Covid-19 Challenges AIA Group as Hong Kong Arrivals Plunge

For longer-term investors, AIA Group Ltd (SEHK: 1299) has been a Hong Kong stock market darling. As one of the largest constituent stocks of the Hang Seng Index, it also has an outsized influence on the overall direction of the Hong Kong market.

Personally, I’ve also been a fan of the Asian insurance giant for its consistent dividend growth and would be more than happy to keep buying it monthly.

However, that’s not to say that the company doesn’t face any challenges. As is the case with all companies worldwide, the Covid-19 outbreak has posed never-before-seen problems (at least in the short term).

For AIA, this is something specific and one that I think investors should be aware of until Covid-19 subsides.

Hong Kong’s VNB decline for AIA

For insurance companies growing at a fast clip, like many are in Asia, the Value of New Business (VNB) is a key metric to look at.

In AIA’s case, it has always been growing fast. From 2010 to 2019 its VNB grew at a compound annual growth rate (CAGR) of 22.5% to reach US$4.15 billion in 2019.

However, of all the regions AIA breaks down numbers for, in 2019 Hong Kong was the only one to post a negative VNB number. Hong Kong’s VNB actually fell 5% in 2019 to US$1.62 billion.

As readers can see, that makes up a significant portion of overall VNB – just shy of 40%.

Reliance on mainland Chinese visitors to Hong Kong

One key factor investors should be reminded of is AIA’s reliance (within its Hong Kong business) on mainland Chinese visitors to the city.

Due to capital controls in China, many mainland Chinese travel to Hong Kong to buy general life and health insurance policies that are priced in US dollars.

Regulations require that these agreements are signed in person. This clearly creates problems for AIA given social distancing, mandatory quarantine periods and the subsequent plunge in mainland Chinese visitors.

Latest visitor numbers particularly ugly

Hong Kong and China have fared relatively well (globally) in terms of coronavirus infections and deaths. However, the visitor numbers still look bad.

Hong Kong’s latest arrival numbers for March and Q1 were painful. Visitor numbers into the city in March plunged 99% year-on-year to just 82,000.

Meanwhile, for the whole of Q1, there were only 3.49 million visitors to Hong Kong. That’s a decline of 80.9% on the same period last year.

To what extent this will impact AIA’s first-half earnings is anyone’s guess but investors can be certain it will take a pretty big hit.

China to partially offset Hong Kong declines

There can be some solace for investors. In the upcoming months, the China Banking and Insurance Regulatory Commission is expected to approve AIA’s application to set up a subsidiary in China.

Currently, the company operates a branch format in five regions and is limited in how it expands its geographic cover to new provinces.

However, with the new setup the legal obstacles will be removed and it will be up to local authorities to grant permissions.

In 2019, AIA China’s VNB saw solid growth of 27% year-on-year to US$1.16 billion. This will most likely slow in 2020 given Covid-19 but the overall positive trend should persist and offer some respite from the Hong Kong slowdown.

Play the long game

For investors, all this means that AIA’s business will face significant short-term headwinds. However, the company is disciplined in how it prices policies and is a best-in-class insurance name in the region.

Overall, I believe this should stand it in good stead to resume solid growth once the coronavirus outbreak is controlled.

In the meantime though, it’s worth monitoring AIA’s VNB numbers – particularly in Hong Kong and China.