PRU (02378): Diversification effect realizes main business resilience, high growth and high dividend value are expected to increase

In the strong market demand released in the first two quarters of last year after the customs clearance, as well as the high base, the demand for mainland residents to invest in insurance in Hong Kong remains strong this year. Data released by the Hong Kong Insurance Authority shows that the total new individual premiums in Hong Kong reached a high of 115.6 billion Hong Kong dollars in the first half of 2024, an increase of 12.2% year-on-year, reaching a historical high. Among them, the investment in insurance by mainland visitors in Hong Kong reached 29.7 billion Hong Kong dollars, showing continued high popularity. The growth trend in the Hong Kong insurance market is evident, and insurance companies are capitalizing on the momentum. On August 28, PRU (02378) announced its performance for the first half of 2024. During the period, the company's new business profit (NBP) for the first half of the year was 1.468 billion US dollars, an 8% year-on-year increase (excluding the impact of exchange rates and economic factors); adjusted operating profit was 1.544 billion US dollars, a 9% year-on-year increase, continuing its growth momentum. In addition, the company's first interim dividend per share was 6.84 US cents, a 9% year-on-year increase. Dual-drive stabilizes the basic business and actively transforms layout, injecting new energy PRU provides life, health insurance, and asset management services in 24 markets in Asia and Africa. During the period, the operating profit from the insurance business was 2.486 billion yuan, an 8% year-on-year increase; and the operating profit from asset management was 1.42 billion yuan, a 9% year-on-year increase. With both major businesses growing steadily, the company has solidified its development base. As of the first half of 2024, the insurance company ranked in the top three in 10 of the 14 Asian life insurance markets it operates in. The multi-channel distribution and bank insurance distribution platforms have maintained large scales, with an average of about 63,000 active agents each month. PRU is also the top independent insurance company in the Asian bank insurance rankings, with over 200 bank insurance partners. The growing demand from Asian affluent populations has driven the fundamental growth of NBP, providing support for the company's long-term business growth and stock performance. Additionally, the company's internal investment business, HengYa, currently manages assets exceeding 247.4 billion US dollars and ranks in the top ten in six markets. Health business transformation is progressing in an orderly manner, and the company is strengthening the independent operation of the health business in areas such as product offerings, distribution, and supplier networks. It is believed that as a leader in life and wealth management, PRU's effective dual-drive of insurance and asset management businesses has solidified its basic business. The operating free surplus earned from the two businesses in the first half of the year was 1.351 billion yuan. As the company actively promotes business transformation, the transition of the health business towards independence is expected to inject new energy into the company's growth and guarantee sustainable long-term value growth. Furthermore, as of the end of June 2024, the company's free surplus ratio was 232%, exceeding the Group's regulatory capital surplus requirement of 15.2 billion yuan, equivalent to a coverage ratio of 282%. Considering the current abundance of free surplus reserves, the company is carrying out a 2 billion US dollar share repurchase program, which is expected to be completed no later than mid-2026, with 700 million US dollars expected to be completed by the end of this year. In addition, the company's dividend growth this year increased by 9%, reaching the upper limit of the expected 7-9% dividend growth for the company. The buyback and dividend payout to shareholders show the company's confidence in the potential for operational growth. With the implementation of a high dividend investment strategy this year, PRU's value as a high dividend target is evident. Goldman Sachs believes that the NBP and operating profit achieved in the first half of the year meet expectations and gives PRU a "buy" rating with a target price of 154 Hong Kong dollars. Diversification benefits confirm the resilience of the main business, and business synergy shows significant momentum for long-term growth PRU's insurance business demonstrates operational resilience with its multiple locations, multi-channel distribution, and diverse product portfolio. Firstly, as of June 30, 2024, the company's insurance business is spread across mainland China, Hong Kong, Singapore, Indonesia, Malaysia, and other growth markets. In particular, the mainland China business is operated in the name of China CITIC PRU Life through a joint venture with CITIC Group's CITIC Financial Holdings. During the period, the annual premium equivalent sales (APE) in various regions were approximately 3.24 billion yuan, 9.66 billion yuan, 4.50 billion yuan, 1.07 billion yuan, 1.91 billion yuan, and 10.84 billion yuan. Overall, sales growth in Malaysia, Singapore, and other growth markets offset declines in other markets. In the first half of the year, annual premium equivalent sales increased by 6% to 31.11 billion yuan, and NBP (excluding economic impact) increased by 8%. It is worth noting that on a high base of 45% growth in the previous year, NBP was able to continue its growth momentum, demonstrating the added operational resilience of its diversified distribution. In fact, despite facing pressure in the Hong Kong business in the first half of the year due to the high base effect in the previous year, the company still achieved an APE of 9.6 billion yuan, and excluding economic factors, it increased by 9%. New business in Hong Kong saw profitability increase by 11 percentage points to 76%, showing its operational resilience. PRU stated that it noticed a rebound in sales momentum in June, which continued into the second half of the year. For 2024, it is expected that the annual growth rate of NBP will be consistent with the annual growth rate needed to achieve PRU's target NBP growth from 2022 to 2027 (an average compound growth rate of 15-20% from 2022-27). Secondly, through multiple distribution channels, PRU rapidly adapts and flexibly responds to the market to meet the needs of each local customer. As of the end of June 2024, the company's distribution network includes approximately 63,000 average active agents per month and over 200 bank partners. During the period, annual premium equivalent sales through the company's bank insurance channel increased by 27% to 13.38 billion yuan; NBP sales in the health and protection areas increased by 15% during the period, accounting for 50% of policies purchased through banks from PRU, and contributing 8.5% to the bank insurance annual premium equivalent sales. With broader coverage of the bank insurance channel, incremental market growth in new business sales remains promising. In addition to traditional agent and bank insurance partner channels, the group has launched the digital tool PRUServices to accelerate innovation and ultimately increase operational efficiency. During the period, PRUServices was launched in Malaysia, with registration numbers approximately double the previous platform.This significantly improves the customer experience, and the Net Promoter Score has improved by 7 points according to transaction levels. The company plans to launch more comprehensive PRUServices in 9 business areas in the next 12 months.Finally, a rich product solution is also an important tool for PRU to seize the market. For example, the company launched an index universal life insurance plan "PRU Heritage Index" in Singapore, which not only meets the inheritance planning needs of high-net-worth individuals, but also enhances customer interaction in the high-net-worth field. In July of this year, the company also launched a groundbreaking medical product that provides medical freedom for travelers to and from Hong Kong, Macau, and mainland China. This product provides comprehensive lifelong protection, allowing customers to access quality medical services in mainland China and other regions through a single application, and enjoy quality protection. In summary, the new and innovative products launched every year diversify the group's product portfolio and help expand its market in various regions. HanYa is the asset management business division of PRU, and through cooperation with the company's insurance business, its investment experience supports the long-term structural growth of insurance products. At the same time, it meets the needs of external third-party customers. In addition, the capital net inflow of the group's insurance department has enhanced the investment capabilities of the asset management company, strengthening existing business with higher risk-adjusted returns. Under the guidance of the above synergies, as of June 30, 2024, the asset management company's managed fund size reached 247.4 billion yuan, a year-on-year increase of 9%, and the adjusted operating surplus increased by 15.5 million yuan, up by 8%. In the first half of the year, HanYa's investment performance was impressive, with 42% of managed funds outperforming the benchmark in one year, and 45% outperforming the benchmark in three years. HanYa's fixed income strategy in Singapore continued to deliver strong long-term performance, with 74% of investment portfolios outperforming the benchmark on average in 1 to 3 years. The stock strategy also performed well, with 69% of investment portfolios in Singapore outperforming the benchmark on average in 1 to 3 years. In the first half of this year, APE of the insurance business in Singapore also recorded a 17% impressive growth. It can be seen that the multi-level local business structure of insurance + asset management also creates synergies for the overall asset management business in terms of new assets and profit growth. In order to continue to leverage business synergies and build momentum for long-term growth, the company and HanYa have launched the "Wealth Academy" to support the training and development needs of Prudential Financial Advisers (PFA) distribution team. The team has grown to over 800 financial advisors, providing a more comprehensive product portfolio as a supplement to PRU's core insurance products and services. The range of products now includes products from eight general insurance companies and three life insurance companies, enriching the product portfolio for affluent and high-net-worth individuals, as well as retirement plans designed to meet the needs of a rapidly aging population. The company is expected to further expand its product range by 2024 and plans to recruit an additional 1000 advisors to join the PFA team. In summary, high growth and high dividend mix Business value assessment changes or welcome new growth PRU continues to cultivate the Asia-Pacific market, positioning its life insurance and asset management business well for steady progress, taking advantage of the opportunity of low insurance penetration rates in various regions to ensure long-term growth certainty. In addition, the company's effective insurance and asset management businesses continue to generate healthy operating free cash flow, indicating the company's strong internal cash generation capabilities and capital surplus generation, providing financial security for new business transformations and actively rewarding shareholders, with room for growth and high dividends. To comprehensively consider the future cash flows of existing business, PRU plans to use TEV (traditional embedded value) as the company's business valuation system in the first quarter of 2025. In fact, PRU has always used EEV (European embedded value) as a value-based reporting method, reflecting changes in business value during the accounting period, but this has reduced comparability with peers who use TEV. It is believed that under the same business valuation system, PRU's business value potential will be further recognized by investors, thereby opening up new valuation growth opportunities.