Tailwinds add up; initiate with an Add
? We see 12 tailwinds for Pru in the near, medium and long term, which we
believe can drive a closing of its sizeable P/EV valuation gap vs. AIA.
? Near-term catalysts include an Asia-based CEO, a Macau licence, improved
capital ratios and EV after HK RBC adoption, and a decrease in Covid cases.
? Pru has significantly underperformed AIA since Nov 2021 by 39% pts, with its
119% P/EV gap to AIA only exceeded four times since 2010 (Fig 109).
? Initiate coverage with an Add call. TP of HK$144.7, with FY22F P/EV at 0.7x.
Many catalysts to narrow its sizeable P/EV gap to AIA
We initiate coverage on Prudential (Pru) with an Add. Our bullishness is due to 12
tailwinds we see for Pru in the near, medium and long term (Fig 2), which we believe can
continually reduce its sizeable P/EV valuation gap vs. AIA. AIA trades at a 119% P/EV
premium to Pru at 17 May 2022, a level exceeded only four times since 2010.
Near-term catalysts: Asia-based CEO, Macau and better capital + EV
We see an imminent announcement of an Asia-based CEO as positive as it affirms Pru’s
strategic shift towards Asia-based growth. Obtaining a Macau licence is also positive as it
allows Pru to re-tap sizeable mainland Chinese visitors (MCV) insurance demand, which
had grown rapidly to comprise two-thirds of Macau’s 4Q21 new business premiums (Fig
5). Like AIA, we see Pru as benefitting from an early adoption of Hong Kong (HK) riskbased-capital (RBC) standards. We see this resulting in improved capital ratios (thus it is
better able to fund future growth) and possibly higher embedded values (EVs) (Fig 18).
Entry into key Asian stock indices is a medium-term catalyst
While we still have AIA as our near-term top sector pick, Pru is our medium-to-long-term
top pick, especially as Pru enters key Asia stock indices, as we think its absence in these
indices limits the ability of Asia investors to drive a closing of Pru’s valuation gap to AIA.
Medium & long-term catalysts could result in a multi-year re-rating
Another medium-term catalyst is Pru is relatively well placed to benefit from a full HKChina border reopening and MCV buying insurance, as HK comprises 29% of FY21 new
business profit (NBP) vs. AIA (21%; Fig 3). We see many reasons to expect MCV to
return strongly upon border reopening (Fig 42), given the current US$/ Rmb strength and
a high correlation coefficient of 91% (Dec 2012-Jun 2019) with MCV premium growth (Fig
44). Long-term catalysts include an alignment of EV methodologies (Pru uses European
EV vs. AIA’s traditional EV) to increase comparability, an increase in the shareholding of
its China and India JVs, and China capital account liberalisation initiatives.
Initiate with an Add rating; SOP-based TP of HK$144.7
Our SOP uses both P/EV and P/BV GGMs (see pg 47 – 54). Potential near-term
catalysts: Asia-based new CEO appointment and share buybacks. Downside risks
include Covid-19 outbreaks, a global recession and lower interest rates.