"Major Banks" JP Morgan: AIA and Prudential's free cash flow improvement outlook is strong, reiterating "Overweight" rating

JP Morgan published a research report indicating that the strong improvement in free surplus and free cash flow generation is expected to rebuild market confidence in the "intrinsic value" of AIA (01299.HK) and Prudential (02378.HK). The bank believes that the free cash flow yield and attractive capital returns may drive stock prices to re-evaluate intrinsic value multiples, with strong growth momentum in Hong Kong presenting upside risks. The bank reiterated its "overweight" rating on AIA and Prudential.

The bank stated that thanks to the recovery of Asian stock markets, last year, Prudential and AIA's stock prices rose sharply by about 70% to 80%, but this was also attributed to improvements in cash generation capabilities. Both companies are focused on optimizing their product portfolios to shorten the payback period for new business, such as increasing the proportion of health and protection products. The P/EV multiple has rebounded from previous lows, with AIA at approximately 1.3 times the forecasted intrinsic value for 2026, and Prudential at about 0.9 times. New business profits drive free cash flow, which is used for capital returns and further growth, and the bank believes this may drive the P/EV re-evaluation for both stocks.

JP Morgan noted that new business sales in Hong Kong's life insurance sector are expected to grow significantly in 2025, but according to the bank's baseline forecast for AIA and Prudential, this year is likely to normalize. Although the bank has not adjusted its forecast figures, it believes there is upside risk to this assumption, as the sales and product environment (especially for mainland visitors to Hong Kong) remains attractive. Regulatory reforms in product distribution may also reduce barriers to new business. According to the bank's scenario analysis, if Hong Kong sales maintain strong momentum (reaching twice the bank's baseline growth rate), AIA and Prudential could have an upside potential of 2.5% to 3.5% in net surplus generation yield by 2028, while the bank also sees an upside potential of 2.5% to 3% in its forecasted IFRS operating profit for 2028, leading to stronger growth