China Pacific Insurance yesterday started to sound out the market for a Hong Kong IPO which at $3.2 billion would become the largest H-share offering since China Citic Bank raised $4.2 billion in April last year.
China's third largest life insurer is expected to attract a lot of attention from international investors because of its size and the rapid development of private insurance in China, but it could have chosen a better day to share its story. Regional markets tumbled after weak data and concerns about more subprime related-losses sparked renewed fears of a global recession. In Hong Kong, the Hang Seng Index lost 3.1% and close peers China Life Insurance and Ping An Insurance dropped 4.3% and 3.4% respectively.
However, sources say China Pacific Insurance, which went public in Shanghai in December through a $4.1 billion IPO, has only a small window to complete the follow-on listing in Hong Kong after the initial plan to come to market in January was postponed because of difficult markets. To make use of its current approvals, China Pacific needs to start trading before the end of March and failing to do so will mean its financial accounts need to be updated before the marketing can resume.
The prolonged market weakness may not be all that bad, since it has resulted in the valuation of the company's A-shares coming down to a level that is more attractive to investors. On the other hand, the ability to price at a substantial discount to the A-share has been severely hampered.
Analysts and bankers from the three bookrunners—China International Capital Corporation, Credit Suisse and UBS—will meet with potential investors for about 1.5 weeks of pre-marketing to gauge the response and will then make a decision on whether to launch the deal or not, the sources say.
The challenge for the company and its three bookrunners is that the price of the H-share offering cannot be below the A-share IPO price of Rmb30 per share, which means there is limited flexibility on the downside if the valuation of the other Chinese insurers continues to drop. The sector has been under pressure partly because its investments in Chinese stocks have lost a lot of value in the downturn.
China Life has shed 25% of its market value since the beginning of this year and is down 42% from its record close on October 30. Ping An, which has been under additional pressure because of plans for a massive rights issue, has fallen 30% this year and 50% from its all-time high on October 2, while PICC Property & Casualty is off 25% year-to-date and 51% from its October 18 high.
Sources say the floor price for China Pacific Insurance's H-share offering, which will translate into about HK$32, puts it at a slight discount to the other two life insurers, although the gap is not particularly wide. Based on a valuation metric referred to as price-to-new business value (which takes into account the embedded value of the insurer), a HK$32 price per share will value China Pacific at a multiple of 26.3 times, according to one source. This compares with about 32.4 times for China Life and 27.7 times for Ping An.
China Pacific's A-shares rallied 60% on its first day of trading on December 25 and reached a closing high of Rmb50.31 two days later. Since then the share price has been on a largely downward trend, although it is still 21% above the IPO price after adding 2.8% yesterday for a close of Rmb36.19.
The number of H-shares on offer has been fixed since the A-share IPO at 783 million plus a 15% greenshoe that will increase it to about 900 million. Based on this, and the floor price, the company will raise at least HK$25.1 billion ($3.2 billion). All the shares on offer will be new and will account for 9.2% of the company or about 20% of the free-float pre-shoe.
Given the size of the offering, China Pacific is expected to enlist cornerstone investors to help anchor the deal. Sources say there is a lot of interest and the company may sell as much as 30% of the deal—the maximum allowed under the Hong Kong listing rules—to various cornerstones. The Carlyle Group has been an investor in China Pacific since 2005 and together with Parallel Investors currently owns 19.9% of the company.
China Pacific is the leading composite insurance company in China with total assets of about Rmb250 billion ($35 billion). It derives just over 65% of its gross premiums from life insurance and the remainder from property and casualty, including auto insurance which makes up about two-thirds of the P&C segment. Based on data published in connection with the A-share listing, the company had a market share of about 10% for life insurance and 11.5% for property & casualty insurance.
One source argues that China Pacific, although smaller than China Life and Ping An both in terms of total assets and gross written premiums, is attractive because it has "a much higher growth rate" and is able to extract synergies between its life and P&C operations.
"It is doing what it is good at, which is to get new people insured. And compared with Ping An, which is trying to diversify into banking, this is a purer insurance play," the source says.
The company is also going public at a time when the effect of the negative spread polices that the Chinese insurers were forced to write before 1999 has largely worn off.
The largest IPO in Hong Kong so far this year is China Railway Construction Corporation's (CRCC) $2.2 billion to $2.3 billion H-share offering, which closes on March 5. The construction firm has already completed a near-simultaneous $3.1 billion A-share portion. CRCC is brought to market by Citi, Citic Securities and Macquarie Capital and is due to start trading in Shanghai on March 10 and in Hong Kong on March 13.
China Citic Bank's H-share offer formed part of a dual listing IPO (in Hong Kong and Shanghai) that raised a combined $5.9 billion post-shoe. Citic Securities, CICC, Citigroup, HSBC and Lehman Brothers were the bookrunners for the H-share portion.