People’s Insurance Company (Group) of China, otherwise known as PICC, is set to hit the market in Hong Kong this month in what could potentially make it the largest IPO in Asia (excluding Japan) this year.
The deal was initially scheduled to tap investors last July as a larger, dual listing in both Hong Kong and Shanghai, although the mainland portion of the offer has now been discontinued. The issuer’s mooted fundraising of up to US$4 billion is daunting. Listings targeting US$500 million have proven challenging in these crises-laden times, one can only guess how a float many multitudes in size might fare. If I were a betting man, though, I’d wager that PICC will get done – but the army of bookrunners will have its work cut out to raise an amount of equity unseen in Hong Kong (and the wider region) for well over a year.
Investors may remember how well they did with the float of PICC P&C (a subsidiary 69% owned by PICC), which listed in Hong Kong in 2003. At the time, this was a bit of a concept stock. It was the first big mainland insurer to list offshore and came to market following a massive state-led overhaul of the sector. People viewed the mainland insurance market as high growth, but its profits were overly dependent on the vagaries of the mainland equities market, as well as on products with guaranteed rates of return – and therefore erratic.
Long story short, PICC P&C was a hit. Its share price is up 5.7 times since listing, and it also paved the way for other successful Hong Kong offerings of mainland insurance stocks, such as Ping An and China Life. Investors once took a chance on this stock and it paid off.
Certainly the growth story still rings true. In 2010, China’s insurance market pulled in about US$215 billion in premiums, up from almost a third as compared with 2009, and recorded some US$780 billion in assets under management. Observers believe that China’s insurance market will be the world’s third largest by 2015. Importantly, at under 4%, insurance penetration in China is about one half to one third that seen in more established markets such as Japan, France or the United Kingdom, providing plenty of upside in the years to come. PICC has scale too, with 120 million individual and 2.5 million corporate customers. With a market share of 36.3%, it ranks as China’s No 1 property and casualty insurer, and as the No 5 life insurer.
So – PICC is an early entrant (having been established as far back as 1949) in a growing market, corners significant share of insurance pie in China (especially in the non-life sector) and has diversified revenue sources and a nationwide network. Other investment highlights, which salespeople sitting on brokerage trading floors will no doubt be feeding to institutional investors, include an asset management platform that looks after investments of almost US$50 billion, and a brand that’s widely recognised. Growth is also quite healthy, net earned premiums having increased at almost 21% per annum over the last three years, and net profit at more than 112% over the same period.
Stocks of Hong Kong-listed insurers such as China Life or Ping An, and especially AIA, have done well this year too. But New China Life, which floated in a US$1.3 billion Hong Kong IPO that also included US$780 million pledged by cornerstone accounts last December, is still trading more than 8% below water. This could temper investors’ enthusiasm.
The market is screaming for a large, liquid deal to infuse new impetus in an otherwise moribund new issue environment. But to achieve this, the offer will need to be fully covered soon after launch. This implies a strong roster of cornerstone investors (including international insurers, asset managers, sovereign wealth funds and tycoons), marketing to which has now been months in the making, although reportedly with mixed results – at least over the previous quarter.
PICC will need to offer value, of course. This will be measured in part with reference to its price-to-embedded value (a methodology used to value life insurance companies). But, if the price is right (read: cheap), this could perhaps be the smoking hot offering investors have been craving for.
Philippe Espinasse, a former investment banker, is the author of “IPO: A Global Guide” (HKU Press).
[This article was originally published in The South China Morning Post on 12 November 2012 and is reproduced with permission.]