China surprising on the upside in 2Q22
- The most surprising element of its 2Q22 results was mainland China’s new business profit (NBP)– only -5% yoy, driven by a marked turnaround in 2Q22.
- 2Q22 China APE was +68% yoy (1Q22’s -7% yoy), driven by bancassurance (1H22: +28%), with 1H22 agency APE falling 11% yoy.
- Singapore was the strongest region for 1H22 NBP growth, up 13% yoy.
- Reiterate Add, with an unchanged TP of HK$144.7.
1H22 NBP, APE and IFRS operating profit beat our estimates
Prudential’s (Pru) 1H22 new business profit (NBP) fell 5% yoy on a constant exchange rate (CER) basis (7% yoy on an actual exchange rate, AER, basis) and was 16% above our forecast (3% above company-provided consensus’). The beat was driven by mainland China, which only saw a 4% CER fall yoy in 1H22 (-5% yoy AER). On an AER basis, 1H22 annualised premium equivalent (APE) was up 6% yoy, 1H22 NBP margin was down 12% yoy and operating profit was up 6% yoy, all above our forecasts (Fig 1).
Bancassurance growth key in China
Pru’s diversified distribution channel was a key advantage in 1H22 for China. Despite a high 1Q21 base in China (1Q21 NBP growth was up 234% yoy, with 1H21 NBP growth up 80% yoy; see Fig 6), and Covid-19 outbreaks in 2Q22, Pru’s 1H22 NBP fell only 5% yoy, much better than our forecast. We estimate that 1H22 China bancassurance NBP was up 26% yoy, with 1H22 China agency NBP down 34% yoy. We believe the strong bancassurance growth was driven by 11 new bancassurance signups in mainland China. 2Q22’s China APE of 68% yoy was also much better than 1Q22’s 7% yoy fall.
Well prepared for Macau launch & the tapping of MCV demand
While Pru’s Macau branch application is pending regulatory approval, we believe it is well prepared for rapid growth in Macau once approval is obtained. Pru is confident based on its survey findings (Figs 11 & 12) which indicated that demand for insurance remains strong among mainland Chinese visitors (MCV), with Macau well placed to tap this demand (Fig 13). Pru also stated that pre-2019, a quarter of MCV buying insurance in HK came from the Guangdong region, with about 50% from the coastal regions; we think this represents low-hanging fruit. Historical evidence also indicates that Rmb weakness could be a powerful motivation for MCV buying insurance offshore (Fig 17).
Singapore the strongest region for 1H22 NBP growth, up 13% yoy
Singapore’s 1H22 NBP strength was also driven by bancassurance, with strong demand from high-net-worth customers for savings and legacy protection products. Singapore accounted for 22% of its 1H22 NBP and was Pru’s largest region in terms of NBP (Fig 4).
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 22). Potential near-term catalysts: Macau licence approval and improved capital ratios. Downside risks: Covid-19 outbreaks, a global recession and lower interest rates.