AIA's China optimism jars with mood in Hong Kong
BREAKINGVIEWS-AIA's China optimism jars with mood in Hong Kong The author is a Reuters Breakingviews columnist. The opinions expressed are his own. Updates to add graphic.
By Ka Sing Chan
HONG KONG, Aug 20 (Reuters Breakingviews) - AIA 1299.HK may be misreading the tea leaves from Beijing. Lee Yuan Siong is the latest CEO to downplay China's offshore wealth crackdown, pointing to robust demand for the $97 billion insurer's policies in Hong Kong. But a 15% drop in its share price suggests AIA’s ability to serve that demand will be curbed. And China’s messaging reinforces those fears.
Mainland authorities have started levying a 20% personal income tax on returns from Hong Kong insurance products, including dividend payouts and interest earned on prepaid premiums, Reuters reported earlier this month, citing sources. Policies bought in the financial centre have long been a popular channel for mainland visitors to diversify assets offshore; they have also become a high-growth business for insurers. Last year, AIA and Prudential PRU.L, 2378.HK both generated roughly 40% of new-business profit from Hong Kong.
Strong half-year results from AIA on Thursday have failed to assuage those concerns. Despite a 10% year-on-year increase in the value of new business in the six months to June, to $3.2 billion, the Hong Kong-based company's stock barely budged. Lee also reiterated the company "was not aware of any changes to the Chinese income tax laws on insurance product" and emphasised that demand remains strong.
Yet those assurances fail to address the elephant in the room. In May, Chinese authorities fined brokers including Futu Holdings 6FHAy.F for facilitating offshore share trading from the mainland without licenses; last month, tax officials announced they will impose individual income taxes on offshore trusts. So the real concern is that Beijing is tightening control of wealth flows into Hong Kong, not how enforcement of taxes will impact demand.
Since the brokerage crackdown, investors have erased $18 billion of market value from AIA. Using the stock's 11.5 times forward earnings multiple, that implies markets are pricing in a $1.6 billion hit to the group's bottom line, or a quarter of last year's total.
The silver lining is that Chinese officials probably do not want to halt cross-border flows completely, or ban the sale of offshore products to domestic investors. The latest decision to allow mainland insurance companies to invest in Hong Kong exchange traded funds is a positive signal. Playing that up may help win over sceptical investors.
CONTEXT NEWS
AIA Group announced on August 20 operating profit after tax increased 13% per share year-on-year to $4.2 billion for the six months ended June. The insurer’s value of new business rose 10% to a record $3.2 billion during the period, of which 36.5% came from Hong Kong.
(Editing by Robyn Mak; Production by Aditya Srivastav)
((For previous columns by the author, Reuters customers can click on CHAN/ KaSing.Chan@thomsonreuters.com))