warranted.  FUNDAMENTALS  Despite presence in 15 markets, AIA’s business is concentrated in 3 core markets of Hong Kong, Singapore, and Thailand. Competition in these markets is growing stronger, and bancassurance (AIA’s weak spot) is gaining importance.  Even the sparse financials from the prospectus indicate that business has declined after the ‘AIG events.’ Although ANP appears to have stabilized in 1H 2010, this was due to strong local currency appreciation.  In key markets, AIA has lost market share for years due to reliance on agent distribution, without a strong strategy in bancassurance. Meanwhile, agent productivity is down 40% from pre-crisis levels in developed markets.  VALUATION  Comparables with similar growth suggest AIA is fairly valued at current levels.  High growth potential is tempered by conservatism on turnaround