CPIC raises $3.1 billion ahead of Hong Kong listing

After a wait of two years, China Pacific Insurance (Group) Co (CPIC) will finally be able to start trading in Hong Kong next week after raising HK$24.1 billion ($3.1 billion) in its H-share initial public offering -- the second largest Hong Kong listing this year.

Some observers initially questioned the rationale of bringing a deal this size so close to year end, and indeed demand does appear to have been somewhat impacted by the weakening of equity markets and the decline in liquidity as more and more funds are now closing their books for the year. But, it was definitely sufficient for the Shanghai-based insurer to comfortably complete the transaction, suggesting that it made the right call in terms of the timing.

The institutional tranche was said to have been "well covered" after more than 60% of the one-on-one meetings during the roadshow were converted into actual orders. Retail investors subscribed for 27 times the number of shares initially earmarked for them, triggering a partial clawback that increased the size of the retail tranche to 7.5% of the total deal, from 5% originally. To trigger the next clawback level (increasing the size of the retail tranche to 10%), the public offer would have had to be at least 50 times covered.

CPIC, which is part-owned by private equity firm Carlyle, fixed the price at HK$28 per share, in the lower half of the HK$26.80 to HK$30.10 marketing range.

Technically this isn't really an IPO as the stock is already listed in Shanghai, but given the restrictions that apply to the direct buying of A-shares by foreign investors, for most international accounts this was the first chance to buy this stock. And the deal was treated the same as any other IPO in terms of marketing with an investor education process, the publication of pre-deal research and a listing prospectus, and a global management roadshow that included investor luncheons and one-on-one meetings.

The same was true for China Minsheng Banking Co, which listed in Hong Kong at the end of November -- nine years after going public in Shanghai. Minsheng sold $3.89 billion worth of shares in its initial H-share sale, making it the largest Hong Kong listing in 2009 and the largest in Asia outside of China's A-share market. In the league tables, Minsheng is listed behind Metallurgical Corp of China's $5.1 billion IPO, but only $2.35 billion of that was raised in the form of internationally available H-shares. The rest was raised by selling A-shares listed in China.

However, in one important aspect, CPIC and Minsheng are different from other Hong Kong IPOs. They were both sold against the backdrop of a live share price -- albeit one that most international investors were unable to impact. The 4% decline in CPIC's A-share price during the H-share roadshow and bookbuilding did have an impact on the price sensitivity in the order book and, according to sources, effectively meant that the upper half of the price range became largely unusable.

CPIC, which provides life as well as property and casualty insurance, was also restricted by an absolute floor price to ensure that the company didn't sell its shares too cheaply to overseas investors. Initially, the company had committed not to set the H-share price below the A-share IPO price of Rmb30 per share (translated into Hong Kong dollars), but when the plans to do the H-share IPO shortly after the Shanghai listing were scuppered by a sharp decline in equity markets in early 2008 it became impossible to meet that price. After lengthy negotiations, the Chinese regulators finally agreed a few months ago to lower the floor price to Rmb23.52, which allowed the company all the flexibility it needed to price the shares at a discount to the other Chinese insurers listed in Hong Kong right now.

However, if markets were to take another downward turn, that could quickly change, which explains why the company was so keen to push ahead with the Hong Kong listing before the end of this year - waiting a few extra weeks could have put it right back in a situation where the floor price would force it to price at a premium to the comps, which effectively would have meant another delay to the listing.

Based on yesterday's exchange rates, then final price implies a discount of about 5% versus the A-share price. The A-shares closed at Rmb26.03 on Tuesday, which translated into about HK$29.50. It also values CPIC at 1.8 times the estimated 2010 embedded value, which puts it at discount of about 30% versus the average price-to-embedded value multiple of China Life Insurance and Ping An Insurance. The two Hong Kong-listed comps both fell during CPIC's roadshow -- by 5.1% and 6.6% respectively - which also explains why investors were setting their price limits for CPIC in the lower part of the range. At the start of the roadshow, the discount versus China Life and Ping As was 32% at the top of the price range. Embedded value is an estimate of future profits from existing policies plus adjusted net asset value.

However, one source noted that the demand was tapering away at higher prices rather than falling away altogether. No information was available yesterday on the final number of institutional investors in the deal, but estimates suggested that several hundred accounts had submitted order. The buyers included international money funds, which were drawn to the company because of its size. The $3.1 billion raised in the IPO account for only 10.2% of the market capitalisation.

About half of the institutional demand came from Asia, with the rest split fairly evenly between US and European investors.

CPIC sold a total of 861.3 million H-shares, of which 783 million, or 90.9%, were new. The remaining 78.3 million shares were secondary and were sold by China's 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. There is an overallotment option that may increase the total proceeds to as much as $3.6 billion.

The deal was supported by six cornerstone investors, which bought a combined $395 million worth of shares, or 12.7% of the deal, with a six-month lockup.

The largest cornerstone was a company wholly-owned by Allianz, a German provider of financial services, including property, casualty, life and health insurance, which invested $150 million. According to the prospectus, Allianz and CPIC will discuss a possible cooperation within areas such has asset management, insurance product development, reinsurance and investment.

In the first nine months this year, CPIC ranked third in China in terms of premium income both within life insurance and property & casualty, with a market share of 8.1% in life insurance and 11.6% in property & casualty. However, according to a syndicate research report, the company has outperformed its larger listed rivals since 2006 in several key areas, including growth in the value of one year's worth of new business (life insurance) and underwriting margins (p&c).

CPIC will start trading in Hong Kong on December 23, almost to the day two years after its debut in Shanghai on Christmas Day 2007.

China International Capital Corp, Credit Suisse, Goldman Sachs and UBS were joint bookrunners for the H-share offering.