Ping An Insurance closed Asia's largest IPO of the year on Friday, raising HK$14.3 billion ($1.83 billion) after pricing the offering just below the mid-point of its indicative range. Having been marketed at HK$9.59 to HK$11.88, the 1.388 billion share deal was priced at HK$10.33 by its four bookrunners BOCI, Goldman Sachs, HSBC and Morgan Stanley.
Pricing at this level was the function of a large, but price sensitive order book. In total, the deal garnered $10.5 billion demand for the international tranche, which was originally slated to comprise 95% of the deal and $6.12 billion from retail investors, which was to account for the remaining 5%. This means the international tranche closed roughly fives times oversubscribed and the retail tranche about 66 times oversubscribed, prompting full clawbacks to 15% of the total.
However, most institutional investors were price sensitive just above the mid-point of the indicative range and the company consequently decided to price below the mid-point to facilitate institutional buying interest once the deal is listed later this week.
As one specialist explains. "In any pricing meeting, the issuer will be told they can price at X, but it would be better to price marginally lower at Y to ensure stable secondary market performance. Typically only one in four companies will accept this."
But in this instance Ping An is said to have decided to price slightly lower still on the basis of wanting to maximise institutional allocations and trade well.
"For a first time issuer with no capital markets experience, their attitude was quite phenomenal and their behaviour beyond anyone's wildest dreams," a second specialist adds. "They want to develop long-term relationships with a wide institutional investor base, so they knew it was important not to whip every last penny off the table."
As a result, institutions were bumped up from 35% of demand in the international book to a 50% allocation. A further 34% of the international book went to corporates and private banks, 10.5% to HSBC and 6% to Japanese the POWL (Public Offering Without Listing).
The POWL allocation was relatively low compared to recent precedent despite demand topping well over $1 billion. Again this was a function of the company's desire to keep retail allocations as low as it could.
About 250 investors are said to have placed orders, with just over a dozen $100 million plus orders and roughly 45 over $50 million. About 30 corporates placed orders for more than $20 million.
By geography, the institutional book split 50% Asia, 30% Europe and 15% US, although many American orders are said to have been booked through Asian offices.
Pre-greenshoe, the company will have a freefloat of 22.4%. Because HSBC subscribed to the new deal it will see its shareholding drop only marginally to 9.99%. And as Ping An has been valued at more than $6 billion, none of HSBC's potential rebates will kick in.
Goldman Sachs and Morgan Stanley, on the other hand, will be diluted. Pre-deal, Goldman had a 6.9% stake and Morgan Stanley 5.9%. They will respectively drop to 5.5% and 4.5%.
At HK$10.33, Ping An has been valued at 2.06 times 2004 price to embedded value compared to a current level of 1.68 times for China Life. On a price to 2004 book basis, it has been priced at 2.5 times compared to 2 times for China Life. On a PE basis, it has been priced at 25 times 2004 earnings compared to 18 times for China Life.
Throughout the marketing process, lead managers argued Ping An deserved a premium because its unprofitable legacy policies skew its book value and embedded value numbers relative to China Life. The latter was able to carve them out and dump them with its state-owned parent.
On the basis of new business value multiples, Ping An's valuation appears much more compelling. Pricing came at 8.25 times compared to about 12 times for China Life. Bankers argued that this makes Ping An particularly attractive given it has a more impressive new business profile.
Its value of one-year sales, for example, account for 22% of its total EV, compared to 7% at China Life.
Specialists conclude that Ping An had a fairly straightforward passage to market. It was not bedevilled by negative headline news and demand held up well despite selling pressure on China Life and PICC, plus the crushing performance of the H-share index, down 10% last week.
The two listed Chinese insurers were fairly range-bound throughout much of the marketing process before dropping last week in line with the overall market. At the beginning of pre-marketing, China Life was trading around the HK$4.5 level. It closed Friday at HK$4.15.
Ping An and its lead managers will now be hoping for calmer market conditions. And even if they remain turbulent, all concerned believe the company's rationale attitude to pricing will see it through its trading debut.