AIA Group: VONB Growth Beats Market Expectations Despite Lower VONB Margin

AIA Group’s 01299 first-half value of new business, or VONB, growth on an actual exchange rate, or AER, basis further accelerated to 37% year on year, ahead of our expectation. But we expect growth momentum to moderate in the second half of 2023 on a higher base, so we keep our 2023 VONB growth forecast at around 24%. As results were largely in line, we retain our HKD 96 per share fair value estimate for AIA. The stock is undervalued, trading at 1.4 times 2023 embedded value, or EV, equity per share. Investor sentiment for AIA was pressured by fears for China market VONB margin dilution given the customer trend toward high-yield savings products and AIA’s increasing sales from bancassurance and lower-tier cities. However, we believe its premier agency force and ongoing mainland China expansion plan should support better-than-peer long-term growth.

The strong new business growth was primarily driven by the 43% year-on-year increase in annualized new premium, or ANP, as a result of the growing attractiveness of U.S. dollar-denominated savings products in both mainland China and Hong Kong markets. These two markets saw ANP grow 43% and 163% year on year, respectively. Geographically, Hong Kong and Thailand led VONB growth on an AER basis, increasing 111% and 26%, respectively. AIA China expectedly posted weaker VONB growth at 7% on an AER basis due to the 6% Chinese yuan depreciation against the USD and VONB margin compression on unfavorable product mix shift.

Other key financial metrics reported solid growth. EV operating profit grew 12% year on year on increased VONB growth and a rise in expected return on EV boosted by higher government bond yields and risk discount rates at the end of 2022. Operating profit after tax rose 6% year on year on a constant exchange rate basis, driven by a stable contractual service margin release rate at around 9%. AIA’s 5% increase in interim dividend indicates its progressive dividend policy remains intact under the new accounting regime.