China Pacific Insurance starts marking for H-share IPO

China Pacific Insurance (Group) Co (CPIC) yesterday started the marketing for its long-awaited H-share initial public offering with sources saying the deal could raise more than $3 billion.

The offering could well be the last multi-billion dollar IPO in Hong Kong this year, depending on whether Russian aluminium producer Rusal gets final approval from the stock exchange to go ahead with its $2.5 billion deal later this week. The third large issuer that was planning to come to market before year end -- Australian commodities play Resourcehouse -- has decided to postpone its offering until early next year since it still has some outstanding issues that it needs to clarify to the stock exchange. Resourcehouse, which is owned by Australian businessman Clive Palmer and is working with Metallurgical Corporation of China on one of its two projects, is looking to raise about $2.5 billion.

CPIC listed in Shanghai two years ago and tried to follow that with a listing in Hong Kong in March 2008. However, that attempt had to be cancelled after the Hong Kong market fell sharply during the marketing, making CPIC's valuation too expensive in relation to its Hong Kong-listed peers -- China Life Insurance and Ping An Insurance.

The key issue back then was that the company, which provides both life and property and casualty insurance, had committed not to price the H-share IPO in Hong Kong below the Shanghai IPO price of Rmb30. Thus, when the Hong Kong market fell, the company was unable to adjust down its offering price accordingly.

That should be less of an issue this time. For one, the Chinese regulator has agreed to lowering the floor price from Rmb30 to Rmb23.52, and more importantly, the H-shares of China Life and Ping An are both trading at a premium of about 11% to 12% to their respective A-shares. This means that CPIC has a lot more room to stick with the floor price and still come at an attractive discount to its Hong Kong-listed peers.

Based on the prevailing exchange rate, the floor price translated into a price in Hong Kong dollars of HK$27.70 as of Friday last week. This equals about 1.7 times 2010 embedded value, based on estimates by one of the bookrunners, and puts CPIC on average at a 33% discount to China Life and Ping An, according to a source.

Another bookrunner has a higher valuation and suggests the floor price translates into a price-to-embedded value multiple for 2010 of just over two times. However, with China Life trading at 2.9 times and Ping An at 3.7 times, there is still room to market CPIC as a relative value play. However, there is no guarantee that the bottom of the price range will correspond to the floor price -- it could be higher, narrowing the gap to the comps. The price range will be set before the company embarks on the official roadshow next Monday (December 7).

The company has already determined, however, that it will sell about 9% of its enlarged share capital in the form of 783 million new shares in its first H-share offering. The final pricing will be fixed on December 15, New York Time, and the listing is scheduled for December 23 - almost two years to the day after its Christmas Day debut in Shanghai in 2007.

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.

However, it is significantly smaller than both China Life and Ping An, which have a market capitalisation of $126 billion and $62 billion respectively. By comparison, CPIC's A-share price implies a market cap of $27 billion. It also has lower invested assets. But being small has its advantages. Like last time the company was in the market, it will be telling investors a story of faster growth.

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. Analyst note that insurance penetration 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.

One syndicate analyst suggests that the 20% compound annual growth rate in premium volumes over the past 10 years, may well be repeated in the next 10 years.

However, none of this may matter if investors decide - as has been suggested by various market watchers over the past few weeks - to close their books early this year. After the challenging start to the year, most investors have had a strong year and they may not want to run the risk of degrading that performance with a late setback. Dubai World's inability to pay back its debt, which surfaced last week, was yet another reminder of this and may have acted as a cue for some investors to secure part of their profits and avoid risky investments in the remaining weeks.

CPIC is being brought to market by China International Capital Corp, Credit Suisse, Goldman Sachs and UBS.