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AIA Group Limited (HKG:1299) Investors Are Paying Above The Intrinsic Value

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Insurance stocks such as 1299 are hard to value. This is because the rules banks face are different to other companies, which can impact the way we forecast their cash flows. For example, insurance companies are required to hold more capital to reduce the risk to shareholders. Emphasizing data points such as book values, as well as the return and cost of equity, can be fitting for gauging 1299’s true value. Below I will take you through how to value 1299 in a reasonably accurate and simple way.

Check out our latest analysis for AIA Group

Why Excess Return Model?

Before we begin, remember that financial stocks differ in terms of regulation and balance sheet composition. Hong Kong’s financial regulatory environment is relatively strict. Furthermore, insurance companies usually do not hold significant portions of physical assets as part of total assets. As traditional valuation models put weight on inputs such as capex and depreciation, which is less meaningful for finacial firms, the Excess Return model places importance on forecasting stable earnings and book values.

SEHK:1299 Intrinsic Value Export February 6th 19
SEHK:1299 Intrinsic Value Export February 6th 19

Deriving 1299’s True Value

The main belief for this model is, the value of the company is how much money it can generate from its current level of equity capital, in excess of the cost of that capital. The returns above the cost of equity is known as excess returns:

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Excess Return Per Share = (Stable Return On Equity – Cost Of Equity) (Book Value Of Equity Per Share)

= (0.15% – 9.1%) x $4.09 = $0.24

Excess Return Per Share is used to calculate the terminal value of 1299, which is how much the business is expected to continue to generate over the upcoming years, in perpetuity. This is a common component of discounted cash flow models:

Terminal Value Per Share = Excess Return Per Share / (Cost of Equity – Expected Growth Rate)

= $0.24 / (9.1% – 2.0%) = $3.45

These factors are combined to calculate the true value of 1299’s stock:

Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share

= $4.09 + $3.45 = $7.54 (HK$59.17)

This results in an intrinsic value of HK$59.17. Compared to the current share price of HK$72.45, 1299 is , at this time, trading above what it’s actually worth. This means 1299 isn’t an attractive buy right now. Valuation is only one side of the coin when you’re looking to invest, or sell, 1299. Fundamental factors are key to determining if 1299 fits with the rest of your portfolio holdings.

Next Steps:

For insurance companies, there are three key aspects you should look at:

  1. Financial health: Does it have a healthy balance sheet? Take a look at our free bank analysis with six simple checks on things like leverage and risk.

  2. Future earnings: What does the market think of 1299 going forward? Our analyst growth expectation chart helps visualize 1299’s growth potential over the upcoming years.

  3. Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether 1299 is a dividend Rockstar with our historical and future dividend analysis.

For more details and sources, take a look at our full calculation on 1299 here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.