PICC P&C draws strong demand for H-share rights issue

PICC Property & Casualty, the non-life insurance arm of Chinese insurance giant PICC Group, has received strong demand for the H-share portion of its renounceable rights issue, which closed yesterday.

The offering, which will result in HK$2.25 billion ($290 million) of fresh capital for PICC P&C, was multiple times covered including excess applications, sources say. As of last night, it was still unclear how big a portion will be available for allocation to investors who submitted excess applications, but it is expected to be no more than 10%.

The strong reception is encouraging in light of the challenging market environment since the rights issue was first announced on May 20. However, the fact that the shares were offered at a deep discount to the market price at the time has obviously helped and has made sure the deal remained attractive even as PICC P&C’s share price has dropped 9.1% since the initial announcement.

Based on yesterday’s closing price of HK$8.75, investors will be buying the new H-shares at a 38.5% discount. The discount to the theoretical ex-rights price (Terp), which works out at about HK$8.42 based on the same close, is 36.1%.

However, the issue price does translate into a 15.7% premium to the audited net asset value per share on December 31, 2012, which was Rmb3.71, or HK$4.65.

When the deal was first announced, the discount to the latest market price was 47.3%, while the discount to Terp was 44.7%.

In addition to the H-share offering, Hong Kong-listed PICC P&C, is also raising Rmb4 billion ($645 million) from an A-share rights issue, bringing its combined fund raising to about $935 million. However, the company isn’t listed in the A-share market and all of its A-shares are currently owned by PICC Group. This means that the parent is taking up the entire A-share portion of the deal.

The fact that it would do so was outlined in the original statement and demonstrates a strong level of support from the controlling shareholder. PICC Group, which completed a Hong Kong IPO of its own in December last year, owns 69% of the non-life insurer.

Meanwhile, US insurance company American International Group (AIG), which owns 31.9% of PICC P&C’s H-share capital and 9.9% of the company as a whole, also committed to take up its entitlement in full. Assuming it didn’t apply for excess shares as well, it will invest a further $93 million into PICC P&C to keep its stake unchanged.

The rest of the H-share offering, valued at about $197 million, was fully underwritten in equal parts by CICC, Goldman Sachs and HSBC. But thanks to the oversubscription, neither of them will have to put up any money.

PICC P&C, which is the largest non-life insurer in China with a market share of 34.9%, is using the money from the rights issue to strengthen its capital base and to improve its solvency margin. In a research note issued after the announcement, analysts at Citi estimated that the solvency margin would rise to 198% from 175% after the deal, based on the 2012 year-end numbers.

Holders of PICC P&C’s Hong Kong-listed shares had the right to buy 1.1 new H-share for every 10 existing shares they own at a price of HK$5.38 per share. This will result in the issuance of approximately 418.2 million new H-shares, which accounts for 11% of the existing H-share capital and 3.4% of the company’s total share capital including the A-shares.

Shareholders who didn’t wish to exercise their rights had the option of selling them in the market.

The A-share portion will see PICC P&C issue approximately 930 million new A-shares on the same 1.1-for-10 basis, which will equal 11% of the domestic share capital and 7.6% of the company as a whole. The offer price is Rmb4.30 per A-share, which is the same as the H-share offer price after adjusting for the exchange rate.

PICC P&C’s was under pressure even before it announced the deeply discounted rights issue, and including the most recent dip the share price has fallen 19.4% so far this year. By comparison, the Hang Seng Index is down 6.3% year-to-date.

PICC Group is still 4% above its IPO price, but has fallen 24.1% from its high in mid-February. In fact, PICC Group and PICC P&C have fallen in tandem since then with the latter off 24.6%.

The Citi analysts said the rights offering was somewhat surprising since they didn’t feel PICC P&C was in urgent need of capital — they referred to the 2012 year-end solvency margin of 175% as decent and noted that PICC Group had a solvency margin of just 152% at the same time. The regulatory requirement is 150%.

However, they added that “premium growth could pick up as auto sales improve from here, and this would require capital. Hence, this rights issue might also be well timed”.

Even so, they noted that they have long held the view that PICC P&C’s profitability will continue to gradually fall from here, and that the valuation is already fair. “We continue to prefer life over P&C in China, as we believe the P&C cycle will continue to slowly deteriorate, whereas life growth should gradually improve and life earnings should rebound significantly,” they said in the May 22 research note.

The views on PICC P&C’s prospects are mixed, however. Of the 26 analysts covering the stock, according to Bloomberg, 13 have a “buy” recommendation on it, while 10 recommend investors to hold. Three analysts regard the stock as a “sell”.

PICC P&C posted a 16.6% increase in net premiums earned and a 29.6% increase in net profit to Rmb10.4 billion ($1.6 billion). About 73% of its turnover came from motor vehicle insurance.

This was the second combined A- and H-share rights issue by PICC P&C in just 18 months. In December 2011 it raised a total of $783 million, of which $245 million came from the H-share portion. Like this latest transaction, it too came at a deep discount with the offering price being set 47% below the closing price immediately before the announcement. The one-for-10 structure was also similar.

According to a company announcement at the time, the H-share portion of the 2011 rights issue was 10.3 times covered, and there were some suggestions that the subscription ratio could be similar this time around.

CICC was the sole global coordinator for the latest rights offering as well as a joint lead underwriter and joint bookrunner together with Goldman Sachs and HSBC.