Investor feedback post roadshow
? We hosted a group investor call with Prudential (Pru), where Pru highlighted
its heavy focus on health and protection and its strong presence across Asia.
? We think Pru benefitted from rising HK margins in 1Q22 amidst an improved
product mix and rising rates, helping to offset premium weakness.
? Key investor concerns remain its low HK free float, EV computations, its new
CEO only starting in Feb 2023 and its dual head office structure.
? Reiterate an Add rating and unchanged TP of HK$144.7.
Rising HK margins could help offset 1Q22 premium weakness
We think Pru saw rising new business profit (NBP) margins in 1Q22F amidst an improved
product mix and higher rates for Hong Kong (HK), its biggest market by NBP (Fig 1). This
could have at least partially offset 1Q22 premium weakness, given that 1Q22’s domestic
system annualised new premiums (ANP) fell more during HK’s fifth wave than the onset
of the pandemic in 2020 (see HK fifth-wave damage worse than 2020, 1 Jun 2022).
Margins had also risen among peers, with AIA’s rising 1Q22 margins more than offsetting
its 30% yoy HK ANP fall (Fig 3), leading to rising 1Q22 HK NBP (see Moving past the
worst quarter, 29 Apr 2022). Manulife also saw 1Q22 NBP margins rise yoy (Fig 6).
China: Tough base for growth, but bancassurance exposure helps
A high base makes 1Q22 NBP growth for mainland China very difficult to achieve for Pru,
as 1Q21 NBP rose 234% yoy (Fig 7). While we see notable China NBP margin pressure
due to shifts in product and distribution mix as well as lower bond yields, we are
encouraged by Citic-Pru reporting that 1Q22 ANP fell only 7% yoy, with agent ANP -23%
yoy and bancassurance +1% yoy (Fig 9). This is consistent with our belief that the
bancassurance channel is more resilient amidst Covid-19 outbreaks than the agent
channel. We believe bancassurance comprised a relatively high 56% of its China NBP in
FY21 (Fig 11). Pru’s geographically diversified China presence also leaves it relatively
less exposed to coastal region Covid-19 lockdowns compared to some foreign peers.
Many areas to work on to close the valuation gap to peers
We had pointed out in Tailwinds add up; initiate with an Add, 18 May 2022, that there
were many areas that represent potential tailwinds over the short, medium and long term,
should Pru manage to successfully address them. During our investor call with Pru,
investors again highlighted their concerns over Pru’s low HK free float, when and if Pru
could consider disclosing traditional embedded value (EV), its dual head office structure
plus duplication of costs and the fact that the new CEO only starts in Feb 2023 (see
Announcement of new CEO based in HK, 25 May 2022).
Reiterate Add rating; TP unchanged at HK$144.7
We value Pru on an SOP basis, via a blend of P/EV and P/BV GGM for its subsidiaries
(Fig 19). Potential near-term catalysts: Macau licence approval and improved capital
ratios. Downside risks: Covid-19 outbreaks, a global recession and lower interest rates.