China Re's $2b HK IPO fully covered

With the global roadshow kicking off this week, the offering is already fully covered thanks to strong Chinese SOE cornerstone support and a range of anchor investors.

China Reinsurance's looming $2 billion initial public offering in Hong Kong is already fully covered thanks to strong demand from cornerstone and anchor investors, two sources with knowledge of the matter have told FinanceAsia.

As the global roadshow for the IPO formally kicked off on Monday, a term sheet seen by FinanceAsia showed China Re with 15 cornerstone commitments totaling $1.12 billion already in the bag. Each cornerstone investor has agreed to a lock-up period of six months.

A further 70-90 anchor investors have been lured since last Thursday to take up the remainder, with the book still to be opened this week to other institutional and retail investors, one of the sources familiar with the issue said. The source suggested that it is potentially the sign of things to come as other Chinese state-owned enterprises seek to raise equity capital against a shaky market backdrop.

“Quite a few Chinese [SOEs] have come in [as cornerstone investors] to help lower the risk of the transaction,” the source told FinanceAsia. “It’s going to be a common theme [with the] next two giant IPOs of [state-owned] China Huarong and CICC.”

Securing big names as cornerstone investors, to help attract other investors and lower the risk of an unfilled book, has become an increasingly common practice for companies listing in Hong Kong.

According to data provider Dealogic, cornerstone investors have committed to about 38% of Hong Kong IPOs so far this year. In the case of AAG Energy Holdings and China Railway Signal & Communication Corporation, they took up about 78% and 67% of the IPOs, respectively.

China Re, China's biggest reinsurance firm by written premiums, has secured individual pledges of  $150 million from Great Wall Pan Asia International Investment and State Grid Yingda International Holdings. China Development Bank International Holdings and Zhuhai Hengqin Guokai Jin Yuan Investment have together also promised $110 million, according to the term sheet.

Other cornerstones pledging $100 million each are CGN Investment Hong Kong, Zhongxinjian Merchant Equity Investment, and Three Gorges Finance Hong Kong. Two domestic peers of China Re -- People’s Insurance Company of China and China Life Insurance -- will invest $50 million each.

Prudential Insurance Company of America is the only international cornerstone investor, allocating $30 million to the Beijing-based reinsurer.

“Orders from cornerstones are [slightly] better than expected,” said the second source with knowledge of the deal. “Strong support from a few [Chinese] SOEs and the deal’s low pricing really boosted the demand.”

Valuation

China Re is offering about 5.77 million new shares, or 13.7% of its enlarged share capital, at HK$2.25 to HK$2.7 per share. A greenshoe option of about 865 million shares could increase the total deal size to $2.3 billion if it prices at the top of its indicative range.

The range represents a discount of roughly 18% to 22% to the share’s fair value range, according to analysts at CICC, one of the IPO’s sponsors. It also values the reinsurer 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 as Chinese share prices tried to establish a floor after a summer-long slide.

But even at the top of the price range, the reinsurer would 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 2.09 times forecast 2015 book value. It is followed by PICC P&C (2.03 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 1.28 times book value.

China Re’s IPO is also the first of three jumbo Chinese transactions scheduled to land in Hong Kong in the wake of the summer's Chinese market rout. So its performance will offer an important indicator of just how well the IPOs of China Huarong Asset Management and CICC can expect to fare. Both are also set to hit the Hong Kong market in the final quarter. 

China Re’s new shares will be sold to institutional and retail investors in an initial 95:5 split. The deal is subject to a clawback whereby the 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.

The company will run its bookbuilding till Friday, October 16, and is hoping to list on October 26.

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

¬ Haymarket Media Limited. All rights reserved.

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