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Morningstar | AIA Group Delivered Slowing NBV Growth in the Third Quarter as China Growth Slowed

No-moat AIA's brief third-quarter financial summary reported a slowing year-on-year growth in new business value, or NBV, at 16%, versus the 22% in the first half on an actual currency basis. The slowing NBV growth was mainly due to local currencies' softness against U.S. dollars, which is the reporting currency of AIA’s financials. Growth remained steady at 17% on a constant currency basis. AIA China’s premium income continued its strong growth momentum at around 30% in the past quarter, flat from the first half. We expect AIA China’s premium growth will remain relatively steady and faster than most peers thanks to AIA’s differentiated product strategy, which was not impacted by ongoing regulation tightening. The results were largely in line with our expectation, as we’ve expected NBV growth in the China market will inevitably soften as we think its NBV margin level already peaked at 91% in the first half, versus 86% in 2017 and 2016. Given intensifying competition on critical illness products in China as a result of stricter regulations on short-term investment-type product sales, we see more downward pressure for AIA China’s margin trend. This translated to our below-market-consensus NBV growth at around 15% in 2018, and we’ve seen a gradual slowdown in NBV growth to 17% versus the 23% to 27% range since 2013. Our long-term thesis is largely intact. We’re confident in the long-term growth of AIA as we believe the company will deliver a slower but more resilient growth thanks to its leading agent productivity and dominating positions in major rapidly growing Asian markets.

We retain our HKD 72 fair value estimate for AIA, as its strong management execution to deliver steady growth over the past eight years and premium agent quality should continue to reward AIA with a higher-than-peer valuation. Trading at a 13% discount to our fair value estimate, the stock is slightly undervalued, but such a discount is not adequate to compensate risks in our view.

Given lack of regional disclosure, we suspect a slower NBV growth in China due to pressure on margin was mostly offset by strong growth in the Hong Kong market. This was particularly driven by a strong third-quarter rebound for mainland visitors’ purchases in the past quarter, which is traditionally a peak season for Chinese outbound travel. Such growth was compounded by a low base in the year-ago period and renewed concerns for RMB depreciation. AIA Singapore continued its strong NBV growth momentum at double-digits into the past quarter, helped by improved agent productivity and increased agent headcounts. While other markets including Thailand and Malaysia saw negative growth and low-single-digit growth respectively as businesses transformation continued in both markets.