Prudential receives significant China reopening boost  

Share price reaction to the Pru's annual results has been negative, but our head of markets sees enough to like in latest numbers from the insurance giant. 

Now fully focused on Asia and Africa, Prudential (LSE:PRU) has been boosted by the recent reopening in China, allowing business to resume its growth trajectory.

Indeed, the longer-term strategy is very much intact, and the group is one which is on an extremely stable financial footing, boosted by a fundraising of $2.4 billion in the last financial year which went towards reducing debt.

• Invest with ii: Open an ISA | ISA Investment Ideas | ISA Offers & Cashback

The insurance and health protection markets within Prudential’s target geographies provide a rich seam of opportunities alongside increasingly wealthy populations with evolving financial needs. The company has pointed to an expected middle class population of 1.5 billion across Asia by 2030, with an estimated health protection gap of $1.8 trillion. The potential spoils are enormous and Prudential has a strong reputation in these regions.

Prospects in China are also receiving a twin boost. On the one hand, regulatory proposals in the region are favourable for insurance markets, while at the same time demographics are also improving given an ageing population, an emerging middle class and rapid urbanisation, to which Prudential is attuned.

The reopening of the economy following the lifting of Covid-19 restrictions also provides a fillip to the Hong Kong business. Significant numbers of mainland Chinese customers choose to buy their insurance products in Hong Kong, since this provides both asset class and currency diversification, as well as access to a broad range of products and high-quality medical care.

With travel now possible, Prudential has seen Annual Premium Equivalent (APE) sales rise by 15% in the two months to February of this year as compared to the year previous, largely driven by Hong Kong sales, and providing a welcome early boost to the group’s immediate outlook.

Alongside those regions, Prudential has also seen the benefits of geographical diversification, with balanced contributions from the likes of Taiwan and South East Asia. In addition, the group is targeting further growth through a combination of growing its range of products, consolidating its distribution channels and enhancing its digital capabilities.

Despite the difficulties of the last year, overall APE sales grew by 9% to $4.39 billion in 2022, up from $4.19 billion and ahead of the expected number of $4.22 billion. Adjusted operating profit also rose from $3.23 billion to $3.38 billion, which was marginally ahead of estimates. The dividend was also increased by 9%, although the projected yield of around 1.5% is pedestrian given other returns from the sector.

Challenges undoubtedly remain, not least of which come from the resurgence of the US dollar, generally uncertain macroeconomic conditions and market volatility.

Indeed, its asset management arm Eastspring felt the shivers from markets, with a 14% decline in Funds Under Management, largely due to index falls as well as foreign exchange translation losses. Adjusted operating profit also fell by 17%, although from a group perspective the continued focus on cost reduction will mitigate any areas of the business which are encountering tougher trading conditions. New business profit also fell by 11% to $2.18 billion, with the culprits coming in the form of higher interest rates and the effects on the group’s business mix.

• Five insurance stocks to buy now
• Five reasons to invest in China
• 2023 Investment Outlook: stock tips, forecasts, predictions and tax changes

Overall, the Chinese reopening is a major boon for immediate prospects, as evidenced by the strength of new sales already being seen in the new financial year. In turn, the share price has had an extremely strong run of late, with a rise of 26% over the last six months contributing to a hike of 13% over the last year, as compared to an increase of 6.4% for the wider FTSE100.

Some profit taking given this recent run has been exacerbated by a weaker wider market in early exchanges, with the shares seeing some weakness. There's also some disappointment about the lack of a strategy update that many professional investors had been anticipating.

However, it appears that longer-term prospects remain very much intact, and the market consensus of the shares as a 'strong buy' is seemingly leading most to believe that the strategy will continue to flourish.