PICC secures $1.8 billion of cornerstone orders

The Chinese insurance giant is seeking to raise up to $3.6 billion from the Hong Kong IPO that opens today. The company finally names 13 bookrunners.

PICC Group has lined up $1.77 billion of cornerstone demand ahead of its initial public offering in Hong Kong, which is likely to raise between $3 and $3.6 billion.

The price range has been set at HK$3.42 to HK$4.03 billion, which will value the company at between Rmb96 billion and Rmb113.2 billion ($15.3 billion to $18 billion) on a pre-money basis, in other words before taking into account the new shares that will be issued as part of the IPO. Including those shares, PICC will have a market capitalisation of between $18.2 billion and $21.5 billion at the time of listing.

Even if priced at the bottom of the range, this will be the largest IPO in Hong Kong this year and the second largest in Asia after that of palm oil, rubber and sugar producer Felda Global Ventures, which raised $3.3 billion ahead of its listing in Malaysia.

PICC, or the People’s Insurance Company (Group) of China as it is formally known, is the dominant non-life insurance company in China through 69%-owned PICC Property & Casualty, which is already listed in Hong Kong, and the fifth largest life insurer.

The level of cornerstone demand means that at least half the deal is already covered and when bookbuilding starts this morning, bankers will be looking for orders for almost as much again to come from other institutional investors who will participate as anchors.

Some of those anchors were in discussions for a cornerstone role, but have for various reasons ended up in the anchor position instead. This means they won’t get a guaranteed allocation, but in return they will have a lot more flexibility with regard to their holdings and won’t have to commit to a lockup. They can also remain anonymous.

The latter is certainly not the case for the 17 cornerstones, which will be disclosed in the prospectus and were heavily scrutinised from the minute the list was confirmed by bankers involved in the deal yesterday. For example, stories immediately appeared in the media suggesting that American International Group (AIG) had dropped out from the cornerstone line-up. The US insurer had been widely rumoured as one of the biggest cornerstones, so its absence from the list was notable and led to all sorts of analysis.

However, sources said early on that there was likely to be another $500 million of demand to be added to the list during the day and indeed, a few hours later AIG was confirmed to have agreed to buy $500 million worth of shares in the IPO. It seems the delay may have been caused by some miscommunication about whether they had to confirm their order by midnight Hong Kong time, or midnight US time.

In addition to AIG, the list of cornerstones includes a number of other insurance companies, including French reinsurer Scor, Japan’s Tokio Marine, and Russia’s largest privately owned insurance company, which is known as Ingosstrakh but is referred to under the English name of Russian Insurance. Domestic sector names like China Life Insurance, Sinosure and China Reinsurance are also present.

But there are also many other Chinese companies on the list, including large state-owned enterprises and companies that have connections to PICC through their day-to-day businesses. Yuexiu Securities, the controlling shareholder of Hong Kong-listed Yuexiu Reit, is taking $100 million worth of shares. Its investment comes after PICC Asset Management recently bought $50 million worth of units in Yuexiu Reit to help fund its acquisition of Guangzhou International Finance Centre. The largest of them all is electricity transmission company State Grid, which is investing $300 million.

This less strategic portion of the cornerstone list caused some market participants to argue that the PICC IPO doesn’t look too different from many other Chinese companies that rely heavily on friends and family to get done – it’s just bigger.

Ahead of today’s launch, PICC finally also confirmed the roles of the banks working on the deal. The top line was as expected with CICC, Credit Suisse, Deutsche Bank, Goldman Sachs and HSBC being named joint global coordinators. Except for Deutsche Bank, the other four of these banks were earlier also appointed joint sponsors.

However, the list of bookrunners did yield a few surprises. Thankfully, PICC has chosen to chop the list from the original 17 names, but as of yesterday the line-up included 13 banks, which, frankly, is still too many if you want an efficient process. However, it is likely that much of the decision-making will be trusted to the five global coordinators.

The most notable names that are not included as bookrunners are Citi, Morgan Stanley and UBS, who will instead be acting as joint lead managers. Macquarie, which was on the original “short-list” back in May, has disappeared from the syndicate altogether, while Essence Securities, which was mandated together with CICC for the A-share trance of what was initially planned to be a dual-listing IPO in Hong Kong and Shanghai, has been given a role as joint bookrunner on the H-share IPO.

It seems PICC stayed true to its word in May and awarded the syndicate roles based on how much cornerstone demand each bank brought it. No cornerstone demand means no bookrunner role.

Clearly Citi, Morgan Stanley and UBS all have the kind of relationships necessary to line up large institutions for high-profile listings. However, sources outside these banks note that the shortlisted banks had to pick which accounts to pursue from a list provided by PICC, making the process rather flawed.

There has also been talk in the past week that the company was threatening to reduce the syndicate role for banks that didn’t match PICC’s view of the minimum valuation of the company in their research reports. It is unclear whether that actually happened. Noticeably, many of the research reports do have a bottom valuation that matches or slightly exceeds PICC’s own market capitalisation estimate, which is said to be Rmb130 billion ($20.8 billion).           

Most banks obviously sought to be on this particular deal, given the sheer size of it, but once you split the league table credits and the fees 13 ways the loss becomes a bit less obvious – particularly if you assume that the global coordinators will get a bigger portion of the fees.

Some people also suggested yesterday that the final line-up may not be set in stone just yet. However, time does seem to be running out since the cornerstones and bookrunners all need to be printed in the prospectus, which has to be ready for the launch of the retail portion this coming Monday.

And for now at least, the joint bookrunners are ABC International, Bank of America Merrill Lynch, BOC International, CCB International, Daiwa, Essence, ICBC International, J.P. Morgan and the five global coordinators.

As reported earlier, PICC will be selling 16.7% of the company through the Hong Kong IPO in the form of approximately 6.90 billion new H-shares. There will also be a 15% greenshoe that could increase the total proceeds to between $3.5 billion and $4.1 billion, depending on the final price.

Five percent of the deal will be set aside for Hong Kong retail investors, while the remaining 95% will be offered to institutional accounts. However, there will also be a public offering without listing (Powl) to Japanese retail investors, which will come out of the institutional tranche. The retail portion of the deal could increase to 20% in case of strong demand.

The retail offering will close at noon Hong Kong time next Thursday and the institutional order books are also expected to be shut sometime that day, with the pricing following shortly afterwards. The trading debut is scheduled for December 7.

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