The Chinese insurance agency and brokerage was up as much as 79.6% to a high of $28.74 early in the session but hovered around or just above the $25 mark for most of the day. It closed 58% above its IPO price at $25.29.
The pricing of the deal followed a similar pattern to that of a couple pf other Chinese companies that have listed in the US in recent weeks: first the initial price range of $11-$13 was raised to $13-$15 on the final day of the bookbuild and then the final price was fixed above the new range at $16. This allowed the company to raise $185.6 million, or 23% more than the maximum indicated in its initial filing. Should it go ahead and also use the 15% overallotment option in full, the total deal size could increase to $213.4 million.
China Digital TV, a provider of connectivity access software and smart cards for digital TV systems, and Longtop Financial Technologies, which provides software and information technology solutions to banks and insurance companies, were other examples of this trend and both also had very stellar first-day performances.
Sources say the high IPO price was a reflection of the strong demand among US investors for non-US assets at the moment and note that the Chinese companies that are seeking to list on either Nasdaq or the New York Stock Exchange fit particularly well into this trend. Many of them, like CNinsure, operate within industries that US and European investors are familiar with from their home markets, but because these industries are typically at a much earlier stage of development in China and in an underpenetrated market, the growth opportunities are much greater.
This is definitely true for CNinsure with the insurance agency and brokerage industry expected to benefit from a projected compound annual growth rate of 150% in life insurance commissions in 2006-2009 and 55% growth of commissions from the non-life segment of the market. The company notes in its listing prospectus that only 1.7% of the Chinese population has life insurance, compared with 4.8% in the US. With regard to non-life insurance, the numbers are 1% for China and 4% for the US.
Looking at the recent Chinese newcomers to the US markets and the deals that are still in the pipeline, most of the companies are also the first from their respective sectors to seek a listing outside of China, which adds to the attractiveness.
CNinsure distributes insurance policies issued by ChinaÆs largest insurance companies as well as several international companies operating in China through 17 of its 21 affiliated insurance intermediaries. The other four are insurance brokerages which sources insurance products from various insurance companies on behalf of its retail or corporate clients. CNinsure, which earns most of its revenues from commissions and fees from the insurance companies, started off in 1999 as a distributor of auto insurance, but in 2002 it expanded into property and casualty insurance and in January 2006 it also began to distribute life insurance products. About 75% of its revenues come from policies sold to retail clients.
According to a source, the offering attracted about 350 investors and ended up more than 20 times covered even though orders were capped at 10% of the base size. The final book was said to have had a good balance between hedge funds and long-only funds and in terms of the geographical split, about 50% went to the US, 35% to Asia and 15% to Europe.
The IPO price values CNinsure at 30.3 times its projected 2008 earnings. This marks a sizeable premium to the insurance agencies in the US and UK, which trade at an average price-to-earnings multiple of 14.8 times. The slower growth profiles of the latter group clearly do warrant a significant premium for CNinsure, although it remains to be seen exactly how big the market believes it should be. The 58% rise in the share price on the first day pushed CNinsureÆs 2008 P/E multiple to about 47.7.
This meant the initial discount to the Chinese insurance companies - PICC Property & Casualty, Ping An Insurance and China Life Insurance û and other US-listed high-growth Chinese companies of any sector, which were also used by analysts as a valuation comparable of sorts, was wiped out after only one day. At the time of pricing after the Tuesday close in the US, the Chinese insurers were quoted at an average 2008 P/E multiple of 43 times, while the US listed Chinese companies were trading at 46 times.
Syndicate analysts project the company will see revenue growth of 75% this year and about 90% in 2008, which should result in a net income CAGR 60% in 2006-2009. However, net income growth will fall to about 27% next year from over 100% this year as the company will begin to pay a 25% tax rate, having paid close to zero in the past few years.
CNinsure sold 26.5% of its share capital in the form of 11.6 million American Depositary shares. Eighty-three percent of the base offering, or 9.65 million shares, are new, while the remaining 17% were sold by existing shareholders, including Lai Qiuping, who is of the two founders of the company and its current president. Morgan Stanley acted as the sole bookrunner.
The US market ended higher with the Dow Jones Industrial Average gaining 1.0% and the Nasdaq Composite adding 1.5%. Having opened on a bullish note on the back of a government report showing that the US economy grew at an annualised rate of 3.9% in the third quarter, the did come under pressure after the Federal Reserve cut its benchmark federal funds rate by 25bp to 4.5% almost five hours into the session.
The cut was entirely in line with expectations, but US commentators noted that traders were likely disappointed that the accompanying statement from the Fed said the upside risks to inflation roughly balance the downside risks to growth, suggesting another rate cut is by no means certain.
Still, after a brief dip into negative territory the Dow recovered again and ended the day higher than were it was before the rate cut announcement.
The stellar performance CNinsure bodes well for the other Chinese listing candidates that are currently on the road marketing US IPOs.
These include Agria Corp, which is seeking to raise up to $283 million ahead of a November 7 listing. The privately-owned company, which is engaged in sheep breeding as well as research, development and production of corn seeds and tree and plant seedlings, has enlisted Credit Suisse to arrange the deal
Air Media, a billboard and screen-based advertising firm, is trying to raise about $150 million with the help of Lehman Brothers and Morgan Stanley. It too is scheduled to start trading on November 7.
The third IPO candidate is Chinese drug store chain Nepstar, which is seeking about $250 million ahead of a November 9 listing. The company is 30% owned by Goldman Sachs, who will also act as bookrunner together with Merrill Lynch.
Focus Media û another screen-based advertising firm that is already listed in the US - has filed for a combination follow-on and sell-down by existing shareholders that could raise as much as $750 million based on the current share price. Citi, Credit Suisse and Merrill Lynch will be arranging that deal, which has yet to hit the road.
The first one to hit the spotlights, however, will be online gaming company Giant Interactive Group, which is due to price its IPO in the early hours of this morning. With an offering size of $680 million to $800 million, this will be the largest private sector IPO in the US by a Chinese company, surpassing LDK SolarÆs $470 million in June this year. Merrill Lynch and UBS are the bookrunners.
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