Insurance - Life│Hong Kong│September 8, 2017

Company Note │ Alpha series

AIA Group Still on a solid growth trajectory ■ We raise FY17F-19 net profit forecasts by 5-22% to reflect strong equity markets and

currency movements. Our target price rises 7% to HK$72. ■ ANP growth slowdown in HK to 2% yoy in 2Q17 was partly offset by higher VONB

margins amid higher mix of longer-premium payment products. ■ We project AIA China to post 45-55% yoy VONB growth in 3QFY17. ■ AIA Thailand recorded fifth consecutive month of positive ANP growth in Jul 2017, in

sharp contrast with the eight consecutive months of falling ANP previously. ■ Maintain Add. The upcoming 3QFY17 results is a potential re-rating catalyst as we

believe consensus' 2HFY17 VONB growth forecast looks too conservative.

Better-than-expected equity market and exchange rate movements We raise our FY17F/FY18F/FY19F net profit by 22%/5%/5% and our embedded value (EV) estimates by 4%/3%/1%. Meanwhile, we cut our value of new business (VONB) estimates for FY17F/FY18F/FY19F by 7%/11%/14% as we elect to be more conservative and now forecast VONB growth of 31%/22%/20% for these years. Our FY17 VONB growth forecast is still above consensus' 27%, as collated by AIA Group.

Sharp slowdown in HK growth, but not overly concerned While AIA HK’s annualised new premium (ANP) growth slowed to 2% yoy in 2Q17 vs. 1Q17’s 104% yoy, we think investors should not be too concerned as 1) AIA had in its 1HFY17 results briefing cautioned that HK ANP growth will slow; 2) VONB margins likely improved given the shift towards products with longer premium-payment duration, and stronger growth via its agent channel vs. broker channel; 3) We see reduced regulatory risk, which is positive for AIA.

Reduced regulatory risk can help spur continued P/EV re-rating AIA HK's growth slowdown is attributable to declining mainland visitor purchases of insurance in HK (MVPIHK), which we estimate fell 7% yoy and 53-63% qoq in 2Q17. This segment and its associated regulatory risk was mainly responsible for AIA’s de-rating in 2016 to 1.35x P/EV from 1.69x in 2015 (the largest yoy decline since its 2010 IPO), despite it reporting its strongest VONB growth (+25.1% yoy) since FY13. Thus, we believe the reduced regulatory risk can help spur a continued P/EV re-rating for AIA.

China is still a key growth driver, albeit slowing slightly Given AIA China's 3QFY17 quarter-to-date gross premium growth of 32% yoy, in line with its 33% yoy growth in 2QFY17, we estimate that it can deliver 3QFY17 ANP growth of 45% yoy and VONB growth of 45-55% yoy.

Thailand clearly picking up AIA Thailand recorded its fifth consecutive month of positive yoy ANP growth in Jul 2017. We see this is an indication of a turnaround trend following the eight consecutive months of falling yoy ANP growth prior. We are highly optimistic that AIA Thailand will no longer post falling VONB yoy for 3QFY17F.

Moving into the low-base period for Singapore As flagged in past reports, we remain confident that AIA Singapore’s VONB will return to positive growth territory in 3QFY17F for a number of reasons.

Higher target price of HK$72 Our GGM-based target price rises 7% (see pg. 19-21 for our valuation, assumptions and key risks). Better-than-expected 3QFY17 results are a potential re-rating catalyst.

SOURCE: COMPANY DATA, CIMB FORECASTS

Hong Kong

ADD (no change) Consensus ratings*: Buy 19 Hold 5 Sell 1

Current price: HK$58.80 Target price: HK$72.00 Previous target: HK$67.10 Up/downside: 22.4% CIMB / Consensus: 6.6%

Reuters: 1299.HK Bloomberg: 1299 HK Market cap: US$90,858m HK$709,957m Average daily turnover: US$129.7m HK$1,013m Current shares o/s: 12,056m Free float: 100.0% *Source: Bloomberg Key changes in this note

FY17F net profit increased by 22%. FY18F net profit increased by 5%. FY19F net profit increased by 5%

Source: Bloomberg Price performance 1M 3M 12M Absolute (%) -3.1 5.7 15.7 Relative (%) -2.5 -0.3 -0.2 Major shareholders % held Citigroup 9.0 Insert

Analyst(s)

Michael CHANG T (852) 2539 1323 E michael.chang@cimb.com

Financial Summary Nov-15A Nov-16A Nov-17F Nov-18F Nov-19FGross Premium (US$m)Investment And Other Income (US$m)Net Premium (US$m) 18,812 20,641 22,188 24,875 27,875Net Profit (US$m) 2,765 4,164 5,493 5,488 6,190Normalised EPS (US$) 0.23 0.35 0.46 0.45 0.51Normalised EPS Growth (19.9%) 50.5% 31.7% (0.4%) 12.5%FD Normalised P/E (x) 32.79 21.78 16.54 16.60 14.76P/NB (x) 23.87 17.68 11.42 7.87 5.12DPS (US$) 0.09 0.11 0.13 0.16 0.19Dividend Yield 1.19% 1.46% 1.74% 2.07% 2.47%P/EV (x) 2.37 2.15 1.82 1.61 1.42P/BV (x) 2.91 2.59 2.32 2.11 1.93ROE 8.7% 12.6% 14.8% 13.3% 13.7%% Change In Normalised EPS Estimates 21.5% 5.1% 4.4%Normalised EPS/consensus EPS (x) 1.08 1.02 1.05

89.093.097.0101.0105.0109.0

41.046.051.056.061.066.0

Price Close Relative to HSI (RHS)

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IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. IF THIS REPORT IS DISTRIBUTED IN THE UNITED STATES IT IS DISTRIBUTED BY CIMB SECURITIES (USA), INC. AND IS CONSIDERED THIRD-PARTY AFFILIATED RESEARCH.

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Insurance - Life│Hong Kong│AIA Group│September 8, 2017

Still on a solid growth trajectory HK/CH growth slows; TH/SG stepping up We update our net profit after tax (NPAT), embedded value (EV) and value of new business (VONB) estimates for AIA Group following the release of the latest data by insurance regulators across the region, and given the better-than-expected mark-to-market from movements in equity markets and foreign exchange rates. As a result, we raise our FY17F, FY18F and FY19F NPAT estimates by 22%, 5% and 5% respectively. Our EV estimates for FY17F, FY18F and FY19F rise by 4%, 3% and 1% respectively. We cut our VONB estimates for FY17F, FY18F and FY19F by 7%, 11% and 14%, respectively as we elect to be more conservative and now forecast VONB growth of 31% in FY17F, 22% in FY18F and 20% in FY19F. We understand that our forecasts are still above consensus as collated by AIA Group, with the consensus forecasting 27% growth for VONB in FY17F. As a result of these changes, our Gordon-Growth-Model (GGM)-derived target price increases by 7% to HK$72, up from HK$67.10 previously. Recent data releases by insurance regulators across the region suggest premium growth for AIA HK and AIA China slowed in 2Q17, with the growth slowdown in AIA HK’s annualised new premiums (ANP) particularly noticeable. We give three reasons why we are not that concerned, with one of the reasons being that the environment of much reduced regulatory risk can help AIA Group to continue its upward P/EV trajectory. Furthermore, AIA Thailand continues to show signs of recovery, recording its fifth consecutive month of positive ANP growth yoy. This is in sharp contrast to the eight consecutive months of falling ANP prior. Thirdly, we expect AIA Group to once again surprise on the upside versus consensus estimates when it reports its 3QFY17 results in mid-Oct 2017. We forecast 27% yoy VONB growth for 2HFY17F and 20% yoy for 3QFY17F. We understand that consensus as collated by AIA Group is forecasting only 17% yoy for VONB growth for 2HFY17F. AIA HK’s growth slowdown well flagged; driven by MVPIHK Recent data from HK’s Insurance Authority (IA) indicate that AIA’s annualised new premium (ANP) growth slowed significantly to 2% yoy in 2Q17 from 1Q17’s 104% yoy growth.

Figure 1: AIA HK's growth yoy of ANP by distribution channel by quarter

SOURCE: CIMB RESEARCH, INSURANCE AUTHORITY

The slowdown in the growth rate was primarily due to lower broker ANP growth (-9% yoy in 2Q17 vs. +203% yoy in 1Q17). Its agent channel also experienced a

203%

-9%

17%

60%104%

2%

47%5%

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1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17

Total ANP Agent ANP Bancassurance ANP Broker ANP

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Insurance - Life│Hong Kong│AIA Group│September 8, 2017

slowdown in ANP growth to 5% yoy in 2Q17, from 1Q17’s 47% yoy, while its bancassurance ANP accelerated to 60% yoy in 2Q17 from 1Q17’s 17% yoy. While such a drastic slowdown might look alarming to some, we make three points. Firstly, AIA's management had in its 1HFY17 results briefing on 28 Jul 2017 guided for a growth slowdown. It stated that while the group "had an exceptionally strong first half in the retail independent financial advisor (IFA) channel", it expects "some normalisation of the growth rate in the full year". Secondly, we had never expected such high growth rates as 203% yoy to be sustainable for the broker channel, and as a consequence, had expected a noticeable slowdown in 2QFY17’s growth rate for AIA HK when we published our 1HFY17 results review report for AIA Group (see ‘The pendulum swings’ dated 28 Jul 2017). Note that as AIA Group does not disclose 1QFY17 and 2QFY17 VONB data by region, but only discloses 1HFY17 VONB data by region, the growth breakdown for 1QFY17 and 2QFY17 by region is estimated by us. Also note that as AIA Group has a Nov financial year end, 2QFY17 corresponds to the quarter ending May 2017, while the 2Q17 industry data by the Insurance Authority corresponds to the quarter ending Jun 2017.

Figure 2: Growth yoy of AIA Group's 1H17 VONB by region, and our estimates for 1QFY17 and 2QFY17

SOURCE: CIMB ESTIMATES, COMPANY

In addition, there appears to be a shift towards selling products with longer premium-payment duration. This should be beneficial to AIA HK’s VONB margins, in our view. The proportion of AIA HK’s regular premium products that have a premium duration of over 10 years rose to 28% in 2QFY17, from 24% in 1QFY17.

Figure 3: Premium-payment duration structure of AIA HK's individual life new business (quarterly data)

SOURCES: CIMB, OCI

Thirdly and most importantly, we are now significantly less concerned about the regulatory risk adversely impacting AIA Group’s share price, than we were at the start of 2017.

1HFY171QFY17

(estimated)2QFY17

(estimated)Hong Kong 54% 76% 32%Thailand -1% -5% 2%Singapore -11% -12% -12%Malaysia 16% 31% 3%China 56% 79% 39%Other Markets 35% 51% 21%Total pre-group office exp. + HK reserving & cap. reqmts. 36% 50% 23%Total growth on a AER basis 39% 53% 27%All growth rates above are on an actual exchange rate basis

8% 2% 4% 3% 3% 1% 1% 3% 4% 1% 1% 1% 1% 0% 1%

25% 32% 28% 27% 29%44% 44% 46%

53%72% 69% 69% 70% 76% 71%

43% 42% 42% 42% 40%

33% 32%32%

28%

18% 20% 20% 20%17%

19%25% 24% 26% 28% 28%

22% 22% 19% 15%9% 10% 10% 9% 7% 9%

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4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17

<5 years (≥5 but <10 yrs) (≥10 but <25 yrs) (≥25 yrs)

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Insurance - Life│Hong Kong│AIA Group│September 8, 2017

This is important as we believe that the adverse regulations impacting an important segment of its customer base (namely the mainland visitors purchasing insurance in HK or MVPIHK for short) was the key reason why AIA Group’s share price underperformed key benchmark indices in the 2016 calendar year. In FY16, this segment contributed half of AIA HK’s VONB, or about 20% of AIA Group’s VONB. Investors should note that AIA Group's share price underperformance in 2016 stands out, particularly as it is in sharp contrast to its outperformance vs. key benchmark indices in every single calendar year since its listing in late 2010.

Figure 4: Share price/index performances of AIA & Prudential in HK vs. major benchmark indices

SOURCES: CIMB, DATASTREAM

The regulatory outlook has changed significantly for AIA Group over the past 12 months with respect to HK, its biggest geographic market, and we had flagged this change in a previous report (see ‘You can have your cake and eat it,’ dated 27 Apr 2017). Capital outflows out of China are now at a much slower pace and more importantly, better controlled. Foreign exchange reserves are steadily rising (as opposed to falling previously). The renminbi is appreciating against the US dollar (vs. depreciating previously), and thus renminbi depreciation expectations are no longer heavily entrenched and a key reason for offshore capital flight away from the mainland. All in all, policymakers are less concerned about capital outflows and thus, we are much less concerned about regulatory risk. Accordingly, we believe that AIA Group’s P/EV multiple can resume its upward trajectory. Investors should note that apart from 2015, when the Hang Seng Index experienced a major share market correction, and the underperformance in 2016, AIA’s P/EV multiple has been on a steadily rising trend since 2011. A key reason for the fall in its forward P/EV multiple from 1.69x in 2015 to 1.35x in 2016 was heightened regulatory risk, which we are no longer concerned about. It is interesting to note that the P/EV de-rating in 2016 happened despite the group reporting its strongest VONB growth (+25.1% yoy) since FY13. This suggests that investor concerns about regulatory risk were a sufficiently large valuation overhang to have more than offset the impact of the group's stronger VONB growth.

AIA Pru vs. HSI vs. MSCI Asia ex Jap. vs. MSCI EM vs. MSCI WorldDec-11 11% -8% 31% 30% 32% 21%Dec-12 25% 53% 2% 6% 9% 11%Dec-13 29% 55% 26% 28% 33% 8%Dec-14 11% 4% 10% 11% 15% 9%Dec-15 8% -1% 15% 19% 24% 12%Dec-16 -6% -15% -7% -9% -13% -12%Sep-17 38% 18% 12% 14% 12% 25%

Relative performanceAbsolute performance

4

Insurance - Life│Hong Kong│AIA Group│September 8, 2017

Figure 5: Calendar-year-end forward P/EV multiple (x) Figure 6: AIA Group's VONB growth yoy

SOURCE: CIMB RESEARCH, BLOOMBERG, COMPANY SOURCE: CIMB RESEARCH, COMPANY

HK growth slowdown driven by the MVPIHK segment As detailed in past reports (see ‘You can have your cake and eat it,’ dated 27 Apr 2017), despite regulators no longer disclosing data on the MVPIHK segment, we believe that we have found a reasonably accurate method to estimate this segment for AIA HK. We track AIA HK’s annualised premiums with durations of 5-10 years, and annualised premiums from the broker channel, as we believe that these datasets have a 97-99% historical correlation co-efficient with AIA HK’s MVPIHK premiums. The charts below show the estimated 2Q17 MVPIHK for AIA HK, with this segment estimated to have fallen 7% yoy in 2Q17, which is in sharp contrast to 1Q17’s 154% yoy rise.

Figure 7: Annualised premiums from offshore customers vs. annualised premiums with duration of 5-10 years (qtr) (AIA HK)

Figure 8: Annualised premiums from offshore customers vs. annualised premiums with duration of 5-10 years (YTD) (AIA HK)

SOURCES: CIMB, INSURANCE AUTHORITY SOURCES: CIMB, INSURANCE AUTHORITY

The fall is even more apparent if we look at the data on a qoq basis, with the fall of AIA HK’s annualised premiums with duration of 5-10 years down 53% qoq in 2Q17. AIA HK’s annualised premiums sourced from the broker channel fell 63% qoq in 2Q17.

Dec-11, 1.19

Dec-14, 1.74Dec-15, 1.69

Dec-16, 1.35

Sep-17, 1.72

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Calendar-year-end forward P/EV multiple (x)

22.4%

39.7%

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AIA Group's VONB growth yoy

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1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17

Offshore (qtr) ≥5 but <10 yrs (qtr)

Correlation co-efficient from 1Q14 to 3Q16 between these two datasets = 97%

2Q17, 1Q17 and 4Q16 are estimated for offshore (qtr) 2Q17's estimated growth of Offshore (qtr) yoyis -7% yoy, versus 1Q17's +154% yoy

(HK$ m)

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Offshore (ytd) ≥5 but <10 yrs (ytd)

Correlation co-efficient from 1Q14 to 3Q16 between these two datasets = 99%

2Q17, 1Q17 and 4Q16 are estimated for offshore (ytd)

(HK$ m)

5

Insurance - Life│Hong Kong│AIA Group│September 8, 2017

Figure 9: Annualised premiums from offshore customers vs. annualised premiums with duration of 5-10 years vs. broker-sourced annualised premiums (qtr) (AIA HK)

Figure 10: Annualised premiums from offshore customers vs. annualised premiums with duration of 5-10 years vs. broker-sourced annualised premiums (YTD) (AIA HK)

SOURCES: CIMB, INSURANCE AUTHORITY SOURCES: CIMB, INSURANCE AUTHORITY

AIA HK’s ANP from the broker channel are largely regular premium payment in nature, with single premiums only comprising 6% of ANP in 2Q17. Despite the sharp fall in 2Q17’s broker sourced ANP, AIA HK’s market share in 2Q17 is still relatively high at 58% in 2Q17 YTD and 47% in the 2Q17 quarter.

Figure 11: AIA HK's mix of single premiums as a percentage of ANP (broker channel only)

Figure 12: Market share of the broker channel for HK individual annualised new premiums (ANP) (YTD)

SOURCES: CIMB, INSURANCE AUTHORITY SOURCES: CIMB, INSURANCE AUTHORITY

The broker channel still comprises a relatively sizeable portion of AIA HK’s ANP at 45% in 2Q17 YTD, second to only the agent channel (49% in 2Q17 YTD).

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1Q142Q143Q144Q141Q152Q153Q154Q151Q162Q163Q164Q161Q172Q17Offshore (qtr) (LHS)

≥5 but <10 yrs (qtr) (LHS)

Broker annualized premiums (qtr) (RHS)

Correlation co-efficient from 1Q14 to 3Q16 between these offshore annualized premiums and broker-sourced premiums = 98%

2Q17, 1Q17 and 4Q16 are estimated for offshore (qtr)

(HK$ m) (HK$ m)

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Offshore (ytd) (LHS)≥5 but <10 yrs (ytd) (LHS)Broker annualized premiums (ytd) (RHS)

Correlation co-efficient from 1Q14 to 3Q16 between these offshore annualized premiums and broker-sourced premiums = 98%

2Q17, 1Q17 and 4Q16 are estimated for offshore (ytd)

(HK$ m) (HK$ m)

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AIA HK's mix of single premiums as a percentage of ANP (broker channel only)

7%

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AIA China Life Prudential

2013 2014 2015 2016 1Q17 2Q17

6

Insurance - Life│Hong Kong│AIA Group│September 8, 2017

Figure 13: AIA HK's growth yoy of ANP by distribution channel by quarter

Figure 14: AIA HK's mix of individual ANP by distribution channel (YTD)

SOURCES: CIMB, INSURANCE AUTHORITY SOURCES: CIMB, INSURANCE AUTHORITY

While AIA HK’s agent channel saw its ANP slow to only 5% yoy in 2Q17, this is still better than the industry average, which saw agent ANP fall 7% yoy in 2Q17.

Figure 15: System growth yoy of new business premiums (APE weighted) by distribution channel by quarter

Figure 16: System mix of new business premiums (APE weighted) by distribution channel by quarter

SOURCE: CIMB RESEARCH, INSURANCE AUTHORITY SOURCE: CIMB RESEARCH, INSURANCE AUTHORITY

We believe that this is in part due to the sharp slowdown in life insurer agent numbers yoy for the system, with agent growth yoy of 8% in Jul 2017 which was well below the peak of 23% yoy in Dec 2016. Life insurer agent numbers for the system have fallen 5% since their peak in Dec 2016.

Agent Bancassurance Broker Other Total1Q15 30% 135% 30% n.a. 34%2Q15 35% 23% 17% n.a. 31%3Q15 24% 42% -18% n.a. 15%4Q15 73% 115% 47% n.a. 68%1Q16 41% 128% 415% n.a. 101%2Q16 41% 64% 460% n.a. 108%3Q16 58% 103% 458% n.a. 126%4Q16 61% 26% 110% n.a. 70%1Q17 47% 17% 203% n.a. 104%2Q17 5% 60% -9% n.a. 2%

85%74% 76%

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2013 2014 2015 2016 1Q17 2Q17

Agents Bank Broker

Agent Bancassurance Broker Other Total1Q15 38% 8% 35% 5% 18%2Q15 48% 31% -6% -6% 31%3Q15 26% 15% -12% -29% 14%4Q15 51% 18% 20% -10% 30%1Q16 37% 33% 73% 12% 39%2Q16 42% 35% 204% 29% 54%3Q16 47% 78% 273% 32% 89%4Q16 48% 52% 91% 59% 56%1Q17 34% -1% 66% 64% 20%2Q17 -7% -14% -39% 67% -17%

Agent Bancassurance Broker Other Total1Q14 24% 64% 11% 1% 100%2Q14 28% 57% 14% 1% 100%3Q14 31% 54% 14% 1% 100%4Q14 38% 45% 16% 1% 100%1Q15 29% 59% 12% 0% 100%2Q15 32% 58% 10% 1% 100%3Q15 34% 55% 11% 1% 100%4Q15 44% 41% 15% 0% 100%1Q16 28% 56% 15% 0% 100%2Q16 29% 51% 20% 1% 100%3Q16 27% 52% 21% 0% 100%4Q16 42% 40% 18% 0% 100%1Q17 32% 47% 21% 0% 100%2Q17 33% 52% 14% 0% 100%

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Insurance - Life│Hong Kong│AIA Group│September 8, 2017

Figure 17: Agent numbers in HK, split by category, and their yoy growth rates

Figure 18: Insurance agent numbers in HK and yoy growth since 2000

SOURCES: CIMB, HKFI SOURCES: CIMB, HKFI

A key reason why AIA has not been as badly impacted by the sharp slowdown in system agent growth numbers is due to its heavy focus on agent productivity in order to drive agent premium growth. Over the last seven years, AIA HK’s agent numbers have grown at a CAGR of only 8% in 2010-2017. While the growth rate of its HK agent force has been slightly faster over the last two years (CAGR of 14% in 2015-2016), we believe it has by no means been the key driver for VONB growth. Rather, rising agent productivity seems to have played a greater role in driving HK VONB growth, with the percentage of AIA HK’s agents that are Million Dollar Round Table (MDRT) members now slightly more than 25%, compared to less than 10% when AIA was listed in late 2010. According to its website, MDRT is internationally recognised as the standard of excellence in the life insurance and financial services business. Its members are required to generate a certain level of premium, commission and income.

Figure 19: Number of insurance agents in HK Figure 20: AIA HK's percentage of agents that are MDRT members

SOURCE: CIMB RESEARCH, COMPANY SOURCE: CIMB RESEARCH, MDRT

General insurance Life insurance

Composite insurance

Total agents

Sep-16 1,318 34,044 23,662 59,024Oct-16 1,330 35,101 23,891 60,322Nov-16 1,356 36,326 24,131 61,813Dec-16 1,357 37,367 24,424 63,148Jan-17 1,341 36,396 24,625 62,362Feb-17 1,396 36,086 24,664 62,146Mar-17 1,395 36,163 25,021 62,579Apr-17 1,413 35,875 25,247 62,535

May-17 1,432 35,671 25,570 62,673Jun-17 1,507 35,743 25,916 63,166Jul-17 1,591 35,326 26,036 62,953

Growth yoy Sep-16 7% 22% 11% 17%Oct-16 8% 23% 11% 17%Nov-16 10% 23% 10% 17%Dec-16 8% 23% 10% 17%Jan-17 7% 22% 11% 17%Feb-17 13% 21% 11% 16%Mar-17 13% 19% 11% 15%Apr-17 11% 16% 11% 14%

May-17 13% 13% 12% 12%Jun-17 19% 10% 12% 11%Jul-17 22% 8% 11% 9%

63,14817%

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May-10 Dec-11 Apr-14 Dec-14 Dec-15 Dec-16 Jul-17Number of AIA HK & Macau agents ('000)

8 8 10 11 12 13 14.3

Number of Pru HK agents ('000)

n.a. n.a. n.a. 7 14 18.7 n.a.

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AIA HK's percentage of agents that are MDRT members

8

Insurance - Life│Hong Kong│AIA Group│September 8, 2017

As at Jul 2017, AIA HK had the second-largest number of MDRT agents in HK, with the segment recording an impressive 54% CAGR over the last two years.

Figure 21: The number of MDRT agents since Aug 2009 in HK Figure 22: Growth rates of MDRT members

SOURCE: CIMB RESEARCH, MDRT SOURCE: CIMB RESEARCH, MDRT

AIA (HK) Pru (HK) Axa (HK) Manulife (HK)Aug-09 661 200 63 77Aug-10 603 239 155 161Aug-11 812 396 310 253Aug-12 923 538 510 246Aug-13 1,000 620 533 282Aug-14 1,321 986 634 343Aug-15 1,569 1,469 717 397Aug-16 2,648 2,612 727 549Jul-17 3,724 4,004 897 613

69%

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Jul-17, 53%

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20%

30%

40%

50%

60%

70%

80%

Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17

AIA (HK) Pru (HK) Axa (HK) Manulife (HK)

9

Insurance - Life│Hong Kong│AIA Group│September 8, 2017

AIA China: Still strong growth, albeit at a slower pace Premium growth continues to be solid for AIA China for the first two months of 3QFY17, up 34% yoy in Jun 2017 and 30% yoy in Jul 2017. As flagged in past reports, Jiangsu continues to lead AIA China’s growth, with premium growth of 66% yoy in Jun 2017. With AIA China being the second-largest market for AIA Group and assuming this solid growth continues, we believe that AIA Group could once again be well placed to exceed consensus expectations when it reports its 3Q17F results.

Figure 23: Regional premium data of AIA China and their growth rates (Dec 2016-Jun 2017)

SOURCE: CIMB RESEARCH, CIRC

Figure 24: Growth in AIA China's premiums by region Figure 25: AIA China premium mix by region (2016)

SOURCES: CIMB, COMPANY REPORTS SOURCES: CIMB, COMPANY REPORTS

It should be noted that AIA China in particular is not just about volume growth. Margin also plays a key role in driving VONB growth. VONB margins have been on the rise as AIA China has been extremely successful in selling higher-margin health insurance to its customer base. Given AIA China’s track record of VONB margin expansion every single year since AIA Group was listed in 2010, we believe that AIA China’s actual 3Q17 VONB growth is likely to be a couple of percentage points higher than our AIA China 3QFY17 ANP growth estimate of 45% .

Guangdong ex Shenzhen

Shanghai Beijing Jiangsu Shenzhen AIA China total

Guangdong ex Shenzhen

Shanghai Beijing Jiangsu Shenzhen AIA China total

Dec-16 901 400 421 423 201 2,345 50% 33% 57% 96% 27% 52%Jan-17 526 271 311 255 123 1,487 27% 15% 36% 72% 17% 31%Feb-17 532 275 251 256 115 1,429 47% 30% 38% 64% 31% 43%Mar-17 724 391 330 319 153 1,918 49% 26% 47% 78% 26% 45%Apr-17 615 274 277 249 151 1,566 23% 36% 22% 58% 31% 31%

May-17 621 281 289 239 146 1,576 15% 17% 29% 52% 10% 22%Jun-17 752 376 330 349 170 1,978 29% 29% 29% 60% 29% 34%Jul-17 608 280 299 262 137 1,587 24% 16% 40% 66% 17% 30%

Growth yoyMonthly premium data of each of AIA's regions

Guangdong ex Shenzhen, 29%Shanghai, 26%

Beijing, 33%

Jiangsu, 64%

Shenzhen, 22%

Total, 33%

-40%

-20%

0%

20%

40%

60%

80%

100%

2010

2011

2012

2013

2014

2015

2016

1Q17

2Q17

Guangdong ex Shenzhen ShanghaiBeijing JiangsuShenzhen Total

Guangdong ex Shenzhen, 38.5%

Shanghai, 20.4%

Beijing, 17.8%

Jiangsu, 13.7%

Shenzhen, 9.6%

10

Insurance - Life│Hong Kong│AIA Group│September 8, 2017

Figure 26: AIA China's VONB-related data Figure 27: AIA China's VONB margins and AIA China's VONB as % of group VONB

SOURCES: CIMB, COMPANY REPORTS SOURCES: CIMB, COMPANY REPORTS

As flagged in past reports (see “What is exceptional?” dated 11 May 2017), AIA’s rising VONB margins is in large part attributable to their heavier focus on protection-focused products versus peers, including health insurance, and in particular critical illness products which have high VONB margins. Four of its five most popular products are critical illness products, a ratio much higher than that of its peers. AIA Group has had tremendous success in selling high-margin health insurance over the years, with individual health insurance premium growth rate hitting a record high of 47% yoy in FY16. Individual health insurance comprised 45% of AIA China’s total premiums in 2016, compared to only 18% of total premiums in 2009.

Figure 28: Growth yoy of AIA China’s premiums Figure 29: AIA China's premium mix

SOURCES: CIMB, COMPANY REPORTS SOURCES: CIMB, COMPANY REPORTS

More evidence of AIA China’s heavy focus and tremendous success in selling health insurance can be seen from our analysis of the top five products sold by AIA China compared to both foreign insurance peers in China and domestic insurance peers. Four of AIA Group’s top five products, by premiums, in 2016 were high-margin critical illness products. None of its peers came close.

(Actual exchange rates) FY10 FY11 FY12 FY13 FY14 FY15 FY16 1H17VONB growth 42% 50% 22% 34% 55% 42% 46% 56%VONB margin chg (% pts) 7.7 14.0 10.3 8.9 16.7 0.4 2.9 4.9ANP growth 10% 4% 0% 16% 25% 41% 42% 48%

(Constant exchange rates) FY10 FY11 FY12 FY13 FY14 FY15 FY16 1H17VONB growth 41% 46% 19% 31% 55% 45% 54% 65%VONB margin chg (% pts) 7.7 14.0 10.3 8.9 16.7 0.4 2.9 5.0ANP growth 10% -3% -9% 39% 18% 44% 49% 56%

8%9% 10% 10% 10%

13%

15%

18%

23%

25.5%33.2%

47.2%

57.5%

66.4%

83.1% 83.5%86.4%

91.7%

0%

5%

10%

15%

20%

25%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 1H17

AIA China as a % of group VONB (RHS) AIA China VONB margins (LHS)

2010 2011 2012 2013 2014 2015 2016Individual life insurance 2% -4% -2% 1% 3% 7% 11%Individual health insurance 12% 30% 24% 22% 29% 37% 47%Individual accident insurance 4% 7% 5% 7% 4% 13% 16%Individual annuities 33% 15% 6% 7% 9% 11% 28%Total individual insurance 8% 6% 6% 8% 12% 19% 29%

Of which:Participating insurance 9% -4% 0% 2% 6% 13% 24%Universal life insurance 35% 9% 7% 6% 4% 4% 2%Investment linked insurance 4% 8% 16% 84% 41% 15% 16%

Group life insurance -7% -15% 2% 2% 13% 17% -4%Group health insurance -9% -3% 11% 3% 20% 23% 28%Group accident insurance 11% -3% 7% 10% 13% 29% -3%Total group insurance -4% -5% 9% 5% 17% 24% 16%

Total gross written premiums 8% 6% 6% 8% 12% 19% 28%

2009 2010 2011 2012 2013 2014 2015 2016Individual life insur. 60% 56% 51% 47% 44% 40% 36% 31%Individual health insur. 18% 18% 23% 26% 30% 34% 39% 45%Individual accident insur. 4% 4% 4% 4% 4% 4% 4% 3%Individual annuities 14% 18% 19% 19% 19% 18% 17% 17%Total individual insur. 96% 96% 97% 97% 97% 97% 96% 97%

Of which:Participating insur. 42% 42% 38% 36% 34% 32% 30% 30%Universal life insur. 0% 0% 0% 0% 0% 0% 0% 0%Investment linked insur. 0% 0% 0% 0% 0% 0% 0% 0%

Group life insur. 1% 0% 0% 0% 0% 0% 0% 0%Group health insur. 3% 2% 2% 2% 2% 2% 2% 2%Group accident insur. 1% 1% 1% 1% 1% 1% 1% 1%Total group insur. 4% 4% 3% 3% 3% 3% 4% 3%

Total gross written premiums 100% 100% 100% 100% 100% 100% 100% 100%

11

Insurance - Life│Hong Kong│AIA Group│September 8, 2017

Figure 30: A comparison of the top five products sold, in terms of premiums, by life insurers in China (2016)

SOURCES: CIMB, COMPANY REPORTS

Similarly, 47% of AIA China’s premiums in 2016 were health insurance premiums. This was much higher than for any of its peers in 2016.

Figure 31: Health insurance premiums as % of total life insurance premiums (2016)

SOURCES: CIMB, COMPANY REPORTS

We believe that AIA Group’s heavy focus on selling high-margin critical illness products versus its peer group helped drive AIA China’s VONB margins to the highest level within AIA Group in FY16 (86.4% versus the group average of 52.8%). It is noteworthy that AIA China is the only geographical segment that saw VONB margins almost quadruple since its IPO in late-2010, rising from 25.5% in FY09 to 86.4% in FY16 (Figure 32), and 91.7% in 1HFY17.

Figure 32: AIA Group’s VONB margins, by region (FY09-FY16)

SOURCES: CIMB, COMPANY REPORTS

No. AIA China Citic-Pru China ICBC-Axa ChinaManulife-Sinochem China China Life Ping An Life CPIC Life NCI

1 Critical illness Critical illness Endowment Critical illness Endowment Endowment (par.) Whole life (par.) Annuity2 Critical illness Annuity (par.) Whole life Whole life health (par.) Annuity Whole life Endowment Whole life annuity (par.)3 Annuity (par.) Annuity (par.) Endowment (par.) Whole life (par.) Annuity Endowment (par.) Annuity (par.) Critical illness4 Critical illness Whole life (par.) Endowment (par.) Annuity (par.) Annuity Endowment (par.) Annuity (par.) Annuity5 Critical illness Whole life (par.) Endowment (par.) Annuity Whole life Whole life (par.) Endowment Annuity

47%

28%

3%

28%

13%15%

7%

21%

0%

10%

20%

30%

40%

50%

AIA

Chi

na

Citic

-Pru

Chi

na

ICBC

-Axa

Chi

na

Man

ulife

-Sin

oche

m C

hina

Chi

na L

ife

Ping

An

Life

CPI

C Li

fe

New

Chi

na L

ife

Percentage of life insurance premiums comprising health insurance (2016)

48.8%

81.5%74.1%

57.1%

86.4%

32.9%

52.8%

25.5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

AIA HongKong

AIA Thailand AIA Singapore AIA Malaysia AIA China AIA Korea Other Markets Group VoNBmargin

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

12

Insurance - Life│Hong Kong│AIA Group│September 8, 2017

AIA Thailand records its fifth consecutive month of positive ANP growth in Jul 2017, in sharp contrast from the eight consecutive months of falling ANP previously Thailand is AIA Group’s third-largest geographical region in terms of contribution to group VONB (9.3% of group VONB in 1H17). We find it very encouraging that AIA Thailand seems to be staging a comeback in terms of ANP growth. It is noteworthy that with Jul 2017’s 9% yoy growth in ANP, AIA Thailand has now recorded five consecutive months of positive ANP growth yoy. This comes after eight consecutive months of negative ANP growth yoy over the Jul 2016 to Feb 2017 period. Also, in May 2017, AIA Thailand recorded its strongest month for ANP growth since Jan 2013. It was also the first time that AIA Thailand registered two consecutive months of double-digit yoy ANP growth since Jan 2013. What this all means to us is that AIA Thailand, which was the laggard in the group in terms of VONB growth (AIA Thailand’s VONB growth in 1QFY17 was negative, but we believe that it may have stopped falling in 2QFY17), is finally turning around. It does seem that the four-year agency restructuring programme that AIA Thailand has been going through since 2012/2013 (where a particularly heavy focus was placed on agent quality and agent productivity, and which led to total agent numbers falling by 25% over the last five years) is finally starting to show results.

Figure 33: AIA Thailand's annualised new premium (ANP) yoy growth on a monthly basis

SOURCE: CIMB RESEARCH, TLAA

More importantly, going forward, the base effect is very favourable and bodes well for the recovery of AIA TH's ANP growth yoy. As mentioned earlier, note that in every month over the Jul 2016 to Feb 2017 period, the yoy growth was negative. This was partly attributable to a period of mourning and a period of business disruption following the Thai king's death in Oct 2016. Secondly, the stricter bancassurance rules in Thailand could conceptually benefit premium growth via the agency channel, and hence benefit insurers like AIA Thailand, who have a strong agency business in Thailand. As of 1H17, 86% of AIA Thailand’s ANP came from the agency channel. People in Thailand buy life insurance in part for tax minimisation reasons, as there are personal income tax deductions. The next table summarises the key details with respect to personal income tax deductions in Thailand.

Jan-13, 37%

Mar-16, -10%Apr-16, -9%

May-16, -15%

Jun-16, 4% Mar-17, 3%

Apr-17, 12%

May-17, 20%

Jun-17, 2%

Jul-17, 9%

-20%

-10%

0%

10%

20%

30%

40%

Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17

AIA TH ANP growth

AIA TH is entering into a favorable 'base period' for yoy growth in ANP, with the months of Jul. 2016 - to Mar. 2017 all recording negative yoy growth rates.

13

Insurance - Life│Hong Kong│AIA Group│September 8, 2017

Figure 34: Thailand personal income tax deductions from buying life insurance and pension insurance

SOURCE: CIMB RESEARCH, BANGKOK POST

On bancassurance rules becoming stricter over the last few years, the details are broader as follows: The Office of the Insurance Commission (OIC) and the Thai Bankers’ Association (TBA) in Oct 2016 issued guidelines to regulate and control the quality of insurance being sold through bank branches. The Bank of Thailand reiterated these rules in Jan 2017. The more important details of these guidelines are listed in the table below.

Figure 35: Thailand bancassurance rules issued in Oct 2016 and reiterated in Jan 2017

SOURCE: CIMB RESEARCH, OFFICE OF THE INSURANCE COMMISSION (OIC), THAI BANKERS' ASSOCIATION (TBA),

BANK OF THAILAND

As such, agent-driven insurers such as AIA and bank-tied insurers such as Muang Thai Life - Kasikorn Bank, SCB Life - SCB, Bangkok Life - Bangkok Bank and Krung Thai Axa Life - Krung Thai Bank compete for the customers who buy life insurance policies for tax deduction reasons. In recent years, the bank tied insurers have won the battle, with their ANP growth substantially outstripping that of the agency channel. With stricter bancassurance rules adversely impacting bancassurance ANP growth yoy, agency channel ANP growth yoy could conceptually start to recover, or at least stop their falling growth trajectory.

Figure 36: Yoy growth of ANP for the agency channel and the bancassurance channel in Thailand

SOURCE: CIMB RESEARCH, TLAA

Details of personal income tax deductions from buying life insurance and pension policies.1. A personal tax deduction of up to THB100,000 a year can be granted for purchases of a regular life

insurance policy.2. A personal tax deduction of up to THB200,000 a year can be granted for purchases of a pension life

insurance policy.3. The aggregate of tax deductions for contributions to life insurance pension funds, provident funds, retirement

mutual funds and the National Savings Fund, shall not be more than 15% of assessable income and not more than THB500,000.

Key details of Thailand bancassurance rules1. Salespeople must clarify that an insurance policy is not a deposit product of a bank.2. Insurance policies must be sold only by certified bank staff who must identify themselves as such before

they begin a sales pitch.3. The buyer can ask to see the licence of bank staff who offer the insurance policy.4. Sales of insurance products must be tailored to the customer's requirements and purchasing ability.5. The buyer has a right to decline to buy insurance and the bank cannot use the purchase of insurance as a

condition to approve lending or any transaction.6. The insurance buyer can cancel the policy within 15 days after getting the policy and have his or her

premiums returned from the bank after deducting expenses.

2Q17, 0%

2Q17, -24%-30%

-20%

-10%

0%

10%

20%

30%

40%

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

2Q17

Agency ANP growth yoy Bancassurance ANP growth yoy

14

Insurance - Life│Hong Kong│AIA Group│September 8, 2017

AIA Singapore: Recovery expected in 2HFY17F We still expect AIA Singapore (7.3% of AIA Group’s VONB in 1H17), to start to show some meaningful improvement in its VONB growth rate in 3QFY17. There are three key reasons for our belief that we are past the worst period in terms of falling VONB for AIA Singapore, and are on the road to recovery. Firstly, weakness in AIA Singapore’s VONB growth (-10% yoy in 1HFY17) was driven by a sharp fall in single premiums. Single premiums have been under downward pressure for quite some time, falling 15% yoy in 1HFY16, down 36% yoy in 2HFY16 and down another 29% yoy in 1HFY17. AIA Singapore is now back to a more normal mix of single premiums within new business premiums. After one and a half years of falling single premium volumes, AIA Singapore’s 1H17 mix of single premiums out of total new business premiums of 81% was slightly below its post-2010 average of 82%. The mix of single premiums within AIA Singapore’s new business premiums had previously reached an unsustainably high level of 89% in 2HFY15, more than 1 s.d. above its post-2010 average.

Figure 37: AIA Singapore's first year regular premium and single premium growth yoy

Figure 38: Mix of single premium within new business premiums for AIA Singapore

SOURCE: CIMB RESEARCH, COMPANY SOURCE: CIMB RESEARCH, COMPANY

It is important to stress that unlike the rest of the region, single premiums do matter much more to AIA Singapore. AIA Group’s mix of single premiums as a percentage of unweighted new business premiums is the highest for Singapore, than any other geographic region.

Figure 39: Percentage of single premiums to new business premiums (unweighted)

SOURCE: CIMB RESEARCH, COMPANY

As such, we believe that there could be limited downside at current levels, and expect AIA Singapore’s VONB to show signs of recovery in 3QFY17F.

-9%-17% -2%

2% 2%

39%

2%

-15% -36%-29%

-100%

-50%

0%

50%

100%

150%

200%

1H10

2H10

1H11

2H11

1H12

2H12

1H13

2H13

1H14

2H14

1H15

2H15

1H16

2H16

1H17

First year regular premiums growth yoy Single premiums growth yoy

73%

78%

79%81%

73%

84%

83%

86%88%

89%

86%

83%

81%

70%

72%

74%

76%

78%

80%

82%

84%

86%

88%

90%

1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15 2H15 1H16 2H16 1H17

Mix of single premium within new business premiums for AIA Singapore

Post-2010 average = 82%1 standard deviation below = 77%1 standard deviation above = 87%

Average

46%

27%

85%

38%

25%

42%49%

43%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

HK TH SG MY CH KR Others Group

FY10 FY11 FY12 FY13 FY14 FY15 FY16

15

Insurance - Life│Hong Kong│AIA Group│September 8, 2017

Secondly, a scan of growth rates yoy for AIA Singapore’s VONB growth indicates that 2HFY17 is likely to benefit from a low base effect, insofar that 2HFY16’s VONB growth fell 18% yoy. This was the worst growth yoy for a half year since AIA listed in 2010.

Figure 40: AIA Singapore's VONB growth yoy since 2010

SOURCE: CIMB RESEARCH, COMPANY

Thirdly, with such a relatively large portion of AIA Singapore’s new business premiums coming from single premium products, we believe that it is possible that a relatively large portion of these new business premiums could be savings-related, with their customer base more likely to be in the mass affluent/private banking tier, rather than mass market. Should this be the case, it is then possible that external events such as the Indonesian tax amnesty could be relevant, as we believe the tax amnesty impacted the high net worth market in Singapore, which is where we think that the broker channel has a relatively heavy presence with its sales of single premium universal life policies. The tax amnesty was introduced in Indonesia in Jul 2016. According to the press in Indonesia which quoted Suryo Utomo, Indonesia's Finance Ministry tax expert in Mar 2017, Singapore accounted for 73% of the assets declared under the tax amnesty (worth Rp751.19tr), and more than 57% or Rp84.52tr (i.e. S$8.85bn) was sent from Singapore back to Indonesia. Under the scheme, generous tax rates from as low as 2% to 10% were offered, depending on when individuals declared their hidden assets, and whether the funds were repatriated With the tax amnesty having ended in Mar 2017, it is possible that single premium universal life policies could start to recover in late-2017. This could benefit AIA Singapore’s VONB growth. Adjusting our estimates due to better-than-expected currency movements and favourable equity market returns Currency movements in 2017 YTD have been better-than-expected for AIA Group, with the US$ weaker-than-expected against the Asian currencies which AIA Group has exposure to. Equity markets across AIA’s major markets have also been performing better-than-expected.

7%

-18%-11%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

1H10 2H10 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15 2H15 1H16 2H16 1H17

AIA Singapore VONB growth yoy

16

Insurance - Life│Hong Kong│AIA Group│September 8, 2017

Figure 41: Yoy currency changes of selected Asian currencies (period average) and the drag on AIA's group VONB

Figure 42: Yoy change of selected share market indices (period average) on a fiscal quarterly basis

SOURCES: CIMB, BLOOMBERG, COMPANY REPORTS SOURCES: CIMB, BLOOMBERG, COMPANY REPORTS

The combination of better-than-expected foreign currency movements and equity markets has led us to revise up our FY17F-19F NPAT estimates by 5-22%. Our FY17F–19F embedded value per share (EVPS) estimates have also been revised up by 1-4%.

Figure 43: Change in earnings forecasts

SOURCES: CIMB ESTIMATES

We have made some changes to our VONB forecasts, and are now forecasting VONB growth yoy in FY17F, FY18F and FY19F of 31%, 22% and 20% respectively. Given that AIA has already reported its 1HFY17 results where VONB growth yoy was 39%, this implies that we are forecasting 23% VONB growth yoy for 2HFY17F. We understand from AIA that consensus is forecasting 27% VONB growth yoy in FY17F, which implies 17% VONB growth yoy in 2HFY17F.

HKD THB SGD MYR CNY KRW AUD IDR PHP Weighted average

1Q13 -0.2% -3.1% -3.7% -1.2% -1.4% -5.5% -0.2% 7.3% -5.7% -1.7%2Q13 0.0% -4.8% -1.0% -0.3% -2.1% -2.4% 0.8% 5.6% -4.1% -1.4%3Q13 0.0% -1.3% 0.4% 1.5% -3.7% -1.8% 11.5% 7.9% 2.8% 0.5%4Q13 0.0% 2.3% 2.0% 4.7% -2.7% -3.1% 10.6% 18.1% 5.0% 2.0%1Q14 0.0% 8.1% 3.0% 7.3% -2.6% -1.1% 16.8% 24.3% 9.4% 4.1%2Q14 -0.1% 10.0% 1.1% 6.5% 0.5% -5.9% 10.5% 17.8% 8.2% 3.7%3Q14 -0.1% 3.3% -1.5% -0.3% 1.1% -9.3% -1.7% 15.1% 0.6% 0.6%4Q14 0.0% 3.1% 2.2% 2.2% 0.4% -0.6% 6.3% 6.5% 2.7% 1.6%1Q15 0.0% 0.3% 5.5% 7.9% 2.5% 3.1% 11.1% 4.2% -0.4% 2.4%2Q15 0.0% 1.5% 7.6% 11.8% 0.0% 4.9% 18.7% 13.8% 0.1% 3.4%3Q15 0.0% 7.1% 9.7% 21.1% 0.9% 12.2% 25.3% 14.7% 4.2% 6.0%4Q15 -0.1% 10.3% 10.3% 30.9% 3.8% 9.0% 23.5% 15.6% 4.6% 7.5%1Q16 0.2% 9.7% 5.9% 20.2% 4.9% 9.1% 12.7% 9.3% 6.6% 5.5%2Q16 0.1% 7.1% 0.8% 10.1% 4.7% 6.5% 3.9% 1.6% 4.7% 3.0%3Q16 0.1% 1.6% -1.3% 4.6% 6.2% -0.4% -0.7% -2.0% 2.6% 1.6%4Q16 0.1% -2.2% -1.8% -1.9% 6.1% -2.4% -5.8% -5.7% 3.6% 0.1%1Q17 -0.2% -1.4% 0.9% 4.4% 5.8% -2.2% -4.6% -2.7% 5.0% 1.2%2Q17 0.2% -1.8% 2.6% 9.5% 5.9% -3.1% -0.6% 0.5% 7.3% 2.1%3Q17 0.7% -3.9% 1.6% 6.0% 1.7% -0.7% -3.1% 0.9% 8.1% 0.9%

HK TH SG MY CN KR AU ID PH Weighted average

1Q13 17% 34% 14% 8% -1% 3% 13% 14% 33% 17%2Q13 10% 33% 13% 8% -5% 0% 18% 22% 37% 15%3Q13 11% 21% 8% 9% -5% 1% 18% 15% 25% 11%4Q13 10% 10% 4% 9% 5% 4% 20% 3% 18% 9%1Q14 -1% -9% -4% 11% -8% -1% 10% -1% -1% -2%2Q14 -1% -12% -4% 9% -9% 1% 8% -2% -5% -3%3Q14 11% 5% 4% 6% 2% 7% 11% 9% 7% 7%4Q14 3% 11% 4% 3% 10% -1% 2% 15% 14% 6%1Q15 6% 19% 9% -3% 51% -1% 5% 20% 24% 15%2Q15 18% 10% 8% -2% 97% 5% 7% 11% 19% 27%3Q15 5% -4% -2% -10% 93% 0% 0% -4% 8% 15%4Q15 -7% -12% -11% -9% 39% 0% -5% -13% -2% -2%1Q16 -15% -17% -19% -6% -1% -1% -9% -13% -10% -12%2Q16 -22% -9% -18% -7% -28% -5% -11% -10% -8% -19%3Q16 -14% 2% -12% -2% -27% -1% -2% 7% 5% -12%4Q16 5% 7% -3% 0% -7% 1% 4% 20% 5% 2%1Q17 12% 21% 10% 1% 1% 7% 13% 16% 6% 10%2Q17 19% 12% 13% 4% 9% 11% 12% 16% 5% 14%3Q17 23% 6% 15% 7% 8% 19% 6% 13% 1% 14%

(US$ m) Old New % chg Old New % chg Old New % chgNet premiums, fee income & other oper. revenue 22,188 22,188 0.0% 24,875 24,875 0.0% 27,875 27,875 0.0%Investment income 7,156 7,997 11.8% 7,909 8,157 3.1% 8,620 8,872 2.9%Total Revenue 29,344 30,185 2.9% 32,784 33,032 0.8% 36,494 36,747 0.7%Total expenses 24,109 24,575 1.9% 26,725 26,690 -0.1% 29,602 29,562 -0.1%OPAT attrib. to shareholders of AIA Group 4,359 4,672 7.2% 5,047 5,282 4.7% 5,741 5,985 4.3%Non operating items 158 822 421.2% 158 205 30.3% 158 205 30.3%NPAT attrib to shareholders of AIA Group 4,517 5,493 21.6% 5,204 5,488 5.4% 5,898 6,190 4.9%

EPS (US$) 0.38 0.46 21.4% 0.43 0.46 5.0% 0.49 0.51 4.3%DPS (US$) 0.13 0.13 -0.6% 0.16 0.16 -1.3% 0.19 0.19 -1.9%BVPS (US$) 3.16 3.24 2.6% 3.45 3.56 3.1% 3.78 3.91 3.5%VONB per share (US$) 0.32 0.30 -6.9% 0.40 0.36 -10.8% 0.50 0.43 -13.8%EVPS (US$) 3.99 4.13 3.7% 4.55 4.68 2.8% 5.25 5.31 1.2%ROE (%) 12.4% 14.8% 2.5% pts 13.0% 13.3% 0.3% pts 13.5% 13.7% 0.1% ptsROEV (%) 17.5% 21.7% 4.2% pts 17.8% 16.9% -0.9% pts 18.9% 17.2% -1.7% pts

FY17F FY18F FY19F

17

Insurance - Life│Hong Kong│AIA Group│September 8, 2017

Figure 44: Our VONB forecasts by region

SOURCE: CIMB ESTIMATES, COMPANY

Another results, yet another beat? AIA Group is due to report its 3QFY17F results in mid-Oct 2017, and given our above-consensus VONB forecasts for FY17F, we are expecting yet another positive result beating consensus forecasts. We have 27% yoy VONB growth forecast for 2HFY17F and 20% yoy forecast specifically for 3QFY17F. We understand from AIA Group (as Bloomberg does not have VONB consensus) that consensus is forecasting only 17% yoy for VONB growth in 2HFY17F. Once again, we point out its enviable track record around results seasons. A trading strategy of buying five days before it reports its results and selling five days after its results (i.e. a ten-day window) for every single results season since its IPO would have delivered a cumulative absolute return of 108%, based on our analysis. After adjusting for market movements (using the Hang Seng Index, HSI, as a proxy), AIA’s cumulative outperformance over the HSI during this 10-day window since its IPO is 77% pts. With AIA having delivered an overall 156% pts outperformance over the HSI since just before it reported its first set of results, its results season outperformance of 77% pts is just under half (49%) of AIA’s overall outperformance over the HSI. Such an enviable track record around the results season is almost always due to better-than-consensus VONB, in our view.

(US$ m) FY16 FY17F FY18F FY19FGroup VONB 2,750 3,591 4,381 5,257HK VONB (mainland-visitor) 581 903 1,064 1,251HK VONB (non-mainland-visitor) 539 647 763 885HK VONB (pension business) 42 47 52 57Total HK VONB 1,161 1,596 1,878 2,193China VONB 536 799 1,102 1,422Other country VONB 1,219 1,390 1,612 1,870HK reserve, cap. reqmts & group exp. -166 -194 -212 -228

y-o-y growthGroup VONB 25% 31% 22% 20%HK VONB (mainland-visitor) 207% 56% 18% 18%HK VONB (non-mainland-visitor) -9% 20% 18% 16%HK VONB (pension business) 12% 12% 11% 10%Total HK VONB 42% 38% 18% 17%China VONB 46% 49% 38% 29%Other country VONB 1% 14% 16% 16%HK reserve, cap. reqmts & group exp. -14% 17% 9% 7%

18

Insurance - Life│Hong Kong│AIA Group│September 8, 2017

Figure 45: AIA's share price performance (absolute and relative) around result dates

SOURCES: CIMB, COMPANY REPORTS, BLOOMBERG

Valuations and recommendation We have made some changes to our NPAT, EV and VONB estimates and our target price. We maintain our Add rating. We value AIA Group using a Gordon Growth Model (GGM) to derive a target P/EV multiple of 2.2x (previously 2.2x), assuming cost of equity (COE) of 8.9%, terminal growth rate (g) of 1.3%, and return on embedded value (ROEV) of 18.4% (previously 17.9%), which is derived from a weighted average ROEV for the next three years. We then apply this 2.2x target P/EV multiple to our FY17F EVPS estimate of US$4.13 (previously US$3.99), and assuming an US$/HK$ exchange rate of 7.75, we arrive at our target price of HK$72, which is 7% higher than our previous target price of HK$67.10. This implies a target new business multiple of 17.4x FY17F VONB per share (previously 14.6x).

t= -1 to t= +1

t= -3 to t= +3

t= -5 to t= +5

Share price change on the day only

t= -1 to t= +1

t= -3 to t= +3

t= -5 to t= +5

Share price change on the day only

4Q10 4% 5% 4% 6% 4% 5% 5% 4%1Q11 4% 7% 7% 3% 5% 8% 9% 3%2Q11 4% 6% 5% 3% 5% 5% 6% 4%3Q11 -1% 0% 6% -2% -2% -2% 1% -1%4Q11 2% 10% 10% 3% 3% 9% 10% 3%1Q12 1% 1% -1% 0% 0% 1% -3% 0%2Q12 0% 2% -3% 0% -2% -2% -3% -2%3Q12 -1% -2% 1% 0% -1% -2% -2% 0%4Q12 2% 5% 6% 4% 3% 5% 9% 4%1Q13 3% 4% 6% 1% 1% 1% 0% 1%2Q13 -1% 3% 8% 0% -1% 0% 5% 0%3Q13 5% 5% 5% 4% 4% 5% 6% 3%4Q13 -2% 0% 2% 0% -1% 1% -1% -1%1Q14 6% 4% 2% 3% 5% 2% 2% 4%2Q14 0% 5% 5% 1% -1% -1% 0% 0%3Q14 -2% -2% -1% -1% -1% -2% 0% -1%4Q14 0% 6% 10% 0% 0% 6% 11% 0%1Q15 2% 1% -1% -1% 1% -4% -2% -1%2Q15 0% 0% -1% -2% 1% 3% 2% -1%3Q15 5% 2% 5% 3% 3% 1% 2% 3%4Q15 -1% 1% 10% 1% 1% 2% 4% 2%1Q16 5% 6% 3% 2% 4% 5% 3% 3%2Q16 -2% 0% -2% -1% -2% -1% -1% -1%3Q16 -2% -3% -1% 1% -1% -1% 1% 0%4Q16 -1% 0% 4% -1% 0% 2% 6% 0%1Q17 8% 10% 13% 6% 7% 7% 9% 6%2Q17 0% 5% 4% -2% 0% 3% 1% -1%Total 40% 81% 108% 33% 33% 56% 77% 30%AIA's outperf. since just before 1st set of results 156% 156% 156% 156%

21 36 49 19

AIA absolute share price reaction AIA relative share price reaction (vs. HSI)

Contribution to AIA Group's total market-relative outperformance (just before its 1st set of results to today), that come from just the 10-day around its results announcement (%)

19

Insurance - Life│Hong Kong│AIA Group│September 8, 2017

Figure 46: AIA Group valuation

SOURCES: CIMB ESTIMATES

We list in the next table how we derive our EVPS estimates.

Figure 47: AIA's embedded value across time

SOURCES: CIMB ESTIMATES, COMPANY REPORTS

AIA currently trades at 1.72x on a 12-month rolling forward P/EV basis, which is 1 s.d. above its historical mean. It also trades at 9.4x on a share price implied trading new business multiple basis (12-month rolling forward), which is just under its historical mean of 9.6x.

Figure 48: AIA's 12-month rolling forward P/EV Figure 49: AIA's share-price-implied trading new business multiple (12-month rolling forward)

SOURCES: CIMB ESTIMATES, COMPANY REPORTS, BLOOMBERG SOURCES: CIMB ESTIMATES, COMPANY REPORTS, BLOOMBERG

AIA Group currently trades at a P/EV premium over other insurers in our coverage. We believe that this is justified, given its lower risk profile, superior

Old New % chgCost of equity 8.9% 8.9% 0.0% ptsTerminal growth rate 1.3% 1.3% 0.0% ptsROEV (weighted average of FY17F-FY19F) 17.9% 18.4% 0.5% ptsTarget P/EV 2.2x 2.2x 3%FY17F EVPS (US$) 3.99 4.13 3.7%i.e. FY17F EVPS (HK$) 30.90 32.03 3.7%US$/HK$ exchange rate 7.75 7.75 0.0%Hence target price (HK$) 67.10 72.00 7%FY17F VONB per share (US$) 0.32 0.30 -7%i.e FY17F VONB per share (HK$) 2.47 2.30 -7%Implied target new business multiple 14.6x 17.4x 19%

(US$ m) FY11 FY12 FY13 FY14 FY15 FY16 FY17F FY18F FY19FOpening EV 24,748 27,239 30,565 33,018 37,153 38,198 42,114 49,969 56,759Value of new business 932 1,188 1,490 1,845 2,198 2,750 3,591 4,381 5,257Expected return on EV 2,029 2,192 2,389 2,635 2,698 2,854 3,139 3,625 4,117Operating experience variance 165 140 114 188 274 365 317 222 156Operating assumption changes -21 -29 10 -80 -26 29 -59 -44 -33Finance costs on medium term notes 0 0 -26 -53 -76 -111 -111 -111 -111EV operating profit 3,105 3,491 3,977 4,535 5,068 5,887 6,878 8,073 9,385Investment return variance -297 933 345 720 -1,804 -37 1,898 368 394Effect of change in economic assumptions -26 -105 429 122 145 -236 0 0 0Other non operating variances 18 -113 -154 23 369 -22 -224 0 0Total EV profit 2,800 4,206 4,597 5,400 3,778 5,592 8,552 8,440 9,779Dividends -170 -530 -595 -689 -814 -1,124 -1,382 -1,651 -1,973Other capital movements -89 -42 11 -14 -12 -5 88 0 0Effect of changes in exchange rates -50 535 -760 -562 -1,907 -547 598 0 0Closing EV 27,239 31,408 33,818 37,153 38,198 42,114 49,969 56,759 64,565

Number of shares 12,044 12,044 12,044 12,045 12,048 12,056 12,090 12,124 12,158EV per share 2.26 2.61 2.81 3.08 3.17 3.49 4.13 4.68 5.31

Oct-11, 1.01x

Apr-15, 2.11x

Sep-17, 1.72x

0.90x

1.10x

1.30x

1.50x

1.70x

1.90x

2.10x

2.30x

Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16

AIA's 12-month rolling forward P/EV

Aver. = 1.52x

+ 1 std. dev. = 1.72x

- 1 std. dev. = 1.31x

+ 2 std. dev. = 1.93x

- 2 std. dev. = 1.11x

Oct-11, 0.2x

Apr-15, 18.3x

Sep-17, 9.4x

0.0x

4.0x

8.0x

12.0x

16.0x

20.0x

Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16

AIA's share-price-implied trading new business multiple (12-month rolling forward)

Aver. = 9.6x

+ 1 std. dev. = 12.5x

- 1 std. dev. = 6.7x

-2 std. dev. = 3.7x

+ 2 std. dev. = 15.5x

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Insurance - Life│Hong Kong│AIA Group│September 8, 2017

management quality and track record of delivering consistent shareholder value. Maintain Add.

Figure 50: Sector comparison

SOURCES: CIMB, BLOOMBERG, COMPANY REPORTS

Risks Key downside risks to our call include the significant weakening of Asian currencies (especially the Rmb, THB, S$, RM, Rp and Php) against the US$, as a substantial portion of AIA Group’s VONB is denominated in these currencies. In addition, any US$ weakness (or not-overly-strong US$) could be important as it would have a positive impact on policy risk with respect to AIA Group’s share price. An overly-strong US dollar against the renminbi could once again cause mainland customers to be wary of renminbi depreciation. This could lead to greater capital outflows that could in turn, lead to more adverse regulations being announced by China’s policymakers. Another downside risk is capital outflows coming under material pressure, as we think that any uncontrolled capital flows could lead to China’s policymakers issuing strict regulations to control capital outflows from China via mainland visitors buying insurance in HK. Further downside risk could be the company’s results failing to meet investors’ expectations in FY17-19F. Another downside risk is a fall in global interest rates. We estimate that a 50bp fall in interest rates would lead to a 3% fall in AIA Group’s valuation.

8-Sep-17 Target +/-Rec Price (HK$) price (HK$) (%) FY16A FY17F FY18F FY16A FY17F FY18F FY16A FY17F FY18F FY16A FY17F FY18F

China Life Add 24.10 26.40 10% 0.94x 0.80x 0.69x -0.8x -2.6x -4.2x 2.2x 1.9x 1.7x 18.6% 18.4% 18.6%Ping An Add 61.70 53.40 -13% 1.59x 1.26x 1.05x 7.4x 3.3x 0.6x 2.3x 2.2x 1.9x 17.5% 18.0% 18.3%CPIC Add 36.30 34.30 -6% 1.20x 1.11x 0.96x 2.6x 1.3x -0.4x 2.1x 1.9x 1.7x 24.1% 18.3% 17.8%PICC P&C Hold 14.10 13.30 -6% n.a. n.a. n.a. n.a. n.a. 1.6x 1.5x 1.5x 1.4x 15.8% 18.6% 17.5%AIA Add 58.80 72.00 22% 2.17x 1.90x 1.67x 17.9x 11.3x 7.5x 3.2x 2.9x 2.7x 13.2% 17.5% 17.8%

P/EV (x) P/BV (x) Group ROEVVONB multiple

21

Insurance - Life│Hong Kong│AIA Group│September 8, 2017

Figure 51: Global insurance peer comparison

SOURCES: CIMB, COMPANY REPORTS, BLOOMBERG

Share prices Rating Target price(local currency) (local currency) FY16A FY17F FY16A FY17F FY16A FY17F

ChinaChina Life 24.10 Add 26.40 1.84x 1.70x 23.1x 19.2x 8.4% 9.7%Ping An 61.70 Add 53.40 2.05x 1.78x 13.1x 11.4x 16.6% 16.9%CPIC 36.30 Add 34.30 1.89x 1.76x 18.8x 16.2x 10.3% 11.3%NCI 47.95 NA NA 2.08x 1.87x 21.1x 16.9x 10.5% 11.7%PICC Group 3.62 NA NA 0.93x 0.83x 8.3x 7.7x 11.3% 11.3%China Taiping 23.05 NA NA 1.34x 1.20x 14.8x 12.7x 9.4% 10.0%PICC P&C 14.10 Hold 13.30 1.36x 1.20x 9.1x 8.3x 15.9% 15.3%

Hong KongAIA 58.80 Add 72.00 2.41x 2.21x 19.1x 17.8x 12.9% 13.3%

TaiwanCathay Financial 48.65 NA NA 1.13x 1.07x 12.9x 12.2x 9.2% 9.2%Fubon Financial 47.65 NA NA 1.06x 0.97x 9.6x 8.7x 11.8% 11.8%China Life (TW) 33.45 NA NA 1.32x 1.25x 13.7x 12.1x 10.0% 10.2%Shin Kong Financial 9.35 NA NA 0.65x 0.62x 14.0x 11.7x 4.9% 6.0%

South KoreaSamsung Life 116,000 Hold 114,000 0.78x 0.75x 16.7x 16.1x 4.9% 4.8%Hanwha Life 6,860 NA NA 0.65x 0.62x 10.4x 10.0x 6.9% 6.1%Tongyang Life 8,510 NA NA 0.62x 0.59x 8.6x 7.0x 10.6% 8.6%Samsung F&M 273,000 NA NA 1.19x 1.12x 11.4x 12.6x 10.7% 9.1%Dongbu Ins 72,500 NA NA 1.20x 1.08x 8.9x 8.2x 14.9% 14.3%Hyundai M&F 43,900 NA NA 1.17x 1.04x 7.6x 7.2x 16.2% 15.2%

AustraliaAMP Ltd 4.90 NA NA 2.09x 2.04x 15.1x 14.5x 13.6% 13.8%IAG 6.14 NA NA 2.40x 2.31x 17.1x 15.9x 14.4% 15.2%QBE 10.18 NA NA 1.24x 1.21x 15.9x 12.3x 7.5% 9.8%Medibank Private 3.01 NA NA 4.17x 3.96x 17.5x 17.2x 24.2% 23.4%

JapanJapan Post 1,344 NA NA 0.42x 0.41x 13.7x 14.1x 3.7% 3.0%Tokio Marine 4,207 NA NA 0.94x 0.89x 12.0x 11.5x 7.9% 8.0%MS&AD Ins. 3,478 NA NA 0.80x 0.75x 9.5x 9.4x 8.2% 8.2%Dai-ichi Life 1,702 NA NA 0.68x 0.65x 11.8x 11.4x 5.2% 5.4%

South East AsiaBangkok Life 44.25 NA NA 1.91x 1.71x 13.9x 12.7x 14.3% 14.5%Great Eastern 26.14 NA NA 1.66x 1.55x 15.6x 15.2x 11.4% 10.4%

Other AsiapacICICI Pru 437.10 NA NA 8.27x 6.51x 35.6x 31.3x 25.7% 24.5%Max Financial 601.25 NA NA 5.94x 5.08x 42.8x 36.5x 19.3% 20.0%Bao Viet Holdings 55,100 NA NA 2.43x 2.31x 26.4x 22.4x 11.1% 12.3%Panin Financial 238.00 NA NA 0.40x 0.37x 5.0x 4.8x 8.4% 8.0%

North AmericaAIG 58.27 NA NA 0.77x 0.71x 13.0x 11.5x 7.1% 7.7%Metlife 46.81 NA NA 0.94x 0.89x 10.2x 9.5x 9.8% 10.1%Prudential Financial 98.65 NA NA 1.03x 0.97x 10.6x 10.1x 12.3% 11.9%Allstate Corp 86.45 NA NA 1.62x 1.51x 15.2x 12.9x 10.6% 12.0%Manulife 23.55 NA NA 1.21x 1.14x 11.3x 10.5x 10.5% 11.1%Great-West Life 34.13 NA NA 1.66x 1.56x 13.1x 11.4x 13.2% 14.3%Sunlife Financial 46.36 NA NA 1.39x 1.29x 12.1x 11.0x 11.9% 12.2%

UKPrudential 1,752 NA NA 2.39x 2.12x 12.9x 11.9x 22.4% 20.7%Aviva 505 NA NA 1.28x 1.23x 10.1x 9.4x 11.0% 11.1%Legal & General 253.80 NA NA 2.20x 2.08x 11.9x 11.2x 18.2% 18.3%Standard Life 414.00 NA NA 1.84x 1.75x 13.8x 0.0x 13.2% 13.0%Admiral Group 1,822 NA NA 8.36x 7.71x 16.6x 16.0x 53.1% 52.7%

Rest of EuropeAxa 23.94 NA NA 0.82x 0.79x 9.7x 9.2x 8.7% 8.8%Allianz 180.45 NA NA 1.17x 1.12x 11.3x 10.7x 10.7% 10.7%Generali 15.04 NA NA 0.93x 0.90x 10.1x 9.7x 9.2% 9.7%NN Group 32.60 NA NA 0.48x 0.47x 9.0x 8.9x 5.1% 5.0%Aegon NV 4.67 NA NA 0.46x 0.44x 7.0x 7.4x 6.7% 6.3%

ROEP/EP/BV

22

Insurance - Life│Hong Kong│AIA Group│September 8, 2017

Figure 52: Key financial data

SOURCES: CIMB ESTIMATES, COMPANY REPORTS

(Year-end 30 November) 2015A 2016A 2017F 2018F 2019FSummaryEPS (US$) 0.23 0.35 0.46 0.46 0.51Operating EPS (US$) 0.36 0.40 0.47 0.53 0.59PE ratio (x) (oper. EPS) 16.6 17.5 15.0 13.3 11.8EPS growth (%) -19.9% 50.6% 31.6% -0.4% 12.5%DPS (US$) 0.09 0.11 0.13 0.16 0.19Dividend yield (%) 1.5% 1.8% 1.9% 2.2% 2.6%Issued shares (m) 12,048 12,056 12,090 12,124 12,158BVPS (US$) 2.58 2.90 3.24 3.56 3.91P/B (x) 2.31 2.41 2.16 1.97 1.79EV per share (US$) 3.17 3.49 4.13 4.68 5.31Growth of EV per share 3% 10% 18% 13% 13%ROEV 5.0% 13.2% 21.7% 16.9% 17.2%Price/EV (x) 1.88 2.00 1.69 1.50 1.32VoNB per share (US$) 0.18 0.23 0.30 0.36 0.43Growth of VONB per share 19% 25% 30% 22% 20%Implied new business (NB) multiple 15.4 15.4 9.7 6.4 3.9

Ratio and growth analysisROA 1.6% 2.3% 2.8% 2.6% 2.7%ROE 8.7% 12.6% 14.8% 13.3% 13.7%Payout ratio 38.9% 31.8% 28.8% 34.5% 36.6%Growth in net earned premium 9.2% 9.7% 7.5% 12.1% 12.1%Growth in operating profit after tax & minorities 22.2% 12.0% 17.4% 13.1% 13.3%Asset portfolio mix 100% 100% 100% 100% 100% - Fixed interest assets 85% 84% 84% 84% 84% - Equity securities & interest in investment funds 10% 11% 11% 11% 11% - Others 5% 5% 5% 5% 5%Average investment income yield 4.9% 5.1% 5.8% 5.4% 5.5%Insurance-related expense ratio 74.9% 74.6% 73.7% 73.2% 73.0%Operating expense ratio 7.8% 7.7% 7.7% 7.6% 7.4%Growth of operating profit after tax and minorities 22.2% 12.0% 17.4% 13.1% 13.3%Growth of net profit after tax and minorities -19.9% 50.6% 31.9% -0.1% 12.8%

23

Insurance - Life│Hong Kong│AIA Group│September 8, 2017

Figure 53: Financial statements of AIA

SOURCES: CIMB ESTIMATES, COMPANY REPORTS

(Year-end 30 November) 2015A 2016A 2017F 2018F 2019F Profit & Loss (US$m)Net premium 18,812 20,641 22,188 24,875 27,875Investment income 6,143 6,424 7,997 8,157 8,872Total Revenue 24,955 27,065 30,185 33,032 36,747Insurance-related expenses 18,700 20,198 22,249 24,195 26,842Other operating-related expenses 1,935 2,086 2,326 2,495 2,720Underwriting income 4,320 4,781 5,610 6,342 7,185Share of P/L from associates 0 (5) (5) (5) (5)Operating profit/(loss) 4,320 4,776 5,605 6,337 7,180Operating profit after tax (OPAT) 3,585 4,013 4,709 5,325 6,033OPAT attrib to shareholders of AIA Group 3,556 3,981 4,672 5,282 5,985Non operating items (791) 183 822 205 205Net profit after tax 2,765 4,164 5,493 5,488 6,190

Balance sheet (US$m) 2015A 2016A 2017F 2018F 2019FAssetsInvestment assets (excluding unit linked) 126,435 137,479 150,129 160,789 171,992Investment assets (including unit linked) 19,794 20,657 21,558 22,498 23,478Other assets 23,529 26,938 30,841 35,309 40,425Total assets 169,758 185,074 202,528 218,595 235,895

LiabilitiesInsurance contract liabilities 115,969 128,186 142,063 154,735 168,162Investment contract liabilities 7,116 7,028 6,941 6,855 6,770Borrowings 3,195 3,460 3,747 4,058 4,394Other liabilities 12,056 11,090 10,201 9,384 8,632Total liabilities 138,336 149,764 162,953 175,032 187,959Net assets 31,422 35,310 39,575 43,564 47,936

Share capital 13,971 13,998 14,113 14,228 14,342Reserves -9,146 -8,348 -8,348 -8,348 -8,348Retained profits 26,294 29,334 33,445 37,282 41,499Total shareholders' equity 31,422 35,310 39,575 43,564 47,936Equity attributable to shareholders 31,119 34,984 39,210 43,161 47,494

24

Insurance - Life│Hong Kong│AIA Group│September 8, 2017

BY THE NUMBERS

SOURCE: CIMB RESEARCH, COMPANY DATA

17.0%19.0%21.0%23.0%25.0%27.0%29.0%31.0%33.0%

7.69.6

11.613.615.617.619.621.623.6

Jan-13A Jan-14A Jan-15A Jan-16A Jan-17F Jan-18F

P/NB vs NB Growth

Rolling P/NB (x) (lhs)

Value Of New Life Business Growth (after-tax) (rhs)

1.2%3.7%6.2%8.7%11.2%13.7%16.2%18.7%21.2%

1.401.501.601.701.801.902.002.102.20

Jan-13A Jan-14A Jan-15A Jan-16A Jan-17F Jan-18F

12-mth Fwd FD Normalised P/E vs FD Normalised EPS Growth

Rolling P/EV (x) (lhs) Life Embedded Value Growth (rhs)

Profit & Loss

(US$m) Nov-15A Nov-16A Nov-17F Nov-18F Nov-19FRevenue 18,812 20,641 22,188 24,875 27,875Total Claims and Changes in Reserves (18,700) (20,198) (22,249) (24,195) (26,842)Acq. Costs/Other Underwriting Exp.Total Underwriting Result (1,823) (1,643) (2,387) (1,815) (1,687)Investment Income on Tech Reserve 6,143 6,424 7,997 8,157 8,872Insurance Profit / (Loss) 4,320 4,781 5,610 6,342 7,185Total Other Technical Income 0 (5) (5) (5) (5)Total Other Revenues 0 0 0 0 0Total Operating Costs 0 0 0 0 0Other Technical Income / (Loss)Depreciation And Amortisation 0 0 0 0 0Operating Profit 4,320 4,776 5,605 6,337 7,180Pretax Income/(Loss) from Assoc. 0 0 0 0 0Post-Tax Oper. Earnings - Life/Other BizHead Office CostsNon-Operating Income/(Expense) 0 0 0 0 0Net Interest Income 0 0 0 0 0Investment Income on Shareholders FundOther Income (791) 183 822 205 205Exceptional ItemsPre-tax Profit 3,529 4,959 6,426 6,543 7,385Taxation (735) (763) (895) (1,012) (1,147)Consolidation Adjustments & OthersExceptional Income - post-taxProfit After Tax 2,794 4,196 5,531 5,530 6,238Minority Interests (29) (32) (38) (42) (48)Preferred DividendsSpecial DividendsFX Gain/(Loss) - post taxOther Adjustments - post-taxPreference Dividends (Australia)Net Profit 2,765 4,164 5,493 5,488 6,190

Operating Ratios

Nov-15A Nov-16A Nov-17F Nov-18F Nov-19FPremium Retention Ratio (life & Health)Benefits Ratio (life & Health) (99%) (98%) (100%) (97%) (96%)Acquisition Expense Ratio (life & Health) 0% 0% 0% 0% 0%Admin Expense Ratio (life & Health) 0% 0% 0% 0% 0%Total Expense Ratio (life & Health) 10.3% 10.1% 10.5% 10.0% 9.8%Policyholder Dividends Ratio (life & Health) 0% 0% 0% 0% 0%Combined Underwriting Ratio (life & Health) (89.1%) (87.7%) (89.8%) (87.2%) (86.5%)Underwriting Profit Margin (life & Health) (9.7%) (8.0%) (10.8%) (7.3%) (6.1%)Operating Profit Margin (life & Health) 23.0% 23.1% 25.3% 25.5% 25.8%

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BY THE NUMBERS… cont’d

SOURCE: CIMB RESEARCH, COMPANY DATA

Balance Sheet

(US$m) Nov-15A Nov-16A Nov-17F Nov-18F Nov-19FFixed AssetsIntangible Assets 0 0 0 0 0Other Long Term Assets 169,758 185,074 202,528 218,595 235,895Total Non-current Assets 169,758 185,074 202,528 218,595 235,895Total Cash And Equivalents 0 0 0 0 0Trade DebtorsOther Current Assets 0 0 0 0 0Total Current Assets 0 0 0 0 0Creditors - Direct & Reinsurance BusinessProvision For Claims Outstanding 115,969 128,186 142,063 154,735 168,162Other Current Liabilities 0 0 0 0 0Total Current Liabilities 115,969 128,186 142,063 154,735 168,162Total Long-term Debt 3,195 3,460 3,747 4,058 4,394Hybrid Debt - Debt ComponentOther Liabilities 19,172 18,118 17,142 16,239 15,403Total Non-current Liabilities 22,367 21,578 20,889 20,297 19,797Total Technical & Other Provisions 0 0 0 0 0Total Liabilities 138,336 149,764 162,953 175,032 187,959Shareholders' Equity 31,119 34,984 39,210 43,161 47,494Minority Interests 303 326 365 402 443Total Equity 31,422 35,310 39,575 43,564 47,936Life Embedded Value 38,198 42,114 49,969 56,759 64,565

Key Ratios

Nov-15A Nov-16A Nov-17F Nov-18F Nov-19FNet Premium Growth 9.2% 9.7% 7.5% 12.1% 12.1%Operating Profit Growth (Life & Health) 23.3% 10.6% 17.4% 13.1% 13.3%Value Of New Life Business Growth (after-tax) 19.1% 25.1% 30.6% 22.0% 20.0%Life Embedded Value Growth 2.8% 10.3% 18.7% 13.6% 13.8%Pre-tax Margin 18.8% 24.0% 29.0% 26.3% 26.5%Net Profit Margin 14.7% 20.2% 24.8% 22.1% 22.2%Effective Tax Rate 20.8% 15.4% 13.9% 15.5% 15.5%Net Dividend Payout Ratio NA NA NA NA NAReturn On Average Assets 1.65% 2.37% 2.85% 2.63% 2.75%Net Gearing 9.31% 9.00% 8.72% 8.59% 8.47%Financial Leverage 5.33 5.37 5.22 5.11 5.01Equity / Assets 18.3% 18.9% 19.4% 19.7% 20.1%

Key Drivers

Nov-15A Nov-16A Nov-17F Nov-18F Nov-19FIndustry gross premium grth (%) N/A N/A N/A N/A N/AGross Premium Growth (%) 9.2 9.7 7.5 12.1 12.1 Gross Premium Mkt share (%) N/A N/A N/A N/A N/AClaims Ratio (%) 74.9 74.6 73.7 73.2 73.0 Net Commission Ratio (%) 7.8 7.7 7.7 7.6 7.4 Net Premium Market Share (%) N/A N/A N/A N/A N/AManagement Expense Ratio (%) N/A N/A N/A N/A N/A

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Insurance - Life│Hong Kong│AIA Group│September 8, 2017

research and will not subject to any prohibition on dealing ahead of the dissemination of investment research. Any such non-independent report must be considered as a marketing communication. United States: This research report is distributed in the United States of America by CIMB Securities (USA) Inc, a U.S. registered broker-dealer and a related company of CIMB Research Pte Ltd, CIMB Investment Bank Berhad, PT CIMB Securities Indonesia, CIMB Securities (Thailand) Co. Ltd, CIMB Securities Limited, CIMB Securities (India) Private Limited, and is distributed solely to persons who qualify as “U.S. Institutional Investors” as defined in Rule 15a-6 under the Securities and Exchange Act of 1934. This communication is only for Institutional Investors whose ordinary business activities involve investing in shares, bonds, and associated securities and/or derivative securities and who have professional experience in such investments. Any person who is not a U.S. Institutional Investor or Major Institutional Investor must not rely on this communication. The delivery of this research report to any person in the United States of America is not a recommendation to effect any transactions in the securities discussed herein, or an endorsement of any opinion expressed herein. CIMB Securities (USA) Inc, is a FINRA/SIPC member and takes responsibility for the content of this report. For further information or to place an order in any of the above-mentioned securities please contact a registered representative of CIMB Securities (USA) Inc. CIMB Securities (USA) Inc does not make a market on other securities mentioned in the report. Neither CIMB Securities (USA) Inc., nor its affiliates have managed or co-managed a public offering of any of the securities mentioned in the past 12 months. Neither CIMB Securities (USA) Inc., nor its affiliates have received compensation for investment banking services from any of the company mentioned in the past 12 months. Neither CIMB Securities (USA) Inc., nor its affiliates expects to receive or intends to seek compensation for investment banking services from any of the company mentioned within the next 3 months. Other jurisdictions: In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is only for distribution to professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

Spitzer Chart for stock being researched ( 2 year data )

AIA Group (1299 HK)

Rating Distribution (%) Inv estment Banking clients (%)Add 51.2% 5.5%Hold 35.7% 3.1%Reduce 11.9% 0.1%

Distribution of stock ratings and inv estment banking clients for quarter ended on 30 June 20171288 companies under cov erage for quarter ended on 30 June 2017

34.0

39.0

44.0

49.0

54.0

59.0

64.0

Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17

Price Close

43.9

0

51.3

0

56.9

0

56.4

0

55.9

0

43.6

0

44.6

0

67.1

0

Recommendations & Target Price

Add Hold Reduce Not Rated

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Insurance - Life│Hong Kong│AIA Group│September 8, 2017

Corporate Governance Report of Thai Listed Companies (CGR). CG Rating by the Thai Institute of Directors Association (Thai IOD) in 2016, Anti-Corruption 2016 AAV – Very Good, n/a, ADVANC – Very Good, Certified, AEONTS – Good, n/a, AMATA – Excellent, Declared, ANAN – Very Good, Declared, AOT – Excellent, Declared, AP – Very Good, Declared, ASK – Very Good, Declared, ASP – Very Good, Certified, BANPU – Very Good, Certified, BAY – Excellent, Certified, BBL – Very Good, Certified, BCH – not available, Declared, BCP - Excellent, Certified, BEM – Very Good, n/a, BDMS – Very Good, n/a, BEAUTY – Good, Declared, BEC - Good, n/a, BH - Good, Declared, BIGC - Excellent, Declared, BJC – Good, n/a, BJCHI – Good, Declared, BLA – Very Good, Certified, BPP – not available, n/a, BR - Good, n/a, BTS - Excellent, Certified, CBG – Good, n/a, CCET – not available, n/a, CENTEL – Very Good, Certified, CHG – Very Good, n/a, CK – Excellent, n/a, COL – Very Good, Declared, CPALL – not available, Declared, CPF – Excellent, Declared, CPN - Excellent, Certified, DELTA - Excellent, Declared, DEMCO – Excellent, Certified, DIF – not available, n/a, DTAC – Excellent, Certified, EA – Very Good, Declared, ECL – Good, Certified, EGCO - Excellent, Certified, EPG – Good, n/a, GFPT - Excellent, Declared, GLOBAL – Very Good, Declared, GLOW – Very Good, Certified, GPSC – Excellent, Declared, GRAMMY - Excellent, n/a, GUNKUL – Very Good, Declared, HANA - Excellent, Certified, HMPRO - Excellent, Declared, ICHI – Very Good, Declared, INTUCH - Excellent, Certified, ITD – Good, n/a, IVL - Excellent, Certified, JAS – not available, Declared, JASIF – not available, n/a, JUBILE – Good, Declared, KAMART – not available, n/a, KBANK - Excellent, Certified, KCE - Excellent, Certified, KGI – Good, Certified, KKP – Excellent, Certified, KSL – Very Good, Declared, KTB - Excellent, Certified, KTC – Excellent, Certified, LH - Very Good, n/a, LPN – Excellent, Declared, M – Very Good, Declared, MAJOR - Good, n/a, MAKRO – Good, Declared, MALEE – Very Good, Declared, MBKET – Very Good, Certified, MC – Very Good, Declared, MCOT – Excellent, Declared, MEGA – Very Good, Declared, MINT - Excellent, Certified, MTLS – Very Good, Declared, NYT – Excellent, n/a, OISHI – Very Good, n/a, PLANB – Very Good, Declared, PLAT – Good, Declared, PSH – not available, n/a, PSL - Excellent, Certified, PTT - Excellent, Certified, PTTEP - Excellent, Certified, PTTGC - Excellent, Certified, QH – Excellent, Declared, RATCH – Excellent, Certified, ROBINS – Very Good, Declared, RS – Very Good, n/a, SAMART - Excellent, n/a, SAPPE - Good, n/a, SAT – Excellent, Certified, SAWAD – Good, n/a, SC – Excellent, Declared, SCB - Excellent, Certified, SCBLIF – not available, n/a, SCC – Excellent, Certified, SCN – Good, Declared, SCCC - Excellent, Declared, SIM - Excellent, n/a, SIRI - Good, n/a, SPA - Good, n/a, SPALI - Excellent, Declared, SPRC – Very Good, Declared, STA – Very Good, Declared, STEC – Excellent, n/a, SVI – Excellent, Certified, TASCO – Very Good, Declared, TCAP – Excellent, Certified, THAI – Very Good, Declared, THANI – Very Good, Certified, THCOM – Excellent, Certified, THRE – Very Good, Certified, THREL – Very Good, Certified, TICON – Very Good, Declared, TIPCO – Very Good, Certified, TISCO - Excellent, Certified, TK – Very Good, n/a, TKN – Good, n/a, TMB - Excellent, Certified, TNR – not available, n/a, TOP - Excellent, Certified, TPCH – Good, n/a, TPIPP – not available, n/a, TRUE – Very Good, Declared, TTW – Very Good, Declared, TU – Excellent, Declared, TVO – Very Good, Declared UNIQ – not available, Declared, VGI – Excellent, Declared, WHA – not available, Declared, WHART – not available, n/a, WORK – not available, n/a. Companies participating in Thailand’s Private Sector Collective Action Coalition Against Corruption programme (Thai CAC) under Thai Institute of Directors (as of October 28, 2016) are categorized into: - Companies that have declared their intention to join CAC, and - Companies certified by CAC

CIMB Recommendation Framework Stock Ratings Definition: Add The stock’s total return is expected to exceed 10% over the next 12 months. Hold The stock’s total return is expected to be between 0% and positive 10% over the next 12 months. Reduce The stock’s total return is expected to fall below 0% or more over the next 12 months. The total expected return of a stock is defined as the sum of the: (i) percentage difference between the target price and the current price and (ii) the forward net dividend yields of the stock. Stock price targets have an investment horizon of 12 months.

Sector Ratings Definition: Overweight An Overweight rating means stocks in the sector have, on a market cap-weighted basis, a positive absolute recommendation. Neutral A Neutral rating means stocks in the sector have, on a market cap-weighted basis, a neutral absolute recommendation. Underweight An Underweight rating means stocks in the sector have, on a market cap-weighted basis, a negative absolute recommendation.

Country Ratings Definition: Overweight An Overweight rating means investors should be positioned with an above-market weight in this country relative to benchmark. Neutral A Neutral rating means investors should be positioned with a neutral weight in this country relative to benchmark. Underweight An Underweight rating means investors should be positioned with a below-market weight in this country relative to benchmark.

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