Expansion Into Mainland China Will Increase Customer Base And Strengthen Long-Term Prospects

Key Takeaways

• Strategic expansion and partnerships in China and Hong Kong diversify channels and enhance high-margin revenue growth.
  
• Technology investments and enhanced digital tools boost productivity and operational efficiency, reducing costs and expanding margins.
  
• Challenges in China's VONB, interest rate impacts, competitive pressures, and regulatory changes may affect AIA Group's revenue growth, margins, and financial flexibility.

Catalysts

Provides life insurance based financial services.

• AIA's strategic geographic expansion into Mainland China with the establishment of new branches in several provinces is expected to significantly increase its customer base, ultimately driving VONB growth and enhancing long-term revenue prospects.
  
• The Premier Agency strategy focuses on high-quality agent recruitment and advanced digital tools, improving agent productivity and customer satisfaction, which should enhance VONB margins and sustainably grow future earnings.
  
• The company's profitability from proprietary technology and digital analytics (TDA) investments, along with the ongoing integration of AI, is enhancing operational efficiencies and boosting productivity. This is likely to reduce operational costs and expand net margins over time.
  
• Significant growth in bancassurance partnerships, especially in Mainland China and Hong Kong, is diversifying distribution channels, boosting high-margin VONB growth, and expanding AIA’s reach into affluent customer segments to drive future revenue.
  
• AIA's strengthened capital management policy, including an increased dividend per share and new share buyback, reflects financial resilience and is expected to contribute to EPS growth and shareholder returns.

AIA Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming AIA Group's revenue will grow by 3.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 30.4% today to 34.0% in 3 years time.
• Analysts expect earnings to reach $8.5 billion (and earnings per share of $0.82) by about April 2028, up from $6.8 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $9.8 billion in earnings, and the most bearish expecting $7.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.4x on those 2028 earnings, up from 12.1x today. This future PE is greater than the current PE for the HK Insurance industry at 7.9x.
• Analysts expect the number of shares outstanding to decline by 3.15% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.81%, as per the Simply Wall St company report.

AIA Group Future Earnings Per Share Growth

Risks

• The slowdown in China's value of new business (VONB) in the latter half of the year may present challenges if these conditions persist, impacting future revenue growth.
  
• Interest rate movements, particularly in China and Thailand, have led to negative investment return variances, potentially affecting margins and overall earnings.
  
• The competitive landscape in Hong Kong and the associated changes in guideline regulations (GL34) could pressure pricing strategies, impacting revenue.
  
• The growth of new business contractual service margin (CSM) at a slower rate than VONB over the past years may indicate challenges in translating sales into long-term earnings.
  
• Potential headwinds from foreign exchange and regulatory changes in markets such as South Korea could impact the required capital, affecting the firm's financial flexibility and net margins.

Valuation

• The analysts have a consensus price target of HK$91.702 for AIA Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$103.06, and the most bearish reporting a price target of just HK$74.04.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $24.9 billion, earnings will come to $8.5 billion, and it would be trading on a PE ratio of 16.4x, assuming you use a discount rate of 6.8%.
• Given the current share price of HK$60.2, the analyst price target of HK$91.7 is 34.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.