• Prudential’s 2021 headline numbers look modestly ahead of expectations, which we think will be supportive for the stock. New business profit was 11% ahead of our expectations.
• The Board declared a second interim dividend of US$0.1186 per share.
• The recent resurgence of COVID-19 in Hong Kong has pushed back the reopening of borders; we now expect the mainland Chinese visitor (MCV) business to return in 3Q22.

Prudential's 2021 Results

• New business profitability growth ahead of expectations. Prudential (SGX:K6S) released 2021 results showing stronger-than-expected new business trends, with new business profit (NBP) up 15% to US$2,526m and solid new business margins (NBM) of 60% vs our full-year NBP and NBM forecast of US$2,278 and 54.7%. The IFRS operating loss after tax for 2021 was US$2,813m which comprised a US$5,027m loss from discontinued operations at Jackson. Prudential plans to reduce the stake in Jackson to less than 10% and secure additional central cost savings of US$70m from the start of 2023. Asia’s IFRS operating profit remains healthy with a 10% rise from US$3,662 to US$4,023, in line with our forecast of US$4,217m.
• Asia growth ahead of expectations. China’s annual premium equivalent (APE) and NBP were US$776m and US$352m, increasing 33% y-o-y and 31% y-o-y respectively. China had become the largest contributor to Prudential’s APE in 2021. This is supported by agency and bancassurance channels which delivered double-digit APE sales growth at 25% and 28%.
• Singapore achieved APE and NBP of US$743m and US$523m mainly due to the higher sales volumes, favourable shift in product mix towards newly-launched, higher margin investment-linked products and an increase of high-margin protection business (such as PruShield).
• Thailand’s new business profit margins increased by 129% y-o-y (constant exchange rate) driven by favourable product mix and improvement in interest rates over the period.

Severe COVID-19 Outbreaks in Indonesia and Hong Kong

• The recent resurgence of COVID-19 cases in Hong Kong has pushed back the reopening of borders. This caused a 27% y-o-y decrease in APE. A mix of wealth and protection offerings and a shift to higher-value products aided Prudential Hong Kong to achieve a 29% y-o-y increase in new business profit margin from 104% to 134%. Indonesia’s APE and NBP both decreased by 6% y-o-y and 19% y-o-y in 2021. COVID-19-related social restrictions and the economic slowdown had affected customer sentiment and disrupted sales activity.
• Prudential is setting up a dedicated Sharia entity as there are around 230mil Muslims in Indonesia and they are massively underserved. The Sharia market is a key strategic priority in Indonesia.

Declared Second Interim Dividend of US$11.86 Ucents Per Share

• The Board declared a second interim dividend of US$0.1186 per share which, together with the first interim dividend of US$0.0537 per share, resulted in a full-year dividend of US$0.1723 per Prudential share.

Reopening of the Border Between Hong Kong and Mainland China Is Key

• Hong Kong brought in the most new business with the highest margins for Prudential. Previously, we expected the border to reopen before the HKSAR’s Establishment Day anniversary on 1 Jul 22. However, the recent resurgence of COVID-19 cases in Hong Kong has pushed back this catalyst. We now expect the MCV business to return in 3Q22. With its bigger exposure in Hong Kong, Prudential will see significant new business value growth in late-22/1Q23.
• Challenging 1H22 in mainland China but agency quality could be near-term catalyst. Prudential has already delivered faster NBP growth in mainland China vs AIA over 2019-21, driven by a combination of low base effect and stronger growth in the Tier 1 cities such as Shanghai and Shenzhen. Given China’s deteriorating economy, Prudential's management guided that 1H22 will be challenging. However, Prudential is focusing on building a professional agency force and enhancing the productivity and quality of the agency force.
• The number of Prudential agents which are qualifying for the Million Dollar Round Table was increased by 23% and the cases per active agent had also increased by 69% in 2021. If Prudential is able to maintain this growth momentum in mainland China, this could be the near-term catalyst to share price performance.

Prudential - Earnings Forecast Revision & Recommendation

• Trim our embedded value (EV) and introduce 2024 EV and NBP. In our initiation report, we expected the border to reopen before the HKSAR's Establishment Day anniversary on 1 Jul 22. However, we now expect the MCV business to return in 3Q22 due to the resurgence of COVID-19 cases in Hong Kong. Hence, the significant new business value growth should come in in late-22/1Q23. We trimmed our 2022/23 full-year EV forecast for Prudential from US$52,987m/ US$59,178m to US$50,401m/US$55,032m and introduce 2024 based on EV-based SOTP-based approach and lower 2022 earnings. Our target price for Prudential implies 2022F 0.75x P/EV and 11.89x 2022F P/E.

Source: UOB Kay Hian Research - 10 Mar 2022