China Re readies $2 billion IPO

Price guidance for the share sale expected later this month would make China's biggest reinsurer one of the cheapest listed insurance companies in Hong Kong.

China Reinsurance looks set to become one of the cheapest insurance companies listed in Hong Kong if, as expected, it floats later this month in a $2 billion deal.

Initial price guidance for its share sale, the first large initial public offering out of the gate in Hong Kong following a summer rout in Chinese shares, is set at HK$2.25 to HK$2.70 per share, sources familiar with the matter told FinanceAsia.

China’s biggest reinsurance group by written premiums hopes to formally begin bookbuilding next week and its performance will be an important indictor of just how well other jumbo IPOs currently in the works can expect to fare. 

Investor sentiment towards new listings got a lift on Thursday after two smaller IPOs – IMAX China and Regina Miracle – performed strongly on their debut. IMAX China, the local unit of US movie technology developer IMAX Corp, rose 10.4% from its IPO price to close at HK$34.25, while intimate wear manufacturer Regina Miracle closed up 16% at HK$6.50.

Based on the initial price guidance China Re will be valued at 1.12 to 1.3 times 2015 consensus  estimated book value, which is slightly more ambitious than the company might have anticipated only last month.

"The 1.3 times price-to-book is higher than several investors expected, as we originally told the company 1.2 times would be an ideal top,” a Hong Kong-based fund manager told FinanceAsia. “But the company wants to push up the price a bit because of the Hong Kong stock market rally these days.”

Having shed almost 8,000 points over the summer, the Hang Seng Index has advanced 8% in the past seven trading days to reach 22,354.91 points on Thursday, its highest level since August 24.

However, even at the top of the pricing range, the reinsurer is poised to be significantly cheaper than most of its prospective Hong Kong-listed peers.
 
Of the six insurance companies already listed in the territory, China Life Insurance trades at the highest multiple of 2.08 times forecast 2015 book value. It is followed by PICC P&C (1.97 times), Ping An Insurance (1.7 times), New China Life (1.56 times), and China Taiping Insurance (1.49 times). People's Insurance Company of China is the cheapest at 1.25 times book value based on its latest closing price.

China Re's indicative pricing range also represents a discount of roughly 18% to 22% to the shares' fair value range, according to analysts at CICC, one of the IPO's sponsors.

Different business model
 
Working against China Reinsurance is the fact it is not a pure insurer, fund management sources said. Last year, only 30% of its revenue came from the insurance business, according to its financial statement.

As a reinsurance company China Re generates most of its revenue from sharing part of the financial risks with primary insurance companies. That is done through purchasing insurance policies from primary insurers to reduce their losses against substantial claims.

Reinsurance companies typically enjoy lower profit margins because their exposure to risks is limited compared with primary insurers. China Re, for instance, reported a gross profit margin of 11.1% last year compared with 16.5% to 36% in the case of Hong Kong's six listed insurers.

As a result, the valuations of global reinsurance companies are generally lower than for primary insurers. Swiss Reinsurance, Munich Reinsurance, and Korea Reinsurance currently trade at 0.88, 0.88 and 0.81 times their respective 2015 book values.

In a research report last week CICC analysts said China Re deserves a higher valuation to its global peers because it has more exposure to the quickly developing China market.

Catastrophic event risk

China Re is also exposed to higher risks against one-off events compared with other insurance companies as it has a heavy emphasis on property and casualty insurance business, which accounted for 72.7% of its gross written premiums last year.

According to its preliminary prospectus, the firm is expected to pay some Rmb1.1 billion ($170 million) for insurance claims arising from the massive explosions in north-eastern Chinese city of Tianjin in August. The country’s worst industrial disaster in years killed some 173 people and left hundreds injured and thousands homeless.

The payment is equivalent to nearly one-fifth of China Re’s cash holdings -- Rmb6.3 billion as of the end of June, or about 5.7% of its IPO proceeds assuming top-end pricing.

It is worth noting too that China Re has set aside approximately Rmb3.4 billion as special dividends for the Ministry of Finance and state-owned investment company Central Huijin, the company’s pre-IPO stakeholders.

That means the reinsurer has already used up 71% of its cash holdings on the special dividends and the Tianjin blast compensation before the IPO.

Nevertheless, the large amount targeted from the Hong Kong IPO will still allow China Re to replenish its coffers and boost its solvency margin ratio beyond the June level of 253%.

While Chinese insurance firms are allowed to maintain a minimum solvency margin ratio of 100% under existing requirements, they are required to double the ratio to 200% by next year under a new solvency system known as the China Risk Oriented Solvency System, or C-Ross.

Insurers that fail to comply with the new capital requirements may be subject to penalties from China Insurance Regulatory Commission, including financial audits, business scope restrictions and forced management changes.

Details

According to a term sheet seen by FinanceAsia, China Re plans to sell about 5.77 million new shares, or 13.7% of its enlarged share capital, to institutional and retail investors in an initial 95:5 split.

The deal is subject to a clawback whereby allocation to retail investors will increase to 7.5% if the Hong Kong public offering is 15 to 50 times oversubscribed, 10% when 50 to 100 times oversubscribed, and 20% when oversubscription exceeds 100 times.

China Re will begin taking institutional orders from October 12 until October 16, with a target to list on October 26.

CICC, HSBC and UBS are joint sponsors of the IPO.

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