Stock Spotlight: Prudential looks to China’s reopening to ensure future potential

The share price of the UK’s third largest insurer has stagnated since the end of 2020, according to data from Morningstar, and has struggled to reach pre-pandemic levels after it shifted its focus to the Asian market.

Prudential made the tactical change in 2021, divesting from US long-term savings business Jackson National Life and turning its attention towards Asia and Africa.

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As a result of the change in the business strategy, Henry Heathfield, equity analyst at Morningstar, said it is difficult to compare the “Prudential of pre-pandemic to the Prudential of today”.

The firm’s switch into China coincided with the ruling government’s zero-Covid policy, which has acted as a headwind to the Chinese economy and market.

Prudential’s Hong Kong business also took a hit, due to its role as a central hub for customers looking for insurance throughout Asia.

Julia Varesko, senior analyst on the Pacific Asset Management Longevity and Social Change fund, said Hong Kong had been badly hit by the closure of the border with China over the last three years, and reported a weaker margin on new business partly because of a change in business mix.

She warned the speed of recovery in Hong Kong remained a “key area of concern” for Prudential.

Will Howlett, equity research analyst at Quilter Cheviot, highlighted China and Hong Kong as the key profit drivers of the group, noting the drop in the firm’s overall profits could largely be attributed to a dip in the profits of its new Hong Kong business, which have fallen 86% from 2018 levels.

Varesko also argued that increased regulatory oversight from the Chinese government had held share performance and valuation back.

With China’s Covid restrictions now lifted, however, Prudential has begun to feel the benefits of its shifted investment focus, analysts said, with its share price up 14% from the end of September last year to the start of March 2023.

Howlett said the re-opening had provided a “reassuring update” on growth following in the firm’s latest results, which reported overall annual premium equivalent sales growing by 9% to $4.4bn, up from $4.2bn, ahead of expectations.

Recent market turmoil in the financial sector has impacted its share price, which fell 21.9% in the past month, according to data from Morningstar.

Delisting

Rumours that the insurer would delist from the UK have swamped Prudential, which currently has a dual London-Hong Kong listing.

Losing firms to global competitors has been a growing pattern for London in the past couple of years, with semiconductor firm Arm recently dashing hopes for a London listing as it opted for New York.

Morningstar’s Heathfield said it would be a “shame” if the firm delisted from the UK, losing the country’s “long-term good practices in governance and oversight”.

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He added while leaving London is “in vogue”, the market has a high proportion of institutional investors, which is positive for share price transparency and price discovery, as well as volatility.

Meanwhile, Varesko noted that a delisting could allow for cost reduction for the firm but would eliminate the index weights in UK benchmarks, potentially leading to passive outflows. This could de-rate the shares temporarily until a new shareholder audience is fully established, she said.

Looking ahead

Moving into a post-Covid world, Varesko said Prudential’s performance showed the “resilience” of the insurance industry, and speculated that demand for protection and health insurance products could continue to increase post-pandemic, as it had done with SARS.

In the long term, Varesko said the firm operates in “attractive product areas”, such as life insurance and asset management, in regions where wealth is increasing and penetration of these products is still low, resulting in a sizeable opportunity to grow.

Richard Hunter, head of markets at interactive investor, explained the firm’s focus on Asia had “enormous” potential, as the middle class population is expected to swell to 1.5 billion by 2030, with an estimated health protection gap of $1.8trn as the population ages and continues to grow.

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The firm’s longer term strategy is “very much intact”, he added, boosted by a $2.4bn fundraising in the last financial year, which went towards reducing debt.

Hunter continued that geographical diversification had boosted the business across the region, along with a growth in the range of products it offers.

Howlett agreed, adding: “Prudential has leading positions in high-growth markets in Asia and Africa which stand to benefit from structural growth drivers, such as lower insurance penetration in their markets and favourable demographics.

“The scale, presence and distribution capabilities in its key markets gives it a competitive advantage over peers and gives it a long growth runway.”

However, Hunter highlighted the challenges for the firm, including a resurgent US dollar, uncertain macroeconomic conditions and market volatility.

Prudential asset management arm Eastspring saw a 14% decline in funds under management, he said, largely due to index falls as well as foreign exchange translation losses.