Prudential’s (PRU) recent quarterly update reminds us why the insurance and asset management group has pivoted towards Asian markets. It may also reassure investors who have had to contend with sub-par growth rates from the region’s largest economy.
The return of cross-border traffic from the Chinese mainland and increased domestic demand in Hong Kong drove annual premium equivalent (APE) sales by 35 per cent to $1.56bn (£1.26bn), while new business profit was up by 43 per cent to $743mn once interest rate movements and other economic impacts are discounted. In Hong Kong, APE sales quadrupled to $455mn, feeding through to new business profits of $293mn, a 106 per cent increase on the same period in 2022.
Thousands of travellers crossed the border in both directions at the start of this year when Beijing effectively ditched its zero-Covid policies. The three-year separation brought about by the virus stifled capital flows (monetary and human) into the Chinese special administrative regions of Macau and Hong Kong. With obstacles removed, wealth managers have been expanding and diversifying their operations in Hong Kong to meet the pent-up demand from investors on the Chinese mainland and elsewhere in the region. Gamblers have also been flooding back into Macau.
The pace of China’s recovery is being closely monitored by politicians, in addition to business analysts, as many hope that a rapid return to previous demand levels will act as a catalyst for ailing western economies. Early signs are positive with growth ahead of expectations, rising by 4.5 per cent over the first quarter, according to the National Bureau of Statistics. Crucially, much of this improvement is linked to a recovery in consumer spending – a positive sign for UK exporters into the country. The People’s Bank of China now predicts a “U-shaped” recovery in consumer prices, helped along by a marked increase in discretionary spending. There are still underlying problems closer to home, our own consumer price growth included, but the west would still welcome most knock-on effects from the reopening process.
Beyond China’s initial bounce, prospects for emerging markets within the region have been enhanced by a deteriorating outlook on the US dollar, notwithstanding any further tightening of US monetary policy. The latest Regional Economic Outlook published by the International Monetary Fund indicates that Asia will contribute about 70 per cent of global growth through this year. Regional growth is pitched at 4.6 per cent, a 0.8 percentage point increase on the prior year. That’s some way adrift of the long-term average, but the quoted rate would be good news given the extent of the disruption to trade since 2020.
Analysts at UBS make the point that Prudential’s sales to visitors from mainland China may already be approaching pre-pandemic levels. That’s significant given that the number of crossings from the mainland were only half that of the rate prior to the lockdowns. The Swiss bank believes that the rapid turnaround is being driven by an affluent demographic from the mainland and their renewed appetite for saving products. However, the bank warns that new business profitability rates are currently adrift of the pre-pandemic equivalents because “initial product demand is more weighted towards relatively lower margin savings products”.
Prudential’s market valuation has increased by around a fifth over the past 12 months, but is the Q1 sales boost adequately reflected in its metrics? The shares now change hands at 13 times adjusted consensus earnings. That’s slightly more than the asking price for several peers, but it still represents a 22 per cent discount to the target price. Analysts predict that Asia new business profit will increase from $2.71bn to $3.36bn in 2024, underpinning a 55 per cent increase in embedded value per share between 2023-26.
The group’s new management is expected to provide a strategic update in August. Speculation has it that the focus will be on driving margins by increasing the proportion of higher-margin health and protection (H&P) products within the revenue mix. Customers from the Chinese mainland focused on savings products to a large extent following the reopening of borders, but that is likely to be a temporary effect. Still, it’s worth noting that because the group has expanded its footprint to around two-dozen markets across the continents of Asia and Africa, new business growth is smoothed out by the offsetting of losses in some markets against positive outcomes in others.
Group chief executive Anil Wadhwani confirmed that “business momentum, particularly in Hong Kong, has continued to date in the second quarter”. Short of any geopolitical shocks, an evolving product mix should bolster the trading margin through the remainder of the year, particularly if – as expected – we witness a shift towards higher-margin H&P products.
