Prudential’s (LSE: PRU) share price is on the up right now. Over the last month, it’s risen more than 15%. Can it keep climbing in 2023? I believe it can.
In fact, I think there could be significant upside from current levels. Here’s why.
Prudential has underperformed
Prudential underperformed the FTSE 100 index by a wide margin last year. While the Footsie was up around 2% (not including dividends), Prudential shares fell about 11%.
Much of this underperformance was related to China’s strict Covid-19 restrictions and the impact they had on the company’s revenues and profits. Ultimately, they hampered mainland China citizens’ ability to travel to Hong Kong (a major financial services hub) and to take out insurance.
Before the pandemic brought cross-border traffic to a standstill, mainland Chinese were the biggest buyers of Hong Kong insurance policies. At the peak in 2016, for example, they bought around HKD $73bn (approx £8bn) worth of policies, representing nearly 40% of all premiums collected in the city.
Since the Hong Kong/China border has been closed however, premiums generated from mainland Chinese citizens have been close to zero. This is reflected in Prudential’s H1 2022 results. For the period, new business profit from its Chinese mainland business contributed pretty much nothing towards Hong Kong’s total new business profit. By contrast, in 2019, it contributed nearly $700m.
China’s reopening is a game-changer
The situation in China has changed dramatically over the last month, or so. In December, China began to relax its Covid restrictions significantly. And on 8 January, it opened up the border between the mainland and Hong Kong for the first time in three years.
This is a major development for Prudential and there’s likely to be a huge amount of pent-up demand for insurance products.
It’s worth noting that when insurer Manulife surveyed over 1,600 mainland Chinese residents in 2021, it found that the vast majority planned to visit Hong Kong when the border reopened, with more than half saying that they intended to purchase insurance products there.
So the outlook for Prudential has improved significantly.
Low valuation
Now this development is reflected in Prudential’s share price, which is on a tear right now. However, I don’t think it’s fully priced in.
Currently, the stock is still more than 20% below its 2021 highs. Meanwhile, the stock’s forward-looking price-to-earnings (P/E) ratio is only about 12.3, which is below the UK market average.
That strikes me as a relatively low multiple, given the company’s growth potential now that it’s solely focused on Asian and African markets.
So I think there are further gains to be had here.
I’m bullish
I’ll point out that I don’t expect Prudential’s share price to rise in a straight line going forward. After the strong gains generated recently, there’s always the chance of a pullback in the near term.
Overall however, I’m very bullish on the stock. If I didn’t already have a sizeable holding in my own portfolio, I’d be buying Prudential shares today.
