To find the last time Hong Kong’s IPO business was as quiet as it is now, you have to go all the way back to the uncertain times of 2003 – a year in which the city was shaken by the SARS virus, which left 298 people dead.
Fortunately, Hong Kong is not currently in the grip of a pandemic disease, but its IPO market appears to have been suffering from a cold all year. Following three years as the world’s top spot for capital raising, the amount of new stock issued in the city is down 80% to just $6.2 billion.
This is why the forthcoming IPO of China’s largest general insurer, The People’s Insurance Company of China (better known as PICC), is attracting more than the usual attention. The proposed flotation could raise as much as $4 billion and, if successful, it could revive Hong Kong’s IPO market, bringing with it a slew of new deals.
But the long-anticipated listing has to get done first (see WiC121), and although the Hang Seng Index has rallied nearly 17% from its 2012 low in June, some believe that investors will need convincing to buy into the company.
“It is definitely not the best time to come to market, but capital has been a pressing issue for the group for some time,” Stanley Tsai, an insurance analyst told the South China Morning Post.
“The company will have to price the IPO at a considerable discount to peers in order to generate enough interest from institutional investors,” said Tsai.
A discount might be hard to countenance for some of PICC’s existing shareholders. China’s Social Security Fund paid Rmb10 billion ($1.6 billion) for an 11% stake in the company, reports 21CN Business Herald, buying in at a price to earnings ratio of around 15 times.
Yet if the deal were to price at around this level, it would come to market with a valuation comparable with established insurers – such as China Life and Ping An.
“If it’s set at 14 to 15 times earnings, we think it is expensive,” an institutional investor told 21CN.
Investors can find clues towards the final valuation by looking at another company, as PICC owns 69% of Hong Kong-listed PICC Property & Casualty, a huge player in China’s property and casualty insurance businesses. This subsidiary accounted for 84% of PICC’s net profit in the first half of the year, reports FinanceAsia.
In fact, the value of the PICC IPO is expected to be closely related to value of PICC P&C. That’s led to some unusual tactical thinking. “We do not rule out the possibility that some investment institutions deliberately short PICC P&C in order to artificially lower the PICC IPO issue price,” a source close to the company told Economic Observer.
PICC P&C is currently trading at around 10.6 times price to earnings, despite a 20% return on equity in 2011. This shows that the company is undervalued, a PICC manager told the Economic Observer.
Although the final pricing of the deal might be lower than PICC might hope, the deal has got a boost from the announcement that a group of cornerstone investors will take half the issue. FinanceAsia reports that $1.8 billion has been committed by 17 big investors. These include strategic buyers such as US insurer AIG. China Life, itself once a part of PICC, is expected take a chunk, as is State Grid, the electricity behemoth (it’s purchasing $300 million). Tokio Marine is also participating – an interesting development in light of the continued tensions between Japan and China over disputed islands in the East China Sea.
Finding enough investors might seem daunting for a large deal in such volatile markets. But PICC has 17 financial institutions working on the listing – a small army of bankers who should be able to fill up the order book by the time the deal prices next week.
Should it price at the top end of the range, PICC will have a market capitalisation of $21.5 billion.
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