AIA Group Stock: Consider Share Buybacks And Q2 Outlook (OTCMKTS:AAGIY)

Elevator Pitch

AIA Group Limited (OTCPK:AAGIY) (OTCPK:AAIGF) (1299:HK) is assigned a Hold investment rating. I previously drew attention to AIA Group’s key investment merits and investment risks in my April 21, 2024 initiation article.

This latest write-up touches on updates regarding the company’s share repurchases, and the prospects of AAGIY’s Mainland Chinese Visitor or MCV segment. I continue to rate AIA Group as a Hold, considering the company’s expanded buyback plan and the continued regulatory scrutiny of MCV insurance sales in the Hong Kong market.

Investors should be aware that they can trade in the company’s shares on the OTC market and the Hong Kong equity market. AIA Group’s Hong Kong-listed shares and Over-The-Counter shares boasted 10-day mean daily trading values ​​of $200 million and $15 million, respectively as per S&P Capital IQ data. The company’s shares are listed on the Stock Exchange of Hong Kong can be bought or sold with Hong Kong brokerages such as Boom Securities or US stockbrokers like Interactive Brokers.

Expansion Of AIA Group’s Share Repurchase Program Is A Positive Development

In late June 2024, AIA Group announced that the company will make changes to its agreement with its stockbroker to reflect a “$2 billion addition to the Company’s existing ($10 billion) share buy-back program.” AAGIY had previously inked a deal with a stockbroker in the earlier part of this year to “operate the (company’s) Automatic Share Buy-back Program on a discretionary basis” as per its prior January 15 disclosure.

The stock has become a much more attractive yield play following this latest development.

I noted in my April 2024 initiation piece that AIA Group has a “three-year $10 billion share repurchase program initiated in 2021” in place which “is expected to be completed in 2024.” AAGIY disclosed at its most recent Q1 2024 analyst briefing on April 29 that it has the “remaining $2.8 billion from the existing ($10 billion) share buyback program” which it “will return in 2024.”

The potential forward FY 2024 buyback yield for AIA Group is 6.4% based on the planned $2.8 billion share repurchases (prior to the recent update) and the new $2.0 billion share buyback plan expansion for this year. AIA Group’s consensus FY 2024 dividend yield is 3.4% (source: S&P Capital IQ). Therefore, the stock could possibly offer a FY 2024 shareholder yield of 9.8% (6.4%+3.4%).

In summary, AIA Group has boosted its potential shareholder yield by expanding the company’s share repurchase plan by $2 billion. My view is that the stock’s appealing high-single digit percentage shareholder yield will limit the downside for the company’s shares to a large extent.

Performance Of Mainland Chinese Visitors Segment May Be Affected By Regulatory Factors

On June 23, 2024, Hong Kong’s Insurance Authority issued a media release with the title “Avoid Falling Prey To Unlicensed Insurance Selling.” The Insurance Authority stressed in its late-June press release that MCVs need to “be aware of the risk of unlicensed selling” pertaining to “unlicensed sales persons” who “make specific recommendations and actively promote particular Hong Kong insurance policies.”

MCVs refer to Mainland Chinese Visitors traveling to Hong Kong. With my earlier April 21, 2024 write-up, I highlighted that “the market is worried about greater regulatory scrutiny of Hong Kong insurance companies’ sales to the MCV segment” in view of recent legal enforcement actions “targeting corrupt conduct in the unlicensed sale of insurance policies to Mainland customers.” The recent June 23, 2024 announcement made by Hong Kong’s Insurance Authority reinforces the prevailing view that MCV insurance sales are now receiving a greater degree of scrutiny from the regulatory authorities.

Japanese bank Nomura (NMR) published a research report (not publicly available) titled “AIA VONB (Value Of New Business) Growth To Slow” a month ago. Nomura mentioned in its June 5, 2024 report that it anticipated that AAGIY’s VONB growth on a YoY basis will moderate from +31% in Q1 2024 to the “low-teen” percentage level for Q2 2024. In the firm’s early-June research report, NMR indicated that it had considered “headwinds from the joint investigation by IA (Insurance Authority) and ICAC (Independent Commission Against Corruption) against suspected unlicensed selling to Mainland visitors” in its preview of AIA Group’s second quarter performance.

AAGIY is expected to report the company’s Q2 2024 results in late August based on a review of the company’s past disclosures. I am of the opinion that there are regulatory-related downside risks associated with AIA Group’s financial performance for the second quarter of the current year.

Final Thoughts

AIA Group’s potential high-single digit percentage shareholder yield is attractive, but the company’s Q2 2024 VONB growth could possibly decelerate with regulatory issues being a potential risk. This justifies a Hold rating for AAGIY.

Moreover, I think that AIA Group is now trading at a fair valuation. My target P/B multiple for AIA Group is 2.0 times based on the Gordon Growth Model. A fair P/B ratio is derived by dividing (ROE minus Perpetuity Growth Rate) by (Cost of Equity minus Perpetuity Growth Rate). I have adopted ROE, Cost of Equity, Perpetuity Growth Rate assumptions of 14% (consensus FY 2024 ROE as per S&P Capital IQ), 8% (sector mean), and +2%, respectively. AIA Group’s current P/B metric is 1.9 times (source: S&P Capital IQ), which is very close to my target valuation.

Editor’s Note: This article discusses one or more securities that do not trade on a major US exchange. Please be aware of the risks associated with these stocks.