Premium demand for China Life IPO

Chinese life insurer amasses demand of $80 billion from retail and institutional investors.

China Life priced near the top of its indicative price range on Friday after attracting demand equivalent to two full trading months on the Hong Kong Stock Exchange. The company accumulated a staggering $80 billion for its $3 billion IPO, the world's largest this year.

Not since Beijing Enterprises in May 1997 have Hong Kong, or indeed world equity markets, seen anything quite like it. As one local banker noted earlier this week, "Hong Kong has a truly manic depressive nature. One month it's as high as a kite, the next it's plunged into black despair. Six months on from SAR's, who'd have predicted the year would end on this note?"

China Life's $80 billion order book comprised $25.2 billion from retail investors, $47.5 billion from global institutional investors and $6 billion from Japanese investors through the POWL (Public Offer Without Listing) in Japan. Corporate investors were also allocated $710 million and US retail investors $120 million.

Putting these phenomenal levels into perspective, the Hong Kong Stock Exchange recorded turnover of $32.3 billion for the whole of November and $47.72 billion for October.

The only Hong Kong IPO, which has ever come anywhere close to these figures is Beijing Enterprises. At the height of the red chip bubble in May 1997, the company recorded a record retail oversubscription rate of 1,276 times for a $200 million IPO.

Since then, only one other listing has attracted demand of more than $35 million and that was China Telecom (now China Mobile). Later the same year, the cellular operator was able to build an order book just shy of $40 billion for a $4.5 billion IPO.

By contrast, Bank of China, achieved a far more modest $19 billion order book for its IPO last year.

In terms of oversubscription ratios, retail investors applied for 168 times their initial 5% allocation and institutional investors 25 times the remainder (excluding the POWL, US retail and corporate tranches). Final allocations saw institutions allocated 48.4%, corporates 23.6%, retail investors 20%, US retail 4% and the POWL 4%.

In a bid to manage an orderly trading debut, bookrunners CICC, Citigroup, Credit Suisse First Boston and Deutsche Bank, successfully sought a regulatory waiver from the usual clawback rules to allocate a maximum of 20% to retail investors no matter how high demand. Most observers, nevertheless, expect the deal to spike sharply from its issue price when it begins trading later this week.

The 6.47 billion share offering had originally been marketed at HK$2.98 to HK$3.65 per share, or $15.35 to $18.80 per ADR. Pricing was settled at HK$3.625 and $18.68.

A total of 1,000 institutions are said to have placed orders, with at least half a dozen asking for more than $500 million and about 150 for more than $50 million. Many investors clearly submitted inflated orders in the hope of securing a better allocation. However, syndication was heavily tilted towards tier 1 accounts, which comprised two thirds of the institutional book.

Only one major account is said to have declined to participate following a one-on-one meeting with the company and of the 1,000 strong order book, only 200 investors are said to have received a meaningful allocation. Well over 100 institutions received nothing at all.

The POWL, led by Daiwa SMBC and Nomura, was also scaled back from an expected 10% of the total.

Where corporate investors are concerned, three companies were allocated $100 million blocks - Cheung Kong, Hutchison Whampoa and New World's Chow Tai Fook and one company, Henderson $200 million. A further 7% of the deal was allocated to other corporate investors. All are subject to a one-year lock up.

At HK$3.625 per share, China Life has been priced on a 2003 price to book ratio of about 1.63 times and at 1.5 times 2004 book. In terms of price to embedded value it has also come at about 1.5 times 2004 estimates and at 14 times 2004 earnings on a P/E basis.

When China Life and PICC were originally mandated, few could have predicted such a successful or frenzied outcome for either IPO from China's insurance sector. Institutional investors have long viewed the Mainland's financial services sector as an unfathomable black hole and the insurance sector is well known for its primitive risk controls and lack of actuaries to price premiums with any degree of accuracy.

Even a few months ago, specialists were worried about China Life's timing so late in the year and the need to coerce "friends of China" into taking strategic stakes in a difficult deal. As it stands, those same friends are now being lambasted for being favoured with unfairly large allocations in a hot transaction.

And in a bizarre twist that few could have also foreseen, China Life is currently priced at a discount to PICC, which has shot up 76.3% since its listing in early November. Typically, life companies trade at a premium to property and casualty insurers, but at HK$3.175 per share, PICC is currently valued at about 2.2 times price to 2003 book.

China Life will begin trading in New York on December 17 and Hong Kong on December 18. There are also a further 970 million shares available through the greenshoe.