China Pacific Insurance calls off H-share IPO

The Chinese life insurer abandons its $3.2 billion offering due to limited pricing flexibility and a tough market, but two smaller listing candidates decide to go ahead.
China Pacific Insurance has decided not to pursue its Hong Kong listing plans after five days of pre-marketing that coincided with the worst weekly performance for the Hang Seng Index in seven years. ChinaÆs third largest life insurer, which went public in Shanghai in December through a $4.1 billion IPO, was looking to raise at least $3.2 billion from an H-share offering.

Given the poor market backdrop, the decision to postpone the H-share sale wasnÆt entirely unexpected. No launch date had been set when the bookrunners started to sound out the market last Monday. Sources said that the final call on whether to proceed would be taken following investor feedback.

In the end though, the challenge wasnÆt necessarily a lack of demand û although a deal the size of this one would typically need a week or two of relative market stability to attract sufficient interest û but the constraints imposed by a floor price determined by the Chinese regulators. Like all simultaneous listings in Shanghai and Hong Kong, the H-share price could not be set below the A-share IPO level, which in this case was Rmb30 per share. And while China PacificÆs A-shares are still trading slightly above that floor, other Chinese insurance companies have fallen significantly in recent months, leaving room for the newcomer to price at only a very tight discount to its larger peers.

China Life has shed 30% of its market value since the beginning of this year and is down 45% from its record close on October 30 last year. Ping An, which has been under additional pressure because of plans for a massive rights issue, has fallen 31% this year and 51% from its all-time high on October 2 last year. China PacificÆs A-shares rallied 60% on their 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 and closed yesterday at Rmb34.36 û 14.5% above the IPO price.

ôAfter weighing up its options, the company decided that there wasnÆt enough pricing flexibility,ö one source says. ôIt will come back later when the markets are more favourable.ö

The insurer, which is about 17%-owned by the Carlyle Group, had initially planned to launch the H-share portion of its offering in January to take advantage of the positive momentum from the A-share sale, but when the global equity markets turned sour in the middle of that month, it decided to wait. Since it would have had to start trading in Hong Kong before the end of March to make use of its current approvals, China Pacific will now need to update its financial accounts before it can return. In all likelihood the earliest this will be is towards the end of the second quarter. China International Capital Corporation, Credit Suisse and UBS are the joint bookrunners.

While the Hong Kong stockmarket finished 0.9% higher yesterday after a 600-point turnaround in afternoon trading, which market participants attributed partly to a short-squeeze, the signs have generally been pointing in the wrong direction recently. Not only did the Hang Seng Index tumble 7.5% last week, but weak payroll data in the US on Friday sparked renewed fears of a recession that resulted in the Dow Jones index extending its two-day loss to 2.9% and closing below 12,000 points for the first time in 15 months. The S&P index finished below 1,300 points for the first time since September 2006, after sliding 3% over two days. Both indices continued to fall last night as the benchmark sweet-crude oil futures pushed above $108 per barrel.

Adding further to the poor sentiment, Honghua Group fell 8.6% in its Hong Kong debut Friday after being down as much as 13.8% at one point. The oil and gas rig manufacturer raised $409 million from an IPO led by Credit Suisse and Morgan Stanley. While the poor performance obviously didnÆt come in isolation, it does show that many investors are unwilling to hold on to their allocated stocks to ride out an initial downturn. It is also a sign, perhaps, that they regard the current sell-off as more than just another case of heightened volatility. Honghua fell another 10% yesterday to HK$3.15, which took the stock 17.8% below its IPO price of HK$3.83.

Despite this backdrop, two other Hong Kong listing candidates decided to launch the institutional roadshows for their respective IPOs yesterday. However, both these deals are well below $100 million and should be able to attract sufficient interest even if the general market sentiment remains poor.

The larger of the two, Wing Fat Printing, which is a spin-off from Hong Kong-listed conglomerate Shanghai Industrial Holdings and makes printed packaging material for the tobacco and alcohol industry, has also set aside 7% of its deal for a preferential share offer to existing Shanghai Industrial shareholders. The company is aiming to raise between HK$607.5 million and HK$690 million ($78 million to $88 million) from the sale of 33.5% of the company. It is offering 150 million new shares at a price between HK$4.05 and HK$4.60 through joint bookrunners BNP Paribas and UBS.

According to a source, the price range values the stock at 9.3-10.6 times its 2008 earnings, which looks cheap compared with larger rival Amvig Holdings, which is also listed in Hong Kong and currently trades at a 13 times this yearÆs earnings.

Meanwhile, Xingfa Aluminium is seeking to raise up to HK$428.9 million ($55 million) from the sale of 125.4 million shares at HK$2.28 to HK$3.42 apiece, according to local media. ICEA is the sole bookrunner.

Looking at companies of a more meaningful size, Want Want will kick off the retail portion of its IPO today with the aim of raising up to $1.4 billion. The producer of rice crackers, flavoured milk and soft candy for the Chinese market, which is seeking to re-list only six months after a privatisation and restructuring exercise, is offering 20.5% of its share capital at a price between HK$3 and HK$4.10 per share. BNP Paribas, Goldman Sachs and UBS are the joint bookrunners.

Also in the market is Evergrande Real Estate Group, which started formal marketing to institutions last Thursday. Brought to market by Credit Suisse, Goldman Sachs and Merrill Lynch, the property developer is looking to raise between $1.3 billion to $2.1 billion.

The next key test for the Hong Kong primary market, however, will be China Railway Construction CorporationÆs (CRCC) trading debut on Thursday. The stock gained 28.2% in its A-share debut in Shanghai yesterday, which most market watchers deemed to be a disappointment in light of the usual first-day gains of at least 50% for newcomers in the A-share market. ChinaÆs second largest construction company, which has been involved in the construction of almost all railway lines in China since 1949, had also attracted close to $440 billion of demand for the A-share offering, sparking hopes that there would be a lot of investors chasing the stock to top up their initial allocations.

CRCCÆs close of Rmb11.64 yesterday is equal to about HK$12.70 and leaves the A-share at a premium of roughly 18% to the H-share IPO price of HK$10.70 û a gap that ôdoesnÆt suggest there will be a big H-share popö when it starts trading in Hong Kong, one observer notes.
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