PICC’s IPO Raises Specter of Cornerstone Deals Gone Sour
People’s Insurance Company (Group) of China (1339) is relying on $1.82 billion of pre-negotiated investments to seal Hong Kong’s biggest initial public offering in two years. History advises caution.
American International Group Inc. (AIG), Zijin Mining Co. and 15 other so-called cornerstone investors have agreed to purchase shares in the first national insurer under Communist rule, receiving a guaranteed amount of stock in exchange for the promise that they won’t sell PICC shares within six months, according to the Beijing-based company’s IPO prospectus. PICC plans to set a final price by tomorrow for the $3.6 billion offering and begin trading in Hong Kong on Dec. 7.
While the presence of investors such as AIG and China’s burgeoning insurance market may help ensure the deal succeeds, cornerstone support doesn't always lead to post-IPO gains. Among 21 Hong Kong deals worth at least $500 million in the past two years, those with the highest proportion of such investors underperformed other IPOs, data compiled by Bloomberg show.
“PICC can probably get this deal done with a reasonable valuation and good names such as AIG among its long-term investors,” said Nelson Yan, a fund manager at Sinocap Management (Hong Kong) Ltd. Still, “cornerstones are no guarantee of success in IPOs.” Yan said he isn’t planning to subscribe for PICC Group shares.
Founded in October 1949, PICC offers property, casualty, life and health insurance products. It had about 130 million individual customers and 2.4 million institutional clients at the end of June, according to its prospectus.
The IPO would be the largest in Hong Kong since October 2010, when AIA Group Ltd. (1299) sold $20.5 billion of shares, data compiled by Bloomberg show.
Cornerstone investors purchase IPO shares at the same price as other buyers. The practice of large investors committing early for an IPO is common in Hong Kong and Southeast Asian bourses though rarely seen in the U.S.
PICC’s bankers are marketing the shares at HK$3.42 to HK$4.03 apiece. Cornerstone buyers will account for more than 59 percent of the deal’s value at the low end of the pricing range, data compiled by Bloomberg show. In the eight offerings worth at least $1 billion over the past two years, cornerstones accounted for an average 26 percent of the deal size, according to the data.
Among the 21 IPOs of $500 million or more in Hong Kong in the past two years, the five with the highest proportion of cornerstone investors have fallen an average 23 percent from their offer prices. The seven deals with no such buyers have awarded their investors with an average 0.5 percent gain, data compiled by Bloomberg show.
Hong Kong’s benchmark stock index fell 6.3 percent during the period.
IPOs by New China Life Insurance Co. and Prada SpA illustrate the divergence of performance. New China Life sold 59 percent of the $1.3 billion Hong Kong portion of its IPO to cornerstone investors last December. Assuming they held their stock, the buyers would have lost about a combined $140 million as the shares slumped 18.3 percent from the offer price, according to data compiled by Bloomberg.
By contrast, Prada, the Italian fashion house that enlisted no cornerstones for a $2.5 billion IPO in June last year, has rallied 61 percent from its offer price. Prada has benefited from rising spending on luxury goods by China’s swelling ranks of affluent people.
PICC has a few advantages that could allow it to defy the cornerstone jinx in the long term, according to some analysts.
The IPO price range values it at 21.8 to 25.7 times 2011 earnings, which is “reasonable” compared with China Life Insurance Co.’s ratio of 28.3 and Ping An Insurance (Group) Co.’s 19.4 multiple, said Olive Xia, a Shanghai-based analyst at Core Pacific-Yamaichi International Ltd.
The company has also barely made inroads into the Chinese market for life and health insurance. Those units “remain small and not very profitable at present, but will see strong growth over the next three to five years,” Xia said.
The potential for continued growth in life insurance is illustrated by low penetration rates in China, according to Stephan Binder, a Shanghai-based director at consulting firm McKinsey & Co. A gauge measuring the size of premiums compared with the local economy shows China has a 2.6 percent life- insurance penetration rate, compared to 10 percent in Hong Kong and 40 percent in Taiwan, according to McKinsey.
“It’s inevitably going to grow,” Binder said.
PICC Group is the biggest property insurer in China with 147 billion yuan in premium income for the first nine months of this year, according to the website of China Insurance Regulatory Commission. It has a 69 percent stake in PICC Property & Casualty Co. (2328), a Hong Kong-traded unit with a market value of $15.5 billion, the prospectus shows.
China’s insurance market expanded at an average 19 percent annual pace in the past decade to become the world’s sixth biggest, while insurers’ assets jumped 10 times, according to the industry regulator.
Other than AIG, which has agreed to buy $500 million of PICC Group’s shares, and Zijin Mining, with a $50 million commitment, backers of the deal include a unit of China State Grid Corp., with a $300 million commitment; and China Export & Credit Insurance Corp., with $100 million.
China International Capital Corp., Credit Suisse Group AG, Goldman Sachs Group Inc., and HSBC Holdings Plc are leading the share sale as joint sponsors, the prospectus shows.
Cornerstone investors can be critical for shoring up IPOs in volatile markets, said Philippe Espinasse, a former equity capital markets banker at UBS AG and Nomura Holdings Inc. and author of “IPO: A Global Guide.”
Quality of Investors
IPOs in Hong Kong are on pace for their worst year since 2003. Companies have so far raised $3.5 billion through IPOs, 78 percent less than the same period in 2011, according to data compiled by Bloomberg.
“What really matters is who these cornerstone investors are,” Espinasse said. Some Chinese companies going public in Hong Kong have relied on state-owned enterprises and other mainland institutions to buy shares in their IPOs, rather than sovereign wealth funds and billionaires, he said.
“It raises questions about the attractiveness of these transactions to the wider universe of institutional investors,” said Espinasse.