China Pacific Insurance IPO to raise up to $3.35 billion

CPIC sets price range at discount to Hong Kong comps and its current A-share price, while Rusal hopes for a listing approval that will allow it to go ahead with its $2 billion IPO tomorrow.

China Pacific Insurance (Group) Co (CPIC) has set a price range for its Hong Kong initial public offering at a level that based on current market prices promises a significant discount to its closest peers. The Shanghai-based company, which provides life as well as property and casualty insurance, kicked off its institutional roadshow yesterday and is scheduled to list on Hong Kong's main board on December 23.

According to sources, the deal will comprise 861.3 million H-shares at a price between HK$26.80 and HK$30.10, which will result in a total deal size between HK$23.08 billion and HK$25.93 billion ($2.98 billion to $3.35 billion).

The price range values the Chinese insurer at 1.67 to 1.84 times its estimated embedded value, which at the top end of the range puts it at a 32% discount to Hong Kong-listed shares of China Life Insurance and Ping An Insurance, which as of yesterday were trading at an average 2.7 times their embedded value. Embedded value is an estimate of future profits from existing policies plus adjusted net asset value.

The discount could increase further during the marketing period since China Life and Ping An are both on a rising trend at the moment. But perhaps more importantly, a 10% rally in CPIC's Shanghai-listed A-shares last Friday, has allowed the company to set the H-share price range at a discount to its A-shares as well. If that relationship persists until pricing, it will undoubtedly make the offering more attractive.

The A-shares closed yesterday at Rmb27.10, which translates into HK$30.75. Like China Minsheng Banking Corp, which listed in Hong Kong last month, CPIC is under no obligation to price its H-shares above the A-shares -- a restriction that has been imposed on several other Chinese companies that have completed near simultaneous A- and H-share listings over the past couple of years. However, Chinese regulators have chosen to be more lenient for companies that have had an A-share listing for some time already (Minsheng Bank listed in Shanghai in 2000, while CPIC made its A-share debut on Christmas Day 2007).

CPIC wasn't so lucky when it made its first attempt to list in Hong Kong in March 2008, however. At that time, the company had committed not to price the H-share IPO below its Shanghai IPO price of Rmb30 and when the Hong Kong market fell sharply during the marketing, it was unable to adjust its offering price accordingly. The result was that the valuation became too expensive in relation to its Hong Kong-listed peers and the deal had to be cancelled.

This time, the Chinese regulators have allowed CPIC to lower the floor price from Rmb30 to Rmb23.52, although with the recent share price gains among insurers -- both in Hong Kong and Shanghai -- that price has lost its importance. China Life, which closed at a two-year high of HK$41 in Hong Kong yesterday, gained 9% last week, while Ping An added 5.7%. Ping An's HK$73.95 finish yesterday was just 2% below the 20-month high of HK$75.60 that it reached on November 25.

CPIC is part-owned by private equity firm Carlyle (a 3.3% stake post the IPO), which may provide additional comfort for investors, and the listing candidate has also attracted six cornerstone investors that have agreed to buy a combined $395 million worth of shares in the IPO. At the bottom of the price range, this translates into 13.3% of the total deal size.

The largest cornerstone will be a company wholly owned by Allianz, a German provider of financial services, including property, casualty, life and health insurance, which has agreed to invest $150 million. Allianz has also entered into a non-binding set of "key principles" regarding a cooperation with CPIC within asset management -- pensions in particular -- and other potential areas such as insurance product development, reinsurance and investment. "The parties intend to discuss and negotiate the terms and conditions of their future cooperation in such areas, using the non-binding principles as the basis for their discussions," the listing document states.

The other cornerstones are: Japan's Mitsui Sumitomo Insurance, which is buying $65 million worth of shares; Hong Kong-based Dah Sing Bank, which will take $30 million worth; and the Cofco group, a Chinese importer-exporter of oils, grains and foodstuffs; investment company China Overseas Holdings; and the Regal Hotel group. The latter three are each investing $50 million.

Of the total number of shares on offer, 783 million, or 90.9%, will be sold by the company, while the remaining 78.3 million will be offloaded by the National Social Security Fund. All H-share companies need to transfer 10% of any new H-share issuance to the NSSF, which can then decide whether to sell them straight away as part of the IPO or to hold on to them for a while.

Including the NSSF shares, the IPO will account for 10.2% of CIPC's enlarged share capital. There is an overallotment option that may increase the total proceeds to as much as $3.85 billion. Initially, 5% of the deal will be earmarked for Hong Kong retail investors, although this may be increased to a maximum of 20% in case of strong demand. The Hong Kong public offering will kick-off on Thursday and the deal is expected to price after the New York close on December 15.

In the first nine months this year, the Shanghai-based company ranked third in China in terms of premium income both within life insurance and property & casualty, according to industry data. In 2008, it generated premium income of Rmb94 billion ($13.7 billion), according to data on its website, and at the end of September this year it had a market share of 8.1% in life insurance and 11.6% in property & casualty. It is significantly smaller than both China Life and Ping An, but as a result, is growing faster than both of these comps.

According to sources, the company recorded 28% growth in sales in the 12 months to July this year, which compares to an average 20% growth for its two main peers. It also grew its invested assets by 58% in the same period, above the 52% recorded by China Life and the 43% that Ping An achieved.

As the third largest player, CPIC is also in a good position to benefit from the long-term growth of the insurance industry in China. Analysts note that insurance penetration in China is still low compared with developed countries, but the continued economic growth in the country as well as rising household incomes are likely to see more and more people sign up for insurance. This trend has already been visible for the past few years with CPIC having increased its number of life insurance customers to 34 million from 14.3 million at the end of 2004 and its property and casualty insurance customers to 13.9 million from 7.7 million.

The Chinese insurer is being brought to the Hong Kong market by China International Capital Corp, Credit Suisse, Goldman Sachs and UBS.

Rusal hopes to kick-off IPO roadshow tomorrow

While this didn't seem likely a week ago, CPIC may end up marketing its IPO in parallel to Rusal, the Russian aluminium giant that is controlled by industrial magnate Oleg Deripaska. The company was up for another hearing in the Hong Kong listing committee yesterday and if approved, sources said it will kick off its institutional roadshow tomorrow. Bankers involved in the Hong Kong IPO said they expect to hear back from the Hong Kong stock exchange this morning.

Rusal, which is aiming to raise about $2 billion from a dual-listing in Hong Kong and Paris, went for a first committee hearing in late November, but the committee said it needed more time to go over the documentation. Since then, Rusal has reached an agreement with its creditors regarding the restructuring of $16.8 billion of outstanding debt, which should significantly improve its chances for a go-ahead from the Hong Kong exchange.

Given the limited time left before the holidays, the timetable for Rusal's potential listing will be quite compressed -- the banks will for instance do the investor education in parallel with the management roadshow -- but people close to the offering note that the deal has been well telegraphed to the market and the top global institutions are already familiar with the company after an earlier cornerstone process, which makes them confident that it can be sold in the available time slot. Assuming it will get the nod from the exchange today, Rusal will pursue a marketing schedule that could see it debut in Hong Kong on December 23 -- the same day as CPIC.

The company is being brought to the Hong Kong market by Bank of America Merrill Lynch, BNP Paribas, BOC International, Credit Suisse and VTB Capital, a unit of Russia's Vnesheconombank. 

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