AIA:Cheap As Chips

Whilst we’ll do “contrite” and apologise for the tabloid-style headline, wewill not back away from the sentiment – investors have regularly testedthe thinking behind our HK$62.94 target price, this note sets it out. We’llsuggest (confusingly) that CEO Tucker has been building the “new backbook”using proceeds from the current back-book to do so: furthermore,AIA’s valuation has, to date, been “theoretical” and that cash earningsgrowth is just starting. The best is yet to come! BUY (loads more!).

A game of two halves....

The fascinating thing about insurance is that, when the policy is sold, the costof production is unknown. Thus, don’t think of Life Insurers in terms of the(seductive) neatness and order of “accounting years” for Life Insurers are butan aggregation of overlapping risks all at different stages of maturity and,hence generating different margins. CEO Tucker has been generating excellentreturns from the book he inherited (the 1st half!), from here on in, slowly butsurely, the new business will start contributing (the 2nd half).

TWPI growth since 2010 has been impressive.....

...and we would suggest this growth has come from two areas but, importantly,has been focused on producing class-leading returns. It’s come fromaggressively opening up new operating geographies (in developing, lesspenetrated markets) and opportunistically in developed markets (be it bymeans of acquisitions or exploiting pricing/product discontinuities).。

The growth has been in the high quality/high margin products。

We wonder, at times, if Life Insurance was invented to employ those who thinkwhole numbers are for loosey-goosey approximators: AIA’s recent growth hasbeen in “traditional protection”, the product line most open to modern statisticaldata-mining techniques where AIA’s deep database is the edge.

Valuation

1H15 results announced last month showed AIA’s emerging market expansionstory is robust. It continues to meet the long-term savings & protection needsof 18 Asia-Pacific markets. With 464 million households reaching disposableincomes >U$10,000 by 2017, and a substantial mortality gap of US$51 trillion,any share of this market implies substantial growth for those insurers with afocus on improving margins alongside delivering customer value proposition.Our target price is unchanged at HK$62.94 (based on 2.0x EV), TSR 27%, BUY.