1H16 results: Strong operating momentum

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access 28 July 2016 Asia Pacific/Hong Kong Equity Research Life Insurance AIA Group (1299.HK / 1299 HK) Rating OUTPERFORM Price (28 Jul 16, HK$) 49.05 Target price (HK$) (from 56.30) 59.00 Upside/downside (%) 20.3 Mkt cap (HK$/US$ mn) 591,025 / 76,208 Enterprise value (US$ mn) 78,238 Number of shares (mn) 12,049 Free float (%) 15.8 52-wk price range (HK$) 50.50-37.25 ADTO-6M (US$ mn) 140.8 *Stock ratings are relative to the relevant country benchmark. ¹Target price is for 12 months. Research Analysts Charles Zhou, CFA 852 2101 6177 charles.zhou@credit-suisse.com EARNINGS 1H16 results: Strong operating momentum ■ AIA announced a strong set of results, with operating statistics beating consensus on all fronts: VNB up 31% YoY (+37% on constant forex), a record 1H VNB growth rate since IPO. Operating profit after tax (excluding market volatility) was up 14% YoY (constant forex). EV up 5% HoH, with annualised RoEV of 16%. AIA increased its interim dividend to HK$0.219, (+17% YoY). ■ Key positives. (1) Continued strong VNB momentum, with +37% YoY (constant forex), a record 1H growth rate. (2) Growth led by both premium volume and margin expansion. The strong VNB was driven by improved margins of 2.5 pp YoY and an increase in annual new premiums (ANP) of 25%, demonstrating AIA's growth capability in both volume and margins. (3) Resilient to macro headwinds, while AIA is not fully immune to macro uncertainties, market-consistent assessment (i.e. market spot rates) produces similar results to reported EV. (4) Strong solvency position of 381% (~400% excluding Tata payment). US$8.2 bn free surplus provides flexibility in capital management (organic growth, M&A and dividend). ■ Investment case. 1H16 results highlight that management continues to execute well on both key strategies of margin enhancement and volume growth. We believe there is much room for progress on both counts, which enhance AIA’s medium-term profile. The strong (largely ungeared) balance sheet gives it additional flexibility in terms of capital management, with new business strain reducing (down to 29% of ANP in 1H16 from 37% FY15). ■ Catalysts: 3Q16 new business update in mid/late-Oct 2016. ■ We lift TP to HK$59 from HK$56.3 (20% upside), after factoring in 1H16 results and MTM of equity and forex 2HTD. Our valuation takes into account the growth and margin profile of each country and implies 1.96x P/EV, 2.3x P/B and 15x NB multiples. The stock is trading at 1.7x P/EV and 2.0x P/B. Share price performance The price relative chart measures performance against the HANG SENG INDEX which closed at 22,174.34 on 28/07/16. On 28/07/16 the spot exchange rate was HK$7.76/US$1 Performance 1M 3M 12M Absolute (%) 10.3 5.0 -3.1 Relative (%) 0.4 -0.2 6.9 Financial and valuation metrics Year 11/14A 11/15A 11/16E 11/17E Life GWP (US$ mn) 17,229.0 18,812.0 20,182.0 22,641.6 P&C GWP (US$ mn) 0.0 0.0 0.0 0.0 Net profit (US$ mn) 3,644.0 2,765.0 3,866.7 4,734.3 EPS (CS adj.) (US$) 0.30 0.23 0.32 0.39 Change from previous EPS (%) n.a. n.a. 10.9 17.6 Consensus EPS (US$) n.a. n.a. 0.30 0.35 EPS growth (%) 24.0 (24.1) 39.8 22.4 P/E (x) 20.9 27.6 19.7 16.1 NTA per share (US$) 2.38 2.43 2.90 3.18 EV per share (US$) 3.08 3.17 3.58 4.00 Dividend yield 1.0 1.4 1.6 1.7 P/B (x) 2.47 2.45 2.08 1.90 ROE (%) 13.1 8.9 11.4 12.3 P&C combined ratio (%) - - - - Source: Company data, Thomson Reuters, Credit Suisse estimates 28 July 2016 AIA Group (1299.HK / 1299 HK) 2 AIA Group (1299.HK / 1299 HK) Price (28 Jul 2016): HK$49.05; Rating: OUTPERFORM; Target Price: (from HK$56.30) HK$59.00; Analyst: Charles Zhou Earnings Drivers 11/14A 11/15A 11/16E 11/17E In-force premiums (TWPI) 19,191 19,876 21,811 24,181 New business annual premiums (ANP) 3,700 3,991 4,854 5,600 Value of 1yr new business (VNB) 1,845 2,198 2,718 3,214 Embedded value (EV) 37,153 38,198 43,077 48,167 New business margin (VNB % ANP) 0.50 0.55 0.56 0.57 Income Statement (US$ mn) 11/14A 11/15A 11/16E 11/17E Life gross written premiums 17,229 18,812 20,182 22,642 P&C gross written premiums 0 0 0 0 Life pre-tax profit 3,918 4,320 4,657 5,353 P&C pre-tax profit 0 0 0 0 Asset mgmt pre-tax profit 0 0 0 0 Other pre-tax profit 0 0 (0) 0 Recur