Company Description

AIA is a leading life insurance organization in the Asia Pacific region that traces its roots in the region for more than 90 years. Company provides insurance, protection, savings, investment and retirement needs. Those financial services cover 15 geographical markets in the region including Hong Kong, Korea, Thailand, Singapore, China, Malaysia, the Philippines, Australia, Indonesia, Vietnam, Taiwan, New Zealand, India, Macau and Brunei. Each local operating units are significant businesses in their own right and, in 2008 and 2009, no more than 25% of our TWPI came from any one geographical market. Company does not only depend on certain markets, which can diversify the income risk.

Premium income and market shares distribution

For nine-month periods ended 31 August 2010, the TWPI income from Hong Kong was US$2105 million dollar, which accounted for 22.6% of total TWPI income. Hong Kong ranked the first of the premium income source. The following was Thailand, Korea and Singapore, the premium income was 20%, 16% and 13% respectively.

Company had the highest market shares among the peers in Hong Kong, Thailand and Singapore. In Thailand, the market shares was up to 35.6% which was 22% far higher than the peer followed. And for Hong Kong and Singapore which are relatively more developed, the compound annual growth rate of insurance premiums were 9.9%yoy and 6.2%yoy respectively.

The potential growth of Asia Pacific

The life insurance premium of Asia Pacific in 2009 was US$358 billion, which was 15.4% of global life insurance premium total. Asia Pacific is one of the biggest life insurance markets in the world. It is estimated that the economic growth of Asia Pacific will remain strong. From 2009 to 2014, the forecast compounded annual growth rate of GDP was 10.2%. For population growth, from 2004 to 2009, the total population and the population over 65 were 1.3% and 2.9% respectively. High household saving rate, growth of the high expenditure customers and the huge high net worth individuals, are the main driving factors for the growth of Asia Pacific.

On the other hand, there are a lot of opportunities in Asia Pacific since the penetration rate and per capita premium are very low. The per capita premium of China, Thailand, Philippines, Indonesia, Vietnam and India are as low as below US$100 and the penetration rates are less than 5%. Moreover, people in Asia Pacific coupled with the lack of accident and health insurance. The emphasis on accident and health insurance and insurance products from clients will increase. Regarding the economic growth and the enhancement of living standards, Asia Pacific can create great opportunities for the company.

Huge but closed China market

In China, the market share of company was only 1%. However, AIA already has the highest market shares among the Foreign and joint venture life insurance companies. The market share of the following peer, Generali China Life Insurance, was only 0.6%. According to data published by the China Insurance Regulatory Commission (CIRC), China's life insurance market is currently dominated by six domestic Chinese life insurance companies that collectively held an aggregate market share of almost 86% of total premiums in 2009. Foreign life insurance companies held an aggregate market share of approximately 6% of total premiums in 2009. Although the market share in China market was very low, for nine-month periods ended 31 August 2010, the TWPI coming from China was US$ 808 million which accounted for 9% of total premium of AIA. China ranked the sixth among the fifteen Asia Pacific markets. This showed the enormous consumption ability of China.

If company aims to stand out in the Asia Pacific, China must be a place for struggle. However, the closed economic model of China and the prowess of China insurance companies are major obstacles for AIA. According to the announcement of management of AIA in the IPO conference, company has signed a bancassurance agreement with ICBC (1398.HK), aiming to increase the market share in China market. Company thinks that bank has wide branch networks and huge clients` base, which can create an opportunity for insurance distribution channels of bank.

Financial results

From 2007 to 2010, the operating profit of company recorded a steady growth, which grew from US$1692 million dollars in 2007 to proportional foreasted US$2268 million dollars in 2010. The annual growth is 10.3%. For the TWPI, it grows from US$11358 million dollars in 2007 to proportional foreasted US$12044 million dollars in 2010. The annual growth is only 2%. The growth of premium income slows down and the proportional foreasted premium in 2010 is still lower than the highest in 2008. The growth of operating profit is mainly come from the growth of investment income. However, if the global market went down, the growth of company will be seriously harmed.

Investment thesis

1. AIA (1299.HK) has attracted six cornerstone investors including New World Development <00017.hk> and its chairman Cheng Yu-tung, Wharf <00004.hk> Chairman Peter Woo, Malaysian pension fund Kumpulan Wang Persaraan, Guoco Group <00053. hk=""> and the Kuwait Investment Authority, Warren Buffett, and the parent company of American International Group AIG (AIG) largest private shareholder BruceBerkowitz's Fairholme.

2. Recently, the market share of AIA in China insurance market is only 1%. For enhancing the market share, company has cooperated with ICBC (1398.HK) that bank will distribute the insurance products of AIA. China will have the fastest growth among the Asia Pacific region. Therefore, this cooperation is a major driving factor for the future growth of AIA.

Risk analysis

1. The growth of operating profit is mainly come from the growth of investment income. However, if the global market went down, the growth of company will be seriously harmed.

2. Although AIA has signed bancassurance agreement with ICBC (1398.HK), it is uncetain that whether company can effectively enhance the market share in China because of the prowess of China insurance companies.

Peers comparison

Valuation

The offering price of AIA is reasonable. The estimated PE ratio ranges from 14.1 to 15.0. The ratios are similar to that of Prudential (2378.HK) which previously attempted to purchase AIA. The ratios are far lower than that of China insurance companies, but higher than that of international giant insurance companies, including mother company AIG (AIG.US) and ING (ING.US). Company forecasts that for the year ending 30 November 2010 the operating profit is expected to be not less than US$2,000 million. And the net profit attributable to the shareholders of AIA Group Limited for the year ending 30 November 2010 is expected to fall within the range of US$1,400 million and US$2,300 million. According to the report from sponsor, Morgan Stanley, the forecast price to embedded value ranges from 1.29 to 1.41 and the price to book value is 1.9.

We assume that the forecast PE ratio and the earning per shares of company are 18 and $1.26 respectively. It is because company benefits from the economic growth of Asia Pacific, the increase in investment income and the enhancement of market share in China market. According to this, the 12-month target price is $22.6. Compared with the upper limit of offering price range, there is around 15% increase and the recommendation is subscribe.

Financial data

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